SUMMUS INC USA - 10-Q Quarterly Report

ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

434 Fayetteville Street, Suite 600
Raleigh, North Carolina 27601
(919) 807-5600
(Address, Including Zip Code, and Telephone Number, Including Area Code
of Registrant's Principal Executive Offices)

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 þ No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.
Yes ¨ No þ

As of August 5, 2004, the registrant had 92,860,405 shares of its Common Stock, par value $.001 per share, issued and outstanding.


		Page No.
PART I	CONSOLIDATED FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)

	Consolidated Balance Sheets as of June 30, 2004
	(Unaudited) and December 31, 2003	3

	Consolidated Statements of Operations for the Three-Month
	Period Ended June 30, 2004 and 2003 (Unaudited)	4

	Consolidated Statements of Operations for the Six-Month
	Period Ended June 30, 2004 and 2003 (Unaudited)	5

	Consolidated Statement of Shareholders' (Deficit) Equity for the
	Six-Month Period Ended June 30, 2004 (Unaudited)	6

	Consolidated Statements of Cash Flows for the Six-Month
	Period Ended June 30, 2004 and 2003 (Unaudited)	9

	Notes to Consolidated Financial Statements (Unaudited)	10

Item 2.	Management's Discussion and Analysis of Financial Condition
	and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market
	Risk	39

Item 4.	Controls and Procedures	39

PART II	OTHER INFORMATION

Item 2	Changes in Securities and Use of Proceeds	40

Item 5.	Other Information	41

Item 6.	Exhibits and Reports on Form 8 –K	44

	June 30, 2004	December 31, 2003
	(Unaudited)
Assets
Current assets:
Cash	$ 748,356	$ 2,188,645
Accounts receivable	922,024	480,494
Prepaids and other current assets	145,569	15,800
Total current assets	1,815,949	2,684,939
Equipment, software and furniture, net	147,374	195,999
Total assets	$ 1,963,323	$ 2,880,938

Liabilities and shareholders’ (deficit) equity
Current liabilities:
Accounts payable	$ 1,380,391	$ 1,350,940
Accrued salaries and related costs	201,080	439,595
Accrued interest	88,010	82,812
Current portion of notes payable	287,869	270,195
Capital lease obligations, current portion	-	17,296
Preferred stock dividends payable	301,273	218,143
Deferred revenue	35,000	-
Total current liabilities	2,293,623	2,378,981
Notes payable, less current portion	132,705	215,932
Convertible notes payable, net of discount of $957,443	42,557	-
Total liabilities	2,468,885	2,594,913

Shareholders’ (deficit) equity :
Series A convertible preferred stock, $0.001 par value;
10,000 shares designated, 2,078 shares issued and
outstanding at June 30, 2004 and December 31,
2003 (liquidation preference of $2,379,273 as of
June 30, 2004)	2,078,312	2,078,312
Series C convertible preferred stock, $0.001 par value;
3,000 shares designated, 1,310 and 60 shares issued and
outstanding at June 30, 2004 and December 31, 2003
respectively (liquidation preference of $60,000 as of
June 30, 2004)	30,184	365,566
Series D convertible preferred stock, $0.001 par value;
4,000 shares designated, 2,525 and 2,900 shares issued
and outstanding at June 30, 2004 and December 31, 2003,
respectively (liquidation preference of $2,525,000 as of
June 30, 2004)	1,754,965	2,015,604
Series E convertible preferred stock, $0.001 par value;
200 shares designated, zero and 170 shares issued and
outstanding at June 30, 2004 and December 31, 2003,
respectively	-	119,460
Common stock, $0.001 par value, 185,000,000 shares
authorized; 92,798,153 and 69,408,639 shares issued
and 92,759,653 and 69,370,139 shares outstanding at
June 30, 2004 and December 31, 2003, respectively	92,759	69,370
Additional paid-in capital	48,498,032	46,315,321
Deferred compensation	(9,625)	(53,427)
Accumulated deficit	(52,722,570)	(50,396,562)
Treasury stock, at cost (38,500 shares)	(227,619)	(227,619)
Total shareholders’ (deficit) equity	(505,562)	286,025
Total liabilities and shareholders’ (deficit) equity	$ 1,963,323	$ 2,880,938

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

	Three-Month Period Ended
		June 30, 2004		June 30, 2003
Revenues:
Wireless applications and contracts		$	1,208,880	$	332,989
Contracts and license fees			–		–
Wireless license fees			–		247,201
Total revenues			1,208,880		580,190
Cost of revenues:
Wireless applications and contracts			627,431		228,419
Contracts and license fees			–		–
Wireless license fees			–		–
Total cost of revenues			627,431		228,419
Gross profit			581,449		351,771
Selling, general and administrative expenses			752,078		1,134,532
Non-cash compensation			6,666		44,148
Research and development			453,097		263,631
Non-cash consulting expense			22,673		36,470
Non-cash settlements			–		(333,950)
Interest expense			55,898		14,222
Net loss		$	(708,963)	$	(807,282)

Net loss applicable to common shareholders:
Net loss		$	(708,963)	$	(807,282)
Accretion of beneficial conversion feature on preferred stock			(84,922)		–
Preferred stock dividends			(41,565)		(47,032)
Net loss applicable to common shareholders		$	(835,450)	$	(854,314)
Per share amounts (basic and diluted)		$	(0.01)	$	(0.01)
Weighted average shares of common stock outstanding			84,362,293		60,533,019

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

	Six-Month Period Ended
	June 30, 2004			June 30, 2003
Revenues:
Wireless applications and contracts		$	1,982,210	$	562,424
Contracts and license fees			13,889		–
Wireless license fees			750		247,201
Total revenues			1,996,849		809,625
Cost of revenues:
Wireless applications and contracts			1,023,768		443,013
Contracts and license fees			3,199		–
Wireless license fees			–		–
Total cost of revenues			1,026,967		443,013
Gross profit			969,882		366,612
Selling, general and administrative expenses			1,786,532		2,490,694
Non-cash compensation			53,702		88,294
Research and development			973,319		528,971
Non-cash consulting expense			29,017		94,706
Non-cash settlements			–		(1,339,290)
Interest expense			76,746		24,441
Net loss		$	(1,949,434)	$	(1,521,204)

Net loss applicable to common shareholders:
Net loss		$	(1,949,434)	$	(1,521,204)
Accretion of beneficial conversion feature on preferred stock			(293,444)		–
Preferred stock dividends			(83,130)		(93,192)
Net loss applicable to common shareholders		$	(2,326,008)	$	(1,614,396)
Per share amounts (basic and diluted)		$	(0.03)	$	(0.03)
Weighted average shares of common stock outstanding			77,651,930		58,429,235

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


	Convertible Preferred Stock
	Series A			Series C		Series D
		Shares	Amount	Shares	Amount	Shares	Amount

Balance at December 31, 2003		2,078	$ 2,078,312	1,310	$ 365,566	2,900	$ 2,015,604
Accretion of beneficial conversion
feature of Series C preferred stock		-	-	-	293,444	-	-
Issuance of common stock in conjunction
with issuance of convertible debt		-	-	-	-	-	-
Beneficial conversion feature related
to issuance of convertible debt		-	-	-	-	-	-
Common stock, options and warrants
issued for services		-	-	-	-	-	-
Common stock issued for cash		-	-	-	-	-	-
Common stock issued for accrued payroll		-	-	-	-	-	-
Preferred stock dividends		-	-	-	-	-	-
Deferred compensation related to
issuance of stock options		-	-	-	-	-	-
Amortization of deferred
compensation		-	-	-	-	-	-
Conversion of Series C, D and E
preferred stock		-	-	(1,250)	(628,826)	(375)	(260,639)
Net loss for the period		-	-	-	-	-	-
Balance at June 30, 2004		2,078	$ 2,078,312	60	$ 30,184	2,525	$ 1,754,965

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

					Additional
	Series E		Common Stock		Paid-In
	Shares	Amount	Shares	Amount	Capital

Balance at December 31, 2003	170	$ 119,460	69,370,139	$ 69,370	$ 46,315,321
Accretion of beneficial conversion
feature of Series C preferred stock	-	-	-	-	-
Issuance of common stock in conjunction
with issuance of convertible debt	-	-	14,286,000	14,286	485,714
Beneficial conversion feature related
to issuance of convertible debt	-	-	-	-	500,000
Common stock, options and warrants
issued for services	-	-	300,000	300	82,717
Common stock issued for cash	-	-	431,034	431	19,655
Common stock issued for accrued payroll	-	-	647,480	647	83,525
Preferred stock dividends	-	-	-	-	-
Deferred compensation related to
issuance of stock options	-	-	-	-	9,900
Amortization of deferred
compensation	-	-	-	-	-
Conversion of Series C, D and E
preferred stock	(170)	(119,460)	7,725,000	7,725	1,001,200
Net loss for the period	-	-	-	-	-
Balance at June 30, 2004	-	$ -	92,759,653	$ 92,759	$ 48,498,032

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

							Total
	Deferred		Accumulated		Treasury		Shareholders’
	Compensation		Deficit		Stock		(Deficit) Equity

Balance at December 31, 2003	$ (53,427	)	$ (50,396,562	)	$ (227,619	)	$ 286,025
Accretion of beneficial conversion
feature of Series C preferred stock	-		(293,444	)	-		-
Issuance of common stock in conjunction
with issuance of convertible debt	-		-		-		500,000
Beneficial conversion feature related
to issuance of convertible debt	-		-		-		500,000
Common stock, options and warrants
issued for services	-		-		-		83,017
Common stock issued for cash	-		-		-		20,086
Common stock issued for accrued payroll	-		-		-		84,172
Preferred stock dividends	-		(83,130	)	-		(83,130	)
Deferred compensation related to
issuance of stock options	(9,900	)	-		-		-
Amortization of deferred
compensation	53,702		-		-		53,702
Conversion of Series C, D and E
preferred stock	-		-		-		-
Net loss for the period	-		(1,949,434	)	-		(1,949,434	)
Balance at June 30, 2004	$ (9,625	)	$ (52,722,570	)	$ (227,619	)	$ (505,562	)

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

		Six-Month Period Ended
		June 30, 2004		June 30, 2003

Operating activities
Net loss	$	(1,949,434)	$	(1,521,204)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization		80,313		152,347
Non-cash compensation		53,702		88,294
Common stock, options and warrants issued for services		83,017		94,706
Amortization of discount on debt and beneficial conversion feature		42,557		–
Non-cash settlements		–		(1,339,290)
Changes in operating assets and liabilities:
Accounts receivable		(441,530)		(170,439)
Prepaid and other assets		(129,769)		(75,233)
Accounts payable and other accrued expenses		58,649		342,610
Accrued salaries and related costs		(178,343)		358,436
Deferred revenue		35,000		(7,285)
Net cash used in operating activities		(2,345,838)		(2,077,058)

Investing activities
Purchases of equipment and furniture		(31,688)		–
Net cash used in investing activities		(31,688)		–
Financing activities
Proceeds from sale of common stock and warrants		520,086		1,326,607
Proceeds from issuance of convertible debt		500,000		–
Proceeds from exercise of warrants		–		779,355
Principal payments on capital lease obligations		(17,296)		(54,894)
Principal payments on notes payable and short-term borrowings		(65,553)		–
Net cash provided by financing activities		937,237		2,051,068
Net decrease in cash		(1,440,289)		(25,990)
Cash at beginning of period		2,188,645		25,990
Cash at end of period	$	748,356	$	–
Supplemental disclosure of cash flow information
Cash paid for interest	$	8,143	$	4,847

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

Summus, Inc. (USA) ("Summus” or the "Company") is engaged primarily in the development of applications that optimize the consumer wireless experience. The core of the Company's business plan is to focus on the emerging wireless and mobile market and partner with leading content brands to bring branded products to mobile phones. Summus has developed software, technology and applications to enable information processing and resource management to include, but not be limited to, the creation, transmission, playing and management of content over wireless networks. We currently offer products in various categories, including games, personalization, photo services, news/information and entertainment. The Company's technology, which provides the foundation for its current services, is designed to address the usability constraints of the existing wireless network infrastructure. This technology will enable more efficient use of existing and future bandwidth allocations, resulting in a perceived bandwidth increase by the mobile end-user. One of our main objectives is to create a superior mobile end-user experience, which will impact devices, wireless carrier infrastructure and mobile applications.

Summus builds products for all major mobile platforms, including QUALCOMM’s Binary Runtime Environment for Wireless™ (BREW™), Java™ 2 Platform, Micro Edition (J2ME™), Symbian OS and WAP. We distribute our applications through major wireless carriers who make our products available to their customers. Summus currently has relationships with carriers that account for 92% of all U.S. wireless subscribers. We also have relationships with international carriers covering Canada, Latin America, Australia, Israel and the U.K.

The Company has completed development of and has launched twenty-seven (27) wireless applications. Twelve (12) wireless carriers in the United States and ten (10) international wireless carriers currently deploy at least one or a combination of the twenty-seven (27) wireless applications that have been completed by the Company. Summus launched its first wireless application during the second quarter of 2002. These applications can be purchased by the end-user as a one-time purchase, or a monthly subscription, depending on content, product function, and/or carrier preferences.

The majority of the applications completed and deployed by the Company, as well as planned future applications, have been developed by the Company through a process that involves securing agreements with content providers and carriers, and developing and launching the applications. The Company outsources the infrastructure needed to host and deliver the transactions for its application end-users.

The consolidated financial statements of the Company included in this quarterly report on Form 10-Q are unaudited. In the opinion of management, such financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of the Company as of June 30, 2004; the results of operations for the three and six-month periods ended June 30, 2004 and 2003; shareholders' deficit as of June 30, 2004; and cash flows for the six-month periods ended June 30, 2004 and 2003.

The accompanying unaudited consolidated financial statements as of and for the three and six-month periods ended June 30, 2004, have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with Article 10 of Regulation S-X. Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These unaudited consolidated financial statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s audited financial statements for the year ended December 31, 2003, which were filed with the Securities and Exchange Commission on March 31, 2004, in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2003. The Form 10-K is available through the Internet in the SEC's EDGAR database at www.sec.gov or from the Company upon request.

The accompanying unaudited consolidated financial statements have been prepared as if the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements at June 30, 2004, the Company incurred a net loss for the quarter of approximately $708,963, has negative working capital of $477,674 at June 30, 2004, and experienced negative cash flows from operations. The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing, and ultimately to attain profitability. The Company is actively promoting and expanding its product line and pursuing additional financing from existing shareholders and other institutional investors. Management expects to be able to attract additional capital to continue to fund and expand operations and also expects that increased revenues will reduce its operating losses in future periods. However, there can be no assurance that management’s plan will be executed as anticipated. The financial statements presented herein do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

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 revenue and expenses during the reporting period. Actual results could differ from those estimates.

After a careful review of the Company’s revenue recognition policies and giving consideration to guidance provided for in Emerging Issues Task Force No. 99-19 Reporting Revenue Gross as a Principal versus Net as an Agent (“EITF 99-19”), the Company has changed certain revenue recognition policies affecting revenues earned by wireless applications and contracts. Prior to 4^th quarter 2003, the Company reported revenues earned by wireless applications and contracts and cost of revenues for wireless applications and contracts net of certain third-party costs in the statement of operations. These transactions have been reclassified to reflect a gross revenue presentation with no effect on gross profit or net loss. The amount by which revenues and costs of revenues have been reclassified for the three and six-month periods ended June 30, 2003, is $115,679 and $214,894, respectively.

Commencing during the second quarter of 2002, our resources were dedicated to the development of solutions for the mobile and wireless markets. Revenues earned from wireless applications are recognized upon delivery and acceptance by the end-user either as a one-time purchase or a monthly subscription. For content delivery partner arrangements, whereby the Company remits a portion of the revenues earned through the sale of the Company’s applications, revenue is recorded on a gross basis in accordance with EITF 99-19. The Company recognizes the cost of payments to the content providers as a cost of revenues. Wireless applications and contracts cost of revenues include all third-party hosting, testing and/or carrier distribution fees. These costs are incurred on a monthly basis and are primarily fixed in nature regardless of the revenue generated by the related applications.

Periodically, we enter into non-recurring engineering arrangements with our content partners. Generally, under the terms of these agreements, we receive funding upfront to complete projects. The funding we receive upfront is recorded as deferred revenue and is recognized as revenue under the terms of the individual arrangements. Deferred revenue represents amounts received for which the Company has not yet completed its contractual obligations.

We recognize revenue from licensee fees for wireless software applications in accordance with the provisions of AICPA Statement of Position 97-2, “Software Revenue Recognition”, as amended by AICPA Statement of Position 98-9 “Modification of SOP No. 97-2 Software Revenue Recognition with Respect to Certain Transactions.” Revenue from software license fees is generally recognized upon delivery provided that a contract has been executed, the vendor fee is fixed or determinable, no significant vendor obligations or uncertainties surrounding customer acceptance remain, and collection of the resulting receivable is deemed probable.

There were no costs related to the wireless license fee revenue generated during the six months ended June 30, 2004, as the license fee revenue related to technology that had been previously developed by the Company, and there were no costs for installation, delivery or customization, or other related costs.

We derive certain revenues from research and development contracts for governmental agencies and the commercial licensing of our technology. We recognize revenue on these contracts at the time services are rendered based upon the terms of individual contracts. Regarding the commercial licensing of our technology, we follow the provisions of AICPA Statement of Position 97-2, “Software Revenue Recognition”, as amended by AICPA Statement of Position 98-9 “Modification of SOP No. 97-2 Software Revenue Recognition with Respect to Certain Transactions.” Revenue from software license fees is generally recognized upon delivery provided that a contract has been executed, the vendor fee is fixed or determinable, no significant vendor obligations or uncertainties surrounding customer acceptance remain, and collection of the resulting receivable is deemed probable.

Management has structured the Company's internal organization as one business segment from which all operating decisions are made and all operating results are evaluated.

Equipment and furniture is stated at cost. Depreciation is computed over the estimated useful lives of the assets (generally three to seven years) using the straight-line method. Amortization of capital lease assets is included in depreciation expense.

Capitalization of software development costs begins with the establishment of technological feasibility of new or enhanced software products. Technological feasibility of a computer software product is established when the Company has completed all planning, designing, coding and testing that is necessary to establish that the software product can be produced to meet design specifications including functions, features and technical performance requirements. All costs incurred prior to establishing technological feasibility of a software product are charged to research and development expense as incurred. No software development costs were capitalized during the three and six-month periods ended June 30, 2004 and 2003.

Upon capitalization of software development costs, the Company will amortize capitalized software development costs on a product-by-product basis at the greater of the amount computed using (a) the ratio of current gross revenues for a product to the total of current and anticipated future gross revenues or (b) the straight-line method over the estimated remaining economic life of the products, generally three years. Amortization begins when the product is available for general release to customers.

Income taxes are accounted for using the liability method in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under SFAS 109, deferred tax assets or liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability from period to period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance would be included in the provision for deferred income taxes in the period of change.

The Company has stock-based compensation plans for employees, consultants and directors. The Company accounts for those plans under the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and related interpretations. For options granted under those plans with an exercise price equal to the market value of the stock on the date of grant, no compensation cost is recognized in net operations as reported in the consolidated statement of operations. Compensation cost is recognized in net earnings/loss for awards granted under those plans with an exercise price less than the market value of the underlying common stock on the date of grant. Such costs are recognized ratably over the vesting period. The Company recorded non-cash compensation related to the issuance of fully-vested stock options with exercise prices below the fair market value of the underlying stock plus the amortization of deferred compensation arising from stock option issuances subject to vesting totaling $53,702 and $88,294 for the six months ended June 30, 2004 and 2003, respectively, and $6,666 and $44,148 for the three months ended June 30, 2004 and 2003, respectively.

The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provision of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). In accordance with SFAS 123, the fair value of each option grant was determined by using the Black-Scholes option pricing model with the following weighted average assumptions for the three and six-month periods ended June 30, 2004 and 2003: dividend yield of 0%; volatility ranging from 1.218 to 1.789; risk-free interest rate ranging from 2.75% to 5.00%; and expected option lives of 5 years for employees and 10 years for Board members.

	Three-Month Period Ended June 30		Six-Month Period Ended June 30
	2004	2003	2004	2003
	(Unaudited)		(Unaudited)

Net loss applicable to common shareholders	$ (835,450)	$ (854,314)	$ (2,326,008)	$ (1,614,396)
Non-cash compensation charges included in net loss applicable to common shareholders	6,666	44,148	53,702	88,294
Stock-based compensation cost that would have been included in net loss applicable to common shareholders under the fair value method	(333,291)	(91,373)	(691,319)	(170,438)

Adjusted net loss applicable to common shareholders	$ (1,162,075)	$ (901,539)	$ (2,963,625)	$ (1,696,540)

Basic and diluted loss per share:
Reported net loss applicable to common shareholders	$ (0.01)	$ (0.01)	$ (0.03)	$ (0.03)
Non-cash compensation charges included in net loss applicable to common shareholders	0.00	0.00	0.00	0.00
Stock-based employee compensation cost that would have been included in net loss applicable to common shareholders under the fair value method	(0.00)	(0.00)	(0.01)	(0.00)

Adjusted net loss applicable to common shareholders	$ (0.01)	$ (0.01)	$ (0.04)	$ (0.03)

The Company accounts for stock-based compensation to non-employees of the Company, primarily consultants and advisors, at the fair value of the equity instrument in accordance with the provisions of SFAS No. 123. Non-cash consulting expense related to such stock based compensation was $29,017 and $94,706 for the six-month periods ended June 30, 2004 and 2003, respectively, and $22,673 and $36,470 for the three-month periods ended June 30, 2004 and 2003, respectively.

Loss per share has been calculated in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic loss per share was computed by dividing the net loss for each period presented by the weighted average number of shares of common stock outstanding for such period, as adjusted for the recapitalization. Although the Company has potential common stock equivalents related to its outstanding stock options, warrants and preferred stock, these potential common stock equivalents were not included in diluted loss per share for each period presented because the effect would have been antidilutive.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (the "Interpretation"), which addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003. The Interpretation becomes effective for entities created before February 1, 2003, at the beginning of the first interim period ending after March 31, 2004. The adoption of the provisions of the Interpretation did not have a material impact on the Company's financial statements.

In May 2004, the Company entered into senior convertible debt agreements with certain investors to provide up to $2,000,000 of financing in the form of convertible notes payable (the "Notes"). The Notes do not bear interest and are convertible into shares of the Company’s common stock at the option of the holder. The Notes mature three years from the date of issuance. Once the Notes mature, the Company has the sole right to pay off the debt or require conversion by the holders of any unconverted portion thereof into shares of the Company’s common stock. At the closing of the senior convertible debt agreements, each investor received 7,143 shares of the Company’s common stock for each $1,000 invested, for a total of 14,286,000 shares of the Company’s common stock. Upon the conversion of each $1,000 of senior convertible debt, the holder shall receive an additional 14,286 shares of the Company’s common stock.

Upon closing, the Company received $1,000,000 in cash and the remaining $1,000,000 of proceeds received have been placed in an escrow account with American Stock Transfer Company (the “Escrow Agent”). The Company shall not have access to this escrowed amount until it has achieved positive EBITDA, as defined, on a monthly basis. When the Company achieves this milestone, the escrowed funds may be delivered to the Company upon the receipt by the Escrow Agent of a certificate from an officer of the Company that such financial milestone has been achieved. The Company is not required to access these funds. If the Company has not achieved positive EBITDA, as defined, by March 31, 2005 and had the escrowed funds released to it, the Escrow Agent shall release the escrowed amounts to the holders of the Notes on a pro rata basis. If the escrowed amount is not released by the Escrow Agent to the Company, the escrowed amount shall have no conversion rights into the Company’s common stock as set forth above.

The Company allocated the $1,000,000 of proceeds received in connection with the financing in May 2004 between the Notes and the 14,286,000 shares of common stock issued on a relative fair value basis. Accordingly, the Company allocated $500,000 to the Notes and $500,000 to the common stock issued. Since the Notes were issued at a discount to the principal balance, which is the basis for conversion, the effective conversion price of the Notes was less than the fair value of the Company's common stock on the date of issuance. Accordingly, a beneficial conversion feature of $500,000 was recorded as a discount to the Notes and a corresponding credit to additional paid-in capital on the date of issuance. Since the Notes have a term of three years, the aggregate discount of $1,000,000 will be amortized to interest expense over a thirty-six month period commencing on the date of issuance. Amortization of the discount of the Notes for the three months ended June 30, 2004 was $42,557.

During the three months ended June 30, 2004, the Company entered into a marketing agreement under which the Company issued 300,000 shares of restricted common stock valued at $54,000 for marketing services, which has been reflected within selling, general and administrative expenses in the accompanying statement of operations. The agreement also provides for future issuances of shares of common stock and cash payments for marketing services based on the achievement of download milestones of a specific wireless application.

On June 24, 2004, the Board of Directors authorized an increase in the number of options available for grant under the Corporation’s Second Amended and Restated 2000 Equity Compensation Plan from 8,500,000 to 15,000,000 to be used as incentives to all employees, management and the Board of Directors.

As of June 30, 2004, the Company had reserved shares of its authorized 185,000,000 shares of common stock for future issuance as follows:

The Company has 2,078 shares of Series A convertible preferred stock (“Series A preferred stock”) outstanding as of June 30, 2004. These shares are valued based upon the liquidation preference (the “Liquidation Preference”) of Series A preferred stock of $1,000 per share.

The holders of the Series A preferred stock are entitled to receive cumulative cash dividends at a rate of 8% per annum of the initial liquidation preference of $1,000 per share. These dividends are accrued monthly. The Company, at its election, can provide for the payment of dividends on the Series A preferred stock through the issuance of additional shares of Series A preferred stock having an aggregate initial liquidation preference equal to the amount of cash dividends otherwise payable. Dividends are cumulative from the date of issuance and are payable, when, as and if declared by the Board of Directors, on March 31 and September 30 of each year. The Company is restricted from paying dividends on common stock until dividends are paid on Series A preferred in full. The Company recorded preferred stock dividends of $41,565 and $83,130 for the three and six months ended June 30, 2004, respectively. As of June 30, 2004, the Company had recorded $301,273 in accrued dividends, which is reflected in current liabilities in the accompanying consolidated balance sheet.

The holders of the outstanding shares of Series A preferred stock are not entitled to vote on matters submitted to the Company’s shareholders for voting. However, approval of holders of a majority of the outstanding shares of Series A preferred stock is required prior to the issuance of a new series of preferred stock that ranks senior to the Series A preferred stock. Each share of the Series A preferred stock is convertible at the option of the holder, at any time after the date of issuance, into shares of common stock equal to the Liquidation Preference divided by the initial conversion price of $14.24. The conversion price is subject to adjustment in accordance with the Company’s articles of incorporation. At the Company’s election, it has the right to redeem any outstanding shares of the Series A preferred stock at the Liquidation Preference of $1,000 per share.

In June 2003, the Company amended its articles of incorporation to establish its Series C convertible preferred stock (“Series C preferred stock”). The Series C preferred stock has an issue price of $1,000 per share and has the following rights and privileges:

During the three and six month periods ended June 30, 2004, certain holders of the Series C preferred stock converted 1,250 shares of Series C preferred stock into 5,000,000 shares of the Company’s unregistered common stock.

In September 2003, the Company amended its articles of incorporation to establish its Series D convertible preferred stock (“Series D preferred stock”). The newly established Series D preferred stock has an issue price of $1,000 per share and has the following rights and privileges:

In November 2003, the Company amended its articles of incorporation to establish its Series E convertible preferred stock (“Series E preferred stock”). The Series E preferred stock has an issue price of $1,000 per share and has the following rights and privileges:

All shares of Series E preferred stock have been converted into shares of the Company’s unregistered common stock.

The accounting treatment for the Series C, D and E preferred stock (the “Preferred Stock”) involved allocating the value of the principal amount received from the Preferred Stock offerings between the Preferred Stock, the associated warrants and a beneficial conversion feature (“BCF”) associated with the Preferred Stock. A BCF existed because the effective conversion rate of the Preferred Stock was below the traded value of the Company’s common stock on the date the Preferred Stock was issued. The BCF for the Preferred Stock totaling $3,579,695 was recorded as a discount to the Preferred Stock and additional paid-in capital on the date the Preferred Stock was issued. Since the Series C preferred stock becomes convertible at any time after nine months from its issuance, the value of its BCF totaling $659,010 will be amortized to retained deficit over a nine-month period commencing with its issuance. Amortization of the Series C preferred stock BCF for the three months ended June 30, 2004 was $84,922. Since the Series D and E preferred stock was convertible immediately, the value of its beneficial conversion feature totaling $2,920,685 was fully amortized to retained deficit on the date of issuance.

The Company entered into a three-year employment agreement with Dr. Bjorn Jawerth, which expired on February 16, 2004, and was not renewed by the Board of Directors. His employment agreement provided for an initial base salary of $350,000, with annual increases of 10%.

The difference between the increased salary amounts of $423,500 and $385,000, respectively, in the second and third years of his employment agreement, and his the original base salary of $350,000 was deferred and accrued by the Company, at Dr. Jawerth’s election, until the Board of Directors and Dr. Jawerth determine when and how these deferred and accrued amounts may be paid. These amounts have been recorded as accrued salaries in the Company’s balance sheet as of June 30, 2004.

Under the terms of the recapitalization transaction, Summus, Inc. agreed to use reasonable commercial efforts to assist Dr. Jawerth in the private sale of up to 1,666,667 shares of Summus, Inc. common stock held by Dr. Jawerth at a per share price of not less than $1.50 per share (representing $2.5 million in value). Under the terms of Dr. Jawerth's employment agreement, the Company was obligated to issue to Dr. Jawerth options, with an exercise price of $1.50 per share, exercisable for three times the number of shares of common stock sold in the private sale as described above. No shares subject to this agreement have been sold. The Company believes it has no further obligations regarding this sale of shares.

Pursuant to the terms of his employment agreement and in accordance with corporate policy, all intellectual property developed by Dr. Jawerth in connection with his employment by the Company is the exclusive property of the Company. Dr. Jawerth’s employment agreement granted him a personal, non-exclusive, non-transferable, world-wide license, without right to sublicense, to make and use New Technology (as defined in the Inventions Award Plan) that was developed during the twelve months following the closing of the recapitalization transaction. Pursuant to the terms of Dr. Jawerth’s employment agreement, the Company terminated Dr. Jawerth’s license on February 4, 2004.

On July 19, 2002, the Company entered into an irrevocable common stock equity line that was intended to provide funding to the Company in amounts up to $10.0 million. The Company filed a registration statement on Form S-1 with the Securities and Exchange Commission (“SEC”) on July 31, 2002 relating to this common stock equity line agreement. Based on comments received from the Securities and Exchange Commission and related communications with the SEC, the Company understood that the terms of the equity line financing arrangement were such that it would not be able to resolve the staff’s comments in a timely manner and seek effectiveness of the registration statement in a timely manner. Due to these developments, the length of time involved in completing the transaction, and other factors, the Company determined that it was in its best interest to withdraw the registration statement and not proceed with the equity line. Accordingly, on September 17, 2002, the Company submitted to the SEC a request to withdraw the registration statement and cancelled all agreements associated with the common stock equity line. In connection with the cancellation of the agreements associated with the common stock equity line, Talisman, the intended purchaser under the equity line, indicated to the Company its intention to retain ownership of the warrants to purchase 500,000 shares of the Company’s unregistered common stock at an exercise price of $0.47 per share that were issued to Talisman upon the execution of the equity line agreements. It is management’s position, with the advice of legal counsel, that the cancellation of these warrants became effective with the cancellation of the equity line agreements and that no loss contingency exists. Therefore, the Company has not recorded the issuance of these 500,000 warrants in its consolidated financial statements nor disclosed them as part of outstanding warrants. The Company has sent correspondence to Talisman stating its position that the warrants have been cancelled. To date, the Company has not received correspondence back from Talisman indicating their concurrence.

The Company established the Inventions Awards Plan (“the Plan”), effective October 30, 2000, to provide incentives to certain eligible employees by providing them with opportunities to receive additional compensation as a result of their development of enhancements or new methods that generate revenue for the Company.

Under the terms of the plan, the Company is obligated to reserve 5% of the gross revenues derived from the licensing or sale of “New Technology”, as defined in the agreement, for distribution among eligible employees. If the Company sells the rights to New Technology, eligible employees shall be entitled to an award of 10% of the gross proceeds.

In addition, the Company may, at its option, initiate a spin-off company to develop New Technology. If the eligible employee accepts a position in the spin-off company, his or her rights to awards under the plan are to be surrendered for 25% of the founders’ equity in the spin-off company.

Dr. Jawerth sent correspondence to the Company on February 17, 2004, seeking payment for certain inventions under the Plan. Management and the Board of Directors of the Company have evaluated these assertions and determined that no amounts are due Dr. Jawerth or other employees under the provisions of the Plan. In addition, the Board of Directors terminated the Plan effective March 10, 2004. If litigation is pursued by Dr. Jawerth for any payments under the Plan and he is successful in such litigation, there may be a material adverse impact to the Company.

On February 25, 2003, Bowne of New York City, LLC (“Bowne”), a financial printing firm, filed a civil summons in the Supreme Court of County of New York in the State of New York, claiming that it is entitled payment in the amount of $276,374, plus accrued interest, for past services rendered to the Company. The Company disputes the total amount Bowne claims the Company owes. The Company has recorded a liability of $276,374 relating to this claim as of June 30, 2004 and 2003. The Company is in the process of attempting to negotiate a settlement to this claim.

This Form 10-Q contains certain forward-looking statements that we believe are within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by such acts. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements, including the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding our strategy, future operations, future expectations or future estimates, financial position and objectives of management. Those statements in this Form 10-Q containing the words "believes," "anticipates," "plans," "expects" and similar expressions constitute forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and are subject to a number of risks, uncertainties and assumptions relating to our operations, results of operations, competitive factors, shifts in market demand and other risks and uncertainties. The most important factors that could prevent us from achieving our stated goals include, but are not limited to, the following:

Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate and actual results may differ from those indicated by the forward-looking statements included in this Form 10-Q. In light of the significant uncertainties inherent in the forward-looking statements included in this Form 10-Q, you should not consider the inclusion of such information as a representation by us or anyone else that we will achieve such results. Moreover, we assume no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.

After a careful review of the Company’s revenue recognition policies and giving consideration to guidance provided for in Emerging Issues Task Force No. 99-19 Reporting Revenue Gross as a Principal versus Net as an Agent (“EITF 99-19”), the Company has changed certain revenue recognition policies affecting revenues earned by wireless applications and contracts. Prior to 4^th quarter of 2003, the Company reported revenues earned by wireless applications and contracts and cost of revenues for wireless applications and contracts net of certain third-party costs in the statement of operations. These transactions have been reclassified to reflect a gross revenue presentation with no effect on gross profit or net loss. The amount by which revenues and costs of revenues have been reclassified for the three and six-month periods ended June 30, 2003 is $115,679 and $214,894, respectively.

Summus was founded in 1984. Summus is primarily engaged in the development of applications that optimize the consumer wireless experience. The core of the Company's business plan is to focus on the emerging wireless and mobile market and partner with leading content brands to bring branded products to mobile phones. Summus has developed software, technology and applications to enable information processing and resource management to include, but not be limited to, the creation, transmission, playing and management of content over wireless networks. We currently offer products in various categories, including games, personalization, photo services, news/information and entertainment. The Company's technology, which provides the foundation for its current services, is designed to address the usability constraints of the existing wireless network infrastructure. This technology will enable more efficient use of existing and future bandwidth allocations, resulting in a perceived bandwidth increase by the mobile end-user. One of our main objectives is to create a superior mobile end-user experience, which will impact devices, wireless carrier infrastructure and mobile applications.

We have completed development of and launched twenty-seven (27) wireless applications. Twelve (12) wireless carriers in the United States and ten (10) international wireless carriers currently deploy at least one or a combination of the twenty-seven (27) wireless applications that have been completed by the Company. Summus launched its first wireless application during the second quarter of 2002. These applications can be purchased by the end-user as a one-time purchase, or a monthly subscription, depending on content, product function, and/or carrier preferences.

To date, the Company has experienced significant operating losses as we have made investments in research and development of our underlying technology and application development. We expect to continue to make investments in those areas; however, the Company is more focused on the development and delivery of applications and the marketing of those applications to make substantial progress in revenue generation. We plan to expand our market presence by partnering with additional wireless carriers as well as increasing subscriber adoption of our applications. Our ability to generate profits and positive cash flow from operations will depend primarily on increasing revenues as well as implementing cost reduction measures.

Summus is continuing to develop applications and information processing tools that optimize the wireless multimedia experience. Our applications are developed to enable the evolution of mobile and wireless devices for dynamically interacting with information resources. Our vision is to enable mobile end-users to experience an entirely new mobile environment, one that frees an individual from location and time dependence and opens new possibilities as to how mobile devices are used.

Summus is focused on delivering compelling end-user applications across multiple mobile operating systems for remote access to and processing of information via handheld devices. Our strategy incorporates the release and distribution of revenue-generating products, each building to the Company’s vision.

Summus continues to position itself as a supplier of solutions that can run on multiple wireless platforms supporting the mobile and wireless marketplace. Summus has developed, and continues to develop, wireless applications designed for efficient and easy interaction with information in the mobile environment. Our technology supports applications and services on the BREW™, Java™ 2 Micro Edition (J2ME ™), Symbian™ OS, PocketPC, Palm OS and Wireless Application Protocol (WAP) wireless operating systems or platforms.

Our business development activities continue to expand with major content brands, such as Sports Illustrated, The Associated Press, and Fuji Film. Through June 30, 2004, we have executed contracts with a variety of content providers to build applications for the distribution of their content.

Sponsorship Relationship with Phil Hellmuth for Texas Hold’em

In the second quarter of 2004, Summus signed an exclusive agreement with professional poker player Phil Hellmuth to brand Summus’ Texas Hold'em mobile game. Phil Hellmuth is a World Poker Champion with nine World Series of Poker (“WSOP”) wins and is the leader on the WSOP money list with over $3.5 million in earnings. Summus is using Mr. Hellmuth's name to brand its multiplayer poker game that debuted in May 2004 on several carriers.

In early 2004, Summus and Fujifilm expanded their relationship to develop a broad range of mobile imaging solutions that will enable consumers to capture, store, share and print all of their digital images in a suite of easy-to-use mobile applications. Summus will integrate Fujifilm's Get the Picture Online service, an extensive print network that connects picture-takers to retail photofinishers, with mobile data services. This solution will give consumers the option to choose a local retail location via their mobile devices and send their digital images to the selected retailer for printing. The application was launched on BREW™, J2ME™ and WAP.

In early 2004, Summus also announced an exclusive agreement with Sports Illustrated, in which Summus is the provider of mobile wallpaper and screen savers in the United States and Canada featuring content from the Sports Illustrated Swimsuit Collection. Summus also has a non-exclusive right to provide this mobile wallpaper and screen savers outside of the United States and Canada. The application, Sports Illustrated Swimsuit 2004, debuted in March 2004 on several carriers and further carrier deployment is continuing.

In May 2004, the Company entered into senior convertible debt agreements with certain investors to provide up to $2,000,000 of financing in the form of Convertible Notes Payable (the "Notes"). These Notes do not bear interest and are convertible into shares of the Company’s common stock at the option of the holder. The Notes mature three years from the date of issuance. Once the Notes mature, the Company has the sole right to pay off the debt or require conversion by the holders of any unconverted portion thereof into shares of the Company’s common stock. At the closing of the senior convertible debt agreements, each investor received 7,143 shares of the Company’s common stock for each $1,000 invested, for a total of 14,286,000 shares of the Company’s common stock. Upon the conversion of each $1,000 of senior convertible debt, the holder shall receive an additional 14,286 shares of the Company’s common stock.

The Company allocated the $1,000,000 of proceeds received in connection with the financing in May 2004 between the Notes and the 14,286,000 shares of common stock issued on a relative fair value basis. Accordingly, the Company allocated $500,000 to the Notes and $500,00 to the common stock issued. Since the Notes were issued at a discount to the principal balance, which is the basis for conversion, the effective conversion price of the Notes was less than the fair value of the Company's common stock on the date of issuance. Accordingly, a beneficial conversion feature of $500,000 was recorded as a discount to the Notes and a corresponding credit to additional paid-in capital on the date of issuance. Since the Notes have a term of three years, the aggregate discount of $1,000,000 will be amortized to interest expense over a thirty-six month period commencing on the date of issuance. Amortization of the discount of the Notes for the three months ended June 30, 2004 was $42,557.

Three-Month Period Ended June 30, 2004 Compared to Three-Month Period Ended June 30, 2003


	Three Months Ended June 30
		% of Total			% of Total
	2004	Revenues		2003	Revenues		$ Change	% Change

Revenues by category:
Wireless applications and
contracts	$ 1,208,880	100.0	%	$ 332,989	57.4	%	$ 875,891	263.0	%
Contracts and license fees	-	-		-	-		-	-
Wireless license fees	-	-		247,201	42.6		(247,201)	(100.0)
Total revenues	$ 1,208,880	100.0	%	$ 580,190	100.0	%	$ 628,690	108.4	%

Wireless Applications and Contracts. Revenue from wireless applications and contracts increased $875,891 to $1,208,880 in the three-month period ended June 30, 2004, up 263.0% from $332,989 in the three-month period ended June 30, 2003. The increase in revenue from wireless applications and contracts resulted from the increase in sales of existing wireless applications and additional wireless applications developed by the Company, launched by several wireless carriers and purchased by end-users. The Company launched its Sports Illustrated Swimsuit Collection wallpaper and screen saver application in March 2004 and launched its multi-player Texas Hold’em game application in May 2004.

Revenue earned from wireless applications is recognized upon delivery and acceptance by the end-user either as a one-time purchase or a monthly subscription.

Wireless License Fees. During the three-month period ended June 30, 2004, the Company did not generate any revenue from wireless license fees. During the second half of 2003, the Company changed its focus from the commercial licensing of its technology to developing wireless applications. Revenue earned from wireless license fees totaled $247,201 in the three-month period ended June 30, 2003. During this period, the Company had sold and delivered existing image software for use in wireless transmission applications.

	Three Months Ended June 30
	2004		2003		$ Change		% Change
Cost of revenues by category
Wireless applications and contracts	$	627,431	$	228,419	$	399,012		174.7	%
Contracts and license fees		-		-		-		-
Wireless license fees		-		-		-		-
Total cost of revenues	$	627,431	$	228,419	$	399,012		174.7	%

Wireless Applications and Contracts. Costs of wireless applications and contracts increased $399,012 to $627,431 in the three-month period ended June 30, 2004, up 174.7% from $228,419 in the three-month period ended June 30, 2003. The increase in costs of wireless applications and contracts resulted from the increase in sales of existing wireless applications and additional wireless applications developed by the Company, launched by several wireless carriers and purchased by end-users. These costs are direct costs associated with the sale and delivery of wireless applications and primarily consist of third-party hosting fees, carrier distribution and fees associated with content information provided by our content providers for wireless applications which were deployed during the three-month period ended June 30, 2004. The costs related to third-party hosting and carrier distribution are incurred on a monthly basis and are primarily fixed in nature regardless of the revenue generated by the related applications.

Wireless License Fees. There was no revenue from wireless license fees during the three-month period ended June 30, 2004; therefore the Company did not record any costs of revenues. During the second half of 2003, the Company changed its focus from the commercial licensing of its technology to developing wireless applications. There were no costs of revenues regarding wireless license fees during the three-month period ended June 30, 2003, since the license fee agreements consummated during this period related to technology that had been previously developed by the Company.

	Three Months Ended June 30
	2004		2003		$ Change		% Change

Gross profit by category:
Wireless applications and contracts	$	581,449	$	104,570	$	476,879	456.0	%
Contracts and license fees		-	-		-		-
Wireless license fees		-	247,201		(247,201)		(100.0)
Total gross profit	$	581,449	$	351,771	$	229,678	65.3	%

Wireless Applications and Contracts. Gross profit resulting from the development and deployment of wireless applications increased $476,879 to $581,449 for the three-month period ended June 30, 2004, an increase of 456.0% over the gross profit for the three-month period ended June 30, 2003 of $104,570. The increase in gross profit resulting from these activities corresponds with the increase in revenues from wireless applications and contracts. The costs for these revenues include costs that are primarily fixed in nature, consisting mostly of third-party hosting fees and content information provided by certain of our content providers, and costs that are primarily variable in nature, consisting mostly of third-party content information.

Wireless License Fees. During the three-month period ended June 30, 2004, the Company did not generate any revenue, costs of revenue or gross profit related to wireless license fees. During the second half of 2003, the Company changed its focus from the commercial licensing of its technology to developing wireless applications. Gross profit resulting from wireless license fees totaled $247,201 for the three-month period ended June 30, 2003. The Company did not incur any specific direct costs associated with the sale, delivery, or installation of the software underlying the license agreements consummated during the period. Additionally, the Company does not expect to incur any future obligations relating to these license fees.

Selling, general and administrative expenses consist primarily of salaries, consulting fees, office operations, administrative and general management activities, including legal, accounting and other professional fees. Selling, general and administrative expenses for the three-month period ended June 30, 2004 were $752,078, compared to $1,134,532 for three-month period ended June 30, 2003. The decrease in selling, general and administrative expenses during the current period as compared to the prior period reflect a reduction in several expense categories, namely salaries, third-party consulting fees, travel and general office administration costs. The reductions in these categories reflect continued cost reduction efforts implemented by management.

Non-cash compensation for the three-month period ended June 30, 2004 was $6,666 compared to $44,148 for the three-month period ended June 30, 2003. Non-cash compensation for each of the three-month periods reflects the amortization for three months of deferred compensation resulting from stock options granted in prior years, at prices below the fair value of the underlying common stock. The decrease in the amount recorded in the current period as compared to the prior period reflects that prior years’ deferred compensation was fully amortized in the three-month period ended June 30, 2004.

Research and development expenses for the three-month period ended June 30, 2004, were $453,097 compared to $263,631 for the three-month period ended June 30, 2003. The increase in research and development expenses is a result of the increased number of wireless applications the Company has in development. The Company is focusing its resources on the development of new products for rapid deployment.

Non-cash consulting expense for the three-month period ended June 30, 2004, in the amount of $22,673 is attributable to 90,000 stock options and 54,034 stock warrants granted to consultants for services, valued using the Black-Scholes option-pricing model.

Non-cash consulting expense for the three-month period ended June 30, 2003 in the amount of $36,470 is attributable to: (1) the issuance of 81,869 shares of restricted common stock issued to consultants for services valued at $27,835; (2) 18,600 stock options granted to consultants for services valued at $6,572, such value was determined by using the Black-Scholes option-pricing model; and (3) $2,063, representing the fair value, as determined using the Black-Scholes option-pricing model, of the vested portion of 33,333 options granted to a member on the Company’s advisory board.

The Company did not enter into any legal settlements during the three-month period ended June 30, 2004.

Non-cash settlements totaling $333,950, resulted from the settlement of unpaid amounts from two of the Company’s creditors during the three-month period ended June 30, 2003.

Interest expense for the three-month period ended June 30, 2004, was $55,898, compared to interest expense of $14,222 for the three-month period ended June 30, 2003. Interest expense for each of the three-month periods includes interest expense related to interest costs associated with capital lease obligations and note payable agreements. In addition, interest expense for the three-month period ended June 30, 2004 includes $42,557 of interest expense related to amortization of the discounts on the convertible notes payable entered into in May 2004.

As a result of the factors discussed above, the net losses for the three-month period ended June 30, 2004 and 2003 were $708,963 and $807,282, respectively.

Six-Month Period Ended June 30, 2004 Compared to Six-Month Period Ended June 30, 2003


	Six Months Ended June 30
		% of Total			% of Total
	2004	Revenues		2003	Revenues		$ Change	% Change

Revenues by category:
Wireless applications and
contracts	$ 1,982,210	99.3	%	$ 562,424	69.5	%	$ 1,419,786	252.4	%
Contracts and license fees	13,889	0.7		-	-		13,889	-
Wireless license fees	750	0.0		247,201	30.5		(246,451)	(99.7)
Total revenues	$ 1,996,849	100.0	%	$ 809,625	100.0	%	$ 1,187,224	146.6	%

Wireless Applications and Contracts. Revenue from wireless applications and contracts increased $1,419,786 to $1,982,210 in the six-month period ended June 30, 2004, up 252.4% from $562,424 in the six-month period ended June 30, 2003. The increase in revenue from wireless applications and contracts resulted from the increase in sales of existing wireless applications and additional wireless applications developed by the Company, launched by several wireless carriers and purchased by end-users. The Company launched its Sports Illustrated Swimsuit Collection wallpaper and screen saver application in March 2004 and launched its multi-player Texas Hold’em game application in May 2004.

Revenue earned from wireless applications is recognized upon delivery and acceptance by the end-user either as a one-time purchase or a monthly subscription.

Contracts and License Fees. Revenue from contracts and license fees was $13,889 in the six-month period ended June 30, 2004 and was generated from providing governmental contract services. This government contract commenced in 2003 and was completed in March 2004. There was no revenue earned from contracts and license fees during the six-month period ended June 30, 2003.

Wireless License Fees. Revenue earned from wireless license fees totaled $750 in the six-month period ended June 30, 2004. Revenue earned from wireless license fees totaled $247,201 in the six-month period ended June 30, 2003. During this period, the Company had sold and delivered existing image software for use in wireless transmission applications. During the second half of 2003, the Company changed its focus from the commercial licensing of its technology to developing wireless applications.

	Six Months Ended June 30
	2004		2003		$ Change		% Change
Cost of revenues by category
Wireless applications and contracts	$	1,023,768	$	443,013	$	580,755		131.1	%
Contracts and license fees		3,199		-		3,199		-
Wireless license fees		-		-		-		-
Total cost of revenues	$	1,026,967	$	443,013	$	583,954		131.8	%

Wireless Applications and Contracts. Costs of wireless applications and contracts increased $580,755 to $1,023,768 in the six-month period ended June 30, 2004, up 131.1% from $443,013 in the six-month period ended June 30, 2003. The increase in costs of wireless applications and contracts resulted from the increase in sales of existing wireless applications and additional wireless applications developed by the Company, launched by several wireless carriers and purchased by end-users. These costs are direct costs associated with the sale and delivery of wireless applications and primarily consist of third-party hosting fees, carrier distribution and fees associated with content information provided by our content providers for wireless applications which were deployed during the six-month period ended June 30, 2004. The costs related to third-party hosting and carrier distribution are incurred on a monthly basis and are primarily fixed in nature regardless of the revenue generated by the related applications.

Contracts and License Fees. Costs of contracts and license fees were $3,199 in the six-month period ended June 30, 2004, and were incurred as part of providing services under a government contract that commenced in 2003 and was completed in March 2004. Costs and of contracts and license fees consisted primarily of salaries and other related costs of providing governmental contract services. There was no revenue earned from contracts and license fees during the six-month period ended June 30, 2003.

Wireless License Fees. There were no costs of revenues regarding wireless license fees during the six-month periods ended June 30, 2004 and 2003, since the license fee agreements consummated during this period related to technology that had been previously developed by the Company.

	Six Months Ended June 30
	2004		2003		$ Change		% Change

Gross profit by category:
Wireless applications and contracts	$	958,442	$	119,411	$	839,031	702.6	%
Contracts and license fees		10,690	-		10,690		-
Wireless license fees		750	247,201		(246,451)		(99.7)
Total gross profit	$	969,882	$	366,612	$	603,270	164.6	%

Wireless Applications and Contracts. Gross profit resulting from the development and deployment of wireless applications increased $839,031 to $958,442 for the six-month period ended June 30, 2004, an increase of 702.6% over the gross profit for the six-month period ended June 30, 2003 of $119,411. The increase in gross profit resulting from these activities corresponds with the increase in revenues from wireless applications and contracts. The costs for these revenues include costs that are primarily fixed in nature, consisting mostly of third-party hosting fees and content information provided by certain of our content providers, and costs that are primarily variable in nature, consisting mostly of third-party content information.

Contracts and License Fees. Gross profit resulting from government contract services during the six-month period ended June 30, 2004 totaled $10,690. The gross profit from these services resulted from deducting primarily salaries and other related costs from the related earned revenue. During the six-month period ended June 30, 2003, the Company did not generate any revenue, costs of revenue or gross profit related to contracts and license fees.

Wireless License Fees. During the six-month period ended June 30, 2004, the Company did not generate any revenue, costs of revenue or gross profit related to wireless license fees. Gross profit resulting from wireless license fees totaled $750 and $247,201 for the six-month periods ended June 30, 2004 and 2003, respectively. The Company did not incur any specific direct costs associated with the sale, delivery, or installation of the software underlying the license agreements consummated during the period. During the second half of 2003, the Company changed its focus from the commercial licensing of its technology to developing wireless applications. Additionally, the Company does not expect to incur any future obligations relating to these license fees.

Selling, general and administrative expenses consist primarily of salaries, consulting fees, office operations, administrative and general management activities, including legal, accounting and other professional fees. Selling, general and administrative expenses for the six-month period ended June 30, 2004 were $1,786,532, compared to $2,490,694 for six-month period ended June 30, 2003. The decrease in selling, general and administrative expenses during the current period as compared to the prior period reflect a reduction in several expense categories, namely salaries, third-party consulting fees, travel and general office administration costs. The reductions in these categories reflect continued cost reduction efforts implemented by management.

Non-cash compensation for the six-month period ended June 30, 2004 was $53,702 compared to $88,294 for the six-month period ended June 30, 2003. Non-cash compensation for each of the six-month periods reflects the amortization for six months of deferred compensation resulting from stock options granted in prior years, at prices below the fair value of the underlying common stock. The decrease in the amount recorded in the current period as compared to the prior period reflects that prior years’ deferred compensation was fully amortized in the six-month period ended June 30, 2004.

Research and development expenses for the six-month period ended June 30, 2004, were $973,319 compared to $528,971 for the six-month period ended June 30, 2003. The increase in research and development expenses is a result of the increased number of wireless applications the Company has in development. The Company is focusing its resources on the development of new products for rapid deployment.

Non-cash consulting expense for the six-month period ended June 30, 2004, in the amount of $29,017 is attributable to 94,500 stock options and 98,048 stock warrants granted to consultants for services, valued using the Black-Scholes option-pricing model.

Non-cash consulting expense for the six-month period ended June 30, 2003 in the amount of $94,706 is attributable to: (1) the issuance of 219,266 shares of restricted common stock issued to consultants for services valued at $68,563; (2) 41,700 stock options granted to consultants for services valued at $9,080, such value was determined by using the Black-Scholes option-pricing model; (3) $15,000 of amortization of a deferred expense recorded in 2002 relating to the issuance of 55,555 shares of restricted common stock valued at $22,500, for consulting services to be rendered over a 4.5 month period; and (4) $2,063, representing the fair value, as determined using the Black-Scholes option-pricing model, of the vested portion of 33,333 options granted to a member on the Company’s advisory board.

The Company did not enter into any legal settlements during the six-month period ended June 30, 2004.

Non-cash settlements totaling $1,339,290, resulted from the settlement of unpaid amounts from four of the Company’s creditors during the six-month period ended June 30, 2003.

Interest expense for the six-month period ended June 30, 2004, was $76,746, compared to interest expense of $24,441 for six-month period ended June 30, 2003. Interest expense for each of the six-month periods includes interest expense related to interest costs associated with capital lease obligations and note payable agreements. In addition, interest expense for the six-month period ended June 30, 2004 includes $42,557 of interest expense related to amortization of the discounts on the convertible notes payable entered into in May 2004.

As a result of the factors discussed above, the net losses for the six-month period ended June 30, 2004 and 2003 were $1,949,434 and $1,521,204, respectively.

As of June 30, 2004 we had $748,356 of cash on hand, negative working capital of $477,674, and approximately $2.3 million in current liabilities.

In May 2004, the Company entered into senior convertible debt agreements with certain investors that provides up to $2,000,000 in financing through the issuance of convertible notes payable (the "Notes"). These Notes do not bear interest and are convertible into shares of the Company’s common stock. These Notes mature three years from the date of issuance. Upon closing of the Notes, the Company received $1,000,000 in cash and $1,000,000 of the proceeds received in this financing have been placed in an escrow account with American Stock Transfer Company (the “Escrow Agent”). The Company shall not have access to this escrowed amount until it has achieved positive EBITDA on a monthly basis. The Company is not required to access these funds. If the Company has not achieved positive EBITDA by March 31, 2005, the Escrow Agent shall release the escrowed amounts to the holders of the senior convertible debt on a pro rata basis.

We anticipate that the sale of our debt and equity securities will continue to represent the primary source of our liquidity until we are able to generate positive cash flow from operations. If we have to raise additional funding, we cannot guarantee that we will be able to raise the necessary capital or that, if we do so, it will be on favorable terms. We may have to sell equity at below market rates, and any future sales of our capital stock to finance our business plan will dilute our existing shareholders' ownership. Our continuation as a going concern depends on our ability to generate sufficient cash flow to meet our obligations on a timely basis, to obtain additional financing as may be required and ultimately to attain profitability. In light of our financial condition and operating losses, our auditors have included in their report on our audited consolidated financial statements an explanatory paragraph which expresses substantial doubt about our ability to continue as a going concern.

Through the end of 2003, we had entered into settlement agreements or arrangements with several of our vendors under which such vendors have agreed to our payment of less than the amounts due, the extension of payment terms by between 9-36 months and/or the satisfaction of the amounts due through a combination of cash and stock. As of the date of this filing, we have been able to make all of the required payments established under settlement agreements previously arranged with certain vendors. We continue to communicate with our vendors to keep them informed of our situation and discuss payment arrangements amiable to both parties under the current circumstances. Additionally, as of June 30, 2004, we had approximately $1.4 million in accounts payable, of which approximately $0.7 million were greater than 90 days old.

As of the date of this report, we are a party to one unsettled lawsuit, whereby the claimant has sued us for non-payment of services provided to the Company. The aggregate value of this claim is $276,374, which is included in accounts payable. Summus has disputed the total amount claimed and is in the process of attempting to negotiate a settlement with the creditor.

The success and growth of our business is dependent in large part on our ability to partner and develop relationships within the wireless industry. In order for us to execute on our business plan, we anticipate that it will require approximately $1.0 to $2.0 million in working capital within the next 12 months to achieve positive cash flow, bring additional applications to market and continue the rollout of our operations.

Subject to our liquidity constraints (including our need to dedicate cash flow to meet our obligations on a timely basis), we intend to invest a larger portion of our working capital on:

Cash Flow used in Operating Activities. Net cash used in operating activities was $2,077,058 in the six-month period ended June 30, 2004, compared to $2,077,058 in the corresponding period of the prior year. The increase in net cash used in operating activities was primarily due to additional payments made to reduce accrued salaries and accounts payable for outstanding vendor obligations during the six-month period ended June 30, 2004. In addition, the Company restructured its organization in February 2004 as part of its focus to reduce future operating expenses and focus on revenue generation. During the six-month period ended June 30, 2003, the Company was deferring payment of certain accounts payable and payroll obligations in efforts to conserve cash while raising the Series C Preferred funding. During the six-month period ended June 30, 2004, the Company was not deferring these payments.

Cash Flow provided by Investing Activities. Net cash used in investing activities was $31,688 in the six-month period ended June 30, 2004, representing computer equipment purchases. No cash was used in investing activities in the six-month period ended June 30, 2003.

Cash Flow provided by (used in) Financing Activities. Net cash provided by financing activities of $937,237 in the six-month period ended June 30, 2004 related to:

Net cash provided by financing activities of $2,051,068 in the six-month period ended June 30, 2003 related to:

At June 30, 2004, we did not have any material commitments for capital expenses. Our principal commitments consisted of obligations under capital and operating leases and notes payable.

The following table summarizes our contractual obligations at June 30, 2004 and the effect these obligations are expected to have on our liquidity and cash flows in future periods.


			Operating		Convertible		Notes		Purchase
	Total		Leases		Notes Payable		Payable		Obligations
Six months ended December 31, 2004	$	417,859	$	126,191	$	-	$	200,668	$	91,000
Year ending December 31, 2005		502,703		252,851		-		221,852		28,000
Year ending December 31, 2006		303,269		200,682		-		102,587		-
Year ending December 31, 2007		1,000,000		-		1,000,000		-		-
Total contractual obligations	$	2,223,831	$	579,724	$	1,000,000	$	525,107	$	119,000

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities", (the "Interpretation") which addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003. The Interpretation becomes effective for entities created before February 1, 2003 at the beginning of the first interim period ending after March 31, 2004. The adoption of the provisions of the Interpretation did not have a material impact on the Company's financial statements.

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses. We have identified the following critical accounting policies that affect the more significant estimates and judgments used in the preparation of our financial statements. On an ongoing basis, we evaluate our estimates, including those related to the matters described below. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions.

Commencing during the second quarter of 2002, our resources were dedicated to the development of solutions for the mobile and wireless markets. Revenues earned from wireless applications are recognized upon delivery and acceptance by the end-user either as a one-time purchase or a monthly subscription. For content delivery partner arrangements, whereby the Company remits a portion of the revenues earned through the sale of the Company’s applications, revenue is recorded on a gross basis in accordance with EITF 99-19. The Company recognizes the cost of revenue share payments to the content providers as a cost of revenues. Wireless applications and contracts cost of revenues includes all third-party hosting, testing and/or carrier distribution fees. These costs are incurred on a monthly basis and are primarily fixed in nature regardless of the revenue generated by the related applications.

There were no costs related to the wireless license fee revenue generated during the six months ended June 30, 2004 and 2003 as the license fee revenue related to technology that had been previously developed by the Company, and there were no costs for installation, delivery or customization, or other related costs.

We derive certain revenues primarily from research and development contracts for governmental agencies and the commercial licensing of our technology. We recognize revenue on these contracts at the time services are rendered based upon the terms of individual contracts. Regarding the commercial licensing of our technology, we follow the provisions of AICPA Statement of Position 97-2, “Software Revenue Recognition”, as amended by AICPA Statement of Position 98-9 “Modification of SOP No. 97-2 Software Revenue Recognition with Respect to Certain Transactions.” Revenue from software license fees is generally recognized upon delivery provided that a contract has been executed, the vendor fee is fixed or determinable, no significant vendor obligations or uncertainties surrounding customer acceptance remain, and collection of the resulting receivable is deemed probable.

We have utilized our equity securities, including unregistered common stock and options/warrants to purchase unregistered common stock, to pay for services and to settle obligations owed to or claimed by creditors. The issuance of equity instruments as payment for services rendered to Summus results in the recording of non-cash compensation or consulting expense as the services are performed. We utilize the Black-Scholes option-pricing model to determine the value of options or warrants issued as payment for services. Underlying the Black-Scholes option-pricing model are several assumptions that are evaluated by management and include: (1) a dividend yield; (2) a common stock volatility factor; (3) the risk-free interest rate; and (4) the expected life of the option or warrant. Management evaluates each of these assumptions on a periodic basis in order to determine the value of the equity instruments used as payment for services as well as to record the associated expense. As conditions change, our evaluation of the assumptions underlying the Black-Scholes option-pricing model may change resulting in differing values of equity instruments issued for services between reporting periods.

We do not use any derivative financial instruments for hedging, speculative or trading purposes. Our exposure to market risk is currently immaterial.

Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, there were no significant changes in the Company's internal controls or in other factors that could significantly affect the disclosure controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

During the three-month period ended June 30, 2004, the Company issued an aggregate of 20,664,514 shares of its common stock to 19 persons and entities. These securities were not registered under the Securities Act of 1933. Except as noted below, the securities described below were issued in transactions deemed to be exempt from registration under Section 4(2) of the Securities Act and Rule 506, as promulgated pursuant to the Securities Act of 1933 as transactions by an issuer not involving any public offering. All of such securities are deemed to be "restricted securities" as defined in Rule 144(a)(3) under the Securities Act. No commissions were paid in connection with any of the issuances.

From April 1, 2004 to June 30, 2004, the Company issued an aggregate of 431,034 shares of unregistered common stock to 1 accredited investor, who is unaffiliated with the Company, for aggregate proceeds of $20,086.

In May 2004, holders of Series C preferred stock converted 1,250 shares of Series C preferred stock into 5,000,000 shares of Summus, Inc. common stock.

In May 2004, a holder of Series E preferred stock converted 80 shares of Series E preferred stock into 400,000 shares of Summus, Inc. common stock.

In May 2004, the Company issued an aggregate of 14,286,000 shares of unregistered common stock to 6 accredited investors in conjunction with the convertible notes payable financing.

In May 2004, Summus issued 300,000 shares of restricted common stock to Phil Hellmuth Productions LLC in connection with a marketing agreement.

In June 2004, Summus issued 647,480 shares of unregistered common stock to employees in lieu of accrued payroll.

On July 28, 2004, Summus entered into employment agreements with each of Gary E. Ban, Andrew L. Fox and Donald T. Locke. All defined terms used in this description of these employment agreements shall have the meanings as set forth in the agreements, copies of which are attached as exhibits to this quarterly report. The employment agreements name Mr. Ban as Chief Executive Officer; Mr. Fox as Executive Vice-President of Business Development and Sales; and Mr. Locke as Chief Financial Officer and General Counsel. The current annual base salaries for each of these officers is as follows:

Under the terms of each of the employment agreements, the Board of Directors will, on an annual basis, review each executive’s base salary in light of the base salaries paid to other executives of Summus and each executive’s performance. It may, in its discretion, increase the executive’s annual base salary by an amount deemed appropriate by the Board.

Under the terms of the agreements of Messrs. Ban and Locke, their annual base salaries shall also automatically be increased to 1.5 times their initial base salary once Summus achieves a fiscal year gross revenue of $10,000,000 and to 2.0 times their initial annual base salary once Summus achieves a fiscal year gross revenue of $20,000,000 and it has net income for each such fiscal year period. Under the terms of Mr. Fox’s agreement, his annual base salary shall automatically be increased to $140,000 once Summus achieves positive cash flow for a fiscal quarter.

In addition to the annual base salary, the Board, in its discretion, may pay each executive a bonus commensurate with other bonuses paid to employees of Summus and take into account the total compensation paid to executives of other companies which would be competitive for the executive’s services. Messrs. Ban and Locke shall receive a bonus of 100% of their annual base salary upon the achievement of Summus’ annual objectives as set by the Board of Directors.

Mr. Fox shall receive an annual bonus for the fiscal year ending December 31, 2004, equal to 15% of his annual base salary upon the achievement by Summus of its annual objectives as set by the Board of Directors. Mr. Fox shall also receive (i) a commission bonus of $10,000 for each transaction brought to Summus by him that Summus receives a gross profit of $250,000 from; (ii) a three percent (3%) commission bonus of the gross profit received by Summus from all transactions brought to the Company by him; and (iii) a one percent (1%) commission bonus of the gross profit received by the Company from all other transactions of Summus brought by personnel under Mr. Fox’s supervision. No funds under these bonus provisions of Mr. Fox’s agreement shall be payable to him until funds are received by Summus. Mr. Fox shall receive the commission bonuses set forth in items (ii) and (iii) of this paragraph for a period of eighteen (18) months from the launch of each such product related to these transactions arranged by him or by personnel under his supervision, as the case may be. After such eighteen (18) month period has expired, the commission bonuses payable to Mr. Fox for a particular transaction shall expire and no longer be payable to him.

Any bonus earned by Messrs. Ban, Fox and Locke pursuant to the provisions of their employment agreements shall not be paid to them unless and until Summus has achieved a cash flow positive position, which will be certified to the Board of Directors by an executive officer of the Company.

The Company shall grant to Messrs. Ban, Fox and Locke options to purchase 1,250,000, 1,000,000 and 1,000,000 shares of the Company’s common stock, respectively. These options shall vest in equal monthly installments over the thirty-six (36) month period beginning February 18, 2004. Messrs. Ban and Locke shall also receive options to purchase an additional 250,000 and 100,000 shares, respectively, of Summus’ common stock if it achieves cash flow positive at any time during the 2004 fiscal year. This grant of options, if achieved, shall be priced as of the date of the achievement of such milestone, as certified by an executive officer of the Company and shall be vested in full as of such date.

All options and/or warrants previously granted to each of Messrs. Ban, Fox and Locke in lieu of cash compensation forgone by them shall have a life of ten (10) years from the date of each such respective grant while the executive is employed by Summus or a life of three years from the date of termination of the executive’s employment.

The employment agreements with Messrs. Ban, Fox and Locke each have a term of one (1) year, which shall be automatically extended (without further action of Summus or the Board of Directors) each day for an additional day so that the remaining term shall continue to be one (1) year; provided that either party may at any time, by written notice to the other party, fix the term to a finite term of one (1) year, without automatic extension, commencing with the date of such notice.

Each executive’s employment under their respective Agreements shall be terminated immediately on his death and may be terminated by the Board:

If an executive’s employment is terminated by death, his estate or designated beneficiaries shall be entitled to receive:

If an executive’s employment is terminated by Summus for Permanent Disability, he shall be entitled to receive

If the executive’s employment is terminated by Summus without Cause prior to a Change of Control, the executive shall be entitled to receive:

If executive’s employment is terminated by the Company without Cause upon a Change of Control or by Executive for Good Reason at any time, executive shall be entitled to receive:

If executive’s employment is terminated by Summus for Cause or by the executive without Good Reason upon a Change of Control (other than as a result of executive’s Permanent Disability or death), the Company shall not have any other or further obligations to executive under this Agreement, except:

If executive’s employment is terminated by Summus for Cause at any time during the Term, Executive shall immediately forfeit any and all unvested stock rights, stock options and other such unvested incentives or awards previously granted to him by the Company and any Bonus earned by him but not paid pursuant to the Agreement.

Each of the employment agreements also contains customary covenants with respect to the non-disclosure of confidential or proprietary information regarding our business, prospects, finances, operations and trade secrets that have no finite duration.

Increase in Number of Options Available under Equity Compensation Plan

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Florida	7370, 5045	65-0185306
*(State or other Jurisdiction of*	*(Primary Standard*	*(I.R.S. Employer*
*Incorporation or Organization)*	*Industrial Classification Codes)*	*Identification Number)*


Series A convertible preferred stock and related dividends		167,084
Series C convertible preferred stock		240,000
Series D convertible preferred stock		12,625,000
Outstanding common stock warrants		44,647,550
Outstanding stock options		6,965,725
Possible future issuance under stock option plans		6,669,431
Convertible notes payable		14,286,000
Total		86,600,790

Name of Purchaser	Number of Shares
Palisades Equity Fund LP	431,034

Name of Purchaser	Number of Shares

Empire Capital Partners LP	3,571,500
Donald Hammett	1,428,600
The Focus Fund LP	2,142,900
Rodney D. Baber Jr.	357,150
JDS Capital LP	5,357,250
John A. Williams	1,428,600

Name of Purchaser	Number of Shares

Gary E. Ban	184,654
Do Hyun Chung	48,655
Lang Gao	32,702
Clark Jackson	35,526
Yuwei Liao	40,020
Donald T. Locke	184,616
Leonard Mygatt	85,134
Jiangying Zhou	36,173

	Six Months Ended June 30
			2004		2003
Cash used in operating activities		$	(2,345,838)	$	(2,077,058)
Cash provided by investing activities		$	(31,688)	$	-
Cash provided by financing activities		$	937,237	$	2,051,068

Exhibit 10.1		Employment Agreement by and between Gary E. Ban and Summus dated as of July 28, 2004
Exhibit 10.2		Employment Agreement by and between Andrew L. Fox and Summus dated as of July 28, 2004
Exhibit 10.3		Employment Agreement by and between Donald T. Locke and Summus dated as of July 28, 2004
Exhibit 10.4		Third Amended and Restated 2000 Equity Compensation Plan
Exhibit 31.1		Rule 13a-14(a)/15a-14(a) Certification of Gary E. Ban, Chief Executive Officer
Exhibit 31.2		Rule 13a-14(a)/15a-14(a) Certification of Donald T. Locke, Chief Financial Officer
Exhibit 32.1		Section 1350 Certification of Gary E. Ban, Chief Executive Officer
Exhibit 32.2		Section 1350 Certification of Donald T. Locke, Chief Financial Officer

(b)	Reports on Form 8-K:
	(1)	Current Report on Form 8-K filed on May 10, 2004 (Item 7)
	(2)	Current Report on Form 8-K filed on July 1, 2004 (Items 7 and 12)


Date: August 12, 2004	By: /s/ GARY E. BAN Gary E. Ban Chief Executive Officer
Date: August 12, 2004	By: /s/ DONALD T. LOCKE Donald T. Locke Chief Financial Officer