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, 2002

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]

The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant as of June 28, 2002, the last business day
of the Registrant's most recently completed second fiscal quarter, based on
the closing price of the voting stock on the OTC Bulletin Board on such date,
was approximately $3,914,566.

As of March 31, 2003, the Registrant had approximately 26,445,663 shares of
common stock, $0.001 par value outstanding.

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TABLE OF CONTENTS

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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. In this document, all references to monetary amounts are
to "Euros", the lawful currency adopted by most members of the European Union
(the "EU"), unless otherwise stated, and "E" refers to Euros.

In 2002, through our subsidiaries, we provided Internet communications services
and solutions. We offered a portfolio of advanced communications products,
including Internet access and value-added services, as well as data services.
Our Internet Protocol ("IP") solutions were based on a core product offering
consisting of Internet connectivity and value-added services. Value-added
services included virtual private networks ("VPNs"), web-hosting, co-location,
security solutions, electronic commerce, Intranet/Extranet and workflow
solutions.

We marketed 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 approached 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 enabled us to work directly with different levels of our
customers' organizations, participate in the design of customers' systems and
offer additional network and communications services as our customers'
businesses grew and their needs changed. In 2002, we sold our services and
solutions primarily through our direct sales force.

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. As a result of these factors, we have and
continue to review strategic options. Further, we have sold certain assets,
discontinued certain operations and reduced our workforce. As part of our
review, we have and may continue to make fundamental changes to our business
strategies, sell assets or subsidiaries, including pursuing a revised business
focus, further reduce our workforce and level of business activity or make other
significant changes. Due to our weak financial position, we sold our data
centers in Hamburg, Munich and Frankfurt, Germany (the "Data Centers"), and
certain other operations so as not to have to fund the operating losses
associated with certain of these operations and to raise cash. See "Item 1.
Business - Employees", "Item 1. Business - Risk Factors" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations".

We have incurred significant losses from operations resulting in a stockholders'
deficiency of E138.0 million at December 31, 2002. We do not expect to achieve
sufficient revenues to support future operations without additional financing.
These conditions raise substantial doubt about our ability to continue as a
going concern. Our ability to continue as a going concern and realize the
carrying value of our assets is dependent upon our ability to obtain additional
financing, restructure our debt, streamline our business and reduce our costs.
We are currently in the process of trying to identify sources of additional
financing, negotiating changes to our debt structure and evaluating our
strategic options. However, there are no assurances that these plans can be
accomplished on satisfactory terms, or at all, or that they will provide
sufficient cash to fund our operations, pay the principal of, and interest on,
our indebtedness, fund our other liquidity needs or permit us to refinance our
indebtedness. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation - Forward-Looking Statements".

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In 2003, we intend to focus our operations upon electronic commerce, and may
consider various alternatives in connection therewith including entering into
joint ventures and other projects to pursue our revised business focus.

Business Developments

In 2002, the telecommunications industry continued to experience a significant
adjustment which began in 2001. During 2002, industry demand for technology
solutions continued to decline in response to industry adjustment, economic
downturn in Europe and other parts of the world and related decline in global
capital markets. As a result of such industry adjustment, the business market
place has changed. Customers continued to focus on reducing costs and,
accordingly, continued to be conservative in their capital spending strategies
in 2002. As a result, the levels of capital spending in the industry around the
world continued to decline in 2002.

As a result of the significant downturn in the telecommunications industry and
the economic environment, and capital market trends, which materially adversely
impacted our operations, and as a result of the substantial amount of debt we
have incurred, we undertook various initiatives to streamline our operations,
activities and strategies and reduce our costs. These activities included the
rationalization and disposition of certain assets and workforce reductions.

The primary focus of these activities in 2002 was to reposition us from a
financial perspective. We continue to review our strategic options and are
monitoring recent developments in the telecommunications and Internet markets.
Although we have sold certain assets, discontinued certain operations and
reduced our workforce, we may, as part of our work plan, make further
fundamental changes to our business strategies, sell assets or subsidiaries,
including pursuing a revised business focus, further reduce our workforce and
level of business activity or make other significant changes. Options under
review include, but are not limited to, pursuing restructuring of our
indebtedness on a consensual basis or under the provisions of bankruptcy
legislation, or liquidating our business and operations. 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".

As part of our strategic review and in order to stop funding operating losses
and preserve capital, we sold various assets.

THE FOLLOWING SUMMARIES OF THE MATERIAL PROVISIONS OF THE AGREEMENTS THAT WE
ENTERED INTO IN CONNECTION WITH THE DISPOSITION OF VARIOUS BUSINESSES, ASSETS
AND SUBSIDIARIES ARE NOT COMPLETE AND THESE PROVISIONS, INCLUDING THE
DEFINITIONS OF CERTAIN TERMS, ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO
THE APPLICABLE AGREEMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (THE
"SEC").

Cybernet AG entered into agreements in 2002 pursuant to which it sold its
assets, equipment, furniture and fixtures (the "Assets") used in the operation
of the Data Centers in Frankfurt, Munich and Hamburg, Germany. As a result, we
no longer operate the Data Centers.

On January 29, 2002, we entered into an option agreement with Telehouse
Deutschland GmbH ("Telehouse") pursuant to which we granted an option (the
"Option") to Telehouse to purchase the Assets used in the operation of the Data
Centers for gross proceeds of approximately E33.6 million (net proceeds of
approximately E30.0 million). Telehouse paid to us approximately E1.3 million in
consideration of the grant of the Option. The Option was exercised on June 25,
2002.

As the result of arrangements made by Telehouse, on June 25, 2002, Cybernet AG
entered into an asset purchase and transfer agreement (the "Data Center
Agreement") with Disko Leasing GmbH ("Disko") pursuant to which Cybernet AG sold
all of the Assets used in the operation of the Data Centers to Disko for
approximately E33.6 million. The net payment received by Cybernet AG, after
payment of an arrangement fee to Telehouse and the offsetting of pre-payments
and other amounts, was approximately E29 million, exclusive of applicable taxes.

Cybernet AG had leased the Data Centers from a third party, fitted them for
operation with the Assets and entered into operating agreements for the Data
Centers with Telehouse. Cybernet AG had subsequently entered into service
agreements with Telehouse pursuant to which Cybernet AG leased back co-location
areas at the Data Centers from Telehouse. Pursuant to the terms of the Data
Center Agreement, Cybernet AG: (i) cancelled the lease agreements for the Data
Centers; (ii) terminated the operating agreements for the Data Centers as of
June 30, 2002 pursuant to

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the terms of an agreement with Telehouse (the "Termination Agreement"); and
(iii) amended the service agreements with Telehouse for the Data Centers in
Frankfurt and Munich, Germany.

The consideration received by Cybernet AG under the Data Center Agreement was
based on the forgone income of Cybernet AG from the Data Centers due to the
cancellation of the leases and operating agreements and the fair value of the
Assets. As a result of the Termination Agreement, the monthly fees due to
Cybernet AG under the operating agreements ceased as of June 25, 2002.

Cybernet AG paid an arrangement fee of approximately E1.3 million to Telehouse
under an agreement (the "Arrangement Fee and Settlement Agreement") dated June
25, 2002 between Cybernet AG and Telehouse in connection with the conclusion of
the transactions under the Data Center Agreement. Under the Arrangement Fee and
Settlement Agreement, Cybernet AG and Telehouse settled all claims relating to
the service agreements at the Data Centers. See our Form 8-K Current Report
dated June 25, 2002.

Cybernet AG entered into an agreement in 2002 pursuant to which it sold the
assets associated with our connectivity business in Germany. As a result, we no
longer provide business solutions or connectivity services in Germany.

On November 7, 2002, Cybernet AG entered into an asset purchase and transfer
agreement (the "PSINET Agreement") with PSINET Germany GmbH ("PSINET GmbH") and
PSINET DataCenter Germany GmbH ("PSINET Germany") pursuant to which Cybernet AG:
(i) sold to PSINET GmbH certain Customer Related Assets (as defined in the
PSINET Agreement); and (ii) sold to PSINET Germany certain Equipment Related
Assets (as defined in the PSINET Agreement) for a maximum of E3.9 million. The
purchase price was comprised of a fixed payment in the aggregate amount of
E400,000 and variable consideration, subject to certain adjustments, of up to
E3.5 million based upon the Expected Annual Revenue (as defined in the PSINET
Agreement) from the Customer Related Assets and Equipment Related Assets. Under
the PSINET Agreement, PSINET GmbH agreed to pay to Cybernet AG E285,000 of the
purchase price plus 5/7 of the variable consideration for the Customer Related
Assets, and PSINET Germany agreed to pay to Cybernet AG E115,000 of the purchase
price plus 2/7 of the variable consideration for the Equipment Related Assets.
The variable consideration was to be adjusted proportionately for the actual
amount of revenue earned from such assets.

Under the PSINET Agreement, PSINET GmbH and PSINET Germany initially paid an
aggregate of approximately E2.9 million, representing 75% of the maximum amount
payable under such agreement. On February 17, 2003, PSINET GmbH and PSINET
Germany further paid an amount representing the remainder of the fixed payment
and additional variable payment required under such agreement. Pursuant to the
PSINET Agreement, the purchase price is subject to certain adjustments to take
into account bad debts collected after February 17, 2003 and the amounts
invoiced to Leasing Customers (as defined therein) that have approved the
transfer of their contracts between February 17, 2003 and April 15, 2003.

In 2002, we sold all of our interest in our wholly-owned subsidiary, Vianet
Telekommunikations AG ("VTAG").

On July 31, 2002, we entered into a share purchase agreement (the "Tiscali
Agreement") with TISCALI Osterreich GmbH ("Tiscali") pursuant to which we sold
to Tiscali all the outstanding shares of VTAG (the "Purchased Shares") held by
us for E1.0 million, subject to a downward price adjustment based on the number
of customers that transferred to Tiscali. Pursuant to the terms of the Tiscali
Agreement, Tiscali paid 75% of the purchase price in August, 2002. The remaining
25% of the purchase price was held by Tiscali in connection with a potential
price adjustment. Tiscali has yet to pay the balance of the purchase price.

In 2002, we sold all of our interest in our wholly-owned subsidiary, Cybernet
Italia S.p.A. ("Italia"), which resulted in the sale of all of our Italian
operations. Italia was our provider of Internet communications services and
solutions in Italy. On April 16, 2002, we entered into a share purchase
agreement (the "Share Purchase Agreement") with Westwood Corporation
("Westwood") pursuant to which we sold all of our shares of Italia to Westwood
for U.S. $10,000. The purchase price represented the fair value of Italia in
light of its historical operating results, financial condition, current and
contingent liabilities, cash requirements and future prospects. See our Form 8-K
Current Report dated April 16, 2002.

In 2003, we entered into a joint venture for participation and investment in the
field of electronic commerce. The joint venture will provide customer
relationship management services through an internet enabled contact center in
India for technology companies and financial institutions in the European and
United States markets. The contact

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center will be located in Mumbai. The contact center will be a sophisticated
multi-media contact center, which will use current convergence technologies
to provide services to various types of customers. It will be configured to
seat 500 customer service agents in its first year of operation, which may be
increased to 1,000 seats by the end of its second year of operation. The
joint venture will provide technical support and financial services and
solutions using multiple channels such as voice, web, email and the internet.
The joint venture's service offerings will include: computer software and
hardware support; customer support, including customer billing enquires,
customer service, query handling and product information requests; and sales
support, including outbound cold calling, outbound sales lead generation,
cross selling, collections and customer satisfaction surveys. Our investment
in the joint venture may be up to E8 million in return for which we would
have a 80% ownership interest therein. However, there can be no assurance
that such joint venture, or any other participation and investment in the
field of electronic commerce, will be successful or that they will provide
sufficient cash to fund our operations, pay the principal of, and interest
on, our indebtedness, fund our other liquidity needs or permit us to
refinance our indebtedness. See "Item 1. Business - Risk Factors".

In 2003, our wholly-owned subsidiary, Cybernet (Schweiz) AG ("Cybernet
Schweiz"), transferred certain assets and contractual rights related to its
operations in Switzerland, which resulted in the sale of substantially all of
our telecommunications operations in Switzerland. Cybernet Schweiz entered into
a sale and purchase agreement (the "Viatel Agreement") with Viatel AG ("Viatel")
pursuant to which Cybernet Schweiz sold certain assets related to its
telecommunications business, including a DMS 100 Switch and related equipment,
and transferred its interest in certain agreements related to its
telecommunications business, including employment agreements and other employee
arrangements, rental and leasing agreements, and supplier and customer
agreements. The purchase price under the Viatel Agreement was E2.7 million,
subject to a downward price adjustment in the event that the number of customers
which transfer to Viatel within 90 days of February 25, 2003 is less than 5,600.

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 2002, the telecommunications industry continued to experience
significant adjustment and the demand for Internet-based technology solutions
continued to decline.

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 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.

Due to our weak financial position, we continue to review our strategic options
and are monitoring recent developments in the telecommunications and Internet
markets, which has and may further result in significant changes to our business
strategies. See "Item 1. Business - Risk Factors".

Products and Services

In 2002, we offered a range of Internet connectivity services, network solutions
and business solutions.

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CONNECTIVITY SERVICES

In 2002, we offered a variety of connectivity solutions, including Internet
access, third party software and hardware implementation and configuration
services, in bundled and unbundled packages. We offered dedicated line
connectivity at speeds ranging from 64 kbps to multiples of 2 Mbps.

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 utilized 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.

SECURITY SOLUTIONS. Corporate networks and systems need to be protected against
unauthorized access and use. We offered a set of third party supplied security
products, including encryption, firewall and authentication packages.

BUSINESS SOLUTIONS

CO-LOCATION. We offered 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.

APPLICATION AND WEBSITE HOSTING. We offered 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.

ELECTRONIC COMMERCE. Electronic commerce is the execution of commercial
transactions on the Internet. We designed and implemented 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 were based on our electronic commerce platform which integrates systems
and technologies of third party vendors.

INTRANET AND WORKFLOW SOLUTIONS. Internet technologies can be utilized in a
customer's internal information technology system. In 2002, we offered 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.

Due to our weak financial position, we continue to review our strategic options,
which has and may further 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:

Due to our weak financial position, in 2002, we sold our Data Centers in
Hamburg, Munich and Frankfurt, Germany, our Austrian, Italian and German
operations and, in 2003, our Swiss operations, as we did not believe it was in
our best interests to continue to fund the operating losses associated with
certain of these operations.

CUSTOMERS. As of December 31, 2002, we provided services to approximately 5,700
customers. The majority of these customers are small- to medium-sized businesses
and small office/home office enterprises. No customer represented more than 10%
of our consolidated revenues in 2002.

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Due to our weak financial position, we continue to review our strategic options
and are monitoring recent developments in the telecommunications and Internet
markets which has and may further result in significant changes to our sales and
marketing activities. See "Item 1. Business - Risk Factors".

Competition

The business of providing Internet services, solutions and electronic commerce
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 experienced a
significant decline in prices for some of our products.

We believe that competition will intensify in the future, given the significant
decline 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.

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 EU and
received a trademark registration for the name "Cybernet" used in conjunction
with our logo. 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
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

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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, most EU countries 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.

Most EU countries 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 most EU countries, 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.

Most countries have market-dominant providers which are legally required to
offer essential services such as transmission, switching and operational
interface to networks operated by third parties. 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.

Employees

We reduced our workforce from approximately 225 employees at the end of 2001 to
approximately 48 employees at the end of 2002, primarily as a result of the
disposition of various operations.

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.

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".

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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 have been or are located. We also currently
lease our regional offices in Frankfurt, Berlin and Munich. We expect to either
sub-lease or terminate the leases in respect of the offices in Frankfurt, Berlin
and Munich in 2003. We believe our facilities are adequate to meet our current
needs.

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.

A former employee of Cybernet filed a claim against a former officer claiming
E0.7 million plus interest. The former officer has claimed full indemnification
for any costs he may have incurred with respect to such claim against Cybernet.

We are also 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

Not applicable.

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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 "ZNETE". We removed our common stock from trading on the Neuer
Markt in Germany effective June 7, 2002. Our common stock is traded in Germany
on the regulated market (Geregelter Markt) of the Frankfurt Stock Exchange. We
are in the process of removing our common stock from trading on the regulated
market (Geregelter Markt) of the Frankfurt Stock Exchange. Our common stock also
trades on the Freiverkehr of the Berlin, Bremen, Dusseldorf, Hamburg, Hannover,
Munich and Stuttgart Stock Exchanges under the securities identification number
WKN. 906 623.

The following tables set forth for the periods indicated the quarterly high and
low sales prices for our common stock on the OTC Bulletin Board for the two
years ended December 31, 2001 and 2002. These are inter-dealer prices, without
retail mark up, mark down or commission and may not necessarily represent actual
transactions.

(b) SHAREHOLDER INFORMATION. As of March 31, 2003, there were approximately 145
holders of record of our common stock and a total of approximately 26,445,663
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.

11

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. The financial statements for
the year ended December 31, 1998 have been 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
year ended December 31, 1998 may not be comparable to the selected financial
information presented for the fiscal years ended December 31, 1999, 2000, 2001
and 2002, respectively.

Business acquisitions and dispositions made during the periods for which
selected financial information is presented materially affect the comparison of
such data from period to period.

In 2001 and 2002, 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 continued tightening in the
capital markets and slowdown in the telecommunications industry throughout 2001
and 2002. 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. We have
incurred significant losses from operations and do not expect to achieve
sufficient revenues to support future operations without additional financing.
These conditions raise substantial doubt about our ability to continue as a
going concern. See "Item 7. Management Discussion and Analysis of Financial
Condition and Results of Operations - Going Concern" and " - Forward-Looking
Statements".

The following selected financial information should be read in conjunction with
our consolidated financial statements and notes thereto and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations", included in this annual report. Certain prior period financial
information has been reclassified to conform to the current period presentation.

12

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

13

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, 2002 should be read
in conjunction with the consolidated financial statements and related notes
included in this annual report. Certain amounts in our consolidated financial
statements and related notes have been reclassified 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".

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, 2000, 2001 and 2002, expressed as a percentage of total
revenues:

14

Going Concern

We have incurred significant losses from operations resulting in a stockholders'
deficiency of E138.0 million at December 31, 2002. We do not expect to achieve
sufficient revenues to support future operations without additional financing.
These conditions raise substantial doubt about our ability to continue as a
going concern. Our ability to continue as a going concern and realize the
carrying value of our assets is dependent upon our ability to obtain additional
financing, restructure our debt, streamline our business and reduce our costs.
We are currently in the process of identifying sources of additional financing,
negotiating changes to our debt structure and evaluating our strategic options.
However, there are no assurances that these plans can be accomplished on
satisfactory terms, or at all, or that they will provide sufficient cash to fund
our operations, pay the principal of, and interest on, our indebtedness, fund
our other liquidity needs or permit us to refinance our indebtedness. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operation - Forward-Looking Statements".

The consolidated financial statements and related notes included in this annual
report have been prepared assuming that we will continue as a going concern.
Accordingly, such 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.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our 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 periods. Actual results may differ from those estimates.

Our management routinely makes judgments and estimates about the effects of
matters that are inherently uncertain. As the number of variables and
assumptions affecting the probable future resolution of the uncertainties
increase, these judgments become even more subjective and complex. We have
identified certain accounting policies, described below, that are the most
important to the portrayal of our current financial condition and results of
operations. Our significant accounting policies are disclosed in Note 1 to our
consolidated financial statements included in this annual report.

IMPAIRMENT OF LONG-LIVED ASSETS. We periodically evaluate long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In performing the review of recoverability, we
estimate future cash flows expected to result from the use of the asset and its
eventual disposition. The estimates of future cash flows, based on reasonable
and supportable assumptions and projections, require our management to make
subjective judgments. In addition, the time periods for estimating future cash
flows is often lengthy, which increases the sensitivity of the assumptions made.
Depending on the assumptions and estimates used, the estimated future cash flows
projected in the evaluation of long-lived assets can vary within a wide range of
outcomes. Our management considers the likelihood of possible outcomes in
determining the best estimate of future cash flows.

Generally, we state depreciable properties at cost less accumulated depreciation
unless the estimated undiscounted cash flows that result from either the use of
an asset or its eventual disposition are less than its carrying amount. In that
situation, an impairment loss is recognized based on the fair value of the
asset. Depreciation is based on the estimated useful lives of the assets (four
to ten years) and it is computed using the straight-line method.

REVENUE RECOGNITION. We offer internet telecommunication and system integration
products, data centre services, network services and voice telephony products.

We recognize revenue pursuant to SEC Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements". In accordance with SAB No. 101,
revenue is recognized when all four of the following criteria are met: (i)
persuasive evidence that an 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
include equipment sales, are recognized upon completion of the related project
and receipt of customer acceptance. Revenues from ongoing network services,
voice telephony and data centre services, including co-location, are recognized
when services are

15

provided. All payments received in advance of providing services are deferred
until the period that such services are provided.

We enter 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 arrangement 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 elements is recognized until that undelivered element is
delivered.

Developments in 2002

CORE MARKET REFOCUS

In light of the significant downturn, which began in 2001, in both the
telecommunications industry and the economic environment and capital market
trends having materially adversely impacted our operations, as well as the
substantial amount of debt that we have incurred, we engaged in a number of
activities in 2002 to streamline operations and activities around our core
markets and business strategies and reduce costs. These included the
rationalization and disposition of assets and workforce reductions. Our work
plan was adjusted during the year and may be further adjusted to reflect the
continued decline in the industry and economic environment, the capital markets
and our financial position.

We continue to review our strategic options and are monitoring recent
developments in the telecommunications and Internet markets in Europe. Although
we have sold certain assets, discontinued certain businesses and reduced our
workforce, we may, as part of our work plan, make fundamental changes to our
business strategies, sell assets or subsidiaries, including pursuing a revised
business focus, further reduce our workforce and level of business activity or
make other significant changes. Options under review include, but are not
limited to, pursuing restructuring of our indebtedness on a consensual basis or
under the provisions of bankruptcy legislation, or liquidating our business and
operations. 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 a result, in the year ended December 31, 2002, we recorded an
impairment charge of approximately E5.6 million for fixed assets and E1.7
million for other assets.

Year Ended December 31, 2002 as Compared to the Year Ended December 31, 2001

RESULTS OF OPERATIONS

Total revenues decreased by 35.8% from E39.1 million in 2001 to E25.1 million in
2002. The decrease in revenues reflected lower revenues in all segments,
resulting from a difficult economic environment wherein customers have been
delaying projects and investments, and the rationalization of our operations.
Internet data center revenues decreased by 53.5% from E10.1 million in 2001 to
E4.7 million in 2002. In 2002, Internet data center revenues represented 18.6%
of total revenues as compared to 25.9% in 2001. Connectivity revenues decreased
by 26.1% from E26.8 million in 2001 to E19.8 million in 2002. In 2002,
connectivity revenues represented 79.1% of total revenues as compared to 68.6%
in 2001. The decreases in Internet data center revenues and connectivity
revenues resulted primarily from the disposition of certain assets and the
discontinuance of certain operations as part of the rationalization of our
operations under our work plan. E-business revenues decreased by 72.7% from E2.2
million in 2001 to E0.6 million in 2002 and represented 5.5% and 2.3% of our
total revenues in 2001 and 2002, respectively. The decrease in E-business
revenues is primarily the result of a reduction in the number of Internet
projects we conducted in 2002 due to the significant continued downturn in the
telecommunications industry.

We derived E13.9 million or 55.4% of total revenues from our operations in
Germany in 2002 compared with E25.1 million or 64.2% in 2001, E1.5 million or
6.0% of total revenues from our operations in Italy in 2002 compared with

16

E6.5 million or 16.7% in 2001, and E9.7 million or 38.6% of total revenues
from our operations in other parts of Europe in 2002 compared with E7.5
million or 19.1% in 2001.

No customer represented more than 10% of total revenues in 2002.

DIRECT COST OF SERVICES

Direct cost of services decreased 46.7% from E25.1 million in 2001 to E13.4
million in 2002 primarily as a result of lower business volume. Direct cost of
services consists of: (i) telecommunications expenses which primarily represent
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. Direct cost of services as a
percentage of revenues decreased from 64.2% in 2001 to 53.3% in 2002, primarily
as a result of rationalizing our operations and cost control measures.

NETWORK OPERATIONS

Network operations costs decreased 26.4% from E7.9 million in 2001 to E5.8
million in 2002. The decrease reflects a continuous effort to reorganize our
technical structure and reduce personnel costs. 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, increased
from 20.1% in 2001 to 23.1% in 2002.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses decreased 13.8% from E18.8 million in 2001
to E16.2 million in 2002, primarily as a result of streamlining of our
operations and the reduction of our workforce under our work plan. General and
administrative expenses consist principally of salaries and other personnel
costs for our administrative staff, rent, allowance for bad debts and external
advisory costs. As a percentage of revenues, general and administrative expenses
increased from 48.2% in 2001 to 64.8% in 2002, primarily as a result of lower
revenues.

We reduced the number of our general and administrative staff from approximately
46 people at the end of 2001 to approximately 22 people at the end of 2002,
primarily as a result of the disposition of various assets and the
implementation of certain cost control measures. 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.

SALES AND MARKETING EXPENSES

Sales and marketing expenses decreased by 48.0% from E10.2 million in 2001 to
E5.3 million in 2002, 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. We decreased the
number of sales and marketing staff we employ from approximately 116 as of
December 31, 2001 to approximately five as of December 31, 2002. As a percentage
of revenues, our sales and marketing expenses fell from 26.1% in 2001 to 21.1%
in 2002.

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
2002. The conclusion of these assessments resulted in a write-down of E5.6
million for fixed assets and E1.7 million for other assets.

In addition, in 2001, based on estimated future cash flows, the remaining
carrying value of goodwill and other intangible assets was written off.

17

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expenses decreased from E20.2 million in 2001 to
E6.6 million in 2002, as a result of the disposition of various assets in 2002.

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, which we sold in 2002 for approximately
E0.3 million plus approximately E0.2 million in settlement of an outstanding
claim.

INTEREST INCOME AND EXPENSE

Interest expense increased from E25.7 million in 2001 to E26.0 million in 2002
as a result of increased indebtedness. Interest income decreased from E1.5
million in 2001 to E0.9 million in 2002 and represented interest earned on the
proceeds of offerings before the proceeds were utilized in our business.

NET LOSS

For 2002, we reported a net loss of E38.5 million, or E1.45 per share on a
diluted basis, compared to a net loss of E134.6 million, or E5.18 per share on a
diluted basis, in 2001.

Year Ended December 31, 2001 as Compared to the Year Ended December 31, 2000

RESULTS OF OPERATIONS

Total revenues increased by 9.1% from E35.8 million in 2000 to E39.1 million in
2001, primarily due to increased payments received under leases at our Internet
data centers, which provided us with a stream of recurring revenues. Internet
data center revenues increased by 101.6% from E5.0 million in 2000 to E10.1
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 E4.4 million in 2000 to E2.2 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 was 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 E26.4
million in 2000 to E26.8 million in 2001. In 2001, connectivity revenues
represented 68.6% of total revenues as compared to 73.6% in 2000.

We derived E25.1 million or 64.2% of total revenues from our operations in
Germany in 2001 compared with E20.9 million or 58.4% in 2000, E6.5 million or
16.7% of total revenues from our operations in Italy in 2001 compared with E8.0
million or 22.4% in 2000, and E7.5 million or 19.1% of total revenues from our
operations in other parts of Europe in 2001 compared with E6.9 million or 19.2%
in 2000.

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

DIRECT COST OF SERVICES

Direct cost of services increased 8.6% from E23.1 million in 2000 to E25.1
million in 2001. Direct cost of services consists of: (i) telecommunications
expenses which primarily represent 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 E8.4 million in 2000 to E7.9
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

18

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 E19.8 million in 2000 to
E18.8 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
consisted 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.

RESEARCH AND DEVELOPMENT

Research and development expenses decreased from E1.5 million (or 4.2% of
revenues) in 2000 to E0.4 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. Our consolidated financial statements combine the
amounts for our research and development expenses with the amounts for our
general and administrative expenses.

SALES AND MARKETING EXPENSES

Sales and marketing expenses decreased by 24.1% from E13.4 million in 2000 to
E10.2 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 were 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.

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 E3.9
million for telecommunication switches and E4.8 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 E22.0 million for
goodwill and E6.4 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.

19

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expenses increased from E19.6 million in 2000 to
E20.2 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.

INTEREST INCOME AND EXPENSE

Interest expense decreased from E35.2 million in 2000 to E25.7 million in 2001
as a result of the early extinguishment of certain of our indebtedness in 2000
and 2001. Interest income decreased from E5.4 million in 2000 to E1.5 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 E7.0 million in 2000 and income tax costs of
approximately E27.7 million in 2001. This change was primarily due to a
valuation allowance that had been recorded. In 2001, as we had incurred losses
since inception and did not expect to achieve profitability in the near future,
we recorded a full valuation allowance against our net deferred tax assets since
realization of these future benefits was 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 E11.5 million ($10.6 million) of our 14.0% Senior
Notes due 2009 (the "Senior Notes") generating an after-tax gain of E4.6
million. The Senior Notes were repurchased at average prices equal to 28.9% of
face value. As required by the terms of the Senior Notes, we had established an
escrow account to provide for payment in full of the first six scheduled
interest payments on the Senior Notes. The amounts contained in the escrow
account are carried on our balance sheet as "Restricted investments". As a
result of the repurchase of Senior Notes, approximately E2.3 million was
released from the escrow account and became available to us. The purchase price
of the Senior Notes repurchased, net of amounts released from the escrow
account, was approximately E1.0 million. The face amount of the Senior Notes
outstanding at December 31, 2001 was approximately E75.8 million ($66.8
million).

The amount shown as an extraordinary item represents the difference between the
amount paid to repurchase the Senior 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 that began in 2001 and
which continued and worsened in 2002, our financial condition has been
materially adversely affected. The significant amount of debt we have incurred
has hindered our ability to raise further funds.

Our working capital, defined as the excess of our current assets over our
current liabilities, was E15.6 million at December 31, 2002.

20

At December 31, 2002, we had cash and cash equivalents totalling approximately
E23.0 million, compared to approximately E2.7 million at December 31, 2001. The
increase in cash and cash equivalents during the year was due to the disposition
of certain assets in 2002.

Operating activities used cash of E24.9 million and E24.3 million in the years
ended December 31, 2002 and 2001, respectively, primarily to fund operations.

Investing activities provided cash of E46.4 million and E27.0 million in the
years ended December 31, 2002 and 2001, respectively, primarily as a result on
the disposition of certain assets.

Financing activities used cash of E1.5 million in the year ended December 31,
2002, primarily as a result of payments made under capital leases. Financing
activities used cash of E5.1 million in 2001, primarily as a result of
repayments made on outstanding indebtedness.

On March 12, 2002, we entered into a Credit Facility Agreement with MFC Merchant
Bank S.A. which provided for a Credit Facility in the aggregate principal amount
of up to E7.0 million (the "Credit Facility") to be made available to us. There
were no amounts outstanding under the Credit Facility as of December 31, 2002.
The Credit Facility expired on March 12, 2003 pursuant to its terms.

In accordance with the provisions of the indenture governing the Senior Notes,
we were required to maintain investments in escrow to cover the first six
scheduled interest payments on the Senior Notes. On July 1, 2002, we made a
semi-annual interest payment of E4.7 million on the outstanding Senior Notes
from restricted investments deposited in our interest escrow account. As a
result, the interest escrow account for such notes has been fully disbursed.

As a result of certain dispositions made in 2002, we have a sufficient amount of
funds to finance our operations. However, we do not have the financial resources
to satisfy our debt obligations. Our ability to continue as a going concern is
dependent upon our ability to obtain additional financing, restructure our debt,
streamline our business and reduce our costs. We are currently in the process of
identifying sources of additional financing, negotiating changes to our debt
structure and evaluating our strategic options. However, there are no assurances
that these plans can be accomplished on satisfactory terms, or at all, or that
they will provide sufficient cash to fund our operations, pay the principle of,
and interest on, our indebtedness, fund our other liquidity needs or permit us
to refinance our indebtedness. Options under review include, but are not limited
to, pursuing restructuring of our indebtedness on a consensual basis or under
the provisions of bankruptcy legislation, or liquidating our business and
operations. See "Item 1. Business - Risk Factors" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation
Forward-Looking Statements".

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 annual 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 advise you to carefully review the
reports and documents we file from time to time with the SEC, particularly our
quarterly reports on Form 10-Q and our current reports on Form 8-K.

21

WE MAY NOT BE ABLE TO CONTINUE OUR BUSINESS AS A GOING CONCERN.

Our ability to continue as a going concern and realize the carrying value of our
assets is dependent upon our ability to obtain additional financing, restructure
our debt, streamline our business and reduce our costs. We are currently in the
process of identifying sources of additional financing, negotiating changes to
our debt structure and evaluating our strategic options. However, there are no
assurances that these plans can be accomplished on satisfactory terms, or at
all, or that they will provide sufficient cash to fund our operations, pay the
principal of, and interest on, our indebtedness, fund our other liquidity needs
or permit us to refinance our indebtedness. Our inability to obtain additional
financing, restructure our indebtedness, streamline our business or reduce our
costs would have a material adverse effect on our financial condition, results
of operations and ability to satisfy our obligations, and may result in our
pursuing a restructuring of our indebtedness either on a consensual basis or
under the provisions of bankruptcy legislation, or liquidating our business and
operations. Further, our inability to obtain additional financing or restructure
our indebtedness, or our pursuing a restructuring of our indebtedness either on
a consensual basis or under the provisions of bankruptcy legislation, may result
in our securityholders losing all or a material portion of their investment in
our securities. The independent auditor's report to the consolidated financial
statements and related notes included in this annual report include additional
comments with respect to this issue.

WE HAVE INCURRED A SUBSTANTIAL AMOUNT OF DEBT.

In order to finance our business, we may need to secure additional sources of
funding, 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
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 pursue a restructuring of our indebtedness which would
have a material adverse effect on our financial condition, results of
operations and ability to satisfy our obligations, and may result in
our pursuing restructuring of our indebtedness on a consensual basis
or under the provisions of bankruptcy legislation, or liquidating our
business and operations.

WE MAY BE SUBJECT TO INTERNATIONAL BANKRUPTCY AND RELATED LAWS WHICH MAY AFFECT
THE ENFORCEABILITY OF BANKRUPTCY JUDGMENTS.

Our subsidiaries are incorporated under the laws of various countries and
conduct operations in countries around the world. Consequently, the bankruptcy
laws of one or more countries in which our subsidiaries operate could apply.
Under bankruptcy laws in the United States, courts typically have jurisdiction
over a debtor's property, wherever located, including property situated in other
countries. There can be no assurance, however, that courts elsewhere would
recognize the United States bankruptcy court's jurisdiction. Accordingly,
difficulties may arise in administering a United States bankruptcy case
involving a debtor with its principal operating assets outside the United
States, and any orders or judgments of a bankruptcy court in the United States
may not be enforceable.

AS MOST OF OUR ASSETS AND OFFICERS AND DIRECTORS ARE OUTSIDE THE UNITED STATES,
SERVICE OF PROCESS AND ENFORCEMENT OF JUDGEMENT MAY BE DIFFICULT.

We are a Delaware corporation. However, most of our assets are located outside
the United States. Further, our officers and directors are not residents of the
United States, and their assets are located outside the United States.

22

Also, most of our subsidiaries are incorporated in countries other than the
United States and conduct their operations and hold their assets outside the
United States. As a result, it may not be possible for holders of our common
stock to effect service of process in the United States upon such
non-resident officers and directors or to enforce in jurisdictions outside
the United States judgements obtained against us or our directors and
officers. This applies to any action, including civil actions based on the
United States federal securities laws. In addition, awards for punitive
damages in actions brought in the United States or elsewhere may be
unenforceable in jurisdictions outside the United States.

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 assets
or subsidiaries, including pursuing a revised business focus, 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.

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;

23

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 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 HAVE A LIMITED OPERATING HISTORY.

We have a relatively short operating history and we are involved in a rapidly
evolving and unpredictable industry.

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.

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

24

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, 2002, we reported a net E21.5 million foreign
exchange translation gain, which resulted in a cumulative foreign exchange
translation gain of E22.2 million at December 31, 2002 compared to a cumulative
foreign exchange transaction gain of E 0.7 million at December 31, 2001.

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,
-------------------------------------------
2002 2001
-------------------- --------------------
PERIOD PERIOD
PERIOD END AVERAGE PERIOD END AVERAGE
---------- ------- ---------- -------

RATES OF EXCHANGE
Euro..................... 0.9536 1.0660 1.1347 1.1166

Based upon the period average exchange rate in 2002, the US dollar decreased by
approximately 4.5% in value against the Euro compared to 2001.

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 prepared a sensitivity analysis to assess the impact of exchange rate
fluctuations on: the amount required to settle the debt outstanding from our
private unit offering and our private discount notes offering; and our 2002
operating results. Based on this analysis, 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 E15.8 million and, accordingly,
would have increased our reported net loss for 2002 by approximately E15.8
million.

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

On May 7, 2002, Ernst & Young Deutsche Allgemeine Treuhand AG) ("E&Y")
resigned as our independent accountants. On May 8, 2002 our board of
directors decided to engage Peterson Sullivan P.L.L.C. to serve as our
independent accountants and approved the change of independent accountants.
The reports of E&Y on our consolidated financial statements for the past two
fiscal years contained no adverse opinion or disclaimer of opinion, and were
not qualified or modified as to audit scope or accounting principles. The
report of E&Y for our 2001 fiscal year was modified for a going concern
uncertainty.

25

During our two most recent fiscal years, and the subsequent interim periods
preceding E&Y's resignation, we had no disagreements with E&Y on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
E&Y, would have caused E&Y to make reference to the subject matter of the
disagreement in connection with its reports on our financial statements for such
years and interim periods. We believe that during our two most recent fiscal
years and the subsequent interim periods preceding E&Y's resignation, there were
no "reportable events," as defined in Item 304(a)(1)(v) of Regulation S-K. We
reported the change in accountants on Form 8-K on May 13, 2002. The Form 8-K
contained a letter from E&Y, addressed to the SEC, stating that it agreed with
the statements concerning E&Y in such Form 8-K.

26

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

We currently have three 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 our
stockholders to be held in 2005; Class B, whose term will expire at the annual
meeting of our stockholders to be held in 2003; and Class C, whose term will
expire at the annual meeting of our stockholders to be held in 2004. At each
annual meeting of our 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. Following is information
relating to our elected and/or appointed directors and executive officers:

MICHAEL J. SMITH, age 55, 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 Bancorp Ltd. ("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.

SLOBODAN ANDJIC, age 59, has been a Class A director since March 12, 2002 and
our Vice-President, Treasurer and Secretary since July 18, 2002. 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 Mercury 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.

JONG DAL LEE, age 67, has been a Class B director since July 18, 2002. Mr. Lee
has been the chairman of Silla Commercial Transport Co. Ltd. since 1998.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the SECURITIES EXCHANGE ACT OF 1934, as amended (the "Exchange
Act") requires that our directors and officers and persons who own more than 10%
of our shares of common stock file reports of ownership and changes in ownership
with the SEC and furnish us with copies of all such reports that they file.
Based solely upon a review of the copies of these reports received by us, and
upon written representation by our directors and officers regarding their
compliance with the applicable reporting requirements under Section 16(a) of the
Exchange Act, we believe that all our directors and officers filed all required
reports under Section 16(a) in a timely manner for the year ended December 31,
2002.

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth information on the annual compensation for each
of the last three years paid to our chief executive officer and those executive
officers that earned in excess of U.S. $100,000 during the most recently
completed fiscal year (the "Named Executive Officers"):

27

- --------------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION
- --------------------------------------------------------------------------------------------------------------------------------
SALARY BONUS SECURITIES UNDERLYING ALL OTHER COMPENSATION
NAME AND PRINCIPAL POSITION YEAR (E) (E) OPTIONS/SARs (#) (E)
- --------------------------------------------------------------------------------------------------------------------------------

Michael J. Smith(1) 2002 267,534 - - -
President, Chief Executive Officer 2001 - - - -
and Chief Financial Officer 2000 - - - -
- --------------------------------------------------------------------------------------------------------------------------------
Slobodan Andjic(2) 2002 253,360 - - -
Vice-President, Secretary and 2001 - - - -
Treasurer 2000 - - - -
- --------------------------------------------------------------------------------------------------------------------------------
Andreas Eder(3) 2002 147,077 303,873 - 230,000(5)
Chairman, President and Chief 2001 153,388 57,303 200,000 32,172(4)
Executive Officer; Head of 2000 143,801 41,664 280,000 -
Management Board of Cybernet AG
- --------------------------------------------------------------------------------------------------------------------------------
Paolo V. di Fraia(6) 2002 95,102 259,138 - 165,000(7)
Director, Vice President 2001 153,388 51,129 200,000 -
International and Chief Financial 2000 95,724 29,282 280,000 -
Officer; Managing Director - Italy
- --------------------------------------------------------------------------------------------------------------------------------

- ---------------
(1) Mr. Smith became an executive officer of Cybernet on March 12, 2002, and,
accordingly, did not receive any compensation from us for services as an
executive officer in fiscal 2000 and 2001.

(2) Mr. Andjic became an executive officer of Cybernet on July 28, 2002, and,
accordingly, did not receive any compensation from us for services as an
executive officer in fiscal 2000 and 2001.

(3) Mr. Eder's employment with Cybernet was terminated on July 27, 2002.

(4) Represents compensation for unused vacation.

(5) Represents compensation payable pursuant to the terms of a termination
agreement with us.

(6) Dr. di Fraia's employment with Cybernet was terminated in 2002. Dr. di
Fraia joined the company in June 2000. The information presented for
fiscal 2000 represents payments made from June 1, 2000 through December
31, 2000.

(7) Represents compensation payable pursuant to the terms of a termination
agreement with us.

1998 Stock Incentive Plan

Cybernet maintains the Cybernet Internet Services International, Inc. 1998 Stock
Incentive Plan (the "Incentive Plan"). The Board of Directors has reserved 5
million shares of common stock for issuance pursuant to awards that may be made
under the Incentive Plan, subject to adjustment as provided therein. The
Incentive Plan allows for the grant of incentive stock options, non-qualified
stock options, stock appreciation rights, stock awards, dividend equivalent
rights, performance units and phantom shares. None of our Named Executive
Officers were granted options to purchase shares of our common stock during
2002. None of our Named Executive Officers exercised options during 2002, nor
did any of our Named Executive Officers hold any exercisable or unexercisable
options at December 31, 2002.

Cash Compensation of Outside Director

The director who is not also an employee of Cybernet did not receive any cash or
other compensation in 2002 in connection with his service on the Board of
Directors.

Executive Agreements

Mr. Smith was party to an interim services agreement with us dated March 29,
2002 which expired June 29, 2002 pursuant to which we paid Mr. Smith a fee of
U.S. $50,000 per month for all services provided to us.

We entered into an agreement with 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"). 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. In addition, under the

28

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.

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 terminated July 27, 2002. In that regard, Mr. Eder also
resigned as a director and officer of our subsidiaries. Under the terms of the
termination agreement, Mr. Eder was entitled to receive Euro 14,913 per month
until the termination date unless his employment was terminated earlier for
cause. In addition, he received Euro 115,000 upon the signing of the termination
agreement and would receive a further Euro 115,000 on the termination date
(provided that his employment had not been terminated earlier for cause). The
termination agreement also contains provisions as to confidentiality,
non-solicitation and settlement of claims.

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 terminated during 2002. Dr. di Fraia also resigned as a
director and officer of our subsidiaries. Under the termination agreement, Dr.
di Fraia was entitled to receive Euro 12,784 per month until the termination
date unless his employment was terminated earlier for cause. In addition, he
received Euro 82,500 upon the signing of the termination agreement, and Euro
82,500 on the termination date (provided that he has not been earlier terminated
for cause). The termination agreement also contains provisions as to
confidentiality, non-solicitation and settlement of claims.

THE FOREGOING SUMMARY OF THE SETTLEMENT AGREEMENT AND THE TERMINATION AGREEMENTS
WITH EACH OF MR. EDER AND DR. DI FRAIA ARE NOT COMPLETE AND ARE QUALIFIED IN
THEIR ENTIRETY BY REFERENCE TO THE SETTLEMENT AGREEMENT AND THE TERMINATION
AGREEMENTS WITH EACH OF MR. EDER AND DR. DI FRAIA WHICH ARE INCORPORATED BY
REFERENCE IN THIS ANNUAL REPORT.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the information regarding the beneficial
ownership of our shares of common stock and preferred stock as of March 31, 2003
by each shareholder who is known by us to own more than 5% of the outstanding
shares of our common stock or preferred stock. The following is based solely on
statements made in filings with the SEC or other information we believe to be
reliable.

- ---------------------------------------------------------------------------------------------------------------------
AMOUNT AND NATURE OF PERCENTAGE OF
NAME COMMON STOCK HELD OUTSTANDING COMMON STOCK
- ---------------------------------------------------------------------------------------------------------------------

Andreas Eder(1) 1,642,765(1) 6.2%
Stefan-George-Ring 19
81929 Munich, Germany
- ---------------------------------------------------------------------------------------------------------------------
MFC Bancorp Ltd.(2) 6,872,796 25.9%
Floor 21, Millenium Tower
Handelskai 94-96
A-1200, Vienna, Austria
- ---------------------------------------------------------------------------------------------------------------------
Holger Timm(3) 1,295,400 4.9%
Trabener Strasse 12
14193 Berlin, Germany
- ---------------------------------------------------------------------------------------------------------------------

29

- ---------------------------------------------------------------------------------------------------------------------
AMOUNT AND NATURE OF PERCENTAGE OF
NAME COMMON STOCK HELD OUTSTANDING COMMON STOCK
- ---------------------------------------------------------------------------------------------------------------------

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

- ---------------
(1) 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.

(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, 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. The term of the agreement pursuant to which such
voting rights were granted to MFC expires on April 30, 2003.

(3) 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. The
term of the agreement pursuant to which such voting rights were granted to
MFC expires on April 30, 2003.

The following table sets forth ownership of our shares as of March 31, 2003 by
each of our directors and all of our directors and executive officers as a
group. Unless otherwise indicated each director has sole voting and disposition
power with respect to the shares set forth opposite his name.

- ---------------------------------------------------------------------------------------------------------------------
AMOUNT AND NATURE OF PERCENTAGE OF
NAME COMMON STOCK HELD OUTSTANDING COMMON STOCK
- ---------------------------------------------------------------------------------------------------------------------

Michael J. Smith(1) 6,872,796 25.9%
- ---------------------------------------------------------------------------------------------------------------------
Jong Dal Lee - -
- ---------------------------------------------------------------------------------------------------------------------
Slobodan Andjic - -
- ---------------------------------------------------------------------------------------------------------------------
All executive officers and directors as a group 6,872,796 25.9%
(1 person)
- ---------------------------------------------------------------------------------------------------------------------

- ---------------
(1) 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, 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. The term of the agreement pursuant to
which such voting rights were granted to MFC expires on April 30, 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Pursuant to an agreement dated April 19, 2002 we engaged MFC to provide
strategic advisory and restructuring services (the "Financial Advisory Services
Agreement"), pursuant to which we agreed to pay MFC U.S.$175,000 per month
payable in advance. Additionally, pursuant to such agreement, we agreed to pay
MFC a fee on the completion of a successful debt restructuring and on other
specified transactions. The success fee payable thereunder is calculated by
reference to specified percentages on proceeds received by us in connection with
asset sales, security issuances and debt restructurings. The Financial Advisory
Services Agreement provides that the maximum total fees payable to MFC
thereunder is U.S.$5.5 million. An expense of E2.3 million was recorded under
such agreement in 2002. MFC is a related party as it exercised voting rights
over 25.9% of the shares of our common stock and one of our directors, Michael
J. Smith, is the president, chief executive officer and director of MFC. The
term of the agreement pursuant to which such voting rights were granted to MFC
expires on April 30, 2003.

On March 12, 2002, we entered into a credit facility agreement with MFC Merchant
Bank S.A. which provided a Credit Facility in the aggregate amount of E7 million
to be made available to us. MFC Merchant Bank S.A. is a wholly-owned subsidiary
of MFC. There were no amounts outstanding under the Credit Facility as of
December

30

31, 2002. The credit facility expired on March 12, 2003 pursuant to its
terms. Interest expense of E177,000 was incurred and paid on the borrowing
under the Credit Facility in 2002.

ITEM 14. CONTROLS AND PROCEDURES

Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on this evaluation,
our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic reports filed with
the SEC. It should be noted that the design of any system of controls is based
in part upon certain assumptions about the likelihood of certain events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all future conditions, regardless of how remote. In addition, we
reviewed our internal controls, and there have been no significant changes in
our internal controls or in other factors that could significantly affect those
controls subsequent to the date of their last evaluation.

31

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K

PAGE
----

(a) (1) FINANCIAL STATEMENTS
Independent Auditors' Report dated March 13, 2003.........................F-1
Consolidated Balance Sheets...............................................F-2
Consolidated Statements of Operations.....................................F-4
Consolidated Statements of Comprehensive Loss.............................F-5
Consolidated Statements of Changes in Shareholders' Equity................F-6
Consolidated Statements of Cash Flows.....................................F-7
Notes to the Consolidated Financial Statements............................F-9
Independent Auditors' Report on Financial Statement Schedule.............F-24
Schedule II - Valuation and Qualifying Accounts..........................F-25
Independent Auditors' Report dated April 15, 2002........................F-26

(2) LIST OF EXHIBITS

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

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

4.1 Unit Agreement dated as of July 8, 1999 by and among
Cybernet Internet Services International, Inc.,
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 Internet Services International, Inc. 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 Internet Services International, Inc.,
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 Internet Services
International, Inc., 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 Internet Services International, Inc.,
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.

32

10.1 (a) Sale and Assignment of Business Shares of 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 SEC
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 SEC 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 SEC 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-Dienstleistungen 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 SEC on
September 18, 1998.

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

10.5 Stock Purchase Agreement dated June 11, 1997 by and
among Cybernet Internet Services International, Inc.,
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 SEC on September 18, 1998.

10.6 Pooling and Trust Agreement dated August 18, 1997 by
and 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 SEC on
September 18, 1998.

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

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

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

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

33

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

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

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

10.13 Sub-lease for Business Premises Office dated February
29, 1996 by and 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 SEC
on September 18, 1998.

10.14 Full Amortization Leasing Agreement No. 13 00 00 for
hardware and software with purchase, extension and
return options by and 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 SEC on September 18, 1998.

10.15 Agreement on the use of data communication installations
of Info AG dated July 29, 1996 by and between Info AG
and Cybernet Internet-Dienstleistungen AG. Incorporated
by reference to the Form S-1 Registration Statement
filed with the SEC on September 18, 1998.

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

10.17 Agreement, undated, by and between Feratel International
GmbH and Cybernet Internet-Dienstleistungen AG.
Incorporated by reference to the Form S-1 Registration
Statement filed with the SEC 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
SEC 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 SEC on November 5, 1998.

10.20 Agreement and Plan of Merger dated October 9, 1998 by
and 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 Internet Services
International, Inc. and Morgan Stanley & Co.
International Limited relating to Cybernet's
E25,000,000 13.0% 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.

34

10.22 Indenture dated August 26, 1999 by and between Cybernet
Internet Services International, Inc. and The Bank of
New York relating to the Cybernet'sE25,000,000 13.0%
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 Internet Services
International, Inc. 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 Internet Services
International, Inc. and Morgan Stanley & Co.
International Limited relating to Cybernet'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 Internet Services International, Inc. 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 SEC on March 30, 2000.

(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 SEC 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
Internet-Dienstleistungen AG. Incorporated by
reference to the Form 10-K Annual Report filed with
the SEC on March 30, 2000.

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

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

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

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

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

35

10.32 Option Agreement dated for reference January 28, 2002 by
and between Cybernet Internet Services International,
Inc. and Telehouse Deutschland GmbH. Incorporated by
reference to the Form 8-K Current Report filed with the
SEC on January 29, 2002.

10.33 Share Purchase Agreement dated April 10, 2002 by and
between Cybernet Internet Services International, Inc.
and Westwood Corporation. Incorporated by reference to
the Form 8-K Current Report filed with the SEC on April
19, 2002.

10.34 Asset Purchase and Transfer Agreement dated June 25,
2002 by and between Cybernet Internet-Dienstleistungen
AG and Disko Leasing GmbH. Incorporated by reference to
the Form 8-K Current Report filed with the SEC on June
28, 2002.

10.35 Termination Agreement dated June 25, 2002 by and between
Cybernet Internet-Dienstleistungen AG and Telehouse
Deutschland GmbH. Incorporated by reference to the Form
8-K Current Report filed with the SEC on June 28, 2002.

10.36 Arrangement Fee and Settlement Agreement dated June 25,
2002 by and between Cybernet Internet-Dienstleistungen
AG and Telehouse Deutschland GmbH. Incorporated by
reference to the Form 8-K Current Report filed with the
SEC on June 28, 2002.

10.37 (a) English Translation of Asset Purchase Agreement
dated July 29, 2002 by and among TELCAT Multicom
GmbH, Cybernet Internet-Dienstleistungen AG,
MultiCall Telefonmarketing AG and Novento Telecom AG.

(b) English Translation of Amending Agreement dated
February 18, 2003 by and among TELCAT Multicom GmbH,
Cybernet Internet-Dienstleistungen AG, MultiCall
Telefonmarketing AG and Novento Telecom AG relating
to the Asset Purchase Agreement dated July 29, 2002.

10.38 Share Purchase Agreement dated for reference July 31,
2002 by and between Cybernet Internet Services
International, Inc. and TISCALI Osterreich GmbH.

10.39 Settlement Agreement dated for reference March 12, 2002
by and among Cybernet Internet Services International,
Inc., MFC Bancorp Ltd., Andreas Eder and Paolo di Fraia.
Incorporated by reference to the Form 8-K Current Report
filed with the SEC on March 28, 2002.

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

10.41 Letter Agreement for financial advisory services dated
April 19, 2002 by and among Cybernet Internet Services
International, Inc., MFC Bancorp Ltd. and MFC Merchant
Bank S.A.

10.42 Indemnity Agreement dated September 12, 2002 by and
between MFC Bancorp Ltd. and Cybernet Internet Services
International, Inc.

10.43 Acknowledgement and Amending Agreement made effective as
of October 15, 2002 by and between MFC Bancorp Ltd. and
Cybernet Internet Services International, Inc. relating
to the Letter Agreement dated April 19, 2002.

36

10.44 Asset Purchase and Transfer Agreement dated November
7, 2002 by and among Cybernet
Internet-Dienstleistungen AG, PSINET Germany GmbH and
PSINET DataCenter Germany GmbH. Incorporated by
reference to the Form 8-K Current Report filed with
the SEC on March 28, 2002.

16 Letter from Ernst & Young Deutsche Allgemeine Treuhand
AG dated May 13, 2002 regarding change in certifying
accountants. Incorporated by reference to the Form 8-K
Current Report filed with the SEC on May 13, 2002.

21 List of Subsidiaries.

23.1 Consent of Peterson Sullivan P.L.L.C.

23.2 Consent of Ernst & Young AG

99.1 Certification.

(b) REPORTS ON FORM 8-K

Form 8-K dated November 29, 2002
Item 2 - Acquisition or Disposition of Assets

Form 8-K dated January 2, 2003
Item 5 - Other Events and Regulation FD Disclosure

Form 8-K dated January 24, 2003
Item 5 - Other Events and Regulation FD Disclosure

37

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: March 31, 2003 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: March 31, 2003
- ------------------------------------
Michael J. Smith
President, Chief Executive Officer,
Chief Financial Officer and Director

/s/ Slobodan Andjic Date: March 31, 2003
- ------------------------------------
Slobodan Andjic
Vice-President, Secretary, Treasurer
and Director

/s/ Jong Dal Lee Date: March 31, 2003
- ------------------------------------
Jong Dal Lee
Director

CERTIFICATIONS

I, Michael J. Smith, certify that:

1. I have reviewed this annual report on Form 10-K of Cybernet Internet
Services International, Inc. (the "Registrant");

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;

4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and

6. The Registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 31, 2003

/s/ Michael J. Smith
------------------------------
Michael J. Smith
Chief Executive Officer and
Chief Financial Officer

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

PETERSON SULLIVAN PLLC
601 UNION STREET SUITE 2300 SEATTLE WA 98101 (206) 382-7777 FAX 382-7700
CERTIFIED PUBLIC ACCOUNTANTS

INDEPENDENT AUDITORS' REPORT

To the Shareholders
Cybernet Internet Services International, Inc.

We have audited the accompanying consolidated balance sheet of Cybernet Internet
Services International Inc. and its subsidiaries as of December 31, 2002, and
the related consolidated statements of operations, comprehensive loss, changes
in shareholders' 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. The financial statements of Cybernet Internet Services International
Inc. and its subsidiaries as of December 31, 2001 and 2000, were audited by
other auditors whose report dated April 15, 2002, included an explanatory
paragraph that referred to conditions raising substantial doubt about the
Company's ability to continue as a going concern.

We conducted our audit 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 audit provides a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company and
its subsidiaries as of December 31, 2002, and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.

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/ Peterson Sullivan P.L.L.C.
- ------------------------------
Peterson Sullivan P.L.L.C.
March 13, 2003
Seattle, Washington

F-1

CYBERNET INTERNET SERVICES INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(In Thousands of Euros)

ASSETS 2002 2001
-------------------- --------------------

Current Assets
Cash and cash equivalents E 22,976 E 2,735
Restricted cash 1,815 2,743
Receivables 5,355 11,980
Restricted investments - 10,567
Prepaid and other 419 1,670
-------------------- --------------------
Total current assets
30,565 29,695
Long-Term Assets
Properties 1,125 32,653
Investments in equity method investees - 2,770
Deferred debt issuance cost 3,653 6,048
Other - 806
-------------------- --------------------
4,778 42,277
-------------------- --------------------
E 35,343 E 71,972
==================== ====================

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

F-2

LIABILITIES AND SHAREHOLDERS'
DEFICIENCY 2002 2001
-------------------- --------------------

Current Liabilities
Trade accounts payable E 3,078 E 13,325
Other accrued expenses 10,838 11,835
Capital lease obligations - 1,060
Accrued personnel costs 1,079 1,848
-------------------- --------------------
Total current liabilities 14,995 28,068

Long-Term Liabilities
Long-term debt 158,342 164,573
Capital lease obligations - 435
-------------------- --------------------
158,342 165,008
-------------------- --------------------
Total liabilities 173,337 193,076

SHAREHOLDERS' EQUITY

Preferred stock, US$ 0.001 par value; 50,000,000
shares authorized, none issued and outstanding
at December 31, 2002 and 2001, respectively - -
Common stock, US$ 0.001 par value; 50,000,000
shares authorized, 26,445,663 shares issued and
outstanding at December 31, 2002 and 2001 25 25
Additional paid-in capital 127,718 127,718
Accumulated deficit (287,931) (249,473)
Accumulated other comprehensive income 22,194 626
-------------------- --------------------
Total shareholders' deficiency (137,994) (121,104)
-------------------- --------------------
E 35,343 E 71,972
==================== ====================

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

F-3

CYBERNET INTERNET SERVICES INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2002, 2001 and 2000
(In Thousands of Euros, Except Per Share Data)

2002 2001 2000
---------------- -------------- ---------------

Revenues E 25,078 E 39,077 E 35,831

Costs and expenses
Direct cost of services 13,370 25,105 23,117
Network operations 5,784 7,861 8,426
General and administrative expenses 16,244 18,842 21,318
Sales and marketing expenses 5,295 10,186 13,428
Impairments 7,305 37,110 2,265
Depreciation and amortization 6,621 20,156 19,563
---------------- -------------- ---------------
54,619 119,260 88,117
---------------- -------------- ---------------
Loss from operations (29,541) (80,183) (52,286)

Other income (expense)
Interest expense (26,034) (25,728) (35,189)
Interest income 930 1,477 5,437
Gain on sale of assets and other 17,175 123 198
Foreign currency losses (597) (6,721) (3,670)
---------------- -------------- ---------------
Loss before taxes, loss in equity method
investees and extraordinary item (38,067) (111,032) (85,510)
Income tax benefit (expense) - (27,678) 6,976
---------------- -------------- ---------------
Loss before loss in equity method investees
and extraordinary item (38,067) (138,710) (78,534)
Losses in equity method investees (391) (538) (168)
---------------- -------------- ---------------
Loss before extraordinary item (38,458) (139,248) (78,702)

Extraordinary item, gain on extinguishment
of debt, net of tax - 4,608 17,754
Net loss E (38,458) E (134,640) E (60,948)
---------------- -------------- ---------------

Basic and diluted loss per share
Loss per share before extraordinary item E (1.45) E (5.36) E (3.38)
Extraordinary item - 0.18 0.76
---------------- -------------- ---------------
Loss per share E (1.45) E (5.18) E (2.62)
================ ============== ===============

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

F-4

CYBERNET INTERNET SERVICES INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Years Ended December 31, 2002, 2001 and 2000
(In Thousands of Euros)

2002 2001 2000
----------------- ---------------- -----------------

Net loss E (38,458) E (134,640) E (60,948)

Other comprehensive income
Foreign currency translation adjustment 21,511 94 (128)
----------------- ---------------- -----------------
Unrealized gain on short-term and restricted investments 57 239 533
----------------- ---------------- -----------------
Other comprehensive income 21,568 333 405
----------------- ---------------- -----------------
Comprehensive loss E (16,890) E (134,307) E (60,543)
================= ================ =================

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

F-5

CYBERNET INTERNET SERVICES INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2002, 2001 and 2000
(In Thousands of Euros)

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

F-6

CYBERNET INTERNET SERVICES INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002, 2001 and 2000
(In Thousands of Euros)

2002 2001 2000
----------------- ----------------- -----------------

Cash Flows from Operating Activities
Net loss E (38,458) E (134,640) E (60,948)
Adjustments to reconcile net loss to net
cash used in operations
Deferred taxes - 27,657 (6,976)
Depreciation 6,621 8,365 8,125
Amortization - 11,791 11,438
Losses in equity method investees 391 538 168
Provision for losses on accounts receivable 1,807 5,514 1,305
(Gain) loss on sale of investments 118 290 (46)
Loss on disposal of leased assets 113 - 198
Amortization of bond discount 2,471 2,656 4,663
Accreted interest expense on long-term debt 13,364 11,861 13,484
Impairment 7,305 32,354 2,265
Loss (gain) on disposal of assets (18,345) 4,756 -
Loss on disposal of business 1,170 - -
Gain on extinguishment of debt - (4,608) (17,754)
Foreign currency transaction losses 131 7,786 6,427
Changes in operating assets and liabilities
Restricted cash 928 49 (2,792)
Receivables 1,403 686 (5,338)
Prepaid and other (81) 500 (3,655)
Trade accounts payable (3,963) 1,726 (6,716)
Other accrued expenses 264 (1,058) (2,172)
Accrued personnel costs (127) (482) (351)
----------------- ----------------- -----------------
Net cash used in operating activities (24,888) (24,259) (58,675)
Cash Flows from Investing Activities

Purchase of short-term investments - - (35,924)
Proceeds from sale of short-term investments - 25,230 72,201
Proceeds from sales of property and equipment 37,336 - -
Proceeds from restricted investments 8,994 10,194 21,014
Product development costs - - (623)
Purchase of property and equipment (473) (5,905) (23,888)
Acquisition of businesses, net of cash acquired - - (2,037)
Sale of business, net of cash sold 541 - -
Acquisition of investments in equity method investees - (409) (1,000)
Payment of deferred purchase obligations - (2,078) -
----------------- ----------------- -----------------
Net cash provided by investing activities 46,398 27,032 29,743
Cash Flows from Financing Activities
Principal payments under capital lease obligations (1,495) (1,347) (2,140)
Proceeds from issuance of bonds and other borrowings - - 962
Repayment of borrowings - (3,722) (36,664)
----------------- ----------------- -----------------
Net cash used in financing activities (1,495) (5,069) (37,842)
Effect of foreign exchange rate on cash and cash equivalents 226 (940) (134)
----------------- ----------------- -----------------
Net increase (decrease) in cash and cash equivalents 20,241 (3,236) (66,908)
Cash and Cash Equivalents, beginning of year 2,735 5,971 72,879
----------------- ----------------- -----------------
Cash and Cash Equivalents, end of year E 22,976 E 2,735 E 5,971
----------------- ----------------- -----------------

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

F-7

CYBERNET INTERNET SERVICES INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2002, 2001 and 2000
(In Thousands of Euros)

2002 2001 2000
----------- ----------- -----------

Noncash investing and financing transactions
Transfer from restricted investments to short-term
investment due to removal of restrictions E 10,567 E 2,339 E 20,374
=========== =========== ===========
Conversion of preferred stock into common stock E - E 1 E 4
=========== =========== ===========
Acquisition of property and equipment through capital
lease obligations E - E 214 E 522
=========== =========== ===========
Other supplemental cash flow disclosures
Cash paid for interest E 10,970 E 10,476 E 27,791
=========== =========== ===========
Cash paid for taxes E - E 109 E 149
=========== =========== ===========

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

F-8

CYBERNET INTERNET SERVICES INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cybernet Internet Services International, Inc. ("the Company") is a U.S.
corporation incorporated in Delaware. The amounts in the notes are rounded to
the nearest thousand except per share amounts.

GOING CONCERN

The Company, through its European subsidiaries, offered a variety of Internet
related telecommunication and systems integration services to corporate
customers located in Europe. However, the Company has incurred significant
losses from operations resulting in a shareholders' deficiency of E(137,994) at
December 31, 2002. The Company does 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.
The Company is in the process of reviewing its strategic options including
seeking additional financing, restructuring its debt, sales of assets and
liquidation. However, there are no assurances that management's review of these
options will result in a plan which can be accomplished or will provide
sufficient cash to fund the Company's operations or satisfy its creditors in the
future. The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Accordingly, these
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.

The Company sold subsidiaries and assets during 2002 to raise cash and reduce
operating losses. The Company sold two subsidiaries and the stock of an equity
method investee for cash of E1,128 resulting in a loss of E(1,170) and also sold
assets for cash amounting to E37,336 resulting in a gain of E18,345. Subsequent
to December 31, 2002, the Company sold assets for cash amounting to E2,700
resulting in a gain of E2,415 and also sold three subsidiaries for cash of E10
resulting in a gain of E2.

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.

F-9

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. Investments in entities where the Company owns
at least a 20% interest, but does not have control, are accounted for under the
equity method. Significant intercompany accounts and transactions have been
eliminated.

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 the Euro using current exchange rates at the
balance sheet dates. Revenue and expenses 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 are reported in accumulated
other comprehensive income. Foreign currency transaction gains or losses are
included in the calculation of net loss.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include highly liquid investments with an original
maturity of three months or less. The Company maintains cash balances in
financial institutions in excess of insured limits.

RESTRICTED CASH

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

GOODWILL AND OTHER INTANGIBLE ASSETS

Prior to January 1, 2002, the Company had been amortizing goodwill and other
intangible assets to expense. Based on a new accounting standard, amortization
of goodwill and other intangible assets with indefinite lives are no longer to
be amortized beginning January 1, 2002. However, during 2001, management
determined, based on estimated future cash flows, that the remaining carrying
value of goodwill and other intangible assets should be written off. Therefore,
no amount for goodwill and other intangible assets are reflected in the December
31, 2002 and 2001, consolidated balance sheets.

F-10

PROPERTIES

Depreciable properties are stated at cost unless the estimated undiscounted cash
flows that result from either the use of an asset or its eventual disposition
are less than its carrying amount. In that situation, an impairment loss is
recognized based on the fair value of the asset. Depreciation is based on the
estimated useful lives of the assets (four to ten years) and is computed using
the straight-line method. Repairs and maintenance are charged to expense
incurred.

Based on management's analyses, impairment losses on properties were recorded
during 2002, 2001 and 2000 in amounts of E5,629,E3,937 and E1,620, respectively.

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 No. 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 which
amounted to E1,162 and E594 at December 31, 2002 and 2001, respectively. These
amounts are included in other accrued liabilities on the consolidated balance
sheets.

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 arrangement 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 a customer's location
through a local telecommunications carrier to one of the Company's access nodes,
transit and peering costs, and the cost of leasing lines to interconnect the
Company's backbone nodes, and 2) the cost of hardware and software sold. The
Company mainly utilizes leased lines for its backbone network, and to connect
its network to its major customers premises.

F-11

NETWORK OPERATIONS

Network operations mainly consist of 1) the personnel costs of technical and
operational staff and related overhead, 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 E553, E1,706 and E3,095 in the
years ended December 31, 2002, 2001 and 2000, respectively.

TAXES ON INCOME

The Company accounts for income taxes under an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. In estimating future tax consequences, the
Company generally considers all expected future events other than enactments of
changes in the tax laws or rates.

DEFERRED DEBT ISSUANCE COSTS

Deferred debt issuance costs are amortized to interest expense over the term of
the related debt. Any remaining balance will be charged to expense if the debt
is retired early.

STOCK-BASED COMPENSATION

The Company has a stock-based employee compensation plan, which is described
more fully in Note 9. The Company accounts for the plan under the recognition
and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under the plan had an
exercise price equal to or greater than the market value of the underlying
common stock on the date of grant. The following table illustrates the effect on
net income and earnings per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation.

F-12

2002 2001 2000
-------------- --------------- --------------

Reported loss before extraordinary item E (38,458) E (139,248) E (78,072)
Deduct: Total stock-based employee
compensation expense determined under fair
value based methods for all awards, net of
any related tax effects (2,848) (3,251) (3,654)
-------------- --------------- --------------
Proforma loss before extraordinary item (41,306) (142,499) (81,726)
Extraordinary item - 4,608 17,754
-------------- --------------- --------------
Proforma net loss E (41,306) E (137,891) E (63,972)
============= =============== ==============
Basic and diluted loss per share
As reported before extraordinary item E (1.45) E (5.36) E (3.38)
Extraordinary item - .18 .76
-------------- --------------- --------------
As reported E (1.45) E (5.18) E (2.62)
============= =============== ==============
Proforma before extraordinary item E (1.56) E (5.48) E (3.51)
Extraordinary item - .18 .76
-------------- --------------- --------------
Proforma E (1.56) E (5.30) E (2.75)
============= =============== ==============

EARNINGS PER SHARE

Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding in the
period. Diluted earnings per share takes into consideration common shares
outstanding (computed under basic earnings per share) and potentially dilutive
common shares.

SEGMENT REPORTING

The Company operates primarily in one business segment, which is providing
international Internet backbone and access services and related communication
services for corporate customers. The Company's operations are in Europe and
present management does not find it useful to segment operations any further.
Therefore, no country segment data is provided in these consolidated financial
statements.

F-13

NEW ACCOUNTING STANDARDS

Statements of Financial Accounting Standards No. ("SFAS") 145 and 146 are
generally modifications to previously adopted standards. A part of SFAS 145 is
effective for years beginning after May 15, 2002, and SFAS 146 is effective for
years beginning after December 31, 2002. These new standards do not have an
effect on the Company's consolidated financial statements.

NOTE 2. GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill during 2001 and 2000 are
summarized below:

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

Balance, beginning of year E 26,054 E 26,120
Acquired 354 6,968
Amortization expense (4,386) (7,034)
Impairment losses (22,022) -
------------- -------------
Balance, end of year E - E 26,054
============= =============

The Company did not acquire any goodwill or other intangible assets during 2002.

Other intangible assets consist of customer lists and management contracts and
are summarized below:

2002 2001 2000
------------------ ---------------- ----------------

Gross carrying amount E - E - E 17,392
Accumulated amortization - - 7,991
Amortization for the period - 3,006 4,142
Impairment recognized - 6,395 -

In addition, impairments of other assets of E1,676, E4,756, and E645
were recorded for the years ended December 31, 2002, 2001 and 2000,
respectively.

F-14

The transitional disclosures required under Statement of Financial Accounting
Standards No. 142 with respect to goodwill and other intangible assets are as
follows:

Year Ended December 31
----------------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------

Reported loss before extraordinary item E (38,458) E (139,248) E (78,702)
Add back amortization
Goodwill - 4,386 7,034
Other intangible assets - 3,006 4,142
--------------- --------------- ---------------
Adjusted loss before extraordinary item (38,458) (131,856) (67,526)
Extraordinary item - 4,608 17,754
--------------- --------------- ---------------
Adjusted net loss E (38,458) E (127,248) E (49,772)
=============== ================ ===============

Basic and diluted loss per share
Reported loss before extraordinary item E (1.45) E (5.36) E (3.38)
Amortization
Goodwill - .17 .30
Other intangible assets - .12 .18
Extraordinary item - .18 .76
--------------- --------------- ---------------
Adjusted net loss per share E (1.45) E (4.89) E (2.14)
=============== ================ ===============

NOTE 3. RESTRICTED INVESTMENTS

Restricted investments were required as part of the Company's debt financing.
These investments were classified as available-for-sale securities at December
31, 2001, and consisted of U.S. Treasury Notes which matured in 2002. There were
no available-for-sale securities at December 31, 2002. Proceeds from the sales
of available-for-sale securities amounted to E8,994, E10,194 and
E21,014 during 2002, 2001 and 2000, respectively. Realized gains (losses) on
the sales of these securities were E(118), E(290) and E46 in 2002,
2001 and 2000, respectively. The cost of these securities was E9,112 and
E20,395 at December 31, 2001 and 2000, respectively, which resulted in
unrealized losses of E57 and E300 being recorded in accumulated
comprehensive income at December 31, 2001 and 2000, respectively. Cost is based
on the specific identification method to determine realized gains or losses.

F-15

NOTE 4. RECEIVABLES

December 31
-------------------------------------
2002 2001
---------------- ----------------

Trade accounts receivable E 7,956 E 14,717
Receivables from affiliates - 356
Other 1,534 2,721
---------------- ----------------
9,490 17,794
Less allowance for doubtful accounts (4,135) (5,814)
---------------- ----------------
E 5,355 E 11,980
================ ================

Receivables are stated at their outstanding principal balances. Management
reviews the collectibility of receivables on a periodic basis and determines the
appropriate amount of any allowance. Based on this review procedure, management
has determined that the allowances were adequate at December 31, 2002 and 2001.
The Company charges off receivables to any allowance when management determines
that a receivable is not collectible. The Company does not generally require
collateral for any of its receivables.

NOTE 5. PROPERTIES

December 31
-------------------------------------
2002 2001
---------------- ----------------

Computer equipment and software E 4,383 E 23,846
Leasehold improvements 4,349 24,607
Furniture and fixtures 587 2,753
---------------- ----------------
9,319 51,206
Less accumulated depreciation and amortization (8,194) (18,553)
---------------- ----------------
E 1,125 E 32,653
================ ================

F-16

NOTE 6. DEBT

December 31
-------------------------------------
2002 2001
---------------- ----------------

Senior Dollar Notes, interest at 14% due January 1 and July 1
until maturity on July 1, 2009, originally issued in US $1,000
principal units including one warrant to purchase approximately 30
common shares of the Company's stock at an exercise price of US
$22.278 per share exercisable until July 1, 2009 resulting in
E45,405 being allocated to additional paid-in capital and a
discount applied to the original principal amount of debt of which
E14,918 and E20,104 remained at December 31, 2002 and 2001,
respectively; E2,481, E2,677 and E6,498 was charged as interest
expense resulting from the amortization of the discount during
2002, 2001 and 2000, respectively; at December 31, 2002, 4,535
shares of the Company's common stock have been reserved as a
result of the warrants E 49,697 E 55,672

Convertible Senior Euro Subordinated Payment-in-Kind Notes,
interest at 13% payable in the form of secondary payment-in-kind
notes on February 15 and August 15 each year until August 15,
2004, when beginning with the February 15 semi-annual interest due
date, current interest is payable in cash until maturity on August
15, 2009, these notes are convertible at any time prior to
maturity at the rate of one share of the Company's common stock
for each E25 in outstanding note balance at the option of the
creditor, at December 31, 2002, 1,439 shares of the Company's
common stock have been reserved in connection with these notes 35,969 32,619

Convertible Senior Dollar Subordinated Discount Notes, 13%
interest due semi-annually beginning February 15, 2004, until
maturity on August 15, 2009, convertible prior to maturity at the
rate of one share of the Company's common stock for each US $25 of
accreted value, as defined, of the notes being converted 72,676 76,282
---------------- ----------------
E 158,342 E 164,573
================ ================

During 2001 and 2000, the Company extinguished Senior Dollar Notes in the
carrying amount of E7,933 and E51,591 for cash of E3,325 and
E33,837 resulting in extraordinary gains. None of the warrants associated
were acquired in the extinguishments.

F-17

NOTE 7. INCOME TAXES

The provision for income taxes (benefit) for years ended December 31 consists of
the following:

2002 2001 2000
--------------- --------------- --------------

Provision for income taxes
Current E - E 21 E 3
Deferred - 27,657 (6,979)
--------------- --------------- --------------
E - E 27,678 E (6,976)
=============== =============== ==============

Differences between the U.S. Federal Statutory and the Company's effective
income tax rate for years ended December 31 are as follows:

2002 2001 2000
--------------- --------------- ---------------

U.S. Federal statutory rate on loss from
operations E (13,460) E (20,228) E (20,926)
Tax differential on foreign losses 360 (3,191) 3,214
Valuation allowance 13,100 51,209 2,265
Other (112) 8,471
--------------- --------------- ---------------
E - E 27,678 E (6,976)
=============== =============== ===============

Deferred income tax assets are composed of the following:

December 31
-------------------------------------
2002 2001
---------------- ----------------

Tax loss carryforwards:
U.S. E 35,564 E 22,439
Germany 39,891 40,176
Other 3,314 3,054
---------------- ----------------
78,769 65,669
Valuation allowance (78,769) (65,669)
---------------- ----------------
Net deferred income tax asset E - E -
================ ================

The tax loss carryforwards are subject to audit by the applicable tax
authorities which may result in changes to the amounts above. Since the Company
has incurred significant losses and does not expect to generate taxable income
in the near future, a valuation reserve for all of the deferred income tax
assets has been deemed appropriate by management.

Losses from foreign source operations amounted to E(4,733), E(41,718)
and E(35,077) for 2002, 2001 and 2000, respectively.

F-18

The Company has U.S. total estimated net operating loss carryforward amounting
to E101,612 at December 31, 2002, which, if not utilized, will expire in
years ended 2022. Other tax loss amounts approximate E97,628 at December 31,
2002, result primarily from operations in Germany which may be carried forward
indefinitely under current tax law.

NOTE 8. SHAREHOLDERS' EQUITY

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, 2002, 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 entitles the holder to receive dividends at a rate
equal to US $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.
Dividends on the Series A Preferred Stock are to 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. 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, 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
provided that all and not less than all of the shares of Series A Preferred
Stock are so redeemed.

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 US $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 holder of any 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.

The Series B Preferred Stock entitles the holder to receive dividends at a rate
equal to US $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. Dividends on
Series B Preferred Stock are to 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. 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.

F-19

The shares of Series B Preferred Stock may be redeemed by the Company 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, 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.

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 US $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.

NOTE 9. STOCK BASED COMPENSATION

In 1998, the Company adopted a 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 reserved 5,000,000 shares
of common stock for issuances under the plan. The following table presents the
changes in the stock options during the year.

Weighted
Average
Exercise Price
Stock Options (In US Dollars)
---------------- ----------------

Outstanding at December 31, 1999 2,194,015 $ 16.10
Granted 2,307,700 7.25
Cancelled 1,068,550 15.94
Forfeited 1,082,533 15.78
----------------
Outstanding at December 31, 2000 2,350,632 9.68
Granted 1,666,450 1.54
Forfeited 1,258,616 10.04
----------------
Outstanding at December 31, 2001 2,758,466 4.60
Forfeited 2,456,541 4.36
----------------
Outstanding at December 31, 2002 301,925 6.54
================

F-20

Since plan inception through December 31, 2002, no options have been exercised
and none have expired. The weighted-average remaining contractual life of
options outstanding at December 31, 2002, was 7.30 years with a contractual life
of 10 years.

As of December 31, 2002, 2001 and 2000, the Company had 249,225, 1,079,049 and
568,869 options exercisable, respectively. The weighted-average exercise price
of options exercisable as of December 31, 2002, is US $7.28. Options vest over a
period of three years from the date of grant and become exercisable upon
vesting. The Company has not recognized any compensation expense related to
stock options in 2002, 2001 or 2000.

The following table presents information about options outstanding as of
December 31, 2002.

Weighted Weighted Weighted
Average Average Average
Exercise Remaining Exercise
Number of Price Contractual Number of Price
Options (In US Life Options (In US
Exercise Price Range Outstanding Dollars) (In Years) Exercisable Dollars)
- ---------------------- ---------------- -------------- ---------------- --------------- -------------

$0.41 - 1.89 51,850 $ 1.44 8.23 17,117 $ 1.45
3.06 - 6.65 103,800 4.94 7.27 87,133 4.79
8.19 - 14.36 143,775 9.14 7.01 142,475 9.12
20.30 - 35.43 2,500 29.63 6.00 2,500 29.63
---------------- ---------------
301,925 249,225
================ ===============

The fair value of each option granted is 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 were as follows:

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

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

During 2000, the Company offered 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 US $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. These options are accounted for
as variable from July 1, 2000, until the options are exercised, forfeited or
expire unexercised. However, because the market price of the Company's stock
decreased since July 1, 2000, the effect has had no impact on net loss. But, 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.

F-21

NOTE 10. EARNINGS PER SHARE

Earnings per share data for year ended December 31 is summarized as follows:

Net Income (Loss)
----------------------------------------------------------
2002 2001 2000
----------------- ----------------- ----------------

Loss available to common shareholders before
extraordinary item E (38,458) E (139,248) E (78,702)
Extraordinary item - 4,608 17,754
----------------- ----------------- ----------------
Net loss E (38,458) E (134,640) E (60,948)
================= ================= ================
Weighted average number of shares outstanding
- basic and diluted 26,445 25,996 23,266
================= ================= ================

Warrants and options were not included in the computation of diluted earnings
per share because they were anti-dilutive in each year.

NOTE 11. TRANSACTIONS WITH RELATED PARTIES

The Company paid E242, E435 and E209 to a law firm for legal
services where a former member of the board of directors is a partner in the
years ended December 31, 2002, 2001 and 2000, respectively.

The Company granted interest free loans totaling E356 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.
Following the sale of stock of the subsidiary in 2002, the Company no longer has
a receivable due from the former Italian management employees.

During 2002, MFC Merchant Bank S.A., an affiliate of MFC Bancorp Ltd. ("MFC"),
provided a revolving senior secured credit line to the Company of up to
E7,000. At December 31, 2002, the Company had no balance outstanding on this
line which bears interest at 14%, is due on March 12, 2003, and is secured by
the Company's ownership in its subsidiaries. Interest expense of E177 was
incurred and paid on the borrowing in 2002. The Company engaged MFC to provide
strategic advisory and restructuring services. Beginning April 2002, the Company
agreed to pay to MFC US $175 per month payable in advance. Additionally,
pursuant to such agreement, the Company agreed to pay MFC a fee on the
completion of a successful debt restructuring and on other specified
transactions. The success fee is computed based on specified percentages
received by the Company from: asset sales, security issuances and debt
restructurings with a cap on total fees payable to MFC of US $5,500. An expense
of E2,289 was recorded under this agreement in 2002. MFC is a related party
because it maintains certain voting rights with respect to approximately 26% of
the Company's outstanding common shares on behalf of two shareholders and an
officer and director of MFC is also an officer and director of the Company.

F-22

NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of financial instruments at December 31 is summarized below:

2002 2001
------------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- ----------- ------------ -----------

Cash and cash equivalents E 22,976 E 22,976 E 2,735 E 2,735
Restricted cash 1,815 1,815 2,743 2,743
Other receivables 1,534 1,534 3,077 3,077
Capital lease obligations - - 1,495 1,495

The fair value of cash and cash equivalents is based on reported market value.
The fair value of restricted cash is equal to its carrying amount because it is
in an account which bears a market rate of interest. The fair value of other
receivables approximates carrying value due to the short-term maturity of the
receivables. The fair value of capital lease obligations, which approximates
carrying value, was estimated using discounted cash flow analyses based on the
Company's incremental borrowing rates for similar types of borrowings.

At December 31, 2002, no quoted market exists for the Company's long-term debt.
Also, based on the Company's current financial position, management believes a
discounted cash flow valuation is not appropriate. Therefore, no fair value
information is presented for the Company's long-term debt at either December 31,
2002, or 2001.

NOTE 13. 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.

The Company has no lease commitments beyond December 31, 2002. Rental expense
was E4,280, E3,504 and E12,171 for 2002, 2001 and 2000,
respectively.

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 any
Company growth and results of operations.

F-23

PETERSON SULLIVAN PLLC
601 UNION STREET SUITE 2300 SEATTLE WA 98101 (206) 382-7777 FAX 382-7700
CERTIFIED PUBLIC ACCOUNTANTS

INDEPENDENT AUDITORS' REPORT

To the Shareholders
Cybernet Internet Services International, Inc.

Our report on the consolidated financial statements of Cybernet Internet
Services International, Inc. is included on page F-1 of this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule II of this Form 10-K.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.

/s/ Peterson Sullivan P.L.L.C.
Seattle, Washington
March 13, 2003

F-24

Schedule II - Valuation and Qualifying Accounts

1 Uncollectible accounts written-off, net of recoveries.

F-25

REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheet of Cybernet
Internet Services International, Inc. and its subsidiaries (the "Company") as
of December 31, 2001, and the related consolidated statements of operations,
comprehensive loss, changes in shareholders' equity (deficit), and cash flows
for each of the two years in the period ended December 31, 2001. Our audits
also included the financial statements schedule listed in the Index at Item
14(a)(2). 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 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 2001, and the consolidated results of their operations and their
cash flows for each of the two 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.

Ernst & Young
Deutsche Allgemeine Treuhand AG
Wirtschaftsprufungsgesellschaft

/s/ Ralf Broschulat /s/ Jurgen Zapf

Ralf Broschulat Jurgen Zapf
Independent Public Accountant Independent Public Accountant

Munich, Germany
April 15, 2002

F-26

EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ---------- ----------------------

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

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

4.1 Unit Agreement dated as of July 8, 1999 by and among Cybernet Internet Services International, Inc.,
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 Internet Services International, Inc. 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 Internet Services International,
Inc., 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 Internet Services
International, Inc., 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 Internet Services International, Inc.,
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.

10.1 (a) Sale and Assignment of Business Shares of 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 SEC on September 18, 1998.

EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ---------- ----------------------

(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 SEC 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 SEC 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-Dienstleistungen 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 SEC on September 18, 1998.

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

10.5 Stock Purchase Agreement dated June 11, 1997 by and among Cybernet Internet Services International, Inc.,
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 SEC on September 18,
1998.

10.6 Pooling and Trust Agreement dated August 18, 1997 by and 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 SEC on September 18, 1998.

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

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

EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ---------- ----------------------

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

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

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

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

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

10.13 Sub-lease for Business Premises Office dated February 29, 1996 by and 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 SEC on September 18, 1998.

10.14 Full Amortization Leasing Agreement No. 13 00 00 for hardware and software with purchase, extension
and return options by and 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 SEC on September 18, 1998.

10.15 Agreement on the use of data communication installations of Info AG dated July 29, 1996 by and
between Info AG and Cybernet Internet-Dienstleistungen AG. Incorporated by reference to the Form S-1
Registration Statement filed with the SEC on September 18, 1998.

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

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

EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ---------- ----------------------

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 SEC 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 SEC on November 5, 1998.

10.20 Agreement and Plan of Merger dated October 9, 1998 by and 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 Internet Services
International, Inc. and Morgan Stanley & Co. International Limited relating to Cybernet's E25,000,000
13.0% 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 Internet Services International, Inc. and The
Bank of New York relating to the Cybernet's E25,000,000 13.0% 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 Internet Services
International, Inc. 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 Internet Services International,
Inc. and Morgan Stanley & Co. International Limited relating to Cybernet'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 Internet Services International, Inc. 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.

EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ---------- ----------------------

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 SEC on March 30, 2000.

(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 SEC
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 Internet-Dienstleistungen AG. Incorporated by reference to the Form 10-K
Annual Report filed with the SEC on March 30, 2000.

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

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

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

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

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

10.32 Option Agreement dated for reference January 28, 2002 by and between Cybernet Internet Services
International, Inc. and Telehouse Deutschland GmbH. Incorporated by reference to the Form 8-K Current
Report filed with the SEC on January 29, 2002.

10.33 Share Purchase Agreement dated April 10, 2002 by and between Cybernet Internet Services International,
Inc. and Westwood Corporation. Incorporated by reference to the Form 8-K Current Report filed with
the SEC on April 19, 2002.

EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ---------- ----------------------

10.34 Asset Purchase and Transfer Agreement dated June 25, 2002 by and between Cybernet
Internet-Dienstleistungen AG and Disko Leasing GmbH. Incorporated by reference to the Form 8-K
Current Report filed with the SEC on June 28, 2002.

10.35 Termination Agreement dated June 25, 2002 by and between Cybernet Internet-Dienstleistungen AG and
Telehouse Deutschland GmbH. Incorporated by reference to the Form 8-K Current Report filed with the
SEC on June 28, 2002.

10.36 Arrangement Fee and Settlement Agreement dated June 25, 2002 by and between Cybernet Internet-
Dienstleistungen AG and Telehouse Deutschland GmbH. Incorporated by reference to the Form 8-K Current
Report filed with the SEC on June 28, 2002.

10.37 (a) English Translation of Asset Purchase Agreement dated July 29, 2002 by and among TELCAT MultiCom GmbH,
Cybernet Internet-Dienstleistungen AG, MultiCall Telefonmarketing AG and Novento Telecom AG.

(b) English Translation of Amending Agreement dated February 18, 2003 by and among TELCAT MultiCom GmbH,
Cybernet Internet-Dienstleistungen AG, MultiCall Telefonmarketing AG and Novento Telecom AG relating
to the Asset Purchase Agreement dated July 29 2002.

10.38 Share Purchase Agreement dated for reference July 31, 2002 by and between Cybernet Internet Services
International, Inc. and TISCALI Osterreich GmbH.

10.39 Settlement Agreement dated for reference March 12, 2002 by and among Cybernet Internet Services
International, Inc., MFC Bancorp Ltd., Andreas Eder and Paolo di Fraia. Incorporated by reference to
the Form 8-K Current Report filed with the SEC on March 28, 2002.

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

10.41 Letter Agreement for financial advisory services dated April 19, 2002 by and among Cybernet Internet
Services International, Inc., MFC Bancorp Ltd. and MFC Merchant Bank S.A.

10.42 Indemnity Agreement dated September 12, 2002 by and between MFC Bancorp Ltd. and Cybernet Internet
Services International, Inc.

EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ---------- ----------------------

10.43 Acknowledgement and Amending Agreement made effective as of October 15, 2002 by and between MFC
Bancorp Ltd. and Cybernet Internet Services International, Inc. relating to the Letter Agreement dated
April 19, 2002.

10.44 Asset Purchase and Transfer Agreement dated November 7, 2002 by and among Cybernet Internet-
Dienstleistungen AG, PSINET Germany GmbH and PSINET DataCenter Germany GmbH. Incorporated by reference
to the Form 8-K Current Report filed with the SEC on March 28, 2002.

16 Letter from Ernst & Young Deutsche Allgemeine Treuhand AG dated May 13, 2002 regarding change in
certifying accountants. Incorporated by reference to the Form 8-K Current Report filed with the SEC
on May 13, 2002.

21 List of Subsidiaries.

23.1 Consent of Peterson Sullivan P.L.L.C.

23.2 Consent of Ernst & Young AG

99.1 Certifications.