CYBERNET INTERNET SERVICES INTERNATIONAL INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________

COMMISSION FILE NUMBER 000-25677

CYBERNET INTERNET SERVICES
INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 51-0384117
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)

SUITE 1620 - 400 BURRARD STREET, VANCOUVER, BRITISH COLUMBIA, CANADA V6C 3A6
(ADDRESS OF OFFICE)

Registrant's telephone number including area code: (604) 683-5767

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

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COMMON STOCK, $0.001 PAR VALUE
(TITLE OF CLASS)
--------------------------------

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of 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 Rule
405 of Regulation S-K 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. [X]

The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant as of March 12, 2002 was approximately
$7,668,504. The last reported sale price of the Registrant's shares of common
stock, $0.001 par value on the OTC Bulletin Board on March 12, 2002 was $0.39
per share.

As of March 12, 2002, the Registrant had approximately 26,535,627 shares of
common stock, $0.001 par value outstanding.

Certain portions of the Registrant's Proxy Statement dated February 22, 2002
are incorporated by reference in Part III hereof.

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TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS.........................................................4
General..........................................................4
Recent Developments..............................................4
Option Agreement.............................................4
Settlement Agreement.........................................4
Credit Facility..............................................5
Stockholders' Meeting........................................5
Overview.........................................................6
Developments in 2001.............................................7
Industry Background..............................................7
Business Strategies..............................................8
Products and Services............................................9
Connectivity Services........................................9
Network Solutions...........................................10
Business Solutions..........................................10
Sales and Marketing.............................................11
Technology and Network Operations...............................13
Overview....................................................13
Markets.....................................................13
IP Network..................................................13
Network Management..........................................14
Data Centers................................................14
Switched Voice..............................................14
Customer Service............................................15
Acquisitions....................................................15
Credit Facility.................................................16
Competition.....................................................17
ISPs........................................................17
Telecommunications carriers.................................18
Major Systems Integrators and Computer Manufacturers........18
Advances in Technology..........................................18
Intellectual Property Rights....................................18
Regulation......................................................19
Subscriber Line Charges.........................................20
Internet Access Charges.........................................20
Employees.......................................................20
Risk Factors....................................................21
ITEM 2. PROPERTIES......................................................21
ITEM 3. LEGAL PROCEEDINGS...............................................21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............21

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................22
ITEM 6. SELECTED FINANCIAL DATA.........................................24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................26
Overview........................................................26
Developments in 2001............................................28
Year Ended December 31, 2001 as Compared to the Year
Ended December 31, 2000.........................................29
Year Ended December 31, 2000 as Compared to the Year
Ended December 31, 1999.........................................33
Liquidity and Capital Resources.................................36
Forward-Looking Statements......................................38
Foreign Currency................................................45
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................46
ITEM 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE......................46

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............46
ITEM 11. EXECUTIVE COMPENSATION..........................................47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT...............................................48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................49

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.................................................50

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PART I

ITEM 1. BUSINESS

GENERAL

Cybernet Internet Services International, Inc. ("Cybernet Delaware") was
established pursuant to the merger of Cybernet Internet Services International,
Inc. (organized under the laws of Delaware in September 1998) and Cybernet
Internet Services International, Inc. (organized under the laws of Utah in
September 1983) ("Cybernet Utah") effective November 18, 1998, the Delaware
corporation being the surviving entity of the merger. Cybernet Utah had
previously acquired Cybernet Internet Dienstleistungen AG ("Cybernet AG") on
September 17, 1997, at which time Cybernet Utah had no material business
activities, assets or liabilities. Cybernet AG was organized in December 1995
under the laws of Germany and commenced significant operations in 1996. The
terms "Cybernet", "we", "us" and "our" refer to Cybernet Delaware and its
subsidiaries, except where its use is such that it is clear that such term means
only Cybernet Delaware.

RECENT DEVELOPMENTS

OPTION AGREEMENT

We lease certain facilities in Frankfurt, Munich and Hamburg, Germany (the "Data
Centers") and have equipped these facilities with certain assets and equipment,
furniture and fixtures ("Assets") which allow them to operate as data centers.
We currently sub-lease these Data Centers to Telehouse Deutschland GmbH
("Telehouse").

On January 29, 2002, we entered into an option agreement dated for reference
January 28, 2002 with Telehouse pursuant to which we granted an option (the
"Option") to Telehouse to (i) purchase the Assets at the Data Centers sub-leased
by Telehouse, and (ii) allow Telehouse to enter into leases at the Data Centers
directly with the lessor (which requires that we terminate the leases at these
Data Centers), for gross proceeds of approximately Euro 33.6 million (net
proceeds of approximately Euro 30.0 million). Telehouse has paid to us
approximately Euro 1.3 million in consideration of the grant of the Option, most
of which will be applied towards the purchase price in the event the Option is
exercised. In the event the Option is not exercised, the payment will be applied
towards Telehouse's obligations to us under the current sub-leases with respect
to the Data Centers. The Option was exercisable under the Option Agreement on or
before March 31, 2002, but was extended to April 30, 2002 by agreement of the
parties. To date, the Option has not been exercised.

THE FOREGOING SUMMARY OF THE OPTION AGREEMENT IS NOT COMPLETE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE OPTION AGREEMENT WHICH IS INCORPORATED BY
REFERENCE IN THIS ANNUAL REPORT.

SETTLEMENT AGREEMENT

We entered into an agreement with MFC Bancorp Ltd. ("MFC"), Andreas Eder and
Paolo di Fraia dated for reference March 12, 2002 (the "Settlement Agreement")
pursuant to which the parties settled various outstanding matters, including
those related to the nomination for election by MFC of certain persons to our
Board of Directors at the meeting of our stockholders held on March 12, 2002
(the "Stockholders' Meeting").

Prior to the Stockholders' Meeting, by way of a unanimous resolution of a quorum
of our then existing Board of Directors passed at a duly convened meeting of the
board, we approved for appointment to the board all of the directors nominated
by MFC for election at the Stockholders' Meeting.

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Under the terms of the Settlement Agreement, Mr. Eder and Dr. di Fraia severally
agreed with us, among other things, that all employment arrangements between us,
our subsidiaries and each of Mr. Eder and Dr. di Fraia would be amended pursuant
to the terms of termination agreements dated March 12, 2002. We agreed, among
other things, to deposit into an escrow account in favour of Mr. Eder and Dr. di
Fraia amounts equal to Euro 115,000 and Euro 82,500, respectively. See "Item 11.
Executive Compensation - Employment Contracts". In addition, under the terms of
the Settlement Agreement, we agreed to make certain other payments and to
deposit them into the escrow account.

Under the terms of the Settlement Agreement, we agreed, among other things,
together with MFC, Ventegis Capital AG ("Ventegis") and Holger Timm
(collectively, the "Shareholders Group") pursuant to the terms of a mutual
release dated March 12, 2002, to release Dr. di Fraia and certain directors (the
"Participating Directors") from all claims arising out of service to us by the
Participating Directors. In addition, pursuant to the terms of the mutual
release, we agreed together with the Participating Directors to release the
Shareholders Group from all claims arising out of their involvement with us.

Under the terms of the Settlement Agreement, MFC agreed, among other things, to
arrange a revolving term credit facility to, among other things, fund working
capital and certain stipulated payments to be made under the terms of the
Settlement Agreement and to restructure our debt.

THE FOREGOING SUMMARY OF THE SETTLEMENT AGREEMENT IS NOT COMPLETE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE SETTLEMENT AGREEMENT WHICH IS
INCORPORATED BY REFERENCE IN THIS ANNUAL REPORT.

CREDIT FACILITY

We have entered into a credit facility agreement with MFC Merchant Bank S.A. (a
subsidiary of MFC) (the "Lender") and 636892 B.C. Ltd. (the security agent on
behalf of the Lender) dated March 12, 2002 (the "Credit Facility Agreement")
pursuant to which the Lender has agreed to make available to us in accordance
with, and subject to the terms and conditions of, the Credit Facility Agreement,
a revolving term credit facility in an aggregate principal amount of Euro 7.0
million. The credit facility bears interest at 14% per annum and has a term of
one year. See "Item 1. Business - Credit Facility".

STOCKHOLDERS' MEETING

The Stockholders' Meeting was held on March 12, 2002. Immediately prior to the
Stockholders' Meeting, Michael J. Smith and Eduard Seligman were appointed as
our Class B directors to fill the Class B director vacancies. In addition, prior
to the Stockholders' Meeting, a quorum of our existing Board of Directors
unanimously approved the nominations for election of Roy Zanatta and Greg
Elderkin as Class B directors, and Michael J. Smith and Eduard Seligman as Class
C directors, at the Stockholders' Meeting.

At the Stockholders' Meeting, Roy Zanatta and Greg Elderkin were elected as our
Class B directors and Michael J. Smith and Eduard Seligman were elected as our
Class C directors.

On March 12, 2002, after the Stockholders' Meeting, the Board of Directors
appointed Slobodan Andjic as a Class A director to fill one of the two Class A
director vacancies and appointed Michael J. Smith as our President and Chief
Executive Officer, and Roy Zanatta as our Secretary and Treasurer.

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OVERVIEW

Through our subsidiaries, we are a provider of Internet communications services
and solutions in Germany, Austria, Italy and Switzerland. We offer a full
portfolio of advanced communications products, including Internet access and
value-added services, as well as data and switched voice services, and customer
support through consulting, design and installation, training, technical support
and operation and monitoring of IP-based systems. Our Internet Protocol ("IP")
solutions are based on a core product offering consisting of Internet
connectivity and value-added services. Value-added services include virtual
private networks ("VPNs"), web-hosting, co-location, security solutions,
electronic commerce, Intranet/Extranet and workflow solutions.

We market our products and services primarily to small and medium sized
enterprises in Europe. Companies in this market are characterized by a lack of
internal technical resources, rapidly expanding communications needs and a high
propensity to utilize third-party outsourcing. We approach business customers by
offering and designing a full range of services and solutions for mission
critical communications needs, such as electronic commerce solutions, Intranets
and VPNs. This enables us to work directly with different levels of our
customers' organizations, to participate in the design of customers' systems and
to offer additional network and communications services as our customers'
businesses grow and their needs change.

We sell our services and solutions primarily through our direct sales force.
Most of our sales people are based in regional offices and are supported by
specialized technical and commercial personnel from our customer care centers in
Munich, Vienna, Zurich, Rome and Trento. We complement our direct sales effort
with an extensive reseller and referral network of over 100 companies and by
forming marketing alliances with technology leaders such as Info AG, OpenShop,
Oracle, Intel, Cisco, SUN Microsystems, Highway One and QS Communications. While
our reseller arrangements begin with sales of our basic product offerings, such
as connectivity, they can lead to direct sales of more complex solutions, such
as security solutions or VPNs.

We operate a geographically distributed IP network based upon leased lines. Our
network is spread over four countries and consists of network nodes equipped
primarily with Cisco and Ascend routers connected to a redundant
high-performance backbone infrastructure. We help corporate customers reduce
telecommunications costs by offering Internet and voice connectivity through
dedicated lines at 65 directly owned points of presence or "POPs". We also offer
a system of dial-in nodes with ISDN or analog modem ports to smaller
enterprises, employees and affiliates of corporate customers. These nodes permit
local dial-in access throughout Germany, Italy and Switzerland and most of
Austria. Our dial-in network in Germany concentrates multiple dial-in access
nodes into larger access points called "Virtual POPs", which use a Public
Switched Telephone Network ("PSTN") to aggregate traffic.

Our financial performance to date has not met expectations, the market for our
products and services has not grown as expected and changes in the condition of
the capital markets have significantly reduced or eliminated our ability to
raise capital. Our ability to raise funds is further hindered by the significant
amount of debt we have incurred. We are now dependant on our credit facility to
fund our existing operations and there is no assurance that we can continue to
source funds under our credit facility. As a result of these factors and
following management changes which took place in March 2002, we are currently
undergoing a review of our strategic options. Following such review, we may make
fundamental changes to our business strategies, sell or discontinue various
businesses, assets or subsidiaries, reduce our workforce and level of business
activity or make other significant changes. Due to our weak financial position,
we have made certain workforce reductions in 2002. In addition, in 2002, we made
the decision to sell our operations in Italy as soon as reasonably practicable
as we do not have the financial resources to support these operations. See "Item
1. Business - Employees",

6

"Item 1. Business - Risk Factors" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations".

DEVELOPMENTS IN 2001

In 2001, the telecommunications industry underwent a period of significant
adjustment. During 2001, industry demand for technology solutions slowed
significantly in response to the rapid and severe industry and economic downturn
in Europe and other parts of the world and the related decline in the global
capital markets. As a result of this adjustment and the difficulties in
obtaining financing for capital expenditures, the business marketplace in the
industry has changed. Customers, now focused on reducing their costs, have
returned to more conservative capital spending strategies. This resulted in a
significant reduction in 2001 in the levels of capital spending in the industry
around the world.

In light of the significant downturn in both the telecommunications industry and
the economic environment and capital market trends having materially adversely
impacted our operations and expected future growth rates, as well as the
substantial amount of debt we have incurred, we engaged in a number of
activities in 2001 to streamline operations and activities around our core
markets and business strategies and reduce costs. Some of our activities in 2001
included:

o workforce reductions to approximately 225 employees at the end of 2001
from approximately 275 employees at the end of 2000;

o delay or cancellation of expansion plans and capital spending;

o discontinuance of our IP network operations in Luxembourg and Hungary;
and,

o rationalization of our global network.

The primary focus of these activities in 2001 was to reposition us from a
financial perspective. We are currently undergoing a review of our strategic
options and may make fundamental changes to our business strategies, sell or
discontinue various businesses, assets or subsidiaries, reduce our workforce
and level of business activity or make other significant changes. See "Item
1. Business - Risk Factors" and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources".

INDUSTRY BACKGROUND

The Internet is a global network of multiple private and public networks that
use standardized communication protocols to communicate with each other. Use of
the Internet has grown rapidly since its initial commercialization in the early
1990s. Consumers and companies in the United States have spearheaded the
adoption of the Internet. While other regions of the world have been slower to
accept the Internet, its use is becoming a standard communications tool
worldwide. In 2001, the telecommunications industry underwent a period of
significant adjustment and the demand for Internet-based technology solutions
slowed significantly.

The Internet has become an important commercial medium and represents a
significant opportunity for businesses to interact in new and different ways
with a large number of customers, employees, suppliers and partners. As use of
the Internet grows, businesses are increasing the breadth and depth of their
Internet product and service offerings. Pioneering Internet-based businesses
have developed Internet products and services in areas such as finance,
insurance, media, tourism, retail and advertising. Other businesses use the
Internet for an expanding variety of applications, ranging from corporate
publicity and advertising to sales, distribution, customer service, employee
training and communication with business partners. Increasingly, Internet
operations are becoming mission-critical for many of these enterprises. To
ensure the reliability of their Internet operations, enterprises

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are requiring that these operations have performance, scalability and expert
management 24 hours a day, seven days a week.

Companies generally utilize two types of Internet services: connectivity and
value-added services. Connectivity services provide access to the Internet,
while value-added services consist of products such as web-hosting, VPNs,
security solutions and systems integration that improve the internal and
external operations of a company.

BUSINESS STRATEGIES

We currently offer a full portfolio of advanced communications products,
including Internet access and value-added services, as well as switched voice
services. The principal elements of our business strategies are as follows:

TARGET SMALL TO MEDIUM SIZED BUSINESS ENTERPRISES. We focus on small to medium
sized enterprises. In Germany, we focus on companies that typically have
revenues between Euro 25 million and Euro 500 million. We believe that this
customer segment is underserved and has substantial and increasing
communications needs. Small to medium sized enterprises typically lack the
technical resources to build and maintain extensive communications systems and,
as a consequence, they outsource many services and solutions to third parties.
We focus in particular on network intensive industries, such as Information
Technology ("IT"), tourism, retail, finance, government, media and advertising.
For many of these industries, utilization of the Internet has become essential.
In certain markets, we also serve high-end residential customers.

INITIATE LONG-TERM RELATIONSHIPS WITH CUSTOMERS THROUGH LOCAL COVERAGE AND AT AN
EARLY STAGE. Unlike some of our competitors, we use strong local management
teams to address the needs of our customers. Most of our sales people are based
in regional offices and are supported by specialized technical and commercial
personnel from our offices in Munich, Vienna, Zurich, Rome and Trento. This
strategy allows us to initiate relationships with our customers at an early
stage of their Internet services requirements, engage in strategic discussions
with senior management about their communications requirements and participate
in the design of their systems, services and solutions. This establishes the
basis for long-term relationships at different levels of our customers'
organizations. We are then in a position to provide our customers with
additional services as their requirements increase or change over time.

DEVELOP A TOTAL COMMUNICATIONS OFFERING. We currently offer both Internet
connectivity services and modular Internet business solutions to our customers.
Our modular solutions include web-hosting and web-housing, VPNs, security
solutions, electronic commerce solutions and Intranet and workflow solutions. We
also offer voice services. We believe IP technology and IP applications will be
the primary platform and interface for business data and voice communications in
the future.

OPTIMIZE OUR SALES CHANNELS. Our sales channels include trained direct sales
representatives with strong technical backgrounds, an extensive reseller program
and marketing alliances with technology leaders such as Hewlett-Packard,
Microsoft, Network Associate and Sun Microsystems.

CONTROL OUR NETWORK. We control and operate our own network infrastructure.
This enables us to:

o maximize revenues by offering total communications services, including
broadband and voice services;

o achieve the highest levels of service quality and reliability; and

o reduce transmission costs.

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This involves:

o optimizing the configuration of our IP network by concentrating
international access at a few select locations where the cost of access
can be minimized; concentrating network planning and management in one
central location; and planning the network's redundancy on a
pan-European basis rather than on a local basis;

o managing space in three large-scale data centers of up to 4,000 square
meters and three smaller data centers of up to 500 square meters to
enhance the co-location and housing services we offer; and,

o leasing transmission capacity on a long-term basis, acquiring backbone
capacity or constructing our own infrastructure in selected locations
to transport high bandwidth data and voice services over all available
transmission protocols.

Due to our weak financial position and following management changes in March
2002, we are currently undergoing a review of our strategic options, which may
result in significant changes to our business strategies. See "Item 1. Business
- - Risk Factors".

PRODUCTS AND SERVICES

We currently offer a range of Internet connectivity services, network solutions
and business solutions to enterprises in Germany, Austria, Italy and
Switzerland, and we offer voice services in Germany and Italy. Due to our weak
financial position, in 2002, we made the decision to sell our operations in
Italy as soon as reasonably practicable as we do not have the financial
resources to support these operations. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations".

CONNECTIVITY SERVICES

We offer a variety of connectivity solutions, including Internet access,
third-party software and hardware implementation and configuration services, in
bundled and unbundled packages. We offer dedicated line connectivity at speeds
ranging from 64 kbps to multiples of 2 Mbps. We offer Internet connectivity to
our corporate customers through dedicated lines at our 65 directly owned POPs.

We also provide both analog and ISDN dial-in Internet access throughout Germany,
Italy and Switzerland as well as most of Austria. In Germany, Italy and
Switzerland, our dial-in service allows customers to dial into one nationwide
number to access the Internet at local telephone rates. Our dial-in services in
Austria utilize seven dial-in access nodes, each of which has its own dial-in
number. We offer our dial-in service through third-party telephone networks.
Outside the countries in which we operate, we offer roaming services at local
call rates in cooperation with more than 350 international ISPs and
telecommunications companies that are part of the Global Reach Internet
Connection.

We offer third-party software products such as electronic mail, news and other
solutions that permit customers to navigate and utilize the Internet and provide
remote access to mobile personnel operating outside traditional office settings.
We also provide router services such as router renting, configuration,
supervision and maintenance. Overall, we are able to offer customers a full
portfolio of services with managed connectivity. Our principal connectivity
services include:

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NETWORK SOLUTIONS

VIRTUAL PRIVATE NETWORKS. Many companies today have private data communication
networks, which are often referred to as corporate networks. These networks are
used to transfer proprietary data between offices and use relatively expensive
leased lines to connect various locations. Our VPNs utilize the Internet as a
cost effective alternative to corporate networks to provide secure transmission
of data and voice with the added benefit of secure remote access. In addition,
our VPN products are often the basis for Intranet services (connectivity of
branch offices, teleworkers and mobile workforce) and Extranet services
(connectivity of business partners, suppliers and customers). We offer these
products in conjunction with hardware and software solutions, as well as
continuous operation and maintenance, customer care and billing services. In
Italy, we offer a product called ALL IN ONE, an all inclusive solution including
combinations of data transmission, Internet access and voice-over IP,
representing the ideal platform to build VPNs for customers.

SECURITY SOLUTIONS. Corporate networks and systems need to be protected against
unauthorized access and use. We currently offer a set of third-party supplied
security products, including encryption, firewall and authentication packages.
We add value to this software by providing services such as security consulting,
installation support, on-the-job training of customers' system administrators,
hotline support (24 hours a day, seven days a week) and security audits. To
assure the security of communication and business transactions between users of
networks, we integrate state-of-the-art software, technologies and standards. We
offer these security solutions as stand-alone products or as part of broader
solutions, such as VPNs or Intranets.

BUSINESS SOLUTIONS

CO-LOCATION. We offer co-location solutions to customers who have the resources
to manage their own servers and websites and who prefer not to share a server
with others. Customers receive the benefits of having their servers housed in
one of our data centers, with full-time connection to the Internet, direct
access to our high-speed network, uninterrupted power supply, regular back-up
and monitoring and technical support 24 hours a day, seven days a week. Our
principal co-location services include:

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APPLICATION AND WEBSITE HOSTING. We offer shared server application and website
hosting services, which permit corporations to market themselves and their
products on the Internet without having to invest in independent technology
infrastructure and operations staff. Such customers receive sufficient bandwidth
to meet their needs and the benefits of having their systems housed in one of
our continuously maintained data centers. Applications on our servers, which our
customers can access, include shop and mall systems, payment systems, publishing
systems and video conferencing.

ELECTRONIC COMMERCE. Electronic commerce is the execution of commercial
transactions on the Internet. We design and implement dedicated electronic
commerce systems or any component part which a customer may require, such as
shop or mall, credit verification and payment handling verification. These
systems are based on our electronic commerce platform which integrates systems
and technologies of third-party vendors, such as Hewlett-Packard, Intershop,
Microsoft, SAP, Sun Microsystems and others. For customers reluctant to
undertake an investment in a proprietary electronic commerce solution, we
maintain our own electronic commerce system, which we provide on a lease basis.

INTRANET AND WORKFLOW SOLUTIONS. Internet technologies can be utilized in a
customer's internal information technology system. We offer Intranet and
workflow solutions that enhance the capabilities, efficiencies and functionality
of our customers' systems, speed the development of new applications, reduce the
cost of developing and maintaining applications and allow the integration of
existing systems and databases. Thus, instead of replacing their systems,
customers can preserve their investment and upgrade their systems with our
enhanced solutions. Our Intranet platform integrates basic dial-in and leased
line connectivity with IP-based VPNs and a communications infrastructure that
includes facsimile, voice mail, electronic mail and enhanced security solutions.

Due to our weak financial position and following management changes in March
2002, we are currently undergoing a review of our strategic options, which may
result in significant changes to the products and services we offer. See "Item
1. Business - Risk Factors".

SALES AND MARKETING

The following table provides information relating to our sales over the past
three years in our primary markets:

In 2001, as part of our cost cutting measures, we have discontinued our IP
network operations in Luxembourg and Hungary. Revenues increased in 2001
primarily as a result of payments received under leases at our Internet data
centers. Due to our weak financial position, in 2002, we made the decision to
sell our operations in Italy as soon as reasonably practicable as we do not
have the financial resources to support these operations. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations".

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We tailor our marketing approach as follows:

o to our principal target market of medium-sized corporations, we offer
customized solutions at competitive prices by designing systems that
integrate modular elements of proven functionality, effectiveness and
reliability;

o to some larger customers with more specialized needs, we offer more
sophisticated technical services and individualized solutions; and,

o to customers with basic service needs, we provide services which
require minimal customization and installation, such as Internet
connectivity.

DIRECT SALES. At December 31, 2001, our direct sales force consisted of 42 sales
representatives located in offices in 12 cities: Frankfurt, Dusseldorf, Berlin,
Munich, Hamburg, Vienna, Rome, Trento, Milan, Padova, Zurich and Lugano.

Our direct sales force has a strong technical background and a detailed
understanding of the differing needs of the customers in the regions they serve.
They are knowledgeable about our main targeted industry segments, particularly
IT, tourism, retail, finance, government, media and advertising.

CHANNEL SALES AND PARTNERSHIPS. Our channel sales group develops relationships
with resellers of our products and services and maintains marketing alliances.
In Germany, our three-person channel sales group works with a network of more
than 100 resellers, primarily software suppliers, systems integrators and ISPs,
through whom we offer basic services such as Internet connectivity that can be
delivered with a minimum of customization and installation. Direct sales people
in Austria and Italy also develop reseller relationships. In addition, we
utilize our reseller relationships to gain direct access to customers for the
sale of additional products and services. Our marketing alliances with a select
group of companies provide a strong mutual referral program, which we believe
will enable us to acquire new customers cost effectively, benefit from
association with well-known partners and increase our brand awareness. We
currently have marketing alliances with Hewlett-Packard, Microsoft, Network
Associates, Sun Microsystems and others.

We conduct our operations and marketing under the Cybernet brand name, although
we use subsidiary brand names for transition periods after acquisitions. We have
undertaken public relations efforts to raise the awareness and visibility of the
Cybernet name in our target markets. We present ourselves as "The Communication
People", providing connectivity, value-added solutions and superior customer
service.

CUSTOMERS. As of December 31, 2001, we provided services to approximately 18,742
business customers. The majority of these customers are small to medium sized
enterprises. We also provide services to larger companies and organizations such
as BASF Corporation, German Parcel, Commerzbank, Hewlett-Packard, Start Media
Plus, DaimlerChrysler Aerospace Dornier, BMW Financial Services, Zuegg,
Honeywell, Lauda Air, Modern Times, Amadeus, Lufthansa, News, ERG, Avis,
Ferrovie dello Stato (Italian Railways), Sony Entertainment and the Italian
Parliament. We also have approximately 10,224 residential customers primarily in
Italy. Other than Telehouse (due to lease payments made in connection with the
Data Centers leased by them), no customer represented more than 10% of our
consolidated revenues in 2001.

Due to our weak financial position and following management changes in March
2002, we are presently evaluating our strategic options, which may result in
significant changes to our sales and marketing activities. See "Item 1. Business
- - Risk Factors".

12

TECHNOLOGY AND NETWORK OPERATIONS

OVERVIEW

The IP network of an ISP consists of a number of access nodes linked by owned or
leased lines. Access nodes are used to provide our customers with access to our
network either through dedicated lines or regular telephone lines (dial-in
access). The IP traffic generated at each access node is carried through our
backbone network to points of traffic exchange, where traffic is exchanged with
other providers' networks. These points of traffic exchange can be of two types:
peering points or transit points. Peering points provide for the free exchange
of traffic pursuant to agreements between ISPs. Transit points provide global
connectivity, which we purchase from international carriers.

MARKETS

From 1998 to 2000, the telecommunications industry experienced rapid growth
in capital spending fueled by deregulation in many countries, strong
economies, readily available sources of capital and substantial growth in
Internet and voice communications traffic. In 2001, capital spending in the
industry around the world decreased substantially. In addition, the industry
experienced continuing consolidation in 2001, with some companies
experiencing financial difficulties, merger announcements and acquisitions of
other "start-up" companies. This also contributed to the reduction in capital
spending during 2001. We believe that the trend towards consolidation in the
global telecommunications industry will continue in 2002. However, the timing
and impact of these initiatives is difficult to predict. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Outlook".

IP NETWORK

We currently operate a geographically distributed IP based network in four
countries (Germany, Switzerland, Austria and Italy), consisting of network nodes
equipped primarily with Cisco and Ascend routers connected to a redundant
high-performance backbone infrastructure. The network nodes are connected
primarily by leased lines and include 19 POPs in Germany, 10 POPs in Italy, 9
POPs in Austria and 27 POPs in Switzerland. As part of our cost cutting
measures, we have discontinued operations in Luxembourg and Hungary. Due to our
weak financial position, in 2002, we made the decision to sell our operations in
Italy as soon as reasonably practicable as we do not have the financial
resources to support these operations. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations".

We lease our lines from major telecommunications carriers and backbone
operators, such as Deutsche Telekom, Telecom Italia, Swisscom, Telekom Austria
GTS and Colt. Our network nodes are interconnected at E-1 to DS3 speeds. We
offer our dedicated line customers direct access to our POPs at bandwidths
ranging from 64 kbps to DS3. We have at present approximately 480 customers
using dedicated line access. We do not expect to expand our network to any
further POP.

Our IP network is designed to offer reliability, scalability and high
transmission speed to our customers. We achieve reliability by operating a fault
tolerant network through our redundant backbone in Germany, Austria, Switzerland
and Northern Italy, which is based on a hierarchical multiple ring design. We
include back-up routers in our access nodes to attain further redundancy, and
thereby minimize the risk of single points of failure. To ensure constant
worldwide connectivity, we use multiple global access providers. In Italy, our
extensive network is based on a star design and achieves redundancy through
back-up leased lines. We derive scalability from a hierarchical multi-layer
architecture that offers the opportunity to add network locations without major
infrastructure changes. We offer transmission capacities ranging from 64 kbps to
DS3 and intend to upgrade parts of our network to STM-1 capacity in the near
future. In addition, our network includes cache servers

13

in the major POPs to reduce the delivery time of regularly requested information
and reduce bandwidth needs for international traffic.

We offer dial-in Internet access through dial-in nodes with analog and ISDN
ports that provide coverage throughout Germany, Italy and Switzerland and most
of Austria. In Germany, our BELT system enables us to offer local dial-in
connections to our customers throughout the country with a single dial-in
number. We have achieved this by concentrating multiple dial-in access nodes
into four larger access points called virtual POPs, using the PSTN to aggregate
traffic. We believe that these virtual POPs generate operating efficiencies,
because there are fewer locations we are required to service. We offer local
dial-in access through a single dial-in number in Switzerland and Italy. In
Austria, our dial-in customers can access our network through seven telephone
numbers.

We have entered into peering agreements with major ISPs in each of the countries
in which we operate. We have peering agreements with more than 202 ISPs in
Germany, Austria, Italy and Switzerland. Our main peering points are in
Frankfurt, Munich, Milan, Rome, Vienna and Zurich. We also peer directly through
leased lines connected to some of our peering partners, such as Deutsche
Telekom.

We have entered into global transit agreements pursuant to which we have
purchased the right to route traffic across the networks maintained by Ebone,
Global One, Swisscom, AT&T Corporation/Unisource, Colt and MCI Worldcom. This
provides our customers with the ability to communicate with those European
countries in which we are not present, and with the rest of the world.
Frankfurt, Munich, Vienna and Zurich currently serve as our global access
points.

NETWORK MANAGEMENT

The effective functioning of our network is one of the key elements of our
operations. We have developed network management capabilities to offer reliable
and cost efficient communications services and to deliver high quality services
to our customers. Our Network Operation Center ("NOC") in Munich monitors the
performance of our network and our international links 24 hours a day and seven
days a week. Our NOC has the capability to identify network problems on a
real-time basis. Our technical support groups are equipped to take the necessary
corrective measures quickly. We have centralized our NOC in a single facility in
Munich.

DATA CENTERS

We house servers in our data centers that are linked to our network. We
currently operate data centers in Munich, Frankfurt, Hamburg, Trento, Rome and
Milan. Our main data centers in Frankfurt, Munich and Hamburg have a total
capacity of 10,600 square meters for co-location. We designed these facilities
to house transmission, IP routing and switching equipment, and to offer hosting,
co-location, facilities management and interconnection services to our corporate
customers, ISPs and telecommunications carriers. Each facility offers
uninterruptible power supply and back-up generators, air-conditioning, constant
monitoring and physical security to ensure a high quality of service with
minimal interruptions. Due to our weak financial position, in 2002, we made the
decision to sell our operations in Italy as soon as reasonably practicable.
Accordingly, we may dispose of our data centers in Italy in the near future. See
"Item 1. Business - Recent Developments - Option Agreement."

SWITCHED VOICE

We offer switched voice services using a third-party provider in Germany and
Italy.

14

CUSTOMER SERVICE

We provide customer service and support in order to enhance the strength of our
brand name, increase customer retention rates and generate new customer
referrals. Our customer services are organized into technical support and call
center groups.

Our technical support group consists of technicians in our Munich NOC and field
engineers. The NOC-based technicians respond to customer requests 24 hours a
day, seven days a week, diagnosing customers' problems and providing immediate
assistance. Our centralized technical support operations improve the quality and
consistency of our support, achieve scalability in our resources and benefit
from economies of scale. Our field engineers are available to visit our
customers' premises, as necessary.

Our call center provides complete information and specifications about each of
our products and advises our customers on service and solutions related
questions.

Due to our weak financial position and following management changes in March
2002, we are currently undergoing a review of our strategic options, which may
result in significant changes to our technology and network operations. See
"Item 1. Business - Risk Factors".

ACQUISITIONS

In order to grow our business, we acquired a number of companies prior to 2001
through which we expanded our technical capabilities, attracted additional
talent, entered new markets and increased our customer base:

o CYBERNET E-COMMERCE. In September 1997, we acquired 100% of Artwise
which was later renamed Cybernet E-Commerce, a German company which
provided us with expertise in Intranet messaging and workflow solutions
and established our presence in the Ulm region of Germany.

o ECLIPSE S.P.A. In December 1997, we acquired 66%, and in October 1999
we acquired the remaining 34%, of Eclipse S.p.A., an ISP based in
Trento, Italy, through which we established our presence in Northern
Italy.

o OPEN:NET INTERNET SOLUTIONS GMBH. In August 1998, we acquired 100% of
Open:Net Internet Solutions GmbH, an ISP through which we increased our
penetration of the southwest German market serviced by Artwise.

o VIANET INTERNET DIENSTLEISTUNGEN AG. In December 1998, we acquired 100%
of Vianet Internet Dienstleistungen AG, a leading Austrian ISP through
which we entered the Austrian market and significantly increased our
customer base.

o SUNWEB INTERNET SERVICES SIS AG. In April 1999, we acquired 51% and an
option to purchase the remaining 49% of Sunweb Internet Services SIS
AG, through which we established a presence in Switzerland and acquired
substantial additional expertise in switched voice services. In June
2000, we acquired the remaining 49% of the company for Euro 480,000
paid in cash (in Swiss Francs).

o FLASHNET S.P.A. In June 1999, we acquired 100% of Flashnet S.p.A., a
leading Italian ISP through which we gained access to all major
business centers in Italy. We have combined Eclipse S.p.A. and Flashnet
S.p.A. into a single operation which we call Cybernet Italy.

15

o NOVENTO TELECOM AG AND MULTICALL TELEFONMARKETING AG. In October 1999,
we acquired 51%, and in January 2000 we acquired the remaining 49%, of
Novento Telecom AG and its sister organization, Multicall
Telefonmarketing AG, which are German direct marketing organizations
for communications services through which we expanded our sales
capabilities and acquired additional sales and marketing expertise.

o CYBERNET S.A.G.L. In April 2000, we acquired Cybernet S.a.g.l., a Swiss
ISP for a maximum purchase price of SFr 500,000 and 12,000 shares of
common stock. Of the purchase price, SFr 400,000 was paid in cash at
September 30, 2000 and the remainder was paid in the beginning of 2001.
The shares will be issued provided certain milestones are achieved.
These milestones have not been achieved to-date. The operations of
Cybernet S.a.g.l. have been combined with those of Sunweb Internet
Services SIS AG.

CREDIT FACILITY

We have entered into a Credit Facility Agreement with MFC Merchant Bank S.A. (as
Lender) and 636892 B.C. Ltd. (as security agent on behalf of the Lender) as of
March 12, 2002 pursuant to which the Lender agreed to make available to us in
accordance with, and subject to the terms and conditions of, the Credit Facility
Agreement, a revolving term credit facility in the aggregate principal amount of
up to Euro 7.0 million, available under three tranches as follows:

o Euro 949,000 under the first tranche to be used for the purpose of
making stipulated payments under the Settlement Agreement and the
payment of financing fees and expenses pursuant to the Credit Facility
Agreement;

o Euro 1,500,000 under the second tranche to be used for the sole purpose
of financing our working capital and general corporate requirements;
and,

o Euro 4,551,000 under the third tranche to be used for the sole purpose
of restructuring our current indebtedness and, in connection therewith,
financing our working capital requirements.

The credit facility bears interest at 14% per annum and has a term of one year
to be paid or repaid on the earlier of March 12, 2003 (which date the Lender may
extend at its sole option for additional periods of 12 months per extension) and
the occurrence of an event of default as set out in the Credit Facility
Agreement.

As continuing security for the performance of all of our obligations under the
credit facility, we pledged certain securities held by us in certain of our
subsidiary companies or companies in which we have an interest and provided a
security interest in all of our right, title and interest in and to presently
owned or held and after acquired personal property, assets and undertakings
(other than real property) and all proceeds thereof and therefrom.

The advancement of funds under the credit facility is subject to certain
conditions precedent, including, but not limited to, our representations and
warranties in the Credit Facility Agreement and related documents being true and
correct and there being no event that has occurred or is continuing or that
would result from such an advance of funds under the credit facility that
constitutes or would constitute a default or an event of default under the terms
of the Credit Facility Agreement. In addition, the advancement of funds under
the second tranche and third tranche is subject to supplemental conditions
precedent.

16

The credit facility contains various covenants restricting, among other things,
our ability to incur indebtedness, merge or dispose of assets, and make
distributions, loans and investments.

Events of default under the credit facility are customary for facilities of this
type, including, but not limited to, the failure to pay principal and interest
as it becomes due, the failure to perform certain covenants and the occurrence
of a change of control with respect to us or any of our subsidiaries.

The Credit Facility Agreement and the transactions contemplated thereby were
unanimously approved by a quorum of the Board of Directors existing prior to the
Stockholders' Meeting.

We have received payment under the first tranche of the credit facility.
However, there can be no assurance that we will receive advances under the
second tranche or third tranche. We are dependent upon the credit facility to
continue operations (assuming the Option is not exercised by Telehouse). See
"Item 1. Business - Risk Factors" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".

THE FOREGOING SUMMARY OF THE MATERIAL PROVISIONS OF THE CREDIT FACILITY
AGREEMENT IS NOT COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
CREDIT FACILITY AGREEMENT WHICH IS INCORPORATED BY REFERENCE IN THIS ANNUAL
REPORT.

COMPETITION

The business of providing Internet services and solutions is highly competitive
and there are no substantial barriers to entry. In addition, many of the basic
connectivity products that we offer are not materially different from those of
our competitors, and have been and will continue to be subject to significant
price competition. We have already experienced a significant decline in prices
for some of our products. See "Item 1. Business - Risk Factors".

We believe that competition will intensify in the future, given the significant
decline in 2001 in market demand, substantially reduced availability of capital
and the continued consolidation in the industry. We expect competition to remain
intense as corporate information technology spending continues to be affected by
global and regional economies and the state of the global capital markets. Our
ability to successfully compete depends on a number of factors including: market
presence; the capacity, reliability and security of our network; the pricing
structure of our services; our ability to adapt our products and services to new
technological developments; and principal market and economic trends. Our
competitors consist of ISPs, telecommunications carriers and system
integrators/computer manufacturers, many of which are larger than us and have
more financial resources.

ISPS

We strive to differentiate ourselves from other ISPs by offering a full range of
services and solutions which business customers are likely to require in
connection with their use of the Internet. Most of our ISP competitors offer
fewer services and focus on connectivity. However, some competitor ISPs have
greater resources and larger communications and network infrastructures than we
do. In Germany, these competitors include UUNet, KPNQuest and Cable & Wireless.
In Austria, they include Cybertron, KPNQuest and Netway Austria. In Italy, they
include I-Net and Albacom/BT.

17

TELECOMMUNICATIONS CARRIERS

Many telecommunications carriers are large organizations and do not provide
Internet services as their main product. With regard to Internet services, we
compete with these organizations by focusing on the Internet and offering
flexible decision-making and execution, responsive customer service, recognized
technical expertise and high quality products. Our principal carrier competitors
in Germany are Mannesmann Arcor, Deutsche Telekom and Viag Interkom. In Austria,
our principal carrier competitors are Telekom Austria, United Telecom and
Telering. In Italy, our principal carrier competitors are Infostrada, Telecom
Italia and Wind.

In offering voice services, we compete directly with carriers, including large
carriers such as Mannesman Arcor, Deutsche Telekom and Viag Interkom. Most of
these competitors are significantly larger and have substantially greater market
presence and financial, technical, operational, marketing and other resources
and experience than we do. In addition, carriers have greater resources to
engage in various forms of price competition, such as bundling Internet services
with other telecommunications services, thereby offering lower prices for either
telecommunications or Internet services. Increased price competition has forced
us and could force us to further reduce our prices, resulting in lower profit
margins. In addition, increased competition for new customers could result in
increased sales and marketing expenses and related customer acquisition costs
and could materially adversely affect our profitability.

MAJOR SYSTEMS INTEGRATORS AND COMPUTER MANUFACTURERS

Major systems integrators and computer manufacturers, such as Accenture and IBM,
provide IT solutions to their clients and have expanded their offerings to
include Internet-related products and solutions. Many of these companies have
established customer relationships and recognized technical expertise, and some
have significantly greater resources than us. However, most do not offer
connectivity services and solutions. Some systems integrators and computer
manufacturers utilize our connectivity services and solutions to complement
their own lines of products and services.

ADVANCES IN TECHNOLOGY

The market for our services is characterized by rapidly changing and unproven
technology, evolving industry standards, changes in customer needs, emerging
competition and frequent introductions of new services. We cannot assure you
that future advances in technology will be beneficial to, or compatible with,
our business or that we will be able to incorporate into our business such
advances on a cost effective and timely basis. Moreover, technological advances
may have the effect of encouraging customers to rely on in-house personnel and
equipment for the services we currently provide. In addition, keeping pace with
technological advances may require substantial expenditures and lead time. See
"Item 1. Business - Risk Factors".

INTELLECTUAL PROPERTY RIGHTS

We rely on a combination of copyright, servicemark and trade secret laws and
contractual restrictions to establish and protect certain proprietary rights in
our products and services. In this regard, we have applied to the European Union
("EU") and received a trademark registration for the name "Cybernet" used in
conjunction with our logo. We have also applied for, but have not yet received,
a trademark registration for the name "Cybernet". We have no patented technology
that would preclude or inhibit competitors from entering our market. We have
entered into confidentiality and invention assignment agreements with our
employees, and non-disclosure agreements with our consultants, vendors,
suppliers, distributors and appropriate customers in order to limit access to
and disclosure of our technology, documentation and other proprietary
information. We cannot assure you that these contractual arrangements or the
other steps we have taken to protect our intellectual property will prove
sufficient to prevent misappropriation of our technology or to deter independent
third-party

18

development of similar technologies. The laws of the countries in which we
operate may not protect our products, services or intellectual property rights
to the same extent as do the laws of the United States. To date, we have not
been notified that our products are claimed to infringe the proprietary rights
of third parties, but we cannot assure you that third parties will not claim
infringement by us with respect to current or future products. We expect that
participants in our markets will be increasingly subject to infringement claims
as the number of products and competitors in our industry segment grows. Any
such claim, whether meritorious or not, could be time consuming, result in
costly litigation, cause product installation delays or require us to enter into
royalty or licensing agreements. Such royalty or licensing agreements might not
be available on terms acceptable to us, or at all. As a result, any such claim
could materially adversely affect our business, results of operations and
financial condition.

REGULATION

REGULATORY ENVIRONMENT IN THE INTERNET-RELATED MARKETS OF CYBERNET. Our Internet
operations are not currently subject to direct regulation by governmental
agencies in the countries in which we operate (other than regulations applicable
to businesses generally). In 1997, Germany enacted the Information and
Communication Services Act which releases Internet access providers from
liability for third-party content in certain circumstances and establishes a
legal framework for Internet commerce with respect to the identification of
service providers, data privacy and price indications on the Internet. A number
of other legislative and regulatory proposals are under consideration with
respect to Internet user privacy, infringement, pricing, quality of products and
services and intellectual property ownership. There is also controversy
regarding the application of value-added taxes in the Internet environment. The
adoption of new laws could materially adversely affect our business, results of
operations and financial condition. See "Item 1. Business - Risk Factors".

REGULATION AND REGULATORY AUTHORITIES IN THE TELECOMMUNICATIONS MARKET.
Effective January 1, 1998, all of the countries in which we operate abolished
the monopoly rights of incumbent operators to provide fixed-line voice telephone
services to the public. As a result, competitive telecommunications markets are
now developing for long distance and international telephone services.
Competition for local telephone service has been much slower to develop.

All of the countries in which we operate have enacted legislation and
regulations and have established regulatory authorities for the
telecommunications industry. The purpose of this regulation is to ensure:

o a wide range of high-quality, telecommunications services to private
individuals and businesses;

o reliable services to the entire population at affordable prices;

o the absence of interference with personal and intellectual property
rights in telecommunications traffic;

o effective competition in the provision of telecommunications services;
and

o access to the dominant operator's network on non-discriminatory terms.

In each of the countries in which we operate, providing telecommunications
services and related facilities requires a license. The regulatory
authorities have various powers, including the authority to grant and revoke
licenses, assign and supervise frequencies, impose universal service
obligations, control network access and interconnection and approve or review
the tariffs and tariff-related general business terms and conditions of
market-dominant providers.

19

In the countries in which we operate, different classes of licenses are
required for different services offered and facilities operated. We have
obtained a "class 4 license" (voice telephone services based upon
self-operated telecommunications networks) in Germany. Geographically this
license covers all of Germany and is valid indefinitely. We have also
obtained a license to provide public telephony service and to operate our own
infrastructure in Austria and have applied for a similar license in
Switzerland. In Italy, we no longer have a license to offer voice telephone
services, but we still have our IP license which permits us to offer our
services throughout the country. We have also obtained a "class 3 license" in
Germany which permits us to operate cables, radio links and other
telecommunications-related infrastructure throughout Germany.

Each of the countries in which we have operations have market-dominant providers
which are legally required to offer essential services such as transmission,
switching and operational interface to networks such as the one we plan.
Market-dominant operators of telecommunications facilities are obligated to
provide interconnection on a non-discriminatory basis and at cost-related
prices. If the terms and conditions of obligatory interconnection cannot be
agreed upon, the regulatory regimes of the countries in which we operate provide
for administrative proceedings which permit regulatory authorities to set the
conditions for interconnection.

SUBSCRIBER LINE CHARGES

We rely upon Deutsche Telekom for leased lines and for unbundled loop lines for
DSL services so as to obtain direct access to customers. The rates which
Deutsche Telekom may charge for such lines have been established by the
Regulatory Authority. From time to time, the ruling of the Regulatory Authority
is subject to change which could affect the current rates. Any possible increase
in these rates for the rental charge could impede our business development.

INTERNET ACCESS CHARGES

T-Online, an ISP owned by Deutsche Telekom, has started to charge Internet
subscribers a flat rate that is significantly lower than the rate charged by
competitor ISPs. This offer is targeted at consumer customers. Since Cybernet's
focus is on business customers, there is little effect on our business. However,
if T-Online or Deutsche Telekom start to offer similar low-cost flat rates to
business customers, our ability to market Internet access services might be
adversely affected.

EMPLOYEES

We reduced our workforce from approximately 275 employees at the end of 2000 to
approximately 225 employees at the end of 2001, primarily through attrition. Due
to our weak financial position, in 2002, we further reduced our workforce to
approximate 203 employees. In addition, in 2002, we made the decision to sell
our operations in Italy as soon as reasonably practicable as we do not have the
financial resources to support these operations. This may lead to further
reductions of our workforce. We currently have approximately 77 employees in our
operations in Italy. There are no collective bargaining agreements in effect.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations".

We believe our employee relations have generally been neutral, but are adversely
affected by our poor financial condition and uncertain future. We believe that
our ability to retain skilled employees will continue to be critical to our
future success. See "Item 1. Business - Risk Factors".

20

RISK FACTORS

THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING INFORMATION THAT IS SUBJECT TO
IMPORTANT RISKS AND UNCERTAINTIES. THE RESULTS OR EVENTS PREDICTED IN THESE
STATEMENTS MAY DIFFER MATERIALLY FROM ACTUAL RESULTS OR EVENTS. RESULTS OR
EVENTS COULD DIFFER FROM EXPECTATIONS AS A RESULT OF A WIDE RANGE OF RISK
FACTORS. FOR INFORMATION REGARDING SOME OF THE RISK FACTORS INVOLVED IN OUR
BUSINESS AND OPERATIONS, SEE "ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - FORWARD-LOOKING STATEMENTS ".

ITEM 2. PROPERTIES

We have an office in Vancouver, British Columbia, Canada, which is rented. We
also lease property where other business offices and certain nodes containing
servers, routers and other equipment are located. Our largest leasehold
properties are our data centers in Munich and Frankfurt which are approximately
4,000 square meters each and our data center in Hamburg which is approximately
2,600 square meters. We currently lease three smaller data centers of up to 500
square meters each in Trento, Rome and Milan. We also currently lease our
regional offices in Frankfurt, Dusseldorf, Berlin, Munich, Hamburg, Vienna,
Trento, Rome, Milan, Padua, Zurich and Lugano. We believe our facilities are
adequate to meet our current needs.

Due to our weak financial position, in 2002, we made the decision to sell our
operations in Italy as soon as reasonably practicable. Accordingly, we may
dispose of our data centers and other properties that we currently lease in
Italy in the near future.

ITEM 3. LEGAL PROCEEDINGS

In December 1998, we applied for and received a class 4 telecommunications
license from Germany's Regulierungsbehoerde fur Telekommunikation und Post
("RTP"), the telecommunications regulatory authority in Germany. The fee for
this license was DM 3.0 million. However, EU regulations relating to such
licenses set the maximum fee that can be charged at the actual cost incurred by
a government agency to administer its regulations. On December 17, 2001, we
filed a petition with RTP to recover a portion of the fee paid for our license
because we believed that the fee charged exceeded the amount chargeable under EU
regulations in effect in 1998. RTP has not yet made a decision regarding our
petition.

We are subject to routine litigation incidental to our business. We do not
believe that the outcome of such litigation will have a material adverse effect
on our business or financial condition.

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

An annual meeting of our stockholders was originally scheduled to be held in the
fourth quarter of 2001. Pursuant to a Delaware court order, the annual meeting
was held on March 12, 2002. The following provides information with respect to
each matter voted upon at the Stockholders' Meeting.

21

ELECTION OF DIRECTORS

There were five nominees for four vacancies for election as directors at the
Stockholders' Meeting: Michael J. Smith and Eduard Seligman as a class C
directors, and Roy Zanatta, Greg Elderkin and Cabot Caskie as a class B
directors. The following votes were cast in electing Mr. Smith, Mr. Seligman,
Mr. Zanatta and Mr. Elderkin as our directors at the Stockholders' Meeting:

APPROVAL OF 1998 CYBERNET STOCK INCENTIVE PLAN

The 1998 Cybernet Stock Incentive Plan was not approved based on the following
distribution of votes:

AFFIRMATION OF AUDITORS

Ernst & Young Deutsche Allegmeine Treuhand AG were affirmed as our auditors for
2000 and 2001.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

(a) MARKET INFORMATION. Our common stock is traded on the OTC Bulletin Board
under the symbol "ZNET" and on the Neuer Markt of the Frankfurt Stock Exchange
under the symbol "CYN". Our common stock also trades on the Freiverkehr of the
Berlin and Munich Stock Exchanges under the securities identification number
WP-Kenn-Nr. 906 623.

The following tables set forth for the periods indicated the quarterly high and
low bid prices for our common stock on the OTC Bulletin Board for the two years
ended December 31, 2000 and 2001. These are inter-dealer prices, without retail
mark up, mark down or commission and may not necessarily represent actual
transactions.

22

March 31............................ $ 3.00 $ 1.09
June 30............................. $ 1.64 $ 0.50
September 30........................ $ 0.80 $ 0.40
December 31......................... $ 0.73 $ 0.35

(b) SHAREHOLDER INFORMATION. As of February 7, 2002, there were approximately
139 holders of record of our common stock and a total of approximately
26,535,627 shares of common stock were outstanding.

(c) DIVIDEND INFORMATION. We have not paid dividends on our common stock in the
past and do not anticipate paying any dividends in the foreseeable future. In
addition, the Credit Facility Agreement restricts our ability to pay cash
dividends.

(d) RECENT SALES OF UNREGISTERED SECURITIES. We sold shares of common stock over
the past three years pursuant to the exemption provided by Section 4(2) of the
SECURITIES ACT OF 1933, as amended, as follows:

PARTY TO
NUMBER OF WHOM SHARES
DATE SHARES ISSUED ISSUED CONSIDERATION
--------------- --------------- ------------------ --------------------

May 2000 108,390 Former owners of Pursuant to adjustment
Eclipse S.p.A. to purchase price for
34% of the shares of
Eclipse S.p.A.
purchased in October
1999 (in connection
with the Eclipse
acquisition)

January 2000 543,812 Former owners of 49% of the shares of
Novento Telecom AG Novento Telecom AG (in
connection with the
Novento acquisition)

October 1999 39,412 Bernd Buchholz 51% of the shares of
Novento Telecom AG (in
connection with the
Novento acquisition)

October 1999 136,402 Former owners of 34% of the shares of
Eclipse S.p.A. Eclipse S.p.A. (in
connection with the
Eclipse acquisition)

June 1999 301,290 Former owners of All the shares of
Flashnet S.p.A. Flashnet S.p.A. (in
connection with the
Flashnet acquisition)

23

PARTY TO
NUMBER OF WHOM SHARES
DATE SHARES ISSUED ISSUED CONSIDERATION
--------------- --------------- ------------------ --------------------

April 1999 25,000 Jurg Heim 51% of the shares of
Marco Samek Sunweb Internet
Services SIS AG (in
connection with the
Sunweb acquisition)

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial information has been derived from our
consolidated financial statements included in this annual report. We were
organized pursuant to the laws of Delaware in September 1998 and, effective
November 18, 1998, we merged with Cybernet Utah. All prior period amounts have
been translated to the Euro using the US dollar to Euro exchange rate in effect
for those periods, except for the financial statements for the years ended
December 31, 1997 and 1998, respectively, which were translated using the US
dollar to Euro exchange rate in effect on January 1, 1999 (the Euro introduction
date). Accordingly, the selected financial information presented below for the
fiscal years ended December 31, 1997 and 1998, respectively, may not be
comparable to the selected financial information presented for the fiscal years
ended December 31, 1999, 2000 and 2001, respectively. In addition, business
acquisitions made during the periods for which selected financial information is
presented materially affect the comparison of such data from period to period.
For a description of such acquisitions see "Item 1. Business - Acquisitions" and
note 3 to our consolidated financial statements for the year ended December 31,
2001 included in this annual report.

In 2001, the telecommunications industry underwent a significant adjustment,
particularly in the United States and Europe. Following a period of rapid
economic growth in 1999 and 2000, we saw a continued tightening in the capital
markets and slowdown in the telecommunications industry throughout 2001. This
resulted in lower capital spending by industry participants and substantially
less demand for our products and services as customers focused on maximizing
their return on invested capital. As a result, our results of operations and
financial condition were materially adversely affected.

The following selected financial information should be read in conjunction with
our consolidated financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
included in this annual report. Certain prior period financial information has
been restated to conform to the current period presentation.

24

YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1998 1999 2000 2001
-------------- -------------- -------------- ------------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Statement of Operations Data:
Revenue

Internet data center services....... E - E - E 651 E 5,011 E 10,102
Connectivity........................ 637 3,144 14,962 26,374 26,817
E-business.......................... 1,421 4,624 5,315 4,446 2,158
----- ---------- ----------- ---------- -----------
Total revenues........................ 2,058 7,768 20,928 35,831 39,077
Direct cost of services............... 931 3,893 13,364 23,117 25,105
----- ---------- ----------- ---------- -----------
Gross margin........................... 1,127 3,875 7,564 12,714 13,972
Operating expenses
Network operations.................. 1,169 3,994 7,345 8,426 7,861
General and administrative
Expenses........................ 429 1,418 17,060 19,826 18,477
Sales and marketing expenses........ 1,057 3,459 12,295 13,428 10,186
Research and development............ 249 2,646 4,040 1,492 365
Impairment of assets and other
asset write-offs................ - - 1,750 2,265 37,110
Depreciation and amortization....... 255 2,297 9,630 19,563 20,156
----- ---------- ----------- ---------- -----------
Total operating expenses.............. 3,159 13,814 52,120 65,000 94,155
----- ---------- ----------- ---------- -----------
Operating loss........................ (2,032) (9,939) (44,556) (52,286) (80,183)
Interest expense...................... (35) (178) (16,931) (35,189) (25,728)
Interest income....................... - 139 3,884 5,437 1,477
Other income.......................... - - - 198 123
Foreign currency losses............... - - (4,362) (3,670) (6,721)
----- ---------- ----------- ---------- -----------
Loss before taxes, minority
Interest and equity earnings........ (2,069) (9,978) (61,965) (85,510) (111,032)
Income tax benefit (expense).......... 1,191 5,554 13,500 6,976 (27,678)
----- ---------- ----------- ---------- -----------
Net loss before minority
interest and equity earnings....... (876) (4,424) (48,465) (78,534) (138,710)
Minority interest..................... - 130 94 - -
Equity in losses of equity
Investments......................... - - - (168) (538)
----- ---------- ----------- ---------- -----------
Net loss before extraordinary
Items............................... (876) (4,294) (48,371) (78,702) (139,248)
Extraordinary items
Gain on early extinguishment
of debt, net of tax............. - - - 17,754 4,608
----- ---------- ----------- ---------- -----------
Net loss.............................. E (876) E (4,294) E (48,371) E (60,948) E (134,640)
----- ---------- ----------- ---------- -----------
----- ---------- ----------- ---------- -----------
Net loss per share.................... E (0.11) E (0.27) E (2.43) E (2.62) E (5.18)
----- ---------- ----------- ---------- -----------
----- ---------- ----------- ---------- -----------

Balance Sheet Data:
Working capital....................... E 820 E 32,291 E 113,103 E 36,067 E 1,627
Total assets.......................... 11,606 68,081 286,48 195,821 71,972
Long-term debt(1)..................... 39 57 181,703 153,321 166,068
Total stockholders' equity 8,194 57,724 68,445 13,203 (121,104)
(deficit) ...............................

-------------------------------------
(1) Including lease obligations.

25

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

OVERVIEW

The following discussion and analysis of our financial condition and results of
operations as at and for the three years ended December 31, 2001 should be read
in conjunction with the consolidated financial statements and related notes
included elsewhere in this annual report. Certain amounts in our consolidated
financial statements and related notes have been restated to conform to the
current presentation.

This section adds additional analysis of our operations and current financial
condition and also contains forward-looking statements and should be read in
conjunction with the factors set forth below under "Forward-Looking Statements".
Where we say "we", "us", "our", or "Cybernet", we mean Cybernet Internet
Services International, Inc. and its subsidiaries.

We changed our reporting currency from the US dollar to the Euro in the quarter
ended September 30, 2000. This change was made because we believe that it
results in a more meaningful presentation of our financial position and results
of operations since the majority of our operations are conducted in Euro and in
currencies that are linked to the Euro. All prior period amounts presented have
been translated to the Euro using the US dollar to Euro exchange rate in effect
for those periods.

The following table sets forth information relating to our operations for the
years ended December 31, 1999, 2000 and 2001, expressed as a percentage of total
revenues:

YEARS ENDED DECEMBER 31,
----------------------------------------

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

Revenues:
Internet data center services................................. 3.1% 14.0% 25.9%
Connectively.................................................. 71.5 73.6 68.6
E-business.................................................... 25.4 12.4 5.5
--------- ---------- ---------
Total revenues................................................... 100.0 100.0 100.0
Direct cost of services.......................................... 63.9 64.5 64.2
--------- ---------- --------
Gross margin..................................................... 36.1 35.5 35.8
Operating expenses:
Network operations............................................ 35.1 23.5 20.1
General and administrative expenses........................... 81.5 55.3 47.3
Sales and marketing expenses.................................. 58.7 37.5 26.1
Research and development...................................... 19.3 4.2 0.9
Impairment of assets and other asset write-offs............... 8.4 6.3 95.0
Depreciation and amortization................................. 46.0 54.6 51.6
--------- ---------- --------
Total operating expenses......................................... 249.0 181.4 (241.0)
-------- --------- -------
Operating loss................................................... (212.9) (145.9) (205.2)
Interest expense................................................. (80.9) (98.2) (65.8)
Interest income.................................................. 18.5 15.2 3.8
Other income..................................................... - 0.5 0.3
Foreign currency losses.......................................... (20.8) (10.2) (17.2)
-------- -------- -------
Loss before taxes, minority interest and equity earnings......... (296.1) (238.6) (284.1)
Income tax benefit (expense)..................................... 64.5 19.5 (70.8)
------- -------- ---------
Net loss before minority interest and equity earnings............ (231.6) (219.1) (354.9)
Minority interest................................................ 0.4 - -
Equity in losses of equity investments........................... - (0.5) (1.4)
------- -------- ---------
Net loss before extraordinary items.............................. (231.2) (219.6) (356.3)
Extraordinary items.............................................. - 49.5 11.8
------- -------- ---------
Net loss......................................................... (231.2)% (170.1)% (344.5)%
======== ========= =========

26

INTRODUCTION OF THE EURO

On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the Euro. The participating countries adopted the Euro as
their common legal currency on that day. The Euro was introduced as the
official currency of these countries on January 1, 2002.

The introduction of the Euro did not materially affect our operations.

SIGNIFICANT ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States ("U.S. GAAP"), which require
us to make certain estimates and assumptions (see note 2 to our consolidated
financial statements). We believe the following significant accounting policies
involve the most significant judgment and estimates used in the preparation of
our consolidated financial statements.

IMPAIRMENT OF ASSETS AND OTHER ASSET WRITE-OFFS. In order to assess impairment
of property and equipment, related goodwill and intangible assets under U.S.
GAAP, we apply Statement Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of". If we conclude that impairment indicators exist, we test for
impairment by comparing the sum of the future undiscounted cash flows derived
from an asset or a group of assets to their carrying value. If the carrying
value of the asset or the group of assets exceeds the sum of the future
undiscounted cash flows, impairment is considered to exist and an impairment
charge will be measured and recorded. An impairment charge is measured using an
estimation of the assets' fair value, typically using a discounted cash flow
method. During 2001, we recorded an impairment charge of approximately Euro 22.0
million for goodwill, Euro 6.4 million for other intangible assets, Euro 3.9
million for telecommunication switches, and Euro 4.8 million for loss on
disposal of assets.

The identification of impairment indicators, the estimation of future cash flows
and the determination of fair values for assets or groups of assets requires us
to make significant judgments concerning the identification and validation of
impairment indicators, expected cash flows and applicable discount rates. If
actual results differ from these estimates, or if we adjust these estimates in
future periods, operating results could be significantly affected.

DEFERRED TAXES. Under U.S. GAAP, deferred taxes are recorded for temporary
differences, including the future tax benefit of net operating loss
carryforwards. In addition, under U.S. GAAP, we record a valuation allowance to
reduce net deferred tax assets to the amount that will more likely than not be
realized. We have considered, for U.S. GAAP purposes, future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for a
valuation allowance. In the event we were to determine that we would be able to
realize the deferred tax asset in the future in excess of their recorded
amounts, an adjustment to the deferred tax asset would increase income in the
period in which such determination was made. Similarly, should we determine that
we would not be able to realize all or part of the net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to expense in
the period such determination was made. The evaluation of net deferred tax
assets requires considerable judgment by us.

NEW ACCOUNTING STANDARDS. In June 1998, the Financial Accounting Standards Board
("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 requires us to recognize all derivatives on the
balance sheet at fair value. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -

27

Deferral of Effective Date of FASB Statement No. 133". In June 2000, SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133", amended SFAS No. 133. This
statement delayed the effective date to January 1, 2001.

Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. As of December 31, 2001, we did not hold any
derivative instruments or conduct any hedging activities. Therefore, there has
been no impact to the consolidated financial statements from the adoption of
SFAS No. 133, 137 and 138.

In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to an annual impairment test. Separable intangible assets that are not
deemed to have an indefinite life will continue to be amortized over their
useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and
intangible assets acquired after June 30, 2001. We will apply the new rules on
accounting for intangible assets beginning in 2002 for all indefinite lived
intangible assets in place as of January 1, 2002 as required. We do not believe
that the new pronouncements will have a material effect on our financial
statements.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs. We currently believe that SFAS No. 143 will not
have a material impact on our financial position or results of operations or
cash flows as we do not have any retirement of tangible long-lived assets
subject to the requirements of SFAS No. 143.

In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets", which supersedes SFAS No. 121. SFAS No. 144
addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of. However, SFAS No. 144
retains the fundamental provisions of SFAS No. 121 for: (1) recognition and
measurement of the impairment of long-lived assets to be held and used; and (2)
measurement of long-lived assets to be disposed of by sale. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. We currently
believe that SFAS No. 144 will not have a material impact on our financial
position or results of operations or cash flows.

DEVELOPMENTS IN 2001

CORE MARKET REFOCUS

During 2001, in light of the significant downturn in both the telecommunications
industry and the economic environment and capital market trends having
materially adversely impacted our operations and expected future growth rates,
as well as the substantial amount of debt that we have incurred, we implemented
our work plan to streamline operations and activities around our core markets
and business strategies and reduce costs. This work plan was adjusted during the
year and may further be adjusted to reflect the continued decline in the
industry and economic environment, the capital markets and our financial
position. In connection with our work plan, we took the following actions in
2001 to position and strengthen our business:

28

o reduced our overall workforce to approximately 225 employees at the
end of 2001 from approximately 275 employees at the end of 2000;

o delayed or cancelled expansion plans and capital spending;

o discontinued our IP network operations in Luxembourg and Hungary; and

o rationalized our global network.

We are currently undergoing a review of our strategic options and may make
fundamental changes to our business strategies, sell or discontinue various
businesses, assets or subsidiaries, reduce our workforce and level of business
activity or make other significant changes. See "Item 1. Business - Risk
Factors" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources".

IMPAIRMENT OF ASSETS AND OTHER ASSET WRITE-OFFS

In light of the significant negative industry and economic trends impacting our
operations and expected future growth rates, and the capital markets' adjustment
of technology valuations, we performed an assessment of certain long-lived
assets as well as goodwill and identifiable intangible assets recorded in
connection with our various acquisitions. As a result, in the year ended
December 31, 2001, we recorded an impairment charge of approximately Euro 22.0
million for goodwill, Euro 6.4 million for other intangible assets, Euro 3.9
million for telecommunication switches, and Euro 4.8 million for loss on
disposal of assets.

YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2000

RESULTS OF OPERATIONS

Total revenues increased by 9.2% from Euro 35.8 million in 2000 to Euro 39.1
million in 2001, primarily due to increased payments received under leases at
our Internet data centers, which provide us with a stream of recurring revenues.
Internet data center revenues increased by 101.6% from Euro 5.0 million in 2000
to Euro 10.1 million in 2001. In 2001, Internet data center revenues represented
25.9% of total revenues as compared to 14.0% in 2000. E-business revenues
decreased by 51.5% from Euro 4.4 million in 2000 to Euro 2.2 million in 2001 and
represented 12.4% and 5.5% of our total revenues in 2000 and 2001, respectively.
The decrease in E-business revenues is primarily the result of a reduction in
the number of Internet projects we conducted in 2001 due to the significant
downturn in the telecommunications industry. Connectivity revenues increased by
1.7% from Euro 26.4 million in 2000 to Euro 26.8 million in 2001. In 2001,
connectivity revenues represented 68.6% of total revenues as compared to 73.6%
in 2000.

We derived Euro 25.1 million or 64.2% of total revenues from our operations in
Germany in 2001 compared with Euro 20.9 million or 58.4% in 2000, Euro 6.5
million or 16.7% of total revenues from our operations in Italy in 2001 compared
with Euro 8.0 million or 22.4% in 2000, and Euro 7.5 million or 19.2% of total
revenues from our operations in other parts of Europe in 2001 compared with Euro
6.9 million or 19.2% in 2000. Due to our weak financial position, in 2002, we
made the decision to sell our operations in Italy as soon as reasonably
practicable as we do not have the financial resources to support these
operations.

Other than Telehouse, which leases our data centers in Frankfurt, Munich and
Hamburg, Germany, no customer represented more than 10% of total revenues in
2000 and 2001.

29

DIRECT COST OF SERVICES

Direct cost of services increased 8.6% from Euro 23.1 million in 2000 to Euro
25.1 million in 2001. Direct cost of services consists of (i) telecommunications
expenses which primarily represents the cost of transporting Internet traffic
from our customers' locations through a local telecommunications carrier to one
of our access nodes, transit and peering costs, and the cost of leasing lines to
interconnect our backbone nodes, and (ii) the cost of hardware and software
sold. We primarily utilize leased lines for our backbone network, and to connect
our network to our major customers' premises. Direct cost of services as a
percentage of revenues decreased marginally from 64.5% in 2000 to 64.2% in 2001.

NETWORK OPERATIONS

Network operations costs decreased 6.7% from Euro 8.4 million in 2000 to Euro
7.9 million in 2001, primarily as a result of a reduction in our workforce and
the streamlining of our operations due to the significant downturn in the
telecommunications industry in 2001. We reduced the number of technical and
operational personnel we employed to approximately 63 people at December 31,
2001 from approximately 106 people at December 31, 2000, primarily through
attrition. Network operations primarily consist of (i) the personnel costs of
technical and operational staff and related overhead, (ii) the rental of
premises solely or primarily used by technical staff, including premises used to
generate our co-location services revenue, and (iii) consulting expenses in the
area of network and software development. Network operations costs, as a
percentage of revenues, fell from 23.5% in 2000 to 20.1% in 2001.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses decreased 6.8% from Euro 19.8 million in
2000 to Euro 18.5 million in 2001, primarily as a result of a reduction in our
workforce and the streamlining of our operations due to the significant downturn
in the telecommunications industry in 2001. General and administrative expenses
consist principally of salaries and other personnel costs for our administrative
staff and office rent. As a percentage of revenues, general and administrative
expenses fell from 55.3% in 2000 to 47.3% in 2001.

We reduced the number of our general and administrative staff from approximately
73 people at the end of 2000 to approximately 46 people at the end of 2001,
primarily through attrition. The reductions were mostly in the areas of finance
and accounting, human resource management, IT, executive management and other
support functions. We have been taking measures since the first quarter of 2000
to find synergies in our operations and to reduce the number of staff in
non-essential support functions.

30

SALES AND MARKETING EXPENSES

Sales and marketing expenses decreased by 24.1% from Euro 13.4 million in 2000
to Euro 10.2 million in 2001, primarily as a result of a reduction in marketing
and advertising expenses due to cost reduction initiatives we have undertaken
given the significant downturn in the telecommunications industry. Sales and
marketing expenses consist principally of salaries of our sales force and
marketing personnel and advertising and communication expenditures. Although we
increased the number of sales and marketing staff we employ from approximately
96 as of December 31, 2000 to approximately 116 as of December 31, 2001, we have
been able to optimize our salary structure with base and variable salary. As a
percentage of revenues, our sales and marketing expenses fell from 37.5% in 2000
to 26.1% in 2001.

RESEARCH AND DEVELOPMENT

Research and development expenses decreased from Euro 1.5 million (or 4.2% of
revenues) in 2000 to Euro 0.4 million (or 0.9% of revenues) in 2001. Research
and development expenses consisted primarily of costs of employees working on
product development, consulting costs and certain overhead items. To reduce
costs, we acquired more products from partners and suppliers, minimizing the
need for in-house development.

IMPAIRMENT OF ASSETS AND OTHER ASSET WRITE-OFFS

As a result of the significant negative industry and economic trends impacting
our operations and expected future growth rates, we performed assessments of
certain long-lived assets as part of our review of financial results during
2001. The conclusion of these assessments resulted in a write down of Euro 3.9
million for telecommunication switches and Euro 4.8 million for loss on disposal
of assets.

In addition, as part of our review of financial results during 2001, we
performed an assessment of the carrying values of goodwill and other intangible
assets recorded in connection with our various acquisitions. The assessment was
performed in light of the significant negative industry and economic trends
impacting our operations and expected future growth rates, and the adjustment of
technology valuations. The conclusion of that assessment was that the decline in
market conditions within our industry was significant and other than temporary.
As a result, we recorded an impairment charge of approximately Euro 22.0 million
for goodwill and Euro 6.4 million for other intangible assets, in the year ended
December 31, 2001, based on the amount by which the carrying amount of these
assets exceeded their fair value. Fair value was determined based on the
assumptions supporting estimated future cash flows and reflected management's
best estimates.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expenses increased from Euro 19.6 million in 2000
to Euro 20.2 million in 2001, reflecting further depreciation of property and
equipment and increased amortization of goodwill related to acquisitions.
Goodwill represented the excess of the purchase price over the fair value of the
tangible assets of companies we acquired. Goodwill was amortized over periods
from five to ten years.

EQUITY IN LOSSES OF EQUITY-METHOD INVESTEES

Losses of equity-method investees reflects our portion of the loss from our
minority investment in B&N Software and the amortization of goodwill related to
the investment.

31

INTEREST INCOME AND EXPENSE

Interest expense decreased from Euro 35.2 million in 2000 to Euro 25.7 million
in 2001 as a result of the early extinguishment of certain of our indebtedness
in 2000 and 2001. Interest income decreased from Euro 5.4 million in 2000 to
Euro 1.5 million in 2001 and represented interest earned on the proceeds of
offerings before the proceeds were utilized in our business.

INCOME TAXES

We recorded income tax benefits of Euro 7.0 million in 2000 and income tax costs
of approximately Euro 27.7 million in 2001. This change is primarily due to a
valuation allowance that has been recorded. In 2001, as the Company has incurred
losses since inception and does not expect to achieve profitability in the near
future, the Company has recorded a full valuation allowance against its net
deferred tax assets since realization of these future benefits is uncertain. The
majority of our deferred tax assets relate to net operating loss carry forwards
generated by our German operations. The loss carry forwards have an indefinite
life under the current German tax law.

EXTRAORDINARY ITEMS

During 2001, we repurchased Euro 11.5 million ($10.6 million) of our 14% Senior
Notes due 2009 (the "Notes") generating an after-tax gain of Euro 4.6 million.
The Notes were repurchased at average prices equal to 28.9% of face value. As
required by the terms of the Notes, we had established an escrow account to
provide for payment in full of the first six scheduled interest payments on the
Notes. The amounts contained in the escrow account are carried on our balance
sheet as "Restricted investments". As a result of the repurchase of Notes,
approximately Euro 2.3 million was released from the escrow account and became
available to us. The purchase price of the Notes repurchased, net of amounts
released from the escrow account, was approximately Euro 1.0 million. The face
amount of the Notes outstanding at December 31, 2001 was approximately Euro 75.8
million ($66.8 million).

The amount shown as an extraordinary item represents the difference between the
amount paid to repurchase the Notes and the carrying value on the balance sheet,
as of the date of extinguishments, net of associated transaction costs and
taxes.

OUTLOOK

In 2001, the telecommunications industry underwent a significant adjustment,
particularly in the United States and Europe. Following a period of rapid
economic growth in 1999 and 2000, we saw a continued tightening in the capital
markets and slowdown in the telecommunications industry throughout 2001. This
resulted in lower capital spending by industry participants and substantially
less demand for our products and services as customers focused on maximizing
their return on invested capital. As a result, our results of operations and
financial condition were materially adversely affected. It is difficult to
predict the duration or severity of this industry adjustment, as growth in
industry spending is not expected to occur until economic concerns have subsided
and the anticipated rationalization of the industry is well underway. Market
visibility remains limited given the uncertainty of the economic downturn and
its impact on our customers' business and spending plans. We do not expect that
results of operations for any quarter will necessarily be consistent with our
quarterly historical profile or indicative of results to be expected for future
quarters.

32

YEAR ENDED DECEMBER 31, 2000 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1999

RESULTS OF OPERATIONS

Total revenues increased by 71.2% from Euro 20,928,000 in 1999 to Euro
35,831,000 in 2000. Internet Project revenues decreased by 16.4% from Euro
5,315,000 in 1999 to Euro 4,446,000 in 2000 and represented 25.4% and 12.4% of
our total revenues in 1999 and 2000, respectively. Network Services revenues
increased by 101% from Euro 15,613,000 in 1999 to Euro 31,385,000 in 2000. In
2000, Network Services represented 87.6% of total revenues as compared to 74.6%
in 1999.

The increase in revenue from Network Services is partially a result of an
expansion of our customer base, which provides us with a stream of recurring
revenues. Although in 2000 we focused primarily on building these recurring
revenues from Network Services, building relationships with customers through
Internet Projects remained a continuing strategy. In addition, 2000 Network
Service revenues include a full year of revenues for Sunweb, Cybernet Italia Spa
and Novento, compared with nine months of Sunweb revenues, six months of
Cybernet Italia revenues and three months of Novento revenues in 1999.

The decrease in Internet Project revenues is mostly the result of our decision
to be more selective when taking on Internet Projects in order to apply scarce
human resources to the projects most likely to generate long-term relationships
and generate revenues from network-based services.

We derived Euro 20,918,000 or 58.4% of total revenues from our operations in
Germany compared with Euro 11,338,000 or 54.2% in 1999, and Euro 8,040,000 or
22.4% of total revenues from our operations in Italy compared with Euro
5,161,000 or 24.7% in 1999. We derived Euro 3,859,000 or 10.8% of total revenues
from our operations in Austria compared with Euro 3,529,000 or 16.9% in 1999,
and Euro 3,014,000 or 8.4% of total revenues from our operations in Switzerland
compared with Euro 900,000 or 4.3% in 1999.

In Germany, the largest customer provides 11.8% of the revenues derived from
that market. In Italy 3% of revenues is derived from the largest customer. In
Austria 5% of revenues is derived from the largest customer. In Switzerland we
do not have any single customer which represented a significant percentage of
revenues in that market.

DIRECT COST OF SERVICES

Direct cost of services increased 73.0% from Euro 13,364,000 in 1999 to Euro
23,117,000 in 2000. Direct cost of services consists of 1) telecommunications
expenses which mainly represent the cost of transporting Internet traffic from
our customers' location through a local telecommunications carrier to one of our
access nodes, transit and peering costs, and the cost of leasing lines to
interconnect our backbone nodes, and 2) the cost of hardware and software sold.
Cybernet mainly utilizes leased lines for it's backbone network, and to connect
its network to its major customers' premises. Direct cost of services as a
percentage of revenues increased from 63.9% in 1999 to 64.5% in 2000.

NETWORK OPERATIONS

Network operations costs increased 14.7% from Euro 7,345,000 in 1999 to Euro
8,426,000 in 2000. Network operations mainly consist of 1) the personnel costs
of technical and operational staff and related overheads, 2) the rental of
premises solely or primarily used by technical staff, including premises used to
generate our co-location services revenue and 3) consulting expenses in the area
of network and software development. Network operations costs, as a percentage
of revenues fell from 35.1% in 1999 to 23.5% in 2000.

33

We had 106 technical and operations personnel on December 31, 2000 compared to
approximately 149 at December 31, 1999.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses increased 16.2% from Euro 17,060,000 in 1999
to Euro 19,826,000 in 2000. General and administrative expenses consist
principally of salaries and other personnel costs for our administrative staff
and office rent. The increase in our general and administrative expenses
reflects the costs of building a corporate infrastructure to support our
anticipated growth and the addition of general and administrative expenses of
companies acquired since 1997. As a percentage of revenues, general and
administrative expenses fell from 81.5% in 1999 to 55.3% in 2000.

General and Administrative staff decreased from approximately 110 personnel at
the end of 1999 to 73 at the end of 2000. The reductions were mostly in the
areas of Finance and Accounting, Human Resource management, IT, Executive
Management and other support functions. We have taken measures since the first
quarter of 2000 to find any possible synergy and to reduce the number of staff
in non-essential support functions.

SALES AND MARKETING EXPENSES

Sales and marketing expenses increased by 9.2% from Euro 12,295,000 in 1999 to
Euro 13,428,000 in 2000. Sales and marketing expenses consist principally of
salaries of our sales force and marketing personnel and advertising and
communication expenditures. Higher sales and marketing expenses reflect a
company-wide increase in advertising and communication expenses, as well as the
cost to integrate and re-organize our sales and marketing teams in the different
countries where we do business. Sales and marketing staff decreased from
approximately 154 on December 31, 1999 to 96 as of December 31, 2000. As a
percentage of revenues, our sales and marketing expenses fell from 58.7% in 1999
to 37.5% in 2000.

RESEARCH AND DEVELOPMENT

Research and development expenses decreased 63.1% from Euro 4,040,000 in 1999 to
Euro 1,492,000 in 2000. Research and development expenses consist principally of
personnel costs of employees working on product development, consulting costs
and certain overhead items. The personnel utilized for this purpose include our
own marketing force and the portion of their time which was devoted to product
development is included in research and development. The decrease is mainly due
to the availability of more products from partners and suppliers, minimizing the
need for in house development. As a percentage of revenues, research and
development decreased from 19.3% in 1999 to 4.2% in 2000. Most of the research
and development expenses have been incurred in our German operations and the
consolidation of acquired companies in 2000 had only a minor impact on the
growth in expenses in this area.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expenses increased from Euro 9,630,000 in 1999 to
Euro 19,563,000 in 2000. This increase reflects increased depreciation of
capital expenditures for property and equipment purchased to build the corporate
infrastructure necessary to support our anticipated growth, and increased
amortization of goodwill related to our 1999 and 2000 acquisitions. Goodwill
represents the excess of the purchase price of companies we purchased over the
fair value of the tangible assets of those companies. Goodwill was amortized
over periods from five to ten years.

34

IMPAIRMENT OF LONG LIVED ASSETS

During 2000 we re-focused our activities towards our core business. As a
consequence we cut or re-assessed certain projects and initiatives, such as
voice telephony. As a result, we recorded impairment losses of approximately
Euro 1,620,000.

Furthermore, due to management restructuring of certain subsidiaries certain key
management employees left us resulting in an impairment of capitalized
management contracts, requiring the recognition of an impairment loss of
approximately Euro 645,000 on these specific management contracts in 2000.

EQUITY IN LOSSES OF EQUITY-METHOD INVESTEES

Losses of Equity-method investees reflects our portion of the loss in our
minority investment in B&N Software and the amortization of goodwill related to
the investment.

INTEREST INCOME AND EXPENSE

Interest expense increased from Euro 16,931,000 in 1999 to Euro 35,189,000 in
2000 as a result of the debt issued in 1999. Interest income increased from Euro
3,884,000 in 1999 to Euro 5,437,000 in 2000 as a result of interest earned on
the proceeds of those offerings before they are utilized in our business. Net
foreign exchange losses decreased from Euro 4,361,000 in 1999 to Euro 3,670,000
in 2000 reflecting the reduction of our US dollar denominated borrowings and
fluctuations in exchange rates.

OTHER INCOME

Other income represents primarily gains recognized on the sales of our rights on
leased carrier grade switches in Italy.

INCOME TAXES

We recorded income tax benefits of Euro 13,500,000 in 1999 and Euro 6,976,000 in
2000. This decrease is mainly due to the adjustment necessary to revalue our
year end deferred tax assets at the new corporate tax rate in Germany, that has
been reduced to 25% from 40%. In addition, a valuation allowance has been
established against some of the deferred tax assets arising from certain of our
operating losses to reflect the estimated amount which most likely will not be
realized. The majority of our deferred tax assets relate to net operating loss
carry forwards generated by our German operations. The loss carry forwards have
an indefinite life under the current German tax law.

EXTRAORDINARY ITEMS

During 2000, we repurchased Euro 77.1 million ($72.6 million) of our Notes
generating a gain of Euro 17.8 million. The Notes were repurchased at average
prices equal to 43% of face value. As required by the terms of the Notes, we had
established an escrow account to provide for payment in full of the first six
scheduled interest payments on the Notes. The amounts contained in the escrow
account are carried on our balance sheet as "Restricted investments". As a
result of the repurchase of Notes, approximately Euro 20.4 million was released
from the escrow account and became available to us. The purchase price of the
Notes repurchased, net of amounts released from the escrow account, was
approximately Euro 13.5 million. The face amount of the Notes outstanding at
December 31, 2000 was approximately Euro 82.2 million ($77.4 million).

35

The amount shown as an extraordinary item represents the difference between the
amount paid to repurchase the Notes and the carrying value on the balance sheet,
as of the date of extinguishments, net of associated transaction costs and
taxes.

LIQUIDITY AND CAPITAL RESOURCES

Since our inception, we have financed our operations and growth primarily from
the proceeds of private and public sales of securities and, accordingly, have
incurred a significant amount of debt. Total net proceeds of debt and equity
offerings in the past five years amounted to approximately $293 million,
including the issuance of $225 million of public debt during 1999. Additionally,
our subsidiaries have financed the acquisition of certain equipment with capital
lease obligations. As a result of the significant adjustment in the
telecommunications industry and capital market trends in 2001, our financial
condition has been materially adversely affected. The significant amount of debt
we have incurred has hindered our ability to raise further funds. We currently
do not have sufficient cash to finance our operations over the next month and
are dependent upon our credit facility. Due to our weak financial position, in
2002, we made the decision to sell our operations in Italy as soon as reasonably
practicable.

Our working capital, defined as the excess of our current assets over our
current liabilities, was Euro 1.6 million at December 31, 2001.

At December 31, 2001, we had unrestricted cash, and cash equivalents and
short-term investments totaling approximately Euro 2.9 million as compared to
Euro 29.0 million at December 31, 2000. The decrease in cash and cash
equivalents and short-term investments during the year was due to cash needed to
fund our operations and investments made in building our data centers throughout
Germany.

In accordance with the provisions of our senior debt, we are required to
maintain investments in escrow to cover the first six scheduled interest
payments on the debt. Accordingly, we had restricted investments of
approximately Euro 10.6 million at December 31, 2001.

Operating activities used cash of Euro 24.3 million and Euro 58.6 million in the
years ended December 31, 2001 and 2000, respectively, primarily to fund
operations.

Investing activities provided cash of Euro 27.0 million and Euro 29.7 million in
the years ended December 31, 2001 and 2000, respectively. Investing activities
generated cash primarily from sales of short-term investments used to fund
operations. Expenditures for property and equipment consisted primarily of
purchases of equipment and investments related to our data centers, Internet
backbone and other equipment. Our capital expenditures decreased from Euro 23.9
million in 2000 to Euro 5.9 million in 2001.

Financing activities used cash of Euro 5.1 million and Euro 37.8 million in the
years ended December 31, 2001 and 2000, respectively. During the year ended
December 31, 2001, we spent Euro 3.7 million to repurchase units of our senior
debt. As a result of these purchases, Euro 2.3 million of previously restricted
investments were released of the restrictions imposed by the debenture agreement
relating to such debt. Accordingly, the net impact on unrestricted cash to
repurchase bonds with a face value of Euro 11.5 million was a decrease of Euro
1.4 million.

At December 31, 2001, we had available combined cumulative tax loss carry
forwards of approximately Euro 96.0 million most of which relate to operations
subject to German tax. Under current German tax law, these tax loss carry
forwards have no expiration date. We have provided a valuation allowance against
these loss carry forwards to reflect the estimated amount that may not be
realized.

36

On January 29, 2002, we entered into an Option Agreement with Telehouse pursuant
to which we granted an option to Telehouse to (i) purchase the Assets at the
Data Centers sub-leased by Telehouse from us, and (ii) allow Telehouse to enter
into leases at the Data Centers directly with the lessor (which requires us to
terminate the leases at these Data Centers), for gross proceeds of approximately
Euro 33.6 million (net proceeds of approximately Euro 30.0 million). Telehouse
paid us approximately Euro 1.3 million in cash in consideration of the grant of
the Option, most of which will be applied towards the purchase price in the
event the Option is exercised. The exercise date of the Option has been extended
from March 31, 2002 to April 30, 2002 by agreement of the parties. To date, the
Option has not been exercised. See "Item 1. Business - Recent Developments".

On March 12, 2002, we entered into the Credit Facility Agreement which provided
for a revolving term credit facility in the aggregate principal amount of up to
Euro 7.0 million to be made available to us under three tranches.

The first tranche under the credit facility in the principal amount of Euro
949,000 must be used for the purpose of making stipulated payments under the
Settlement Agreement and the payment of financing fees and expenses pursuant to
the Credit Facility Agreement. The second tranche in the principal amount of up
to Euro 1,500,000 must be used solely to finance our working capital and for
general corporate requirements. The third tranche in the principal amount of
Euro 4,551,000 must be used solely to restructure our current indebtedness and,
in conjunction therewith, to finance our working capital requirements.

The credit facility bears interest at 14% per annum and has a term of one year
to be paid or repaid on the earlier of March 12, 2003 (which date the Lender may
extend at its sole option for additional periods of 12 months per extension) and
the occurrence of an event of default as set out in the Credit Facility
Agreement.

As continuing security for the performance of all of our obligations under the
credit facility, we pledged certain securities held by us in certain of our
subsidiary companies or companies in which we have an interest and provided a
security interest in all of our right, title and interest in and to presently
owned or held and after acquired personal property, assets and undertakings
(other than real property) and all proceeds thereof and therefrom.

The advancement of funds under the credit facility is subject to certain
conditions precedent, including, but not limited to, our representations and
warranties in the Credit Facility Agreement and related documents being true and
correct and there being no event that has occurred or is continuing or that
would result from such an advance of funds under the credit facility that
constitutes or would constitute a default or an event of default under the terms
of the Credit Facility Agreement. In addition, the advancement of funds under
the second tranche and third tranche is subject to supplemental conditions
precedent.

The credit facility contains various covenants restricting, among other things,
our ability to incur indebtedness, merge or dispose of assets, and make
distributions, loans and investments.

Events of default under the credit facility are customary for facilities of this
type, including, but not limited to, the failure to pay principal and interest
as it becomes due, the failure to perform certain covenants and the occurrence
of a change of control with respect to us or any of our subsidiaries.

The Credit Facility Agreement and the transactions contemplated thereby were
unanimously approved by a quorum of the Board of Directors existing prior to the
Stockholders' Meeting.

37

We are dependent upon the credit facility to continue operations. Without
further advances under the credit facility, we do not have sufficient funds to
continue our operations over the next month. However, if the acquisition by
Telehouse of our Data Centers is completed, we would receive gross proceeds of
approximately Euro 33.6 million (net proceeds of approximately Euro 30.0
million). There can be no assurance that we will receive further advances under
the credit facility or that the Option will be exercised by Telehouse or, if we
do receive such further advances and/or Telehouse exercises the Option, that we
will have sufficient funds to continue operations in the future or that we will
be successful in returning our operations to profitability. We may need to
obtain additional financing in the future and there can be no assurance that we
will be successful in obtaining such financing or on terms satisfactory to us.

FORWARD-LOOKING STATEMENTS

Certain information and statements contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations and other sections of
this report, including statements containing words such as "could", "expects",
"may", "anticipates", "believes", "intends", "estimates", "plans", and similar
expressions, are forward-looking statements. These address our business, results
of operations and financial condition, and include statements based on current
expectations, estimates, forecasts and projections about the operating
environment, economies and markets in which we operate and our beliefs and
assumptions regarding such operating environment, economies and markets. In
addition, we or others on our behalf may make other written or oral statements
which constitute forward-looking statements. This information and such
statements are subject to important risks, uncertainties and assumptions, which
are difficult to predict. The results or events predicted in these statements
may differ materially from actual results or events. Some of the factors which
could cause results or events to differ from current expectations include, but
are not limited to, the factors set forth below. Except as otherwise required by
applicable securities laws, we disclaim any intention or obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.

WE ARE DEPENDENT UPON THE CREDIT FACILITY TO CONTINUE OPERATIONS AFTER THE NEXT
MONTH.

We have been financing our operations through proceeds from the public and
private sales of our securities. Accordingly, we have incurred a substantial
amount of debt. As a result of the significant downturn in the
telecommunications industry and capital market trends in 2001, our financial
condition has been materially adversely affected. The significant amount of debt
we have incurred has hindered our ability to raise further funds. We do not have
sufficient funds to continue our operations over the next month. We are
dependent upon the credit facility to continue operations, unless the
acquisition by Telehouse of our Data Centers is completed prior to exhausting
our funds. Although we have received payment under the first tranche of the
credit facility, there can be no assurance that we will receive further advances
under the credit facility or that the Option will be exercised by Telehouse or,
if we do receive such further advances and/or Telehouse exercises the Option,
that we will have sufficient funds to continue operations in the future or that
we will be successful in returning our operations to profitability. We may need
to obtain additional financing in the future and there can be no assurance that
we will be successful in obtaining such financing or on terms satisfactory to
us.

WE HAVE INCURRED A SUBSTANTIAL AMOUNT OF DEBT, WHICH HINDERS OUR ABILITY TO
RAISE FURTHER FUNDS.

In order to finance our business, we may need to secure additional sources of
funding in addition to our credit facility, including debt and/or equity
financing, in the future. However, we have incurred a substantial amount of
debt, which hinders our ability to raise further funds. There can be no
assurance that we will be able to secure additional funding in the future. A
high level of debt, arduous or restrictive terms and conditions relating to
accessing certain sources of funding, poor

38

business performance or lower than expected cash inflows could have materially
adverse consequences on the operation of our business.

Other effects of a high level of debt include the following:

o we may have difficulty borrowing money in the future, or accessing
sources of funding;

o we may need to use a large portion of our cash flow from operations to
pay principal and interest on our indebtedness, which would reduce the
amount of cash available to finance our operations and other business
activities;

o a high debt level, arduous or restrictive terms and conditions, or
lower than expected cash flows would make us more vulnerable to
economic downturns and adverse developments in our business; and

o if operating cash flows are not sufficient to meet our operating
expenses, capital expenditures and debt service requirements as they
become due, we may be required, in order to meet our debt service
obligations, to delay or reduce capital expenditures or the
introduction of new products, sell assets and/or forego business
opportunities.

WE HAVE AND ARE CONTINUING TO STREAMLINE OPERATIONS AND ACTIVITIES AROUND OUR
CORE MARKETS AND BUSINESS STRATEGIES AND REDUCE COSTS.

In response to changes in industry and market conditions, we have engaged in
activities to streamline our business and reduce costs. We have based our work
plan on certain assumptions regarding the cost structure of our business and the
nature and severity of the current industry adjustment, which may prove not to
be accurate. We are currently reviewing our strategic options with regard to the
future direction of our business.

In connection with reviewing our strategic options, we have assessed, and will
continue to assess, our business strategies, whether we should dispose of or
discontinue various businesses, assets or subsidiaries or further reduce our
workforce and level of business activity or make other significant changes to
our operations or otherwise, as well as review the recoverability of our
tangible and intangible assets associated with our businesses. Any decision to
further limit investment or to dispose of or otherwise exit businesses or make
other significant changes may result in the recording of additional charges,
such as workforce reduction costs, facilities reduction costs, asset write downs
and contractual settlements. Additionally, estimates and assumptions used in
asset valuations are subject to uncertainties, as are accounting estimates with
respect to the useful life and ultimate recoverability of our carrying basis of
assets, including goodwill and other intangible assets. As a result, future
market conditions may result in further charges for the write down of tangible
and intangible assets.

WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT THE INITIATIVES WE HAVE UNDERTAKEN
AND, EVEN IF SUCCESSFULLY IMPLEMENTED, THESE INITIATIVES MAY NOT BE SUFFICIENT
TO MEET THE CHANGES IN INDUSTRY AND MARKET CONDITIONS AND TO ACHIEVE FUTURE
PROFITABILITY.

We must successfully implement our work plan if we are to adjust our cost
structure to reflect current and expected future economic conditions, market
demands and revenues, and to achieve future profitability. We must also manage
the potentially higher growth areas of our business effectively, as well as the
non-core areas of our business, in light of current and expected future market
demands and trends.

39

Under our work plan, we have implemented a number of initiatives, including
writing down our tangible and intangible assets, to streamline our business.
However, our work plan, including workforce reductions, may not be sufficient to
meet the changes in industry and market conditions, and such conditions may
continue to deteriorate or last longer than we expect. In addition, we may not
be able to successfully implement our work plan and may be required to refine,
expand or extend our work plan. Furthermore, our workforce reductions may impair
our ability to realize our current or future business objectives. Lastly, costs
actually incurred in connection with these initiatives may be higher than the
estimated costs of such actions and/or may not lead to the anticipated cost
savings. As a result, our initiatives may not result in our return to
profitability.

ECONOMIC CONDITIONS IN THE UNITED STATES, EUROPE AND GLOBALLY, AFFECTING THE
TELECOMMUNICATIONS INDUSTRY, AS WELL OTHER TRENDS AND FACTORS AFFECTING THE
TELECOMMUNICATIONS INDUSTRY, ARE BEYOND OUR CONTROL AND MAY RESULT IN REDUCED
DEMAND AND PRICING PRESSURE FOR OUR PRODUCTS AND SERVICES.

There are trends and factors affecting the telecommunications industry which are
beyond our control and may affect our operations. Such trends and factors
include:

o adverse changes in the public and private equity and debt markets and
our ability, as well as the ability of our customers, to obtain
financing or to fund working capital and capital expenditures;

o adverse changes in the market conditions in our industry and the
specific markets for our products and services;

o visibility to, and the actual size and timing of, capital expenditures
by our customers;

o inventory practices, including the timing of service deployment, of our
customers;

o policies of our customers regarding utilization of single or multiple
vendors for the products and services they purchase;

o the overall trend toward industry consolidation and rationalization
among our customers and competitors;

o governmental regulation or intervention affecting communications or
data networking; and

o the effects of war and acts of terrorism.

Economic conditions affecting the telecommunications industry, which affect
market conditions in the telecommunications and networking industry, in the
United States, Europe and globally, affect our business. Reduced capital
spending and/or negative economic conditions in the United States, Europe and/or
other areas of the world could result in reduced demand for or pricing pressure
on our products and services.

RATIONALIZATION AND CONSOLIDATION IN THE TELECOMMUNICATIONS INDUSTRY MAY CAUSE
US TO EXPERIENCE A LOSS OF CUSTOMERS.

The telecommunications industry has experienced the consolidation and
rationalization of industry participants and we expect this trend to continue.
There have been adverse changes in the public and private equity and debt
markets for telecommunications industry participants which have affected their
ability to obtain financing or to fund capital expenditures. Some operators have
experienced financial difficulty and have, or may, file for bankruptcy
protection or be acquired by other operators. Other operators may merge and we
and one or more of our competitors may each supply products and

40

services to the companies that have merged or will merge. This
rationalization/consolidation could result in our dependence on a smaller number
of customers, purchasing decision delays by the merged companies and/or our
playing a lesser role, or no longer playing a role, in the supply of
communications services and solutions to the merged companies.

WE MAY BE MATERIALLY AND ADVERSELY AFFECTED BY CONTINUED REDUCTIONS IN SPENDING
BY OUR CUSTOMERS.

A continued slowdown in capital spending by our customers may affect our
revenues more than we currently expect. Moreover, the significant slowdown in
capital spending by our customers has created uncertainty as to market demand.
As a result, revenues and operating results for a particular period can be
difficult to predict. In addition, there can be no certainty as to the severity
or duration of the current industry adjustment. As a result of the recent
changes in industry and market conditions, many of our customers have reduced
their capital spending on telecommunications infrastructure. Our revenues and
operating results have been and are expected to continue to be materially and
adversely affected by the continued reductions in capital spending by our
customers.

WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR OPERATING RESULTS AND RATE OF
GROWTH.

Our operating results may fluctuate significantly as a result of a number of
factors. These factors include:

o our ability to successfully complete programs on a timely basis to
reduce our cost structure, including fixed costs, and to streamline our
operations;

o our ability to implement our work plan without negatively impacting our
relationships with our customers, the delivery of products and services
based on new and developing technologies and at competitive prices, and
the retention of qualified personnel;

o our ability to retain and increase business with existing
customers, attract new customers and satisfy our customers'
demands;

o timing and costs of upgrades and developments in our systems and
infrastructure;

o the inherent uncertainties of using estimates and assumptions for asset
valuations and the impact of changes in accounting principles used to
value assets;

o fluctuations in our gross margins;

o the impact of acquired businesses and technologies; and

o the development, introduction and market acceptance of new
technologies.

Significant fluctuations in our operating results could contribute to volatility
in the market price of our common shares.

OUR GROSS MARGINS MAY BE NEGATIVELY AFFECTED, WHICH IN TURN WOULD NEGATIVELY
AFFECT OUR OPERATING RESULTS AND COULD CONTRIBUTE TO VOLATILITY IN THE MARKET
PRICE OF OUR COMMON SHARES.

Our gross margins may be negatively affected as a result of a number of factors,
including:

o increased price competition;

o excess capacity;

41

o higher material or labour costs;

o obsolescence charges;

o introductions of new products and services and costs of entering new
markets;

o increased levels of customer services; and

o changes in product and geographic mix.

Lower than expected gross margins would negatively affect our operating results
and could contribute to volatility in the market price of our common shares.

FUTURE CASH FLOW FLUCTUATIONS MAY AFFECT OUR ABILITY TO FUND OUR WORKING CAPITAL
REQUIREMENTS OR ACHIEVE OUR BUSINESS OBJECTIVES IN A TIMELY MANNER.

Our working capital requirements and cash flows are subject to quarterly and
yearly fluctuations, depending on such factors as timing and size of capital
expenditures, levels of sales, collection of receivables and customer payment
terms. Our inability to manage cash flow fluctuations resulting from such
factors could have a material adverse effect on our ability to fund our working
capital requirements from operating cash flows and other sources of liquidity or
to achieve our business objectives in a timely manner.

WE HAVE A LIMITED OPERATING HISTORY AND OUR STOCK PRICE IS VOLATILE.

We have a relatively short operating history and we are involved in a rapidly
evolving and unpredictable industry. The trading price of our common stock may
fluctuate significantly. Trading prices of our common stock may fluctuate in
response to a number of events and factors, including:

o general economic conditions;

o changes in interest rates;

o conditions or trends in the Internet industry;

o fluctuations in the stock market in general and market prices for
Internet-related companies in particular;

o quarterly variations in operating results;

o changes in capital structure, including issuance of additional debt or
equity to the public;

o additions or departures of key personnel; and

o corporate restructurings, including layoffs or closures of facilities.

42

WE HAVE MADE STRATEGIC ACQUISITIONS IN ORDER TO ENHANCE THE EXPANSION OF OUR
BUSINESS. IF WE ARE NOT SUCCESSFUL IN OPERATING OR INTEGRATING THESE
ACQUISITIONS, OUR BUSINESS, RESULTS OF OPERATIONS, AND FINANCIAL CONDITION MAY
BE MATERIALLY AND ADVERSELY AFFECTED.

In the past, we acquired companies to enhance the expansion of our business and
products. Acquisitions involve significant risks and uncertainties. These risks
and uncertainties include:

o the risk that the industry may develop in a different direction than
anticipated and that the technologies we acquire do not prove to be
those we need to be successful in the industry;

o the risk that future valuations of acquired businesses may decrease
from the market price we paid for these acquisitions;

o the generation of insufficient revenues by acquired businesses to
offset increased operating expenses associated with these acquisitions;

o the potential difficulties in integrating new products, businesses and
operations in an efficient and effective manner;

o the potential loss of key employees of the acquired businesses;

o the risk that acquired businesses will divert the attention of our
senior management from the operation of our business; and

o the risks of entering new markets in which we have limited experience
and where competitors may have a stronger market presence.

OUR BUSINESS MAY SUFFER IF STRATEGIC ALLIANCES WHICH WE HAVE ENTERED INTO ARE
NOT SUCCESSFUL.

We have entered into a number of strategic alliances with members in our
industry. If a member of a strategic alliance fails to perform its obligations,
if the relationship fails to develop as expected, or if the relationship is
terminated, we could experience impairment of our relationships with our
customers.

Our present and future strategic alliances may create risks such as:

o disruption of our ongoing business, including loss of management focus
on existing business;

o impairment of relationships with existing employees, customers and
companies with which we have formed strategic alliances; and

o problems retaining key technical and managerial personnel.

WE MAY NOT BE ABLE TO RETAIN THE SPECIALIZED TECHNICAL AND MANAGERIAL PERSONNEL
NECESSARY TO ACHIEVE OUR BUSINESS OBJECTIVES.

Competition for certain key positions and specialized technical personnel in the
high-technology industry is intense, despite current economic conditions. We
believe that our future success depends in part on our ability to retain
qualified personnel in a timely manner, particularly key members of senior
management and in our key areas of potential growth. A key factor in retaining
qualified employees is our ability to provide employees with the opportunity to
participate in the potential growth of our business through programs such as
stock option plans and employee investment plans.

43

The value of these opportunities may be adversely affected by the volatility or
negative performance of the market price for our common shares.

WE FACE SIGNIFICANT COMPETITION AND MAY NOT BE ABLE TO MAINTAIN OUR MARKET SHARE
AND MAY SUFFER FROM COMPETITIVE PRICING PRACTICES.

We operate in a highly volatile industry that is characterized by vigorous
competition for market share and rapid technological development. Competition is
heightened in periods of slow overall market growth. These factors could result
in aggressive pricing practices and growing competition from start-up companies,
established competitors, as well as well-capitalized computer systems and
communications companies, which, in turn, could have a material adverse effect
on our results of operations and financial condition.

We expect that we will face additional competition from existing competitors and
from a number of companies that have entered or may enter our existing and
future markets. Some of our current and potential competitors have greater
marketing, technical and financial resources, including the ability to provide
customer financing in connection with the sale of products and services. Many of
our current and potential competitors have also established, or may in the
future establish, relationships with our current and potential customers.
Increased competition could result in price reductions, negatively affecting our
operating results, reducing profit margins and potentially leading to a loss of
market share.

FLUCTUATING EXCHANGE RATES BETWEEN THE US DOLLAR AND EURO MAY NEGATIVELY IMPACT
OUR BUSINESS, RESULTS OF OPERATIONS, AND FINANCIAL CONDITION.

We carry a substantial amount of debt in US dollars, but our reporting currency
is the Euro. Accordingly, fluctuations in exchange rates between the US dollar
and Euro can have a material adverse effect on our results of operations and
financial condition. See "Item 7A. Quantitative and Qualitative Disclosures
about Market Risk".

WE OPERATE IN A HIGHLY DYNAMIC AND VOLATILE INDUSTRY CHARACTERIZED BY RAPIDLY
CHANGING TECHNOLOGIES AND EVOLVING INDUSTRY STANDARDS.

Our industry is characterized by rapidly changing technologies and evolving
industry standards. Our success will depend on our ability to comply with
emerging industry standards, to address emerging market trends and to compete
with technological and other developments carried out by others. We may not be
successful in targeting new market opportunities or in achieving market
acceptance for our businesses.

CHANGES IN REGULATION OF THE INTERNET MAY AFFECT THE MANNER IN WHICH WE CONDUCT
OUR BUSINESS AND MAY MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS, RESULTS OF
OPERATIONS, AND FINANCIAL CONDITION.

There are currently few domestic or international laws or regulations that apply
directly to access to or commerce on the Internet. We could be materially and
adversely affected by regulation of the Internet in any country where we operate
in respect of such technologies as voice over the Internet, encryption
technology and access charges for Internet service providers. We could also be
materially and adversely affected by increased competition as a result of the
continuing deregulation of the telecommunications industry. If a jurisdiction in
which we operate adopts measures which affect the regulation of the Internet or
the deregulation of the telecommunications industry, we could experience both
decreased demand for our products and increased costs of selling such products.
Changes in laws or regulations governing the Internet and Internet commerce
could have a material adverse effect on our business, results of operations, and
financial condition.

44

FOREIGN CURRENCY

Our operations are conducted in international markets and our consolidated
financial results are subject to foreign currency exchange rate fluctuations.
Since the majority of our operations are conducted in Euro and in currencies
that are linked to the Euro, we report our consolidated financial results in
Euro. However, we have incurred a substantial amount of debt in US dollars.
Accordingly, our financial position for any given period, when reported in Euro,
can be significantly affected by the exchange rate for the US dollar to the Euro
prevailing during that period.

We translate foreign assets and liabilities into Euro at the rate of exchange on
the balance sheet date. Revenues and expenses are translated at the average rate
of exchange prevailing during the period. Unrealized gains or losses from these
translations are recorded as shareholders' equity on the balance sheet and do
not affect our net earnings.

In the year ended December 31, 2001, we reported a net Euro 0.1 million foreign
exchange translation loss and, as a result, the cumulative foreign exchange
translation loss increased to Euro 0.7 million at December 31, 2001 from Euro
0.6 million at December 31, 2000.

The average and period end exchange rates for the US dollar to the Euro for the
periods indicated are as follows:

YEARS ENDED DECEMBER 31,
---------------------------------------------
2001 2000
--------------------- ------------------

PERIOD PERIOD
PERIOD END AVERAGE PERIOD END AVERAGE
---------- ------- ---------- -------

RATES OF EXCHANGE
Euro..................... 1.1347 1.1166 1.0620 1.0850

Based upon the period average exchange rate in 2001, the US dollar increased by
approximately 2.9% in value against the Euro since December 31, 2000.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary market risks we are exposed to are interest rate and foreign
currency exchange rate fluctuations. We manage our exposure to interest rate
fluctuations by maintaining our cash balances in deposits at banks and in highly
liquid short-term investments, such as money market mutual funds, which lowers
our exposure to interest rate fluctuations. We have not entered into any
derivative hedging instruments to reduce the risk of exchange rate fluctuations.

As a result of our private unit offering in July 1999 and private discount notes
offering in August 1999, we have a substantial amount of debt in US dollars. Our
reporting currency is the Euro. The majority of our foreign exchange rate
exposure for financial statement reporting purposes relates to the translation
of our US dollar debt into Euro which is impacted by changes in the exchange
rate between the Euro and the US dollar. Significant fluctuations in the US
dollar to Euro exchange rate affects the amount of Euro required to satisfy this
debt. We estimate that a 10% increase in the exchange rate for the US dollar to
the Euro would increase the Euro amount required to settle the debt outstanding
from the private unit offering and the private discount notes offering by
approximately Euro 13.1 million.

We prepared a sensitivity analysis to assess the impact of exchange rate
fluctuations on our 2001 operating results. Based on this analysis, we estimate
that a 6% increase in the exchange rate for the US dollar to the Euro would have
increased our reported net loss for 2001 by approximately Euro 7.6 million.

45

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is included in this annual report
beginning on page F-1.

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated by reference to pages 12 to 14 and 17 and 18 of the Registrant's
definitive proxy statement filed February 21, 2002.

We currently have five directors. In accordance with the terms of our
Certificate of Incorporation and By-Laws, our Board of Directors is divided into
three classes: Class A, whose term will expire at the annual meeting of
stockholders to be held in 2005; Class B, whose term will expire at the annual
meeting of stockholders to be held in 2003; and Class C, whose term will expire
at the annual meeting of stockholders to be held in 2004. At each annual meeting
of stockholders, the successors to directors whose terms then expire will be
elected to serve until the third annual meeting following election and until
their successors are duly elected and qualified. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of
one-third of the directors.

Mr. Eder, Dr. di Fraia, Mr. Besner and Mr. Fratarcangelo are no longer our
directors and/or officers. See "Item 1. Business - Recent Developments".
Following is information relating to our recently elected and/or appointed
directors and executive officers:

MICHAEL J. SMITH, age 53, has been our President, Chief Executive Officer and a
Class C director since March 12, 2002. Mr. Smith is the President and Chief
Executive Officer and a director of MFC. Mr. Smith has been the President and
Chief Executive Officer of MFC since 1996 and a director since 1986. Mr. Smith
is also a director of TriMaine Holdings, Inc., Drummond Financial Corporation
and Euro Trade & Forfaiting, Inc. and a member of the management board of
Digitale Telekabel AG. Formerly, Mr. Smith was the Executive Vice-President,
Chief Financial Officer, Secretary and a trustee of Mercer International Inc.
from 1985 to 1996. Mr. Smith was one of the founding members of the Prentiss
Howard Group, a company organized in 1979 which assists domestic and
international companies with investments, mergers and acquisitions.

ROY ZANATTA, age 37, has been our Secretary, Treasurer and a Class B director
since March 12, 2002. Mr. Zanatta has been the Secretary, Vice-President and a
director of MFC since 1996. Mr. Zanatta is also a director of TriMaine Holdings,
Inc. Formerly, Mr. Zanatta consulted for and held positions with the British
Columbia Hydro and Power Authority, the Canadian Standards Association and
Atomic Energy of Canada Ltd. Mr. Zanatta earned a B.A.Sc. degree in 1987 from
the University of British Columbia (Canada) and an MBA in 1991 from McGill
University (Canada).

EDUARD SELIGMAN, age 36, has been a Class C director since March 12, 2002. Mr.
Seligman is a Vice-President of MFC Merchant Bank S.A., a fully licensed Swiss
bank. Mr. Seligman has been an employee of MFC Merchant Bank S.A. since 1998.
Mr. Seligman is also a member of the management board of Digitale Telekabel AG.
Formerly, Mr. Seligman held the position of co-manager of a private fund with
Performance Plus S.A. (Switzerland) from 1996 to 1998 and worked in the
commercial department of Credit Suisse from 1993 to 1995. Mr. Seligman is a
Certified Financial Analyst and earned a lic. Oec. HSG. degree in 1992 from the
St. Gallen University for Business Administration, Law and Social Studies
(Switzerland).

46

GREG ELDERKIN, age 38, has been a Class B director since March 12, 2002. Mr.
Elderkin is the Executive Vice President, a director and the designated real
estate broker at Pacific West Brokerage, Inc. Mr. Elderkin has held these
positions since 1989. In addition, Mr. Elderkin is a co-founder and director of
the SFG Funds, a private real estate lending organization, and a director of Med
Net International Ltd., a Toronto Stock Exchange listed company.

SLOBODAN ANDJIC, age 57, has been a Class A director since March 12, 2001. Mr.
Andjic has also been a director of Euro Trade Forfaiting Inc. since October 10,
2000 and a director of Marine Shuttle Operations Inc. since January 11, 2002.
Mr. Andjic has served as Vice President and a director of Swiss Investment Group
since 1998. He served as an advisor to the President of Mercur and a director
and coordinator of the Mercur group of companies from 1996 to 1998. Mr. Andjic
was the Chairman of Yugoexport Athens Company from 1994 to 1996.

ITEM 11. EXECUTIVE COMPENSATION

Incorporated by reference to pages 16 to 26 of the Registrant's definitive proxy
statement filed February 21, 2002.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

The table below provides information on exercises of options to purchase shares
of our common stock during 2001 by the Named Executive Officers and information
with respect to unexercised options held by the Named Executive Officers at
December 31, 2001:

NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
SHARES UNDERLYING UNEXERCISED MONEY OPTIONS AT FISCAL
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END YEAR-END
EXERCISE REALIZED (#) (E)
NAME (#) (E) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- ------------------- ----------- --------- --------------------------- ----------------------------

Andreas Eder - - 235,484/244,516 -/-

Bernd Buchholz - - 155,270/324,730 -/-

Paolo V. Di Fraia - - 213,262/266,738 -/-

- ---------------------
(1) Based on the closing price of our shares of common stock on the OTC Bulletin
Board on December 31, 2001 of $0.37.

EMPLOYMENT CONTRACTS

On March 12, 2002, pursuant to the Settlement Agreement we entered into a
termination agreement with Mr. Eder in connection with his employment agreement
with us. Under the terms of the termination agreement, the employment agreement
between Mr. Eder and us is to be terminated effective September 15, 2002, unless
terminated earlier by written notice of 30 days. In that regard, Mr. Eder also
agreed to resign as a director and/or officer of our subsidiaries on or before
the termination date. Under the terms of the termination agreement, Mr. Eder is
entitled to receive Euro 14,913 per month until the termination date unless his
employment is terminated earlier for cause. In addition, he received Euro
115,000 upon the signing of the termination agreement and will receive a further
Euro 115,000 on the termination date (provided that his employment has not been
terminated earlier for cause) and Euro 287,000 if Telehouse completes the sale
and transfer agreement under the option agreement as described in "Item 1.
Business - Recent Developments". Mr. Eder is also entitled to receive options to
purchase up to 262,222 shares of our common stock exercisable as to 144,444
shares as of February 28, 2002 at a price of Euro 9.02 per share, exercisable as
to 40,000 shares as of February 28, 2002 at a price of Euro 4.19 per share and
exercisable as to 77,778 shares as of March 1, 2002 at a price of Euro 1.89 per
share, subject to the provisions of the Cybernet 1998

47

Stock Incentive Plan. The termination agreement also contains provisions as to
confidentiality, non-solicitation and settlement of claims. (See "Item 1.
Business - Recent Developments".

On March 12, 2002, pursuant to the Settlement Agreement we entered into a
termination agreement with Dr. di Fraia in connection with his employment
agreement with us. Under the terms of the termination agreement, his employment
agreement with us is to be terminated effective September 15, 2002, unless
terminated earlier by written notice of 30 days. Dr. di Fraia agreed to resign
as a director and/or officer of our subsidiaries on or before the termination
date. Under the termination agreement, Dr. di Fraia is entitled to receive Euro
12,784 per month until the termination date unless his employment is terminated
earlier for cause. In addition, he received Euro 82,500 upon the signing of the
termination agreement, will receive Euro 82,500 on the termination date
(provided that he has not been earlier terminated for cause) and Euro 205,000 if
Telehouse completes the sale and transfer agreement under the option agreement
as described in "Item 1. Business - Recent Developments". Mr. Eder is also
entitled to receive options to purchase up to 240,000 shares of our common stock
exercisable as to 40,000 shares as of February 28, 2002 at a price of Euro 4.19
per share, exercisable as to 77,778 shares as of March 1, 2002 at a price of
Euro 1.89 per share and exercisable as to 122,222 shares as of March 9, 2002 at
a price of Euro 8.19 per share, subject to the provisions of the Cybernet 1998
Stock Incentive Plan. The termination agreement also contains provisions as to
confidentiality, non-solicitation and settlement of claims. See "Item 1.
Business - Recent Developments".

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as of March 12, 2002 regarding
beneficial ownership of shares of our common stock by:

(1) each stockholder known by us to be the beneficial owner of
more than five (5%) percent of the outstanding shares of
common stock;

(2) each of our current directors and executive officers; and

(3) all of our current directors and executive officers as a
group.

The information presented has either been furnished to us by beneficial owners
of our common stock or is based upon filings made with the U.S. Securities and
Exchange Commission. As ofMarch 12, 2002, there were 26,535,627 shares of our
common stock outstanding.

AMOUNT OF PERCENTAGE OF
COMMON OUTSTANDING
STOCK COMMON
NAME OF HOLDER HELD(1) STOCK
--------------------------------------------- ----------- ---------------

Directors and Executive Officers:

Michael J. Smith (2) 6,872,796 25.9%

Roy Zanatta(3) 6,872,796 25.9%

Eduard Seligman - -

Greg Elderkin - -

Slobodan Andjic - -

All directors and executive officers as a group(4) 6,872,796 25.9%

48

AMOUNT OF PERCENTAGE OF
COMMON OUTSTANDING
STOCK COMMON
NAME OF HOLDER HELD(1) STOCK
--------------------------------------------- ----------- ---------------

Principal Stockholders Other Than Directors and Executive Officers:
Andreas Eder 1,642,765(5) 6.2%
Stefan-George-Ring 19
81929 Munich, Germany

MFC Bancorp Ltd.(4) 6,872,796 25.9%
17 Dame Street
Dublin 2, Ireland

Holger Timm(6) 1,295,400 4.9%
Trabener Strasse 12
14193 Berlin, Germany

Ventegis Capital AG 5,577,396 21.0%
(formerly Cybermind Interactive Europe)
Kurfurstendamm 119
10711 Berlin, Germany

- --------------
*Indicates less than 1% beneficial ownership.

(1) Beneficial ownership is determined in accordance with rules of the U.S.
Securities and Exchange Commission and includes shares over which the
beneficial owner exercises voting or investment power. Shares of common
stock subject to options currently exercisable or exercisable within sixty
days of March 12, 2002 are deemed to be outstanding for the purposes of
computing the percentage ownership of that individual or group, but are not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person shown in the table.

(2) On November 2, 2001, MFC was granted voting rights over 1,295,400 shares
and 5,577,396 shares of our common stock beneficially owned by Holger Timm
and Ventegis Capital AG (formerly Cybermind Interactive Europe),
respectively, pursuant to an agreement among MFC, Holger Timm, Ventegis and
Consors Capital Bank AG dated for reference October 29, 2001. Mr. Smith is
a director and executive officer of MFC but disclaims beneficial ownership
of these shares.

(3) On November 2, 2001, MFC was granted voting rights over 1,295,400 shares
and 5,577,396 shares of our common stock beneficially owned by Holger Timm
and Ventegis Capital AG (formerly Cybermind Interactive Europe),
respectively, pursuant to an agreement among MFC, Holger Timm, Ventegis and
Consors Capital Bank AG dated for reference October 29, 2001. Mr. Zanatta
is a director and executive officer of MFC but disclaims beneficial
ownership of these shares.

(4) On November 2, 2001, MFC was granted voting rights over 1,295,400 shares
and 5,577,396 shares of our common stock beneficially owned by Holger Timm
and Ventegis Capital AG (formerly Cybermind Interactive Europe),
respectively, pursuant to an agreement among MFC, Holger Timm, Ventegis and
Consors Capital Bank AG dated for reference October 29, 2001. The directors
and executive officers of MFC disclaim beneficial ownership of such shares.

(5) Includes 38,750 shares of our common stock held by Mr. Eder's spouse. She
has sole investment and sole voting power over all shares of common stock
held by her, and Mr. Eder disclaims beneficial ownership of any of such
shares. Also includes options to purchase 262,222 shares of our common
stock under the Cybernet 1998 Stock Incentive Plan which are currently
exercisable. Does not include options to purchase 217,778 shares of our
common stock under the incentive plan exercisable on certain dates after
March 12, 2002.

(6) We have been advised by Mr. Timm that (i) he is a minority shareholder and
a member of the supervisory board of Ventegis, (ii) Mr. Timm and Ventegis
have each granted MFC voting control over shares they own, and (iii) Mr.
Timm disclaims beneficial ownership of our securities held by Ventegis.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Incorporated by reference to page 23 of the Registrant's definitive proxy
statement filed February 21, 2002.

49

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K

PAGE
----

(a) (1) FINANCIAL STATEMENTS

Independent Auditors' Report.......................................................................F-1
Consolidated Balance Sheets........................................................................F-2
Consolidated Statements of Operations..............................................................F-3
Consolidated Statements of Cash Flows..............................................................F-4
Consolidated Statements of Changes in Shareholders' Equity.........................................F-6
Notes to the Consolidated Financial Statements.....................................................F-7

(2) LIST OF EXHIBITS

3.1 Certificate of Incorporation. Incorporated by reference to the
Form S-1 Registration Statement filed with the Commission on
September 18, 1998.

3.2 Bylaws. Incorporated by reference to the Form S-1 Registration
Statement filed with the Commission on September 18, 1998.

4.1 Unit Agreement dated as of July 8, 1999 by and among Cybernet,
Lehman Brothers International (Europe) and Morgan Stanley &
Co. International Limited. Incorporated by reference to the
Form S-4 Registration Statement No. 333-86853 filed September
10, 1999.

4.2 Indenture dated as of July 8, 1999 by and between Cybernet and
The Bank of New York, relating to the Cybernet's notes
contained in the Units. Incorporated by reference to the Form
S-4 Registration Statement No. 333-86853 filed September 10,
1999.

4.3 Collateral Agreement dated as of July 8, 1999 by and among
Cybernet, Lehman Brothers International (Europe) and Morgan
Stanley & Co. International Limited, relating to the Unit
Agreement. Incorporated by reference to the Form S-4
Registration Statement No. 333-86853 filed September 10, 1999.

4.4 Registration Rights Agreement dated as of July 8, 1999 by and
among Cybernet, Lehman Brothers International (Europe) and
Morgan Stanley & Co. International Limited, relating to
Cybernet 's notes contained in the Units. Incorporated by
reference to the Form S-4 Registration Statement No. 333-86853
filed September 10, 1999.

4.5 Warrant Agreement, dated as of July 8, 1999 by and among
Cybernet, Lehman Brothers International (Europe) and Morgan
Stanley & Co. International Limited, relating to Cybernet 's
warrants contained in the Units. Incorporated by reference to
the Form S-4 Registration Statement No. 333-86853 filed
September 10, 1999.

50

10.1 (a) Sale and Assignment of Business Shares of the Artwise
GmbH Software Losugen dated September 18, 1997 by and
among Mr. Stefan Heiligensetzer, Mr. Frank
Marchewicz, Mr. Rolf Strehle, Mr. Gerhard
Schonenberger, Mr. Lothar Bernecker, Artwise GmbH
Software Solutions, Cybernet
Internet-Dienstleistungen AG and Cybernet
Internet-Beteiligungs GmbH. Incorporated by reference
to the Form S-1 Registration Statement filed with the
Commission on September 18, 1998.

(b) Amending Agreement Concerning the Sale and Assignment
of Interest in Artwise GmbH Software LoSungen of
September 18, 1997 by and among Rolf Strehle, Gerhard
Schonenberger, Cybernet Internet-Dienstleistungen AG
and Cybernet Internet - Beteiligungs GmbH.
Incorporated by reference to the Form 10-K Annual
Report filed with the Commission on March 30, 2000.

10.2 Sale and Assignment of Shares in Open: Net Internet
Solutions GmbH dated August 12, 1998 by and among Mr.
Thomas Egner, Mr. Uwe Hagenmeier, Mr. Markus Kress,
Mr. Oliver Schaffer, Cybernet Internet
Dienstleistungen AG, and Cybernet
Internet - Beteiligungs GmbH. Incorporated by
reference to the Form S-1 Registration Statement
filed with the Commission on September 18, 1998.

10.3 Private Agreement for the Sale of Company
Shareholdings and Increase of Share Capital dated
December 4, 1997 by and among Cybernet Internet
Dienstleistung AG, Mr. Robert Loro, Stefano Longano,
Domenico Loro, Angelo Longano, Emma Pontara, Maria
Teresa Francesconi and Mauro Longano. Incorporated by
reference to the Form S-1 Registration Statement
filed with the Commission on September 18, 1998.

10.4 Stock Purchase Agreement dated June 17, 1998 among
Cybernet, Tristan Libischer, and Alexander
Wiesmuller. Incorporated by reference to the Form S-1
Registration Statement filed with the Commission on
September 18, 1998.

10.5 Stock Purchase Agreement, dated June 11, 1997, among
Cybernet, Cybermind Interactive Europe AG, Rudolf
Strobl, Roland Manger, Thomas Schulz, Andreas Eder,
and Holger Timm. Incorporated by reference to the
Form S-1 Registration Statement filed with the
Commission on September 18, 1998.

10.6 Pooling and Trust Agreement dated August 18, 1997
among Cybermind Interactive Europe AG, Andreas Eder,
Roland Manger, Thomas Schulz, Rudolf Strobl, Holger
Timm, and Dr. Hubert Besner, as trustee. Incorporated
by reference to the Form S-1 Registration Statement
filed with the Commission on September 18, 1998.

10.7 (a) Pooling and Trust Agreement dated August 1, 1998
between Stefan Heiligensetzer and Dr. Hubert Besner,
as trustee. Incorporated by reference to the Form S-1
Registration Statement filed with the Commission on
September 18, 1998.

51

(b) Schedule of Additional Artwise Pooling Agreements,
referencing agreements of Mr. Marchewicz, Mr.
Strehle, Mr. Schonenberger and Mr. Bernecker.
Incorporated by reference as to the Form S-1
Registration Statement filed with the Commission on
September 18, 1998.

10.8 Consulting Agreement dated December 15, 1997 between
Cybernet Internet-Dienstleistungen AG and Eiderdown
Trading Ltd. Incorporated by reference to the Form
S-1 Registration Statement filed with the Commission
on September 18, 1998.

10.9 Employment Contract dated February 23, 1998 between
Cybernet Internet-Dienstleistungen Aktiengesellschaft
and Andreas Eder. Incorporated by reference to the
Form S-1 Registration Statement filed with the
Commission on September 18, 1998.

10.10 Employment Contract dated May 15, 1997 between
Cybernet Internet-Dienstleistungen Aktiengesellschaft
and Alessondro Giacalone. Incorporated by reference
to the Form S-1 Registration Statement filed with the
Commission on September 18, 1998.

10.11 Employment Contract dated April 28, 1997 between
Cybernet Internet-Dienstleistungen AG and Christian
Moosmann. Incorporated by reference to the Form S-1
Registration Statement filed with the commission on
September 18, 1998.

10.12 Employment Contract dated February 23, 1998 between
Cybernet Internet-Dienstleistungen Aktiengesellschaft
and Rudolf Strobl. Incorporated by reference to the
Form S-1 Registration Statement filed with the
Commission on September 18, 1998.

10.13 Sublease for business premises office dated February
29, 1996 between KG Bayerische Hausbau GmbH and Co.
and Cybernet AG.i.G. Incorporated by reference to the
Form S-1 Registration Statement filed with the
Commission on September 18, 1998.

10.14 Full Amortization leasing Agreement No. 13 00 00 for
Hard- and Software with purchase, extension and
return options between CyberNet
Internet-Dienstleistungen AG and Miller Leasing Miete
GmbH dated January 22, 1998. Incorporated by
reference to the Form S-1 Registration Statement
filed with the Commission on September 18, 1998.

10.15 Agreement on the use of Data Communication
Installations of Info AG dated July 29, 1996 between
Info AG and CyberNet Internet-Dienstleistungen Ag.
Incorporated by reference to the Form S-1
Registration Statement filed with the Commission on
September 18, 1998.

10.16 Ebone Internet Access Contract dated February 26,
1997 between Ebone Inc. and Cybernet AG. Incorporated
by reference to the Form S-1 Registration Statement
filed with the Commission on September 18, 1998.

52

10.17 Agreement, undated, between Feratel International
GmbH and Cybernet Internet-Dienstleistungen AG.
Incorporated by reference to the Form S-1
Registration Statement filed with the Commission on
September 18, 1998.

10.18 Cybernet Internet Services International, Inc. 1998
Stock Incentive Plan. Incorporated by reference to
the Form S-1/A Registration Statement filed with the
Commission on November 5, 1998.

10.19 Cybernet Internet Services International, Inc. 1998
Outside Directors' Stock Option Plan. Incorporated by
reference to the Form S-1/A Registration Statement
filed with the Commission on November 5, 1998.

10.20 Agreement and Plan of Merger, dated October 9, 1998,
between Cybernet Internet Services International,
Inc., a Utah corporation, and Cybernet Internet
Services International, Inc., a Delaware corporation.
Incorporated by reference to the Form S-1/A
Registration Statement filed on November 5, 1998.

10.21 Registration Rights Agreement dated August 26, 1999
by and between Cybernet and Morgan Stanley & Co.
International Limited relating to Cybernet 's Euro
25,000,000 Convertible Senior Subordinated
Pay-In-Kind Notes due 2009. Incorporated by reference
to the Form S-4 Registration Statement No. 333-86853
filed September 10, 1999.

10.22 Indenture dated August 26, 1999 by and between
Cybernet and The Bank of New York relating to the
Cybernet's Euro 25,000,000 Convertible Senior
Subordinated Pay-In-Kind Notes due 2009. Incorporated
by reference to the Form S-4 Registration Statement
No. 333-86853 filed September 10, 1999.

10.23 Registration Rights Agreement dated August 26, 1999
by and between Cybernet and Morgan Stanley & Co.
International Limited relating to Cybernet's
$35,000,000 13.0% Convertible Senior Subordinated
Discount Notes due 2009. Incorporated by reference to
the Form S-4 Registration Statement No. 333-86853
filed September 10, 1999.

10.24 Registration Rights Agreement dated August 26, 1999
by and between Cybernet and Morgan Stanley & Co.
International Ltd. relating to the company's
$15,002,183 13.0% Convertible Senior Subordinated
Discount Notes due 2009. Incorporated by reference to
the Form S-4 Registration Statement No. 333-86853
filed September 10, 1999.

10.25 Indenture dated August 26, 1999 by and between
Cybernet and The Bank of New York relating to
Cybernet's $35,000,000 and $15,002,183 13.0%
Convertible Senior Subordinated Discount Notes due
2009. Incorporated by reference to the Form S-4
Registration Statement No. 333-86853 filed September
10, 1999.

10.26 (a) Condition Precedent Sale and Transfer of Novento
Telecom AG and Multicall Telefonmarketing AG Stock
and Sale and Assignment of Claims dated December 2,
1999. Incorporated by reference to the Form 10-K
Annual Report filed with the Commission on March 30,
2000.

53

(b) Sale and Transfer of Stock of Novento Telecom AG and
Multicall Telefonmarketing AG and Purchase and
Assignment of Claims, dated October 1, 1999.
Incorporated by reference to the Form 10-K Annual
Report filed with the Commission on March 30, 2000.

10.27 (a) Framework Contract for the Performance of Project
and Consulting Services, dated November 19, 1999, by
and between Beam GmbH and Cybernet AG. Incorporated
by reference to the Form 10-K Annual Report filed
with the Commission on March 30, 2000.

(b) Loan and Security Agreement, dated November 10, 1999,
by and between Rolf Strehle, Gerhard Schonenberger
and Cybernet Internet - Dienstleistungen AG.
Incorporated by reference to the Form 10-K Annual
Report filed with the Commission on March 30, 2000.

10.28 Stock Purchase Agreement, dated February 19, 1999, by
and between Jurg Heim, Marco Samek and Cybernet.
Incorporated by reference to the Form 10-K Annual
Report filed with the Commission on March 30, 2000.

10.29 Cooperation Software Licensing Agreement, dated
December 28, 1999, by and between Berningshausen &
Neben OHG and Cybernet. Incorporated by reference to
the Form 10-K Annual Report filed with the Commission
on March 30, 2000.

10.30 Employment Agreement, dated as of November 1, 1999,
by and between Bernd Buchholz and Cybernet.
Incorporated by reference to the Form 10-K Annual
Report filed with the Commission on March 30, 2000.

10.31 1998 Stock Incentive Plan. Incorporated by reference
to Form S-8 filed with the Commission on July 6,
2000.

10.32 Option Agreement dated for reference January 28, 2002
between Cybernet and Telehouse Deutschland GmbH.
Incorporated by reference to the Form 8-K filed with
the Commission on January 29, 2002.

10.33 Settlement Agreement dated for reference March 12,
2002 among Cybernet, MFC Bancorp Ltd., Andreas Eder
and Paolo di Fraia. Incorporated by reference to the
Form 8-K filed with the Commission on March 28, 2002.

10.34 Credit Facility Agreement dated as of March 12, 2002
among MFC Merchant Bank S.A., Cybernet Internet
Services International, Inc. and 636892 B.C. Ltd.
Incorporated by reference to the Form 8-K filed with
the Commission on March 28, 2002.

21 List of Subsidiaries.

23 (a) Consent of Ernst & Young Deutsche Allgemeine
Treuhand AG.

(b) Consent of Grant Thornton S.p.A.

54

(b) REPORTS ON FORM 8-K

Form 8-K dated January 29, 2002
Item 5 - Other Events

Form 8-K dated March 28, 2002
Item 5 - Other Events

55

Report of Independent Auditors

To the Board of Directors and Shareholders
Cybernet Internet Services International, Inc.:

We have audited the accompanying consolidated balance sheets of Cybernet
Internet Services International, Inc. and its subsidiaries ("the Company") as of
December 31, 2000 and 2001, and the related consolidated statements of
operations, cash flows and changes in shareholders' equity (deficit) for each of
the three years in the period ended December 31, 2001. Our audits also included
the financial statements schedule listed in the Index at Item 14(a). These
financial statements and Schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the financial
statements of Cybernet Italia S.p.A. or Eclipse s.r.l. for the year ended
December 31, 1999, both wholly owned subsidiaries, which statements reflect
total revenues constituting 25% in 1999 of the related consolidated totals.
Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to data included for
Cybernet Italia S.p.A. and Eclipse s.r.l. for 1999 is based solely on the
reports of the other auditors.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of the Company as of December 31, 2000 and
2001, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully described in
Note 1, the Company has incurred recurring operating losses and used significant
amounts of cash to operate the Company. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The accompanying
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.

/s/ Ernst & Young
Deutsche Allgemeine Treuhand AG

Munich, Germany
April 15, 2002

F-1

CYBERNET INTERNET SERVICES INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, DECEMBER 31,
2000 2001
-------------------- ------------------
(in thousands Euro, except share data)

ASSETS
Cash and cash equivalents..................................................... 5,971 2,735
Restricted cash............................................................... 2,792 2,743
Short-term investments........................................................ 23,040 149
Trade accounts receivable -- net of allowance for doubtful accounts of Euro
1,307 and Euro 5,814 at December 31, 2000 and 2001, respectively............ 12,939 8,903
Related party receivables..................................................... 356 356
Other receivables............................................................. 4,885 2,721
Restricted investments........................................................ 11,509 10,567
Prepaid expenses.............................................................. 566 574
Other current assets.......................................................... 4,493 947
-------------------- ------------------
Total current assets.......................................................... 66,551 29,695

Property and equipment, net................................................... 42,585 32,653
Product development costs, net................................................ 2,465 806
Goodwill, net................................................................. 26,054 -
Investments................................................................... 2,899 2,770
Deferred income taxes ........................................................ 27,657 -
Restricted investments........................................................ 10,608 -
Other assets.................................................................. 17,002 6,048
-------------------- ------------------

TOTAL ASSETS.................................................................. 195,821 71,972
==================== ==================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES
Overdrafts and short-term borrowings..................................... 567 170
Trade accounts payable................................................... 11,429 13,155
Other accrued liabilities................................................ 12,893 11,835
Deferred purchase obligation ............................................ 2,078 -
Current portion capital lease obligations................................ 1,187 1,060
Accrued personnel costs.................................................. 2,330 1,848
-------------------- ------------------
Total current liabilities........................................... 30,484 28,068

Long-term debt .......................................................... 150,693 164,573
Capital lease obligations, net of current portion........................ 1,441 435

SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, USD 0.001 par value; 50,000,000 shares authorized, 600,000 and
0 issued and outstanding at December 31, 2000 and 2001,
respectively................................................................ 1 0
Common stock, USD 0.001 par value; 50,000,000 shares authorized, 25,845,663 and
26,445,663 shares issued and outstanding at December 31, 2000 and 2001,
respectively............................................................... 24 25
Additional paid-in capital.................................................... 127,718 127,718
Accumulated deficit........................................................... (114,833) (249,473)
Accumulated other comprehensive income........................................ 293 626
-------------------- ------------------
Total shareholders' equity (deficit).......................................... 13,203 (121,104)
-------------------- ------------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT).......................... 195,821 71,972
==================== ==================

See accompanying notes to consolidated financial statements.

F-2

CYBERNET INTERNET SERVICES INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31
----------------------------------------------------
1999 2000 2001
-------------------- --------------- ----------------
(in thousands Euro, except share and per share data)

Revenues:
Internet data center services....................... 651 5,011 10,102
Connectivity........................................ 14,962 26,374 26,817
E-business.......................................... 5,315 4,446 2,158
-------------------- --------------- ----------------
Total revenues........................................... 20,928 35,831 39,077
Direct cost of services.................................. 13,364 23,117 25,105
-------------------- --------------- ----------------
Gross margin............................................. 7,564 12,714 13,972
Operating expenses:
Network operations................................... 7,345 8,426 7,861
General and administrative expenses.................. 17,060 19,826 18,477
Sales and marketing expenses......................... 12,295 13,428 10,186
Research and development............................. 4,040 1,492 365
Impairment of assets and other asset write-offs...... 1,750 2,265 37,110
Depreciation and amortization........................ 9,630 19,563 20,156
-------------------- --------------- ----------------
Total operating expenses................................. 52,120 65,000 94,155
-------------------- --------------- ----------------
Operating loss........................................... (44,556) (52,286) (80,183)
Interest expense......................................... (16,931) (35,189) (25,728)
Interest income.......................................... 3,884 5,437 1,477
Other income............................................. - 198 123
Foreign currency losses.................................. (4,362) (3,670) (6,721)
-------------------- --------------- ----------------
Loss before taxes, minority interest and equity earnings. (61,965) (85,510) (111,032)
Income tax benefit (expense)............................. 13,500 6,976 (27,678)
-------------------- --------------- ----------------
Net loss before minority interest and equity earnings.... (48,465) (78,534) (138,710)
Minority interest........................................ 94 - -
Equity in losses of equity investments................... - (168) (538)
-------------------- --------------- ----------------
Net loss before extraordinary items...................... (48,371) (78,702) (139,248)
Extraordinary items:
Gain on early extinguishment of debt, net of tax......... - 17,754 4,608
-------------------- --------------- ----------------
Net loss................................................. (48,371) (60,948) (134,640)
==================== =============== ================
Basic and diluted loss per share:
Loss per share before extraordinary items............. (2.43) (3.38) (5.36)
Extraordinary items................................... - 0.76 0.18
-------------------- --------------- ----------------
Loss.................................................. (2.43) (2.62) (5.18)
==================== =============== ================

Number of shares used to compute loss per share ......... 19,877,290 23,266,340 25,995,663
==================== =============== ================

See accompanying notes to consolidated financial statements.

F-3

CYBERNET INTERNET SERVICES INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1999 2000 2001
--------- --------- --------

CASH FLOWS FROM OPERATING ACTIVITIES: (in thousands Euro)
Net loss..................................................... (48,371) (60,948) (134,640)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN
OPERATIONS:
Minority interest......................................... (94) - -
Deferred taxes............................................ (13,500) (6,976) 27,657
Depreciation and amortization............................. 9,630 19,563 20,156
Equity in losses of equity investments.................... - 168 538
Provision for losses on accounts receivable............... 870 1,305 5,514
(Gain) loss on sale of short-term investment.............. - (46) 290
Loss on disposal of leased assets......................... - 198 -
Amortization of bond discount............................. 2,544 4,663 2,656
Accreted interest expense on long-term debt............... 3,776 13,484 11,861
Impairment of assets...................................... 1,750 2,265 32,354
Loss on disposal of assets................................ 4,756
Gain on early extinguishment of debt...................... - (17,754) (4,608)
Foreign currency transaction losses....................... 5,694 6,427 7,786
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Restricted cash........................................ - (2,792) 49
Trade accounts receivable.............................. (3,547) (5,126) (1,478)
Other receivables...................................... (3,605) 144 2,164
Related party receivables.............................. - (356) -
Prepaid expenses....................................... (984) (2,953) (8)
Other current assets................................... (393) 81 (391)
Other assets........................................... (9,619) (783) 899
Trade accounts payable................................. 12,022 (6,716) 1,726
Other accrued expenses and liabilities................. 12,519 (2,172) (1,058)
Accrued personnel costs................................ 2,009 (351) (482)
--------- --------- --------
Net cash used in operating activities.............. (29,299) (58,675) (24,259)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments........................... (77,183) (35,924) -
Proceeds from sale of short-term investments................. 33,026 72,201 25,230
Purchases of restricted investments.......................... (56,409) - -
Proceeds from restricted investments......................... - 21,014 10,194
Product development costs.................................... - (623) -
Purchase of property and equipment........................... (23,900) (23,888) (5,905)
Acquisition of businesses, net of cash acquired.............. (23,962) (2,037) -
Acquisition of equity investments............................ - (1,000) (409)
Payment of deferred purchase obligations..................... (4,066) - (2,078)
--------- --------- --------
Net cash (used in) provided by investing activities..... (152,494) 29,743 27,032
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipt of subscription receivable........................... 16 - -
Proceeds from the issuance of bond warrants.................. 53,885 - -
Principal payments under capital lease obligations - (2,140) (1,347)
Proceeds from issuance of bonds and other borrowings......... 166,072 962 -
Repayment of borrowings...................................... (1,932) (36,664) (3,722)
--------- --------- --------
Net cash provided by (used in) financing activities..... 218,041 (37,842) (5,069)
Impact of foreign exchange rate changes...................... (45) (134) (940)
--------- --------- --------
Net increase (decrease) in cash and cash equivalents......... 36,203 (66,908) (3,236)
Cash and cash equivalents at beginning of year............... 36,676 72,879 5,971
--------- --------- --------
Cash and cash equivalents at end of year..................... 72,879 5,971 2,735
========= ========= ========

See accompanying notes to consolidated financial statements.

F-4

FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1999 2000 2001
--------- --------- --------

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Acquisitions (Note 3):
Fair value of assets acquired ........................... 35,413 12,714 -
Less:
Cash acquired....................................... 255 195 -
Cash paid .......................................... 24,217 2,057 -
Stock issued........................................ 8,521 5,648 -
------------- ------------- -------------
Liabilities assumed...................................... 2,420 4,814 -
============= ============= =============
Transfer from restricted investments to short-term investment
due to removal of restrictions........................... - 20,374 2,339
============= ============= =============
Conversion of preferred stock into common stock.............. 2 4 1
============= ============= =============

Acquisition of Property and Equipment Through Capital Lease
Obligations.................................................. 4,305 522 214
============= ============= =============

OTHER SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest.................................. 1,757 21,791 10,476
============= ============= =============
Cash paid for taxes..................................... 15 149 109
============= ============= =============
Depreciation............................................ 3,765 8,125 8,365
============= ============= =============
Amortization............................................ 5,865 11,438 11,791
============= ============= =============

See accompanying notes to consolidated financial statements.

F-5

CYBERNET INTERNET SERVICES INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(ALL AMOUNTS IN THOUSANDS)

STOCK ADDITIONAL
PREFERRED STOCK COMMON STOCK SUBSCRIPTION PAID-IN ACCUMULATED
--------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT RECEIVABLE CAPITAL DEFICIT
---------- ---------- ---------- ------------ ---------------- ----------------- ----------------

Balance January 1, 1999......... 6,360 7 18,762 17 (17) 62,381 (5,514)
Issuance of shares for
acquisitions.................... 607 1 8,410
Payment of subscription
receivable...................... 17
Conversion of preferred stock (1,567) (2) 1,567 2
Warrants........................ 50,963
Other issuances................. 34 - 663
Net loss........................ (48,371)
Currency translation adjustment.

Unrealized loss on short-term
and restricted investments......

Comprehensive loss..............
---------- ---------- ---------- ------------ ---------------- ----------------- ----------------
Balance December 31, 1999. 4,793 5 20,970 20 - 122,417 (53,885)
Issuance of shares for
acquisitions.................... 652 - 5,246
Conversion of preferred stock (4,193) (4) 4,193 4
Other issuances................. 30 - 55
Net loss........................ (60,948)
Currency translation adjustment

Unrealized gain on short-term
and restricted investments......

Comprehensive loss..............
---------- ---------- ---------- ------------ ---------------- ----------------- ----------------
Balance December 31, 2000. 600 1 25,845 24 - 127,718 (114,833)
Conversion of preferred stock... (600) (1) 600 1
Net loss........................ (134,640)
Currency translation adjustment

Unrealized gain on short-term
and restricted investments......

Comprehensive loss..............
---------- ---------- ---------- ------------ ---------------- ----------------- ----------------
Balance December 31, 2001 - - 26,445 25 - 127,718 (249,473)
========== ========== ========== ============ ================ ================= ================

ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'

INCOME (LOSS) EQUITY (DEFICIT)
--------------- ----------------

Balance January 1, 1999......... 851 57,725
Issuance of shares for
acquisitions.................... 8,411
Payment of subscription
receivable...................... 17
Conversion of preferred stock -
Warrants........................ 50,963
Other issuances................. 663
Net loss........................ (48,371)
Currency translation adjustment.
(130) (130)
Unrealized loss on short-term
and restricted investments...... (833) (833)
--------------- ----------------
Comprehensive loss.............. (49,334)
--------------- ----------------
Balance December 31, 1999 (112) 68,445
Issuance of shares for 5,246
acquisitions....................
Conversion of preferred stock -
Other issuances................. 55
Net loss........................ (60,948)
Currency translation adjustment
(128) (128)
Unrealized gain on short-term
and restricted investments...... 533 533
--------------- ----------------
Comprehensive loss.............. (60,543)
--------------- ----------------
Balance December 31, 2000. 293 13,203
Conversion of preferred stock... -
Net loss........................ (134,640)
Currency translation adjustment
94 94
Unrealized gain on short-term
and restricted investments...... 239 239
--------------- ----------------
Comprehensive loss.............. (139,307)
--------------- ----------------
Balance December 31, 2001 626 (121,104)
--------------- ----------------
--------------- ----------------

See accompanying notes to consolidated financial statements.

F-6

CYBERNET INTERNET SERVICES INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

Cybernet Internet Services International, Inc. ("Cybernet Inc") (formerly known
as New Century Technologies Corporation) was incorporated under the laws of the
State of Utah on September 27, 1983. Cybernet Inc changed its state of
incorporation to Delaware in November 1998. Effective September 16, 1997 the
Company acquired Cybernet Internet Dienstleistungen AG ("Cybernet AG"), a German
stock corporation that offers a variety of Internet related telecommunication
and systems integration services to corporate customers. Cybernet AG was founded
in December 1995, and commenced significant operations in 1996.

Cybernet Inc and its subsidiaries (the "Company") have incurred significant
operating losses since inception, and have not achieved and do not expect to
achieve sufficient revenues to support future operations without additional
financing. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Since inception, the Company has financed its
operations primarily through public and private sales of common stock and public
debt, and short-term borrowings from banks. These financings have funded the
Company's operating losses, which total approximately Euro 249,473,000 for the
years from inception though December 31, 2001. The Company's operations continue
to generate negative operating cash flows; in the year ended December 31, 2001
cash used in operations totaled approximately Euro 24,259,000. Management
believes that planned cost savings and anticipated improvements in operating
results in 2002 will reduce the amount of cash used in operations which, when
combined with available unrestricted cash as of December 31, 2001, and
anticipated new financing sources, will permit the Company to continue to
operate. The Company is currently in the process identifying alternative
financing sources, negotiating changes to its debt structure and evaluating its
strategic options. However, there are no assurances that these plans can be
accomplished nor that they will provide sufficient cash to fund the Company's
operations. The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern and,
accordingly, do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of these
uncertainties.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements reflect the application of
certain significant accounting policies as described in this note and elsewhere
in the accompanying consolidated financial statements and notes.

ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Cybernet Inc and
its subsidiaries. All significant intercompany investments, accounts, and
transactions have been eliminated.

F-7

RECLASSIFICATIONS
Certain prior year amounts in the consolidated financial statements have been
reclassified to conform to the current year presentation.

FOREIGN CURRENCY
The functional currency for the Company and its subsidiaries is the local
currency of the country in which the subsidiary is located. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation," the assets and liabilities for the Company's international
subsidiaries are translated into Euro using current exchange rates at the
balance sheet dates. Statement of operations items are translated at average
exchange rates prevailing during the applicable period. The gains and losses
resulting from the changes in exchange rates from year to year have been
reported in accumulated other comprehensive income. Foreign currency transaction
gains or losses are included in the calculation of net loss.

CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.

RESTRICTED CASH
Restricted cash consists of cash in bank for bank guarantees used to secure
miscellaneous obligations.

SHORT-TERM INVESTMENTS
In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," available-for-sale securities are carried at fair value,
with unrealized gains and losses reported in accumulated other comprehensive
income. Realized gains and losses and declines in value judged to be other than
temporary on available-for-sale securities are included in other income. The
Company has classified all debt and equity securities as available-for-sale.
Cost of securities sold is determined on a specific identification basis.

CONCENTRATION OF CREDIT RISK
Financial statements that potentially subject the Company to concentrations of
credit risks consist primarily of cash and cash equivalents, short-term
investments, restricted investments, trade accounts receivable and long-term
debt. Short-term investments are comprised of highly liquid mutual fund
investments. Credit risk on trade receivable balances is minimized by the
diverse nature of the Company's customer base. A portion of the Company's debt
is denominated in U.S. Dollars and, as such, is subject to the impact of changes
of the Euro to U.S. Dollar exchange rate.

The Company is economically dependent on the entities from which it leases their
telecommunication lines comprising its network. It is probable that failure of
these entities to honor their lease obligations or to renew leases under
economically viable conditions would have a negative near-term impact on the
Company's growth and results of operations.

PROPERTY AND EQUIPMENT
Property and equipment are recorded at acquisition cost and depreciated using
the straight-line method over the estimated useful life of the asset, which
ranges from 4 years (computer equipment and software) to 10 years (leasehold
improvements and furniture and fixtures). Major replacements and improvements
are capitalized while general repairs and maintenance are charged to expense as
incurred.

PRODUCT DEVELOPMENT COSTS
The Company capitalizes certain costs incurred related to the development of
products that will be sold to customers. Costs capitalized include direct labor
and related overhead and third party costs related to establishing network
systems. All costs in the development process are classified as

F-8

research and development and expensed as incurred until technological
feasibility has been established. Once technological feasibility has been
established, which is defined as completion of a working model, such costs are
capitalized until the individual products are commercially available.
Amortization is calculated using the greater of (a) the ratio that current gross
revenues for a product bear to the total of current and anticipated future
revenues for that product or (b) the straight-line method over four years. The
Company regularly reviews the carrying value of product development costs and a
loss recognized when the net realizable value falls below the unamortized cost.
In 1999 such a loss totaling Euro 409,000 was recorded as additional
amortization in the German operations as the Company is no longer marketing the
related products. Accumulated amortization amounted to approximately Euro
4,000,000 and Euro 5,200,000 at December 31, 2000 and 2001, respectively.
Remaining book value amounts to Euro 2,465,000 and Euro 806,000 at December 31,
2000 and 2001, respectively.

COMPUTER SOFTWARE FOR INTERNAL USE
The Company capitalizes certain software development costs incurred to develop
certain of the Company's billing software. These costs are accounted for in
accordance with Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." In accordance with
SOP 98-1, internal and external costs incurred to develop internal-use computer
software during the application development stage are capitalized. Application
development stage costs generally include software configuration, coding,
installation and testing. Costs incurred for maintenance, testing minor upgrades
and enhancements are expensed as incurred. Capitalized internal-use software
development costs are included in property and equipment and are depreciated on
a straight-line basis over the useful lives of the related software of up to 4
years.

The Company capitalized approximately Euro 2,384,000, Euro 51,000 and Euro 0 of
software development costs during the years ended December 31, 1999, 2000 and
2001, respectively. Amortization associated with the capitalized software
development costs totaled approximately Euro 166,000, Euro 724,000 and Euro
1,038,000 for the years ended December 31, 1999, 2000 and 2001, respectively.

GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill, which represents the excess of purchase price over fair value of net
assets acquired, is amortized on a straight-line basis over a period between 5
to 10 years, the estimated useful life. Accumulated amortization related to
goodwill totaled approximately Euro 7,042,000 at December 31, 2000. Other
intangible assets, which consists of customer lists and management contracts, is
amortized on a straight-line basis over a period between 5 to 10 years, their
estimated useful lives. Accumulated amortization related to other intangible
assets totaled approximately Euro 7,991,000 at December 31, 2000. Other
intangible assets have been classified in Other Assets on the consolidated
balance sheet. The Company assesses the recoverability of goodwill and
intangible assets by determining whether the amortization of the related balance
over its remaining life can be recovered through reasonably expected
undiscounted future cash flows. Management evaluates the amortization period to
determine whether later events and circumstances warrant revised estimates of
the amortization period. Please refer to Note 3 for impairment of goodwill and
other intangible assets recorded during fiscal 2001.

INVESTMENTS
Investments in affiliated entities in which the Company has the ability to
exercise significant influence, but not control, of an investee, generally an
ownership interest of the voting stock of between 20% and 50%, are accounted for
under the equity method of accounting. Accordingly, the Company's share of the
investee's earnings or loss is included in the consolidated statements of
operations. The Company records these investments on the consolidated balance
sheets as "Investments" and its share of the investees' losses in "Equity in
losses of equity investments." The portion of the Company's equity investments
that exceeds its claim of the net assets of the investee, if any, is assigned to
goodwill and amortized over a period of five years.

F-9

REVENUE RECOGNITION
The Company offers Internet telecommunication and system integration products,
data center services, network services and voice telephony products.

The Company recognizes revenue pursuant to Securities & Exchange Commission
("SEC") Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements." In accordance with SAB 101, revenue is recognized when
all four of the following criteria are met: (i) persuasive evidence that
arrangement exists; (ii) delivery of the products and/or services has occurred;
(iii) the selling price is both fixed and determinable; and, (iv) collectibility
is reasonably probable.

Revenues from Internet telecommunication and system integration products, which
includes equipment sales, are recognized upon completion of the related project
and receipt of customer acceptance. Revenues from ongoing network services,
voice telephony and data center services, including co-location, are recognized
when services are provided. All payments received in advance of providing
services are deferred until the period that such services are provided.

The Company enters into multiple element arrangements, which may include any
combination of monthly network services, professional consulting services and/or
equipment sales. Each element of a multiple element arrangements is evaluated to
determine whether it represents a separate earnings process. If a multiple
element arrangement can be segmented, revenue is allocated among the multiple
elements based upon the fair value of the elements. If an undelivered element is
essential to the functionality of a delivered element, no revenue allocated to
the delivered element is recognized until that undelivered element is delivered.

DIRECT COST OF SERVICES
Direct cost of services consists of 1) telecommunications expenses, which mainly
represent the cost of transporting Internet traffic from our customers' location
through a local telecommunications carrier to one of our access nodes, transit
and peering costs, and the cost of leasing lines to interconnect our backbone
nodes, and 2) the cost of hardware and software sold. The Company mainly
utilizes leased lines for it's backbone network, and to connect its network to
its major customers premises.

NETWORK OPERATIONS
Network operations mainly consist of 1) the personnel costs of technical and
operational staff and related overheads, 2) the rental of premises solely or
primarily used by technical staff, including premises used to generate our
co-location services revenue, and 3) consulting expenses in the area of
network and software development.

GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist principally of salaries and other
personnel costs for our administrative staff, office rent and maintenance of
office equipment.

SALES AND MARKETING COSTS
Marketing costs include the costs of all personnel engaged in marketing
activities, the costs of advertising and public relations activities (e.g. trade
shows), and other related costs. Advertising costs are expensed as incurred.
Advertising expense was approximately Euro 2,582,000, Euro 3,095,000 and Euro
1,706,000 in the years ended December 31, 1999, 2000 and 2001, respectively.

RESEARCH AND DEVELOPMENT
Research and development expenses consist principally of personnel costs of
employees working on product development, consulting costs and certain overhead
items. The personnel utilized for this purpose include our own marketing force
and the portion of their time that was devoted to product

F-10

development is included in research and development. Research and development
expenditures, including direct and allocated expenses, are charged to operations
as incurred.

IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets and certain
identifiable intangible assets in accordance with SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." SFAS
No. 121 requires recognition of impairment for long-lived assets in the event
the net book value of these assets exceeds the future undiscounted cash flows
attributable to these assets. The Company assesses potential impairments to its
long-lived assets and identifiable intangible assets when there is evidence that
events or changes in circumstances have made recovery of the assets carrying
value unlikely. Should an impairment exist, the impairment loss is measured
based on the excess of the carrying value of the asset over the asset's fair
value or discounted estimated future cash flows.

Due to a change in the technological approach to our Voice Telephony product,
the Company decided to dispose of several telecommunication carrier grade
switches and updates with a historical cost of approximately Euro 6,057,000. The
Company has recorded impairment losses of approximately Euro 1,620,000 and Euro
3,937,000 for the years ended December 31, 2000 and 2001, respectively,
resulting in a carrying value of Euro 500,000. The assets have been
re-classified from property and equipment into current assets and this loss was
recorded as impairment of assets in the fiscal 2000 and 2001 statements of
operations.

As discussed previously, please refer to Note 3 for impairment of goodwill and
other intangible assets.

INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes," using the liability method. Under this method, deferred income taxes are
recognized for temporary differences between financial statement and income tax
bases of assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse. The effect of a change in tax
rates on deferred tax assets and liabilities is recognized in the period that
includes the enactment date. Deferred tax assets are reduced by a valuation
allowance when the Company cannot make the determination that it is more likely
than not that some portion or all of the related tax asset will be realized.

STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, compensation expense is recorded for stock
options awarded to employees and directors to the extent that the option
exercise prices are less than the common stock's fair market value on the date
of grant, where the number of shares and exercise price are fixed. The
difference between the fair value of the Company's common stock and the exercise
price of the stock option, if any, is recorded as deferred compensation and is
amortized to compensation expense over the vesting period of the underlying
stock option. The Company follows the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation." All stock-based awards to
nonemployees are accounted for at their fair value in accordance with SFAS No.
123 and related interpretations.

NET LOSS PER SHARE
Basic and diluted loss per share are calculated in accordance with SFAS No. 128,
"Earnings per Share." Basic loss per share is based upon the number of
weighted-average shares of common stock outstanding for the respective years.

F-11

SEGMENT REPORTING
The Company operates primarily in one line of business, which is providing
international Internet backbone and access services and related communication
services for corporate customers. The Company's reportable segments are divided
by country since each country's operations are managed and evaluated separately.
Accordingly, the Company has made disclosures relating to geographical segment
information in accordance with the requirements of SFAS No. 131, "Disclosure
About Segments of an Enterprise and Related Information."

RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires the Company to
recognize all derivatives on the balance sheet at fair value. In June 1999, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of Effective Date
of FASB Statement No. 133." In June 2000, SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of FASB
Statement No. 133", amended SFAS No. 133. This statement delayed the effective
date to January 1, 2001.

Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. As of December 31, 2001, the Company did not
hold any derivative instruments or conduct any hedging activities. Therefore,
there has been no impact to the consolidated financial statements for the
adoption of SFAS No. 133, 137 and 138.

In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment test. Separable intangible assets that are not
deemed to have an indefinite life will continue to be amortized over their
useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and
intangible assets acquired after June 30, 2001. The Company will apply the new
rules on accounting for intangible assets beginning in 2002 for all indefinite
lived intangible assets in place as of January 1, 2002 as required. The
Company's management does not believe that the new pronouncements will have a
material effect on the Company's financial statements.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs. The Company currently believes that SFAS No. 143
will not have a material impact on its financial position or its results of
operations or cash flows as the Company does not have any retirement of tangible
long-lived assets subject to the requirements of SFAS No. 143.

In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets," which supersedes SFAS No. 121. SFAS No. 144
addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of. However, SFAS No. 144
retains the fundamental provisions of SFAS No. 121 for: 1) recognition and
measurement of the impairment of long-lived assets to be held and used; and 2)
measurement of long-lived assets to be disposed of by sale. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The Company
currently believes that SFAS No. 144 will not have a material impact on its
financial position or its results of operations or cash flows.

F-12

3. BUSINESS ACQUISITIONS

ACQUISITIONS
Effective August 15, 1998, the Company acquired 100% of the outstanding shares
of Open:Net Internet Solutions GmbH ("Open:Net") for a total consideration of
Euro 2,174,000. Euro 739,000 of the purchase price was paid in cash with the
remainder settled in exchange for the issuance of 58,825 shares of the common
stock of the Company. The acquisition has been accounted for using the purchase
method of accounting and as such the accompanying financial statements reflect
Open:Net's results of operations from August 15, 1998. Goodwill recorded in
connection with the acquisition of Open:Net, of Euro 1,800,000 was being
amortized over 10 years. Due to changes in the business and reassessment by
management, with effect from January 1, 1999 the remaining goodwill was being
amortized over four years.

Effective December 28, 1998, the Company acquired 100% of the outstanding shares
of Vianet Internet Dienstleistungen AG ("Vianet") for a cash payment of Euro
3,835,000 and 300,000 shares of the common stock of the Company. The shares were
to be issued to the selling shareholders of Vianet in increments of 60,000
shares over five years contingent on the continued employment of the
individuals. In 1999 and 2000, 60,000 shares were released in accordance with
the terms of the agreement. In addition, in 1999 75,000 shares were released in
connection with the termination of one if the selling shareholders, who lost his
right to the balance of the 150,000 due under the original agreement. The value
of the remaining 90,000 shares will be added to the cost of acquiring the Vianet
when the shares are issued to the selling shareholders. The acquisition has been
accounted for using the purchase method of accounting and as such the
accompanying financial statements reflect Vianet's results of operations from
January 1, 1999. Goodwill recorded in connection with the acquisition of Vianet,
amounted to Euro 3,282,000.

Effective April 13, 1999, the Company acquired 51% of the outstanding shares of
Sunweb Internet Services SIS AG ("Sunweb") for a total consideration of Euro
1,587,000. Euro 924,000 of the purchase price was paid in cash (in Swiss Francs)
with the remainder settled in exchange for the issuance of 25,680 shares of the
common stock of the Company. Goodwill recorded in connection with the
acquisition, amounting to Euro 1,369,000, is being amortized over 10 years.
Effective June 2000, the Company acquired the remaining 49% of the outstanding
shares of Sunweb AG, for a consideration of Euro 480,000 paid in cash (in Swiss
Francs). Goodwill recorded in connection with the acquisition of the remaining
shares in Sunweb amounted to an additional Euro 480,000.

Effective June 30, 1999, the Company acquired 100% of the outstanding shares of
Cybernet Italia S.p.A. ("Cybernet Italia")(formerly Flashnet S.p.A.) for a total
consideration of Euro 27,004,000. Euro 21,200,000 of the purchase price was paid
in cash (in Italian Lire) with the remainder settled in exchange for the
issuance of 301,290 shares of the common stock of the Company. The acquisition
has been accounted for using the purchase method of accounting and as such the
accompanying financial statements reflect Cybernet Italia's results from June
30, 1999. Goodwill recorded in connection with the acquisition of Cybernet
Italia, amounted to Euro 16,431,000.

Effective October 28 1999, the Company acquired of 51% of the outstanding shares
of Novento Telecom AG ("Novento") and 51% of Multicall Telefonmarketing AG
("Multicall") for a consideration of Euro 1,625,000. Euro 1,014,000 of the
purchase price was paid in cash with the remainder settled in exchange for the
issuance of 39,412 shares of the common stock of the Company. The acquisition
has been accounted for using the purchase method of accounting and as such the
accompanying financial statements reflect Novento and Multicall's results from
October 28, 1999. Goodwill recorded in connection with the acquisition of
Novento, amounted to Euro 978,000. Effective January 1, 2000, the Company
acquired the remaining 49% of the outstanding shares of Novento Telecom AG
("Novento") and the remaining 49% of Multicall Telefonmarketing AG ("Multicall")
(together "Novento"), for a consideration of Euro 5,553,000. Euro 1,022,000 of
the

F-13

purchase price was paid in cash with the remainder settled in exchange for
the issuance of 543,812 shares of the common stock of the Company. Goodwill
recorded in connection with the acquisition of the remaining shares in Novento,
amounting to an additional Euro 2,964,000.

Effective October 29, 1999 the Company acquired the remaining 34% of the
outstanding shares of Eclipse, in which the Company already owned 66% of the
outstanding shares, for a total consideration of Euro 2,209,000. Euro 361,000 of
the purchase price was paid in cash with the remainder settled by depositing
136,402 shares of the common stock of the Company in a pooling trust from which
the shares will be released to the sellers. Goodwill recorded in connection with
the acquisition of the remaining shares in Eclipse, amounted to an additional
Euro 1,901,000. Under the terms of the agreement the price was reviewed in light
of the subsequent movement in the share price of the Company. As a consequence
of this review, an additional 108,390 shares were issued to the selling
shareholders in May 2000. Goodwill of Euro 950,000 was recorded in 2000. Total
goodwill recorded in connection with the acquisition of Eclipse was Euro
3,828,000.

Effective April 17, 2000, the Company acquired 100% of Cybernet S.a.g.l., an
internet service provider located in Lugano, Switzerland, for a maximum purchase
price of SFr 500,000 (Euro 321,065) and 12,000 shares of common stock. The
12,000 shares of common stock will be released to the former owners only upon
the achievement of certain revenue targets during the fiscal year 2001. The
value of the 12,000 shares will be added to the cost of acquiring Cybernet
S.a.g.l when the shares are issued to the selling shareholders. Of the purchase
price SFr 400,000 (Euro 256,852) was paid in cash at September 30, 2000. The
rest of the purchase price was paid in the beginning of 2001. The acquisition
has been accounted for using the purchase method of accounting and as such the
accompanying financial statements reflect Cybernet S.a.g.l's results from April
2000. Goodwill recorded in connection with the acquisition of Cybernet S.a.g.l,
amounted to Euro 297,000.

PRO FORMA RESULTS (UNAUDITED)
The following unaudited pro forma consolidated results of operations for the
years ended December 31, 1999 and 2000 assume the acquisitions described above
occurred as of January 1, 1999:

YEAR ENDED 31 DECEMBER
----------------------------------------------
1999 2000
----------------------- ----------------------
(in thousand Euro, except per share data)

Revenue 28,421 35,893
Net loss (53,712) (61,485)
Basic and diluted loss per share (2.57) (2.64)

IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS
During the fourth quarter of fiscal 2001, the Company performed an impairment
assessment of goodwill and identifiable intangible assets recorded in connection
with its various acquisitions. The assessment was performed primarily due to the
continued depressed value of the Company's stock price during fiscal 2001, the
losses that the Company has incurred since inception, the Company's significant
underperformance relative to projections and the overall decline in industry
growth rates, which indicated that this trend might continue for an indefinite
period. The Company determined that the estimated future undiscounted cash flows
were below the carrying value of the goodwill and identifiable intangible assets
associated with the aforementioned acquisitions. As a result, the Company
recorded Euro 22,022,000 and Euro 6,395,000 for impairment charges related to
goodwill and other intangible assets, respectively, in the year ended December
31, 2001 to reduce goodwill and identifiable intangible assets to zero. The
assumptions supporting the estimated future undiscounted cash flows reflect
management's best estimates.

F-14

4. EQUITY INVESTMENTS

Effective September 28, 2000, the Company acquired 25% of the outstanding shares
of B&N Software AG for total consideration of Euro 3,068,000. The Company had an
option to buy additional 7% of the outstanding shares for a price of Euro
859,000 until June 30, 2001. Goodwill recorded in connection with the
acquisition of B&N of Euro 2,200,000 is included in "Investments" in the
consolidated balance sheets, and the amortization of the goodwill is included in
"Equity in losses of equity investments" in the consolidated statements of
operations. Goodwill is being amortized over a period of five years. On April
11, 2001, the Company purchased an additional 1,836 shares of common stock of
B&N Software AG for the price of Euro 409,000 and abandoned the option. As a
consequence of this purchase, the Company's investment in B&N Software AG
represents 26,5% of the equity of B&N Software AG. Additional goodwill of Euro
354,000 was recorded from the purchase in 2001.

5. SHORT-TERM AND RESTRICTED INVESTMENTS

Under the terms of Units issued on July 1, 1999 (refer to Note 10) amounts
equivalent to the first six-scheduled interest payments were required to be
invested in U.S. government securities and restricted in their use to the
payment of such interest when falling due. These have been classified as
Restricted Investments on the Company's balance sheet at December 31, 2000 and
2001, and are deemed to be available-for-sale securities for accounting
purposes.

Short-term and restricted investments are summarized as follows:

IMPACT OF
FOREIGN UNREALIZED
CURRENCY HOLDING UNREALIZED MARKET
COST TRANSLATIONS GAINS HOLDING LOSSES VALUE
---------- -------------- ------------- --------------- ----------

SHORT-TERM INVESTMENTS (in thousands Euro)

DECEMBER 31, 2001
6.125%U.S. Treasury Notes due January 1, 2002.................63 11 - (1) 73
6.25% U.S. Treasury Notes due July 1, 2002....................65 10 1 - 76
-- -- --- ---- --
128 21 1 (1) 149
=== == === === ===
DECEMBER 31, 2000
HypoVB FLR-TN Euro 2.840.000...............................2,833 - - (3) 2,830
Hypo Lux FLR Euro 13.650.000...............................3,642 - 12 3,654
5.5% U.S. Treasury Notes due January 1, 2001...............4,370 428 - (12) 4,786
6.625% U.S. Treasury Notes due July 1, 2001................1,262 121 - (23) 1,360
6.125%U.S. Treasury Notes due January 1, 2002..............4,699 455 - (46) 5,108
6.25% U.S. Treasury Notes due July 1, 2002.................4,868 472 - (38) 5,302
----- ------ ---- ------ -----
21,674 1,476 12 (122) 23,040
====== ===== === ===== ======
RESTRICTED INVESTMENTS
DECEMBER 31, 2001
6.125%U.S. Treasury Notes due January 1, 2002..............4,475 740 - (70) 5,145
6.25% U.S. Treasury Notes due July 1, 2002.................4,637 772 13 - 5,422
----- ------ --- ----- -----
9,112 1,512 13 (70) 10,567
===== ===== === ==== ======

DECEMBER 31, 2000
5.5% U.S. Treasury Notes due January 1, 2001...............4,799 454 - (13) 5,240
6.625% U.S. Treasury Notes due July 1, 2001................5,056 469 - (88) 5,437
6.125%U.S. Treasury Notes due January 1, 2002..............5,176 485 - (49) 5,612
6.25% U.S. Treasury Notes due July 1, 2002.................5,364 504 - (40) 5,828
----- --- --- ----- -----
20,395 1,912 - (190) 22,117
====== ===== === ===== ======

F-15

The net unrealized holding gains and losses are recorded in accumulated other
comprehensive income unless the amount relates to foreign exchange movements,
which are recorded in the statement of operations.

Proceeds from the sale of available-for-sale securities and restricted
investments in 1999, 2000 and 2001 were approximately Euro 33,026,000, Euro
93,215,000 and Euro 35,424,000, respectively. The Company did not recognize any
gains or losses on the sales of short-term investments in 1999. Losses of
approximately Euro 46,000 and Euro 290,000 were recognized in 2000 and 2001,
respectively.

6. PROPERTY AND EQUIPMENT

Net property and equipment consist of the following at December 31, 2000 and
2001 (in thousands Euro):

DECEMBER 31
-------------------------
2000 2001
-------- --------

Computer equipment and software....................... 28,842 23,846
Leasehold improvements................................ 21,368 24,607
Furniture and fixtures................................ 2,765 2,753
----- -----
52,975 51,206
Less accumulated depreciation and amortization........ (10,390) (18,553)
-------- --------
Net property and equipment............................ 42,585 32,653
======== ========

7. LEASES

The Company leases facilities and equipment under long-term operating leases,
and has long-term data and voice communication agreements. Future minimum
payments under non-cancelable operating leases with initial terms of one year or
more are as follows (in thousands Euro):

Year ending December 31
2002 ............................................ 3,102
2003............................................. 2,124
2004............................................. 1,475
2005............................................. 1,412
2006............................................. 1,325
Thereafter......................................... 2,757
-------
12,195
=======

The Company's rental expense under operating leases in the years ended December
31, 1999, 2000 and 2001 totaled approximately Euro 6,922,000, Euro 12,171,000
and Euro 3,504,000, respectively.

The Company has financed the acquisition of certain computer equipment through
capital lease agreements with interest rates ranging from 5% to 8%. At December
31, 2000 and 2001, the gross value of assets under capital leases was Euro
7,376,000 and Euro 6,774,000, respectively, and related accumulated amortization
was approximately Euro 3,463,000 and Euro 3,703,000, respectively.

F-16

Future minimum lease payments in connection with these leases are as follows (in
thousands Euro):

Year ending December 31
2002 ............................................. 1,098
2003 ............................................. 475
2004.............................................. 36
2005.............................................. -
2006.............................................. -
Thereafter.......................................... -
--------
1,591

Less: Interest Portion................................. (96)
--------
1,495
========

The assets and liabilities under capital lease are recorded at the lesser of the
present value of aggregated future minimum lease payments, including estimated
bargain purchase options, or the fair value of the assets under lease. Assets
under capital lease are amortized over the lesser of their estimated useful
lives of 5 years or the term of the lease.

8. OTHER ASSETS

Other assets consist principally of expenses incurred in connection with the
bonds issued during 1999 and amounts allocated to customer base and management
contracts in connection with business acquisitions. Bond issuance costs of
approximately Euro 7,567,000 are being amortized to interest expense over the
period of the borrowings. The unamortized balance at December 31, 2000 and 2001
was approximately Euro 5,188,000 and Euro 4,205,000, respectively. Amounts
allocated to customer base and management contracts are being amortized on a
straight-line basis over their useful lives - between three and five years. The
unamortized balance of these assets at December 31, 2000 and 2001 was
approximately Euro 9,565,000 and Euro 0, respectively.

9. OVERDRAFTS AND SHORT-TERM BORROWINGS

Overdrafts represent temporary overdrafts of bank balances. The overdrafts are
not subject to formal agreements with the banks.

As of December 31, 2001, the Company had established short-term unsecured
overdraft facilities under which the Company and its subsidiaries could borrow
up to Euro 170,000. The facilities are denominated in Italian Lire. The interest
rate fluctuates based on current lending rates and was 5.64% and 5,72% at
December 31, 2000 and 2001, respectively. As of December 31, 2001, Euro 170,000
of the overdraft facility was used with no availability remaining.

10. LONG-TERM DEBT

At December 31, 2001 and 2000, the Company's long-term debt consisted of the
following (in thousands Euro):

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

14% Senior Dollar Notes payable, due 2009............................................. 57,490 55,672
13% Convertible Senior Euro Subordinated Payment-in-Kind Notes, due 2009.............. 29,469 32,619
13% Convertible Senior Dollar Subordinated Discount Notes, due 2009 - Offering 1...... 44,614 53,394
13% Convertible Senior Dollar Subordinated Discount Notes, due 2009 - Offering 2...... 19,120 22,888
-------- --------
150,693 164,573
Less current portion.................................................................. - -
Long-term portion..................................................................... 150,693 164,573
======== ========

F-17

On July 1, 1999, the Company issued 150,000 Units, each unit consisting of USD
1,000 principal amount of 14.0% Senior Dollar Notes due 2009 ("Notes") and one
Warrant ("Warrant") to purchase 30.2311 ordinary shares of Cybernet Internet
Services International, Inc. Interest on the Notes is payable on July 1 and
January 1 of each year, beginning January 1, 2000. The Notes will mature on July
1, 2009. The Notes and the Warrants became transferable on September 10, 1999.
The Warrants can be exercised at an exercise price of USD 22.278 per ordinary
share of the Company's common stock, and are exercisable from January 1, 2000 to
July 1, 2009.

The net proceeds of the unit offering were approximately Euro 141 million (USD
146 million). Euro 50,963,000 (USD 57,466,000) thereof was invested in U.S.
government securities, which are restricted in use of the payment in full of the
first six scheduled interest payments. Euro 45,405,000 (USD 51,199,000) of the
net proceeds were allocated to the Warrants based upon a fair value allocation
of the proceeds between the Notes and the Warrants and have been recorded in
additional paid-in capital. The resultant discount on the Notes is being
accreted over the term of Notes using the straight-line method. The notes
payable and related discount are as follows at December 31, 2000 and 2001 (in
thousands Euro):

2000 2001
--------------------- ---------------------

Note payable, gross 82,208 75,776
Less discount on note payable 24,718 20,104
--------------------- ---------------------
Long-term portion of note payable 57,490 55,672
===================== =====================

The Units contain covenants applicable to the Company, including limitations and
requirements to indebtedness, restricted payments, dividends and other payments,
the issuance and sale of capital stock, transactions with stockholders and
affiliates, liens, asset sales, issuance of guarantees of indebtedness,
sale-leaseback transactions, consolidations and mergers, and provision of
financial statements and reports. At December 31, 2001, the Company was in
compliance with its covenants.

On August 26, 1999, the Company completed private offerings of USD 50,002,183 in
aggregate initial accreted value of 13.0% Convertible Senior Subordinated
Discount Notes due 2009 (in two separate offerings) ("Discount Notes") and Euro
25 million aggregate principal amount of 13.0% Convertible Senior Subordinated
Payment-in-Kind Notes due 2009 ("Payment-in-Kind Notes"). The Discount Notes do
not accrue cash interest prior to August 15, 2004 and the first semi-annual
payment of cash interest is payable on February 15, 2004. The Payment-in-Kind
Notes require payment of interest semi-annually in the form of secondary notes
issued under the payment-in-kind feature starting on February 15, 2000 and
continuing through August 15, 2004, and in the form of cash starting on February
15, 2005 and continuing to maturity on August 15, 2009. The Discount Notes are
convertible at any time after August 26, 2000 and prior to maturity at the rate
of one share of common stock for each USD 25.00 of accreted value of the
Discount Notes being converted. The Payment-in-Kind Notes are convertible at any
time after August 26, 1999 and prior to maturity at the rate of one share of
common stock for each Euro 25 in principal amount of the notes being converted.
After payment of discounts and commissions, the net proceeds of these offerings
were approximately Euro 69 million (USD 72 million).

The covenants associated with the Discount Notes are in most material aspects
the same as those associated with the Units, discussed above. At December 31,
2001, the Company was in compliance with its covenants.

During the year ended December 31, 2000, the Company paid Euro 33,837,000,
including commissions, of unrestricted cash to repurchase a portion of the
Senior Dollar Notes, which had a face value of Euro 72,092,000 and a carrying
value of Euro 55,726,000. The notes were retired upon repurchase, which resulted
in an extraordinary gain of Euro 17,754,000. None of the detachable

F-18

Warrants were acquired in the repurchase. During the year ended December 31,
2001, the Company paid Euro 3,325,000, including commissions, of unrestricted
cash to repurchase a portion of the Senior Dollar Notes, which had a face value
of Euro 11,508,000 and a carrying value of Euro 8,067,000. The notes were
retired upon repurchase, which resulted in an extraordinary gain of Euro
4,608,000. None of the detachable Warrants were acquired in the repurchase.

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company in estimating the fair values of its financial instruments used the
following methods and assumptions:

Cash and equivalents, restricted investments, trade receivables, short-term
investments, trade payables and accrued expenses - The carrying amounts
approximate fair value because of the short-term maturity of these instruments.

Long-term debt - At December 31, 2001, based upon quoted market values, the fair
value of the Company's 14% Senior Dollar Notes is estimated to be approximately
Euro 10,324,000. At December 31, 2001, quoted market values for the 13%
Convertible Senior Subordinated Discount Notes and the 13% Convertible Senior
Subordinated Payment-in-Kind Notes were unavailable. Accordingly, management is
unable to determine the fair value of the 13% Convertible Senior Subordinated
Discount Notes and the 13% Convertible Senior Subordinated Payment-in-Kind Notes
at December 31, 2001, which are subordinate to the Company's 14% Senior Dollar
Notes.

Capital lease and other long-term debt obligations - The fair value, which
approximates the carrying value, was estimated using discounted cash flow
analyses based on the Company's incremental borrowing rates for similar type
borrowings.

12. SHAREHOLDERS' EQUITY

COMMON STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock. Holders of
Common Stock are entitled to one vote per share on all matters submitted to a
vote of shareholders. The Common Stock is not redeemable and has no conversion
or preemptive rights.

PREFERRED STOCK
The Company is authorized to issue 50,000,000 shares of Preferred Stock with
relative rights, preferences and limitations determined at the time of
issuance. As of December 31, 2001, the Company has no issued and outstanding
Series A and B and C Preferred Stock. All of the Company's previously issued
Preferred Stock was converted to Common Stock.

SERIES A PREFERRED STOCK
The holders of the Series A Preferred Stock are entitled to receive dividends at
a rate equal to USD 0.01 per share per annum before any dividends are paid or
set apart for payment upon any other series of Preferred Stock of the Company,
other than Series B or Series C Preferred Stock, or on the Common Stock of the
Company. Commencing with the fiscal year beginning on January 1, 1998, the
dividend on the Series A Preferred Stock will be paid for each fiscal year
within five months of the end of each fiscal year, subject to the availability
of surplus or net profits there for. The dividends on the Series A Preferred
Stock are not cumulative. The holders of the Series A Preferred Stock are not
entitled to vote.

The shares of Series A Preferred Stock may be redeemed by the Company at any
time after January 1, 2000, at a redemption price of one share of the Common
Stock of the Company for each share of Series A Preferred Stock plus any unpaid
dividends earned thereon; provided that all and not less

F-19

than all of the shares of Series A Preferred Stock are so redeemed and provided
further that if the Company has not redeemed the Series A Preferred Stock by
December 31, 2001, a holder of Series A Preferred Shares may at any time
commencing January 1, 2002, require the Company to purchase all of the shares of
the Series A Preferred Stock held by the holder for a purchase price of $3.00
per share plus any dividends earned but unpaid on such shares.

A holder of Series A Preferred Stock may convert each share held into one share
of the Common Stock of the Company; provided, however, that (1) no conversion
may occur prior to January 1, 1999; (2) no more than 25% of the Series A
Preferred Shares held by the holder may be converted prior to January 1, 2000;
(3) no more than an additional 25% of the Series A Preferred Shares held by the
holder may be converted prior to January 1, 2001; (4) the remainder of the
Series A Preferred Shares held by the holder may be converted commencing January
1, 2001 and; (5) any conversion may not be for less than all of the Series A
Preferred Shares held by the converting shareholder eligible for conversion at
the time of the notice.

Upon the liquidation, dissolution or winding up, whether voluntary or
involuntary, of the Company, the holders of the Series A Preferred Stock will be
entitled to be paid the sum of $3.00 per share plus an amount equal to any
unpaid accrued dividends before any amount is paid to the holder of any other
series of Preferred Stock, other than the Series B Preferred Stock or the Series
C Preferred Stock, or to the Common Stock of the Company. After payment of these
amounts to the holders of the Series A Preferred Stock, the remaining assets of
the Company will be distributed to the holders of the Common Stock.

In July 1999, holders of 276,560 shares of Series A Preferred Stock converted
their shares into 276,560 shares of the Company's Common Stock. In January 2000,
holders of 300,000 shares of Series A Preferred Stock converted their shares
into 300,000 shares of the Company's Common Stock. In 2001, holders of 600,000
shares of Series A Preferred Stock (representing the remaining shares
outstanding) converted their shares into 600,000 shares of the Company's Common
Stock.

SERIES B PREFERRED STOCK
The holders of the Series B Preferred Stock are entitled to receive dividends at
a rate equal to USD 0.01 per share per annum before any dividends are paid or
set apart for payment upon any other series of Preferred Stock of the Company
other than the Series C Preferred Stock or on the Common Stock of the Company.
Commencing with the fiscal year beginning on January 1, 1998, the dividend on
the Series B Preferred Stock will be paid for each fiscal year within five
months of the end of each fiscal year, subject to the availability of surplus or
net profits thereof. The dividends on the Series B Preferred Stock are not
cumulative. The holders of the Series B Preferred Stock are entitled to one vote
per share.

The shares of Series B Preferred Stock may be redeemed by the Company at any
time after January 1, 2000, at a redemption price of one share of the Common
Stock of the Company for each share of Series B Preferred Stock plus any unpaid
dividends earned thereon through the date of redemption; provided that all and
not less than all of the shares of Series B Preferred Stock are so redeemed.

A holder of Series B Preferred Stock may convert each share held into one share
of the Common Stock of the Company provided, however, that (1) no conversion may
occur prior to January 1, 1999; (2) no more than 25% of the Series B Preferred
Shares held by the holder may be converted prior to January 1, 2000; (3) no more
than an additional 25% of the Series B Preferred Shares held by the holder may
be converted prior to January 1, 2001; (4) the remainder of the Series B
Preferred Shares held by the holder may be converted commencing January 1, 2001;
and, (5) any conversion may not be for less than all of the Series B Preferred
Shares held by the converting shareholder eligible for conversion at the time of
the notice.

F-20

Upon the liquidation, dissolution or winding up, whether voluntary or
involuntary, of the Company, the holders of the Series B Preferred Stock will be
entitled to be paid the sum of $3.00 per share plus an amount equal to any
unpaid accrued dividends before any amount is paid to the holder of any other
series of Preferred Stock other than the Series C Preferred Stock or to the
Common Stock of the Company. After payment of these amounts to the holders of
the Series B Preferred Stock, the remaining assets of the Company will be
distributed to the holders of the Common Stock.

In January 2000, holders of 1,313,240 shares of Series B Preferred Stock
converted their shares into 1,313,240 shares of the Company's Common Stock. In
December 2000, holders of 2,580,000, shares of Series B Preferred Stock
converted their shares into 2,580,000, shares of the Company's Common Stock.

SERIES C PREFERRED STOCK
In July 1998, holders of 1,400,000 shares of Series C Preferred Stock
(representing the entire amount outstanding) converted their shares into
1,400,000 shares of the Company's Common Stock. Prior to the conversion holders
of Series C Preferred Stock received a stock dividend in Common Stock of the
Company in lieu of a cash dividend. The stock dividend was valued at the closing
price of the Common Stock on the date the dividend was declared.

13. STOCK INCENTIVE PLAN

In 1998, the Company adopted a stock incentive plan ("Stock Incentive Plan")
that provides for the grant of stock options to purchase shares of the Company's
common stock to employees and members of the Board of Directors. The Company has
elected to follow APB 25 and the related interpretations in accounting for its
employee stock options. Under APB 25, generally if the exercise price of the
Company's employee stock options equals the market price of the underlying stock
at date of grant, no compensation expense is recorded.

The Company has reserved 5,000,000 shares of common stock for issuances under
the Stock Incentive Plan. The following table presents the changes in the stock
options during the year.

WEIGHTED-
AVERAGE
STOCK OPTIONS EXERCISE PRICE
-----------------------------------

Outstanding at January 1, 1999 685,000 USD 32.01
Granted 1,846,625 USD 12.68
Forfeited 337,610 USD 30.64
-----------------------------------
Outstanding at December 31, 1999 2,194,015 USD 16.10
Granted 2,307,700 USD 7.25
Cancelled 1,068,550 USD 15.94
Forfeited 1,082,533 USD 15.78
-----------------------------------
Outstanding at December 31, 2000 2,350,632 USD 9.68
Granted 1,666,450 USD 1.54
Forfeited 1,258,616 USD 10.04
-----------------------------------
Outstanding at December 31, 2001 2,758,466 USD 4.60
===================================

Since plan inception through 2001, no options have been exercised and no options
have expired. The following table presents weighted-average information about
options issued during 2001.

On grant date, options issued during 2001 Number of Options Weighted-average Weighted-average
with exercise price: Issued Exercise Price Fair Value
----------------------------------------- ----------------- ---------------- -----------------

Equals to market price 558,000 USD 0.96 USD 0.85
Exceeds market price 1,108,450 USD 1.82 USD 1.48

F-21

The weighted-average contractual life of options outstanding at December 31,
2001 was 8.72 years with a contractual life of 10 years.

As of December 31, 1999, 2000 and 2001, the Company had 198,757 options, 568,869
options and 1,079,049 options exercisable, respectively. The weighted-average
exercise price of options exercisable as of December 31, 2001 is USD 6.28.
Options vest over a period of three years from the date of grant and become upon
vesting. The Company has not recognized any compensation expense related to
stock options in 1999, 2000 or 2001.

The following table presents information about options outstanding as of
December 31, 2001.

NUMBER OF WEIGHTED WEIGHTED-AVERAGE NUMBER OF WEIGHTED
RANGE OF EXERCISE PRICES OF OPTIONS AVERAGE REMAINING OPTIONS AVERAGE
OPTIONS OUTSTANDING OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISABLE PRICE
(IN YEARS)
- ------------------------------------------------------------------------------------------------------------------

USD 0.41 - USD 1.89 1,497,450 USD 1.49 9.15 302,685 USD 1.58
USD 3.06 - USD 6.65 432,850 USD 4.48 8.64 168,443 USD 4.45
USD 8.19 - USD14.36 19,166 USD 10.11 8.07 600,755 USD 8.90
USD20.30 - USD35.43 9,000 USD 26.52 7.22 7,166 USD 27.41
----------------- -------------
2,758,466 1,079,049
================= =============

SFAS No. 123 requires the presentation of pro forma information regarding net
income and earnings per share as if the Company had accounted for its employee
stock options under the fair value method of that statement. The fair value of
these options was estimated at the date of grant using the Black-Scholes
option-pricing model. The assumptions used in calculating the fair value of the
options granted in 1999, 2000 and 2001 were as follows.

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

Risk free interest rate......... 5.5% 5.5% 4.61%
Stock price volatility factor... 0.821 0.859 1.242
Expected life of options........ 5 years 5 years 5 years
Dividend yield.................. 0.0% 0.0% 0.0%

Had the Company determined compensation expense for this plan in accordance with
the provisions of SFAS No. 123, the fair value of the options would have been
amortized over the option vesting periods. Under this method, the Company's net
loss and loss per share for the years ended December 31, 1999, 2000 and 2001
would have been as follows (in thousand Euro, except per share amounts):

YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 2000 2001
---- ---- ----

Pro forma net loss 53,447 63,972 137,891
Pro forma net loss per share - basic and
diluted 2.69 2.75 5.30

STOCK OPTION REPRICING
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44, which
has been adopted prospectively as of July 1, 2000

F-22

requires that stock options that have been modified to reduce the exercise price
be accounted for as variable. During 2000, the Company offered Stock Incentive
Plan participants the opportunity to exchange stock options previously granted
for new options at the current stock price. Approximately 1.07 Million new
options with an exercise price of USD 9.02, the fair market value of the stock
on the date of the exchange, were exchanged for previously issued options. This
exchange is considered a re-pricing and changes the status of these options to
variable options. Under FIN 44, the options are accounted for as variable from
July 1, 2000 until the options are exercised, forfeited or expire unexercised.
Prior to the adoption of FIN 44, the Company accounted for these stock options
as fixed. Because the market price of the Company's stock decreased since July
1, 2000, the effect of adopting FIN 44 has had no impact on net loss for the
years ended December 31, 2000 and 2001 related to vested options. Furthermore,
any future increases in the market price of the stock, above the exercise price
of the options, will result in recognition of stock-based compensation expense
in future reporting periods.

14. PROVISION FOR INCOME TAXES

In March 1999 the German government passed tax legislation, which reduced the
corporate income tax rate from 45% to 40%. Accordingly, the Company's deferred
tax assets and liabilities related to Germany were re-measured using 40% in the
first quarter of 1999.

On July 14, 2000, the German government approved legislation, which will, among
other things, reduce the corporate tax rate to 25% and eliminate the tax credit
system. Furthermore, the capital gains tax was reduced from 25% to 20%. The new
law is effective January 1, 2001. Accordingly, the Company's deferred tax assets
and liabilities related to Germany were re-measured using the revised rates in
the fourth quarter of 2000.

The Company's principal operations are currently located in Germany. Pretax loss
for the years ended December 31, 1999, 2000 and 2001 were taxable in the
following jurisdictions (in thousands Euro):

YEAR ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001
---- ---- ----

Germany............................................... (31,477) (21,199) (28,583)
U.S................................................... (23,036) (50,433) (69,314)
Italy................................................. (4,781) (5,704) (8,019)
Other................................................. (2,671) (8,174) (5,116)
-------------- ------------ --------------
Total................................................. (61,965) (85,510) (111,032)
============== ============ ==============

For the years ended December 31, 1999, 2000 and 2001, the components of the
provision for income taxes, substantially all of which relates to Germany, are
as follows (in thousands Euro):

YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 2000 2001
---- ---- ----

Current.............................................. 15 3 21
Deferred............................................. (13,515) (6,979) 27,657
---------------- ---------------- -------------
Income tax (benefit) expense......................... (13,500) (6,976) 27,678
================ ================ =============

F-23

The Company has net deferred tax assets as of December 31, 2000 and 2001 as
follows (in thousands Euro):

DECEMBER 31,
-----------------------
2001 2001
---- ----

Deferred tax assets
Net operating loss carryforwards............................... 42,954 66,379
Other.......................................................... 4 -
------------ ------------
42,960 66,379
Valuation allowance............................................ (14,460) (65,669)
------------ ------------
28,500 710
Deferred tax liabilities
Product development costs...................................... 828 329
Depreciation and amortization.................................. 15 381
------------ ------------
843 710
------------ ------------
Net deferred tax assets............................................. 27,657 0
============ ============

As of December 31, 2001, the Company had available combined cumulative net
operating loss carryforwards of approximately Euro 162.4 million to offset
future taxable income. Under current tax laws, substantially all of these loss
carryforwards have an indefinite life and may be used to offset the Company's
future taxable income. Net operating loss carryforwards are subject to review
and possible adjustment by the applicable taxing authorities. Furthermore, under
current tax laws, certain substantial changes in the Company's ownership may
limit the amount of net operating loss carryforwards, which could be utilized
annually to offset future taxable income. Subsequent significant ownership
changes could further effect the limitation in future years.

In 2001, as the Company has incurred losses since inception and does not expect
to achieve profitability in the near future, the Company has recorded a full
valuation allowance against its net deferred tax assets since realization of
these future benefits is uncertain.

The change in valuation allowance was an increase of Euro 2.3 million and Euro
51.2 million for the years ended December 31, 2000 and 2001, respectively. The
changes primarily relate to additional losses incurred in those years and the
full valuation of net deferred tax assets in fiscal 2001.

For the years ended December 31, 1999, 2000 and 2001, a reconciliation of income
taxes determined using the United States statutory federal income tax rate of
35% to actual income taxes provided is as follows (in thousands Euro):

YEAR ENDED DECEMBER 31,
---------------------------------------
1999 2000 2001
---- ---- ----

Income tax benefit at statutory rate.................... (21,688) (20,926) (20,228)
Higher foreign tax rates................................ (8,598) (6,420) (3,191)
Valuation allowance..................................... 12,195 2,265 51,209
Statutory rate change................................... 516 9,634 -
Other................................................... 4,075 8,471 (112)
------------ ---------------- ---------------
Income tax (benefit) expense............................ (13,500) (6,976) 27,678
============ ================ ===============

F-24

15. LOSS PER SHARE

For the years ended December 31, 1999, 2000 and 2001, the following table sets
forth the computation of basic and diluted loss per share (in thousands Euro,
except per share data):

DECEMBER 31,
--------------------------------------
1999 2000 2001
---- ---- ----

Numerator:
Net loss-numerator for basic and diluted loss per............ (48,371) (60,948) (134,640)
Denominator:
Denominator for basic and diluted loss per share -- weighted-average
shares outstanding........................................... 19,877 23,266 25,996
Basic and diluted loss per share.................................. (2.43) (2.62) (5.18)

The denominator for diluted loss per share excludes the convertible preferred
stock and stock options because the inclusion of these items would have an
anti-dilutive effect.

16. EXTRAORDINARY ITEMS

During 2000, the Company repurchased a portion of its 14% Senior Notes due 2009
(the "Notes"). The Company repurchased Euro 77.1 million (USD 72.6 million) of
Notes at average prices equal to 43% of the face value of the Notes repurchased.
As required by the terms of the Notes, the Company had established an escrow
account to provide for payment in full of the first six scheduled interest
payments on the Notes. The amounts contained in the escrow account are carried
on the Company's balance sheet as "Restricted investments." As a result of the
repurchase of Notes, approximately Euro 20.3 million has been be released from
the escrow account and is available to the Company. The cash paid to repurchase
the Notes in 2000, net of amounts released from the escrow account, was
approximately Euro 15.3 million.

During 2001, the Company purchased additional 14% Senior Dollar Notes payable,
due 2009, with face value of USD 10.6 Million (Euro 11.5 Million). Following
this purchase the face value of the remaining outstanding 14% Senior Dollar
Notes payable, due 2009, was USD 66.8 Million (approximately Euro 75.8 Million).
The notes were purchased by the Company for an average of 28.9% of face value.

The amount shown as an extraordinary item represents the difference between the
amounts paid to extinguish the Senior Notes and the carrying value on the
balance sheet, as of the date of extinguishment, net of associated costs.

17. RELATED PARTY TRANSACTIONS

The Company paid Euro 255,000, Euro 209,000 and Euro 435,000 to a law firm for
legal services where one of the members of the board of directors is a partner
in the years ended December 31, 1999, 2000 and 2001, respectively.

In the year ended December 31, 1999, Sunweb, a wholly-owned subsidiary of the
Company, purchased goods and services totaling CHF 2,346,000 (Euro 1,174,000)
from a company owned by a relative of a member of the senior management team.

The Company granted interest free loans totaling Euro 356,000 to three former
Italian management employees. The loans were due on December 31, 2000 and are
denominated in Italian Lire. No payments have been made on the loans to date.

F-25

On December 28, 1999 the Company entered into a Cooperation Software Licensing
Agreement with B&N Software AG, ("B&N"). This contract grants the Company an
exclusive, non-transferable, chronologically and geographically unrestricted
distribution rights to certain products produced by B&N. The license fee for the
contract was Euro 1,023,000 and is being expensed over three years starting in
2000. The Company has an investment representing 26,5% of common stock in B&N.

The Company has an account receivable of approximately Euro 281,000 from a
company that filed for insolvency in 2000, which has been guaranteed by B&N in
accordance with an agreement dated March 1, 2001.

18. SEGMENT INFORMATION

The Company evaluates performance, and allocates resources, based on the
operating profit of its subsidiaries, which are organized geographically. The
accounting policies of the reportable segments are the same as those described
in the Summary of Significant Accounting Policies in Note 2.

The Company operates in one line of business, which is providing international
Internet backbone and access services and related communication services for
corporate customers. The Company's reportable segments are divided by country
since each country's operations are managed and evaluated separately.

For the years ended December 31, 1999, 2000 and 2001, information concerning the
Company's geographic locations is summarized as follows (in thousands Euro):

YEAR ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001
---- ---- ----

REVENUES:
Germany............................................... 11,338 20,918 25,078
U.S................................................... - - -
Italy................................................. 5,161 8,040 6,513
Other................................................. 4,429 6,873 7,486
-------------- ------------ --------------
Total................................................. 20,928 35,831 39,077
============== ============ ==============

DEPRECIATION AND AMORTIZATION:
Germany............................................... 4,844 10,189 9,321
U.S................................................... 5,444 8,571 7,080
Italy................................................. 606 1,360 1,494
Other................................................. 486 1,708 2,261
-------------- ------------ --------------
Total................................................. 11,381 21,828 20,156
============== ============ ==============

INTEREST EXPENSE:
Germany............................................... 107 141 76
U.S................................................... 16,630 34,683 25,359
Italy................................................ 174 356 286
Other................................................. 20 9 7
-------------- ------------ --------------
Total................................................. 16,931 35,189 25,728
============== ============ ==============

INTEREST INCOME:
Germany............................................... 24 144 15
U.S................................................... 3,860 5,078 1,453
Italy................................................. - 210 7
Other................................................. - 5 2
-------------- ------------ --------------
Total................................................. 3,884 5,437 1,477
============== ============ ==============

F-26

YEAR ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001
---- ---- ----

LOSS BEFORE TAXES:
Germany............................................... (31,477) (21,199) (28,583)
U.S................................................... (23,036) (50,433) (69,314)
Italy................................................ (4,781) (5,704) (8,019)
Other................................................. (2,671) (8,174) (5,116)
-------------- ------------ --------------
Total................................................. (61,965) (85,510) (111,032)
============== ============ ==============

EQUITY IN LOSSES OF EQUITY INVESTMENTS:
Germany............................................... - - -
U.S................................................... - (168) (538)
Italy................................................ - - -
Other................................................. - - -
-------------- ------------ --------------
Total................................................. - (168) (538)
============== ============ ==============

EXTRAORDINARY ITEMS:
Germany............................................... - - -
U.S................................................... - 17,754 4,608
Italy................................................ - - -
Other................................................. - - -
-------------- ------------ --------------
Total................................................. - 17,754 4,608
============== ============ ==============

INCOME TAX BENEFIT (EXPENSE):
Germany............................................... 13,690 6,976 (27,657)
U.S................................................... (26) - -
Italy................................................ (160) - -
Other................................................. (4) - (21)
-------------- ------------ --------------
Total................................................. 13,500 6,976 (27,678)
============== ============ ==============

At December 31, 2000 and 2001, the Company's property and equipment by
geographic location and capital expenditures by geographic area are as follows
(in thousands Euro):

DECEMBER 31,
---------------------------
2000 2001
---- ----

TOTAL ASSETS:
Germany............................................... 85,574 40,738
U.S................................................... 91,542 14,260
Italy................................................ 11,619 11,465
Other................................................. 7,086 5,509
------------- -------------
Total................................................. 195,821 71,972
============= =============

Property and equipment
Germany............................................... 32,311 24,575
U.S................................................... - -
Italy................................................. 5,809 5,314
Other................................................. 4,465 2,763
------------- -------------
Total................................................. 42,585 32,653
============= =============

Capital Expenditures:
Germany............................................... 20,272 4,219
U.S................................................... - -
Italy................................................. 1,966 1,022
Other................................................. 1,650 664
------------- -------------
Total................................................. 23,888 5,905
============= =============

19. COMMITMENTS AND CONTINGENCIES

The Company is subject to pending and threatened legal actions that arise in the
normal course of business. In the opinion of management, no such actions are
known to have a material adverse impact on the financial position of the
Company.

F-27

20. ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income consists of unrealized gains or losses on
marketable securities and translation adjustments from consolidation. At
December 31, 2000 and 2001, the components of accumulated other comprehensive
income were as follows:

DECEMBER 31,
------------------------------
2000 2001
---- ----

Unrealized holding losses (300) (57)
Currency translation adjustment 593 683
--------------- --------------
293 626
=============== ==============

21. SUBSEQUENT EVENTS

TELEHOUSE PURCHASE OPTION
On January 29, 2002, the Company entered into an Option Agreement ("Agreement")
with Telehouse Deutschland GmbH ("Telehouse"). Pursuant to the Agreement, the
Company granted Telehouse an option to purchase the Company's existing data
centers located in Munich, Frankfurt and Hamburg (Germany) for an aggregate
purchase price of approximately Euro 30,000,000. Telehouse currently leases
these data centers from the Company. The option to purchase is exercisable by
Telehouse on or before March 31, 2002. In consideration of the option grant,
Telehouse paid the Company an amount of approximately Euro 1,300,000 ("Option
Payment"), most of which will be applied towards the purchase price in the event
the option is exercised. In the event the option is not exercised, the Option
Payment will be applied towards Telehouse's obligations to the Company under the
current lease between the Company and Telehouse. On March 26, 2002, the Option
Agreement expiration date was extended to April 30, 2002.

CREDIT FACILITY
On March 12, 2002, the Company entered into a credit facility agreement ("Credit
Facility") with MFC Merchant Bank S.A. ("MFC") for maximum borrowings of Euro
7,000,000. The Company is obligated to borrow in three tranches: Euro 949,000,
Euro 1,500,000 and Euro 4,551,000. Each borrowing tranche is dependent upon
certain events occurring, as defined. The Company has received Euro 865,800
(into a trustee account under the Credit Facility to-date). The Credit Facility
bears interest at a rate of 14% per annum and comes due on March 12, 2003. The
Credit Facility can be extended at the discretion of MFC. The Credit Facility
contains certain qualitative covenants, as defined, that the Company must
comply. The Credit Facility is collateralized by substantially all of the
Company's assets, excluding restricted cash and restricted investments.

MFC is considered a related party as it maintains voting rights on behalf of two
shareholders that hold approximately 26% of the Company's outstanding shares and
members of MFC are members of the Company's Board of Directors and executive
management.

ITALIAN OPERATIONS
In 2002, the Company's Board of Directors made the decision to sell the
Company's operations in Italy as the Company's management does not have the
financial resources to support these operations and has been actively searching
for a buyer. At December 31, 2001, the Company had not made any adjustments to
the net realizable value of the operations in Italy. The Company has not entered
into any agreements for the sale of these operations to date. Please refer to
Note 18, "Segment Information," for financial information relating to the
operations in Italy.

F-28

TERMINATION AGREEMENTS

On March 12, 2002, the Company entered into termination agreements with two
individuals that were officers of the Company. The Company paid a total of
approximately Euro 198,000 to these individuals and placed approximately Euro
198,000 in escrow in accordance with the terms of the termination agreements.
Furthermore, upon execution of the Telehouse option agreement, these individuals
will be paid a bonus of approximately Euro 492,000 in accordance with the terms
of the termination agreements.

22. FINANCIAL INFORMATION BY QUARTER (UNAUDITED)

Quarterly financial information for the years ended as of December 31, 2001 and
2000 is as follows (in thousands Euro, except per share data):

MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
FISCAL 2001 QUARTERS ENDED, 2001 2001 2001 2001
----------------- ----------------- ----------------- ----------------

Net revenues 9,880 9,901 9,879 9,417
Gross profit 4,387 3,741 4,278 1,566
Operating loss (8,990) (9,642) (10,238) (51,313)
Net loss before extraordinary items (18,895) (19,976) (7,014) (93,363)
Net loss (14,878) (19,976) (6,423) (93,363)

Net loss per share before extraordinary
items - basic and diluted (0.73) (0.77) (0.27) (3.59)
Net loss per share - basic and diluted (0.58) (0.77) (0.25) (3.59)

MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
FISCAL 2000 QUARTERS ENDED, 2000 2000 2000 2000
----------------- ----------------- ----------------- ----------------

Net revenues 7,163 9,303 9,546 9,819
Gross profit 2,565 3,354 3,019 3,776
Operating loss (14,248) (12,346) (10,272) (15,420)
Net loss before extraordinary items (23,906) (17,182) (17,577) (20,037)
Net loss (23,906) (17,182) (4,834) (15,026)

Net loss per share before extraordinary
items - basic and diluted (1.03) (0.73) (0.76) (0.86)
Net loss per share - basic and diluted (1.03) (0.73) (0.21) (0.64)

The quarter ended March 31, 2001 includes the following infrequently occurring
charges to the consolidated statement of operations: Euro 4,017,000 gain on the
early retirement of debt.

The quarter ended June 30, 2001 includes the following infrequently occurring
charges to the consolidated statement of operations: Euro 2,556,000 to write
down several telecommunication carrier grade switches.

The quarter ended September 30, 2001 includes the following infrequently
occurring charges to the consolidated statement of operations: Euro 591,000 gain
on the early retirement of debt.

The quarter ended December 31, 2001 includes the following infrequently
occurring charges to the consolidated statement of operations: Euro 28,417,000
for impairment of goodwill and identifiable intangible assets; Euro 4,756,000
for loss on disposal of property and equipment; Euro 1,381,000 to write down
several telecommunication carrier grade switches; and, Euro 27,657,000 for the
increase in valuation allowance for deferred tax assets.

F-29

The quarter ended March 31, 2000 includes the following infrequently occurring
charges to the consolidated statement of operations: Euro 1,620,000 to dispose
of several telecommunication carrier grade switches.

The quarter ended September 30, 2000 includes the following infrequently
occurring charges to the consolidated statement of operations: Euro 12,743,000
gain on the early retirement of debt.

The quarter ended December 31, 2000 includes the following infrequently
occurring charges to the consolidated statement of operations: Euro 1,620,000 to
dispose of several telecommunication carrier grade switches; Euro 645,000 for
impairment of goodwill and identifiable intangible assets; Euro 5,011,000 gain
on the early retirement of debt.

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

Schedule II

Euro thousand Net expense (recovery)
------------------------------
Balance at Charged to Charged Balance
beginning costs and to other at end of
of period expenses accounts Deductions period
-----------------------------------------------------------------------

For the year ended December 31, 1999
- - Allowance for doubtful debt 317 870 - - 1,187
- - Deferred tax asset valuation allowance - 12,195 - - 12,195

For the year ended December 31, 2000
- - Allowance for doubtful debt 1,187 120 - 1,307
- - Deferred tax asset valuation allowance 12,195 2,265 - - 14,460
For the year ended December 31, 2001
- - Allowance for doubtful debt 1,307 5,514 - (1,007)(1) 5,814
- - Deferred tax asset valuation allowance 14,460 51,209 - -- 65,669

(1) Uncollectable accounts written-off, net of recoveries.

F-30

Independent Accountants' Reports on Cybernet Italia S.p.A. and Eclipse S.p.A.

Presented below are the Independent Accountants' Reports on Cybernet Italia
S.p.A. and Eclipse S.p.A.. These audit reports and the related audited financial
statements for the year ended December 31, 1999 were relied on by Ernst & Young
in the performance of their audit of the consolidated financial statements of
the Company. Their audit report is contained on page F-1. The audited financial
statements of Cybernet Italia S.p.A. and Eclipse S.p.A. referred to in these
audit reports have not been included in this document.

INDEPENDENT ACCOUNTANTS' REPORT

The Board of Directors
Cybernet Italia S.p.A.
Via C. Veneziani, 48
Roma, Italy

We have audited the accompanying balance sheet of Cybernet Italia S.p.A. as of
December 31, 1999, and the related statements of loss, stockholders' equity
(deficit), and cash flows for the six months then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing standards.
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 statements presentation.
We believe that our audits provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cybernet Italia S.p.A. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.

Cybernet Italia S.p.A. is a wholly-owned subsidiary of Cybernet Internet
Services International, Inc. ("Cybernet"). As shown in the accompanying
financial statements, the Company has incurred a net loss of ITL 5,944 millions
for the six months ended December 31, 1999, and has incurred substantial net
losses for the past two years. At December 31, 1999, current liabilities
exceeded current assets by ITL 7,102 millions and total liabilities
substantially equalled total assets. Realization of a major portion of the
assets in the accompanying balance sheet is dependent upon continued operations
of the Company, which in turn is dependent upon the Company's success of its
future operations and the continuing financial support of Cybernet. As discussed
in Note 2.b, Management believes that actions presently taken to revise the
Company's operating and financial requirements provide the opportunity for the
Company to continue as a going concern. It is not possible, however, to predict
at this time the success of management efforts. Accordingly, the Company has
received firm commitments from Cybernet that Cybernet will continue to meet the
Company's financial requirements in the event this is necessary.

March 29, 2000

/s/ Grant Thornton S.p.A.
Grant Thornton S.p.A.

F-31

INDEPENDENT ACCOUNTANTS' REPORT

The Board of Directors
Eclipse S.p.A.
Vicolo S. Maria, 30
Rovereto, Italy

We have audited the accompanying balance sheet of Eclipse S.p.A. as of December
31, 1999, and the related statement of loss, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
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 statements presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Eclipse S.p.A. as of December
31, 1999, and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.

Eclipse S.p.A. is a wholly-owned subsidiary of Cybernet Internet Services
International, Inc. ("Cybernet"). As shown in the accompanying financial
statements, the Company has incurred a net loss of ITL 3,814 millions. At
December 31, 1999, current liabilities exceed current assets by ITL 1,288
millions and total liabilities substantially equalled total assets. Realization
of a major portion of the assets in the accompanying balance sheet is dependent
upon continued operations of the Company, which in turn is dependent upon the
Company's success of its future operations and the continuing financial support
of Cybernet. As discussed in Note 2.b, Management believes that actions
presently taken to revise the Company's operating and financial requirements
provide the opportunity for the Company to continue as a going concern. It is
not possible, however, to predict at this time the success of management
efforts. Accordingly, the Company has received firm commitments from Cybernet
that Cybernet will continue to meet the Company's financial requirements in the
event this is necessary.

March 29, 2000

/s/ Grant Thornton S.p.A.
Grant Thornton S.p.A.

F-32

SIGNATURES

Pursuant to 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.

CYBERNET INTERNET SERVICES
INTERNATIONAL, INC.

Dated: April 15, 2002 By: /s/ Michael J. Smith
----------------------------------
Michael J. Smith
President and Chief Executive Officer

Pursuant to the requirements of the SECURITIES EXCHANGE ACT OF 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

/s/ Michael J. Smith Date: April 15, 2002
- ------------------------------------
Michael J. Smith
President, Chief Executive Officer,
Chief Financial Officer and Director

/s/ Roy Zanatta Date: April 15, 2002
- ------------------------------------
Roy Zanatta
Secretary, Treasurer and Director

/s/ Eduard Seligman Date: April 15, 2002
- ------------------------------------
Eduard Seligman
Director

/s/ Greg Elderkin Date: April 15, 2002
- ------------------------------------
Greg Elderkin
Director

/s/ Slobodan Andjic Date: April 15, 2002
- ------------------------------------
Slobodan Andjic
Director