10-K 1 file001.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 2003 or [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to __________ COMMISSION FILE NUMBER 0-25552 DUALSTAR TECHNOLOGIES CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 13-3776834 --------------------------------- ------------------------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 11-30 47TH AVENUE, LONG ISLAND CITY, NEW YORK 11101 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (718) 340-6655 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- None None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.01 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]. No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Act). Yes [ ]. No [X]. The aggregate market value of the voting and non-voting common equity held by non-affiliates as of December 31, 2003 was approximately $1,206,231 based upon the closing price ($0.09) for such common equity on such date. The number of shares outstanding of the Registrant's Common Stock, as of December 31, 2003, was 16,501,568. The aggregate market value of the voting and non-voting common equity held by non-affiliates as of September 19, 2003 was approximately $4,288,822 based upon the closing price ($0.32) for such common equity on such date. The number of shares outstanding of the Registrant's Common Stock, as of September 19, 2003, was 16,501,568. PART I The statements contained in this Annual Report on Form 10-K, including the exhibits hereto, relating to operations of DualStar Technologies Corporation and its subsidiaries (DualStar or the Company) may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Please note that the words: "intends", "expects", "plans", "estimates", "projects", "believes", "anticipates" and similar expressions are intended to identify forward-looking statements. Actual results of the Company may differ materially from those in the forward-looking statements and may be affected by a number of factors including the Company's ability to continue operations, if Madeleine L.L.C. were to call its loan, the ability of the Company to raise and provide the capital resources to fund any operating losses that may occur through the operation of the construction business, the Company's ability to continue to obtain insurance and suretyship coverage, regulatory or legislative changes, the Company's dependence on key personnel, and the Company's ability to manage growth, in addition to those risk factors set forth below and in the section captioned Risk Factors and the assumptions, risks and uncertainties set forth below in the section captioned Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as other factors contained herein and in DualStar's other filings with the SEC. The Company can give no assurance that its plans, intentions, and expectations will be achieved and actual results could differ materially from forecasts and estimates. ITEM 1 - BUSINESS OVERVIEW DualStar Technologies Corporation ("DualStar" or the "Company"), through its wholly owned subsidiaries, operates construction-related businesses. The Company completed the discontinuance of its communications business in August 2003. The Company's communications segment's telephone service business was discontinued in August 2002. In April 2002, the Company sold communications network equipment for $0.4 million. The transaction resulted in a loss of $0.5 million. In August 2002, the Company sold certain access agreements on properties located in the Los Angeles area and the communications assets located in the properties for $0.4 million. The transaction resulted in a gain of $0.1 million. A $2.5 million charge for the impairment of certain remaining communications assets was recorded in fiscal year 2002. In January 2003, the Company sold the network infrastructure assets in conjunction with its exit out of the Internet service business for a nominal amount. The net book value of the assets sold was $0.6 million. In August 2003, the Company and its wholly owned subsidiary, ParaComm, Inc. ("ParaComm"), consummated the sale to an affiliate of its senior lender, Madeleine, LLC ("Madeleine"), of substantially all of ParaComm's assets, pursuant to an Asset Purchase Agreement dated as of July 2003 by and among the Company, ParaComm, Madeleine, and PCM Acquisitions Corp. Such assets related to ParaComm's satellite television and private cable services business in Florida. The consideration for the sale was the reduction of $3.2 million of the principal amount of a note of the Company to Madeleine, plus waiver of accrued and unpaid interest on such principal amount. Such reduction is subject to certain post-closing adjustments, which are not expected to be material. The Company incurred significant losses in the last several fiscal years, primarily in the communications segment. The Company completed the discontinuance of its communications business in August 2003. There can be no assurance that the construction segment will sustain profitability or positive cash flow from future operations. Given the current U.S. economic climate and market conditions and the financial condition of the Company, there is a substantial likelihood that the Company will be unable to raise additional funds on terms satisfactory to it, if at all, to fund any future operating losses that may occur through the operation of the construction business. On November 8, 2000, the Company consummated a $12.5 million senior secured loan transaction with Madeleine, an affiliate of Blackacre Capital Management L.L.C. ("Blackacre") (the "Madeleine Loan"). The Madeleine Loan, which is due and payable in November 2007, bears interest at a fixed rate of 11% per annum. The Madeleine Loan is a senior secured obligation of the Company and is guaranteed by certain subsidiaries of the Company, which have pledged substantially all of their respective assets to collateralize such guarantee. In connection with the Madeleine Loan, the Company issued warrants to purchase 3,125,000 shares of common stock at an exercise price of $4.00 per share, subject to antidilution provisions, expiring in December 2007, to an affiliate of Madeleine. A portion of the Madeleine Loan was used to retire existing indebtedness of the Company in the principal amount of $7 million owed to Madeleine and to pay expenses of obtaining the Madeleine Loan. The remaining proceeds were used for the Company's working capital purposes. No value was allocated to the warrants because the value was deemed immaterial. The outstanding principal and accrued interest with respect to the senior secured indebtedness owed by the Company to Madeleine totals approximately $13.1 million in September 2003. -1- The Company has not made payments to Madeleine pursuant to the Madeleine Loan agreement and is presently in default under the terms of the agreement relating to the outstanding debt to Madeleine. The de-listing of the Company's common shares from the Nasdaq National Market in June 2001 also created a default under the Madeleine Loan agreement. Madeleine may call the loan due and payable at any time, and, if it is not paid, foreclose on significant assets of the Company's subsidiaries that secure such loan. If the Company cannot raise additional funds for continuing operations or if Madeleine demands payment on its loan, the Company will likely be forced to cease operations. Accordingly, there is substantial doubt about the Company's ability to continue as a going concern. In June 2003, the Company entered into an agreement in principle with Madeleine, whereby Madeleine would exchange all of the outstanding principal and accrued interest of the Madeleine Loan for the Company's interests in certain real estate and certain private cable television assets and for common equity of the Company. The agreement in principle provides that the outstanding principal and accrued interest with respect to the senior secured indebtedness owed by the Company to Madeleine is to be exchanged for (a) certain private cable television systems and associated assets related to properties in Florida of ParaComm, Inc., a wholly-owned subsidiary of the Company, in consideration of a reduction of indebtedness equal to the fair market value of such assets (which transaction was consummated in August 2003); (b) certain real estate owned by the Company located in Long Island City, New York in consideration of the reduction of indebtedness equal to the fair market value of such real estate; and (c) issuance of approximately 7.6 million shares of the Company's common stock to Madeleine for the balance of the indebtedness. Such number of shares issuable to Madeleine represents all of the authorized and unissued shares of common stock of the Company less shares reserved for issuance pursuant to the exercise of outstanding stock options and warrants to purchase common stock that are not surrendered and cancelled. In connection with the transaction, certain members of management of the Company and an affiliate of Madeleine, respectively, are to surrender options and warrants to be cancelled. The agreement also provides for the issuance of new options to such management members at a subsequent date, subject to approval by the stockholders of the Company of an increase in the number of shares of authorized Common Stock. Upon such issuance to Madeleine, Madeleine will own approximately 32% of the total outstanding stock of the Company. The Company and Madeleine are presently negotiating definitive agreements for transactions (b) and (c), which are subject to approval by the Board of Directors of the Company. There can be no assurance that definitive agreements will be reached. DualStar is a Delaware corporation. Its principal place of business is located at 11-30 47th Avenue, Long Island City, New York 11101. DualStar's telephone number is (718) 340-6655. DualStar's common stock, par value $.01 per share (the Common Stock), trades on the Over-the-Counter Bulletin Board under the symbol DSTR. As of September 19, 2003, there were 16,501,568 shares of Common Stock issued and outstanding. BUSINESS AND OPERATING STRATEGIES DualStar Historical Background: DualStar was incorporated in the State of Delaware on June 17, 1994. The construction-related subsidiaries of DualStar consist of Centrifugal/Mechanical Associates, Inc. (CMA), formed in June 1995; High-Rise Electric, Inc. (High-Rise), formed in July 1995, Integrated Controls Enterprises, Inc. (ICE), formed in August 1996, and BMS Electric, Inc. (BMS), formed in July 2000. Property Control, Inc. (PCI) was formed in June 1995. The communications-related subsidiaries of DualStar consist of OnTera, Inc. (OnTera) (formerly known as DualStar Communications, Inc.), formed in February 1996, and ParaComm, Inc. (ParaComm), acquired by DualStar in May 2000. DualStar wholly owns each subsidiary. As described above (see Overview), certain assets of ParaComm were sold in August 2003. The Company historically has engaged in two business segments: construction and communications. The Company completed the discontinuance of its communications business in August 2003. CONSTRUCTION BUSINESS AND OPERATING STRATEGIES. Overview. High-Rise designs and installs sophisticated electrical systems for newly constructed residential and commercial high-rise buildings. CMA engages in mechanical contracting services, i.e. heating, ventilation and air conditioning (HVAC) services. High-Rise's and CMA's engagements are generally performed under fixed price long-term contracts undertaken with general contractors, with the lengths of such long-term contracts varying, but typically ranging from one to two years. ICE supplies, installs and services facility management, energy management, building automation, and commercial temperature control systems. In general, ICE acts as a subcontractor to mechanical subcontractors, including those of the Company. ICE also -2- works directly for real property owners and general contractors. BMS installs and services electrical systems, concentrating on low-voltage work in the areas of building management systems and controls, and fire and security, mostly in new construction. PCI owns or manages the Company's fixed asset or office peripheral needs, e.g., ownership and maintenance of real property. Major Customers. The Company's construction customers, which are concentrated in the New York Metropolitan area, include various general contractors, real estate developers, hotels, governmental agencies, and subcontractors. For the year ended June 30, 2003, revenue from two customers (Bovis Lend Lease, Inc. (formerly Lehrer McGovern Bovis, Inc.), and HRH Construction Corporation) amounted to approximately 37% and 17% of the Company's total revenues, respectively. For the year ended June 30, 2002, revenue from one customer (Bovis Lend Lease, Inc. (formerly Lehrer McGovern Bovis, Inc.)) amounted to approximately 64% of the Company's total revenues. For the year ended June 30, 2001, revenue from two customers (Bovis Lend Lease, Inc. and Rockrose Construction Corp.) amounted to approximately 60% and 15% of the Company's total revenues, respectively. In addition, as of June 30, 2003, contract and retainage receivables from Bovis Lend Lease, Inc. and HRH Construction Corporation amounted to approximately 15% and 28% of the Company's total contract and retainage receivables, respectively. As of June 30, 2002 and 2001, contract and retainage receivables from Bovis Lend Lease, Inc. amounted to approximately 52% and 58% of the Company's total contract and retainage receivables, respectively. In addition, for the fiscal years ended June 30, 2002 and 2001, approximately 0.2% and 2.0% of the Company's total revenues, respectively, were derived from HRH Construction Corp. DualStar's President and Chief Executive Officer is also the Chairman of HRH Construction Corp. HRH Construction Corp. is an affiliate of Blackacre. Manufacturing. The Company's production facilities are capable of fabricating and assembling mechanical and electrical systems and subsystems. The Company maintains a test and inspection program to ensure that such systems meet customer requirements for performance and quality workmanship. In addition, pipe fabrication and machine shops allow for the manufacture of both prototype and production hardware. To support its internal operation and to extend its overall capacity, the Company purchases a wide variety of components, assemblies and services from outside manufacturers, distributors and service organizations. Marketing and Sales. For High-Rise and CMA, the Company's marketing strategy has focused on cultivating and maintaining long-term relationships with developers, general contractors, electrical and mechanical engineers and architects. The relatively high dollar value of each contract (generally ranging from $2 million to $15 million), combined with the technically complex nature of the projects covered by the Company's contracts result in an in-depth and complex purchase decision process for each contract. The selling cycle for the Company's contracts may last approximately 90 days. In general, sales activities are handled by senior management or direct sales personnel. Due to the depth of analysis involved in the customer's purchase decision, management must often maintain frequent interaction with the buyer throughout the selling process. ICE solicits property owners, general contractors, and mechanical contractors in addition to serving CMA. BMS sells most of its services to ICE. For ICE and BMS, some work is performed for unaffiliated entities such as mechanical contractors, general contractors and owners directly. Sources of Supply and Backlog. The raw materials, such as pipe, fittings and valves, and electrical components used in the development and manufacture of the Company's mechanical and electrical systems and subsystems are generally available from domestic suppliers at competitive spot prices; fabrication of certain major components may be subcontracted for on an as-needed basis. The Company does not have any long-term contracts for its raw materials. The Company has not experienced any significant difficulty in obtaining adequate supplies to perform under its contracts. At June 30, 2003, the backlog of the Company's construction business was approximately $38 million and approximately $38 million at June 30, 2002. The Company believes that most of its backlog at June 30, 2003 will be completed prior to December 31, 2004, but no assurances can be given with respect thereto. Backlog represents the total value of unrealized revenue on all contracts awarded on or before a specified date. The Company does not believe that its backlog at any particular time is necessarily indicative of its future business or performance. Competition. The electrical, mechanical, electronic, control and environmental businesses are characterized by intense and substantial competition. The Company's construction competitors range from small firms to large multinational companies. Competition for private sector work generally is based on several factors, including quality of work, reputation, price and marketing approach. The Company believes that it is established in the electrical and mechanical contracting industries, and will be able to maintain a strong competitive position in its areas of expertise by adhering to its basic philosophy of delivering high-quality work in a timely fashion within client budget constraints. In both the private and public sectors, the Company, acting either as a prime contractor or as a subcontractor, occasionally joins with other firms to form a team that competes for contracts by submitting a jointly prepared proposal. Because a team of firms will usually -3- offer a stronger set of qualifications than any single firm, teaming arrangements are generally advantageous to the Company's success. These teaming relationships, however, generate risk to the Company in the event that a non-DualStar team member experiences financial difficulty or is otherwise unable to fulfill its responsibilities on the project. The Company maintains a large network of business relationships with other companies and has drawn repeatedly upon these relationships to form winning teams. Moreover, each DualStar subsidiary may market its services independently, with the potential to offer in concert with other DualStar subsidiaries, comprehensive and complementary services on multi-million dollar construction projects. The Company's construction contracts with public sector clients are often awarded through a competitive bidding process that places no limit on the number or type of bidders that may compete. The process usually begins with a government Request for Proposal (RFP) that delineates the size and scope of the proposed contract. Proposals submitted by the Company and others are evaluated by the government on the basis of technical merit, response to mandatory solicitation provisions, corporate and personnel qualifications and experience, management capabilities and cost. While each RFP sets out specific criteria for the choice of a successful offeror, RFP selection criteria in the government services market often tend to weigh the technical merit of the proposal more heavily than cost. The Company believes that its experience and ongoing work strengthen its technical qualifications and thereby enhance its ability to compete successfully for future government work. However, the Company can make no assurances that it may be able to continue to successfully bid and compete in its marketplace. COMMUNICATIONS BUSINESS AND OPERATING STRATEGY. Overview. The Company's communications businesses, the discontinuance of which were completed in August 2003, were conducted through OnTera and ParaComm. OnTera was originally launched as a retail provider of integrated communications services to the MDU market in the metropolitan New York area. OnTera was a Competitive Local Exchange Carrier (CLEC), an Internet Service Provider (ISP), and a provider of subscription television services. ParaComm also provided subscription television services. OnTera and Paracom, while operating as subsidiaries of the Company, faced substantial competition for the services provided to residential consumers in the metropolitan New York area. OnTera's main competitors in the metropolitan New York area included (1) Internet service providers (ISPs) and cable companies providing high-speed Internet and data access services, such as Verizon Avenue, AOL, AT&T and RCN; and (2) cable franchise operators, such as TimeWarner. OnTera attempted to differentiate itself in this highly competitive environment by improving the MDU's communications infrastructure, providing responsive support for property owners and residents, and by providing residents a single source for a variety of services. Many of OnTera's competitors were well financed, had significant market share and significantly more resources than were available to OnTera. OnTera believed that the MDU market was under-served by the then current communications service providers, with a majority of MDUs being restricted to (i) cable television service from franchise cable operators, and (ii) possible high-speed Internet access service provided by second- and third-tier carriers and cable overbuilders. The Company's communications segment discontinued its telephone business in New York City and, in April 2002, informed their telephone customers and the FCC that telephone services would be phased out starting June 2002. In fiscal 2003, the Company informed the FCC that all telephone services ceased. As part of a June 2003 agreement in principle, the Company and ParaComm sold substantially all of ParaComm's assets to an affiliate of Madeleine. See "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations." PATENT, TRADEMARK, SERVICE MARK, COPYRIGHT AND PROPRIETARY RIGHTS. Seven service marks, Global Hiring Hall, CyberBuilding, CyberBuilders, CyberCierge, DualStar Communications, DualStar and DualStar Technologies, were registered with the U.S. Patent & Trademark Office (USPTO) from 1997 through 1999. Three trademarks, CyberBuilding, CyberView and Building Area Network, were registered with the USPTO in 1998 and 1999. The Company may in the future file patent or copyright applications, or additional trademark or service mark applications, relating to certain of the Company's mechanical, electrical, electronic, control, environmental, information technology, security, entertainment and communications products and services. Nevertheless, if patents are issued, or trademarks, service marks or copyrights are registered, there can be no assurance as to the extent of the protection that will be granted to the Company as a result of having such patents, trademarks, service marks or copyrights, or that the Company will be able to afford the expenses of any complex litigation which may be necessary to enforce its proprietary rights. Failure of any future or existing patents, trademark, service mark and copyright applications may have a material adverse impact on the Company's business since the Company may not otherwise be able to protect the proprietary or trade secret aspects of its business and operations, thereby diluting the Company's ability to compete in the marketplace. Except as may be required by the filing of patent, trademark, service mark and copyright applications, the Company will attempt to keep all other proprietary information secret and to take such actions as may be necessary to insure the results of its -4- development activities are not disclosed and are protected under the common law concerning trade secrets. Such steps may include the execution of nondisclosure agreements by key Company personnel and may also include the imposition of restrictive agreements on purchasers of the Company's products and services. There is no assurance that the execution of such agreements will be effective to protect the Company, that the Company will be able to enforce the provisions of such nondisclosure agreements or that technology and other information acquired by the Company pursuant to its development activities will be deemed to constitute trade secrets by any court of competent jurisdiction. CONSTRUCTION BUSINESS REGULATION. Substantial environmental laws have been enacted in the United States and in the New York Metropolitan area in response to public concern over the environment. These federal, state and local laws and the implementing regulations affect nearly every customer of the Company. Efforts to comply with the requirements of these laws may increase demand for the Company's construction services, and the Company believes there will be a trend toward increasing regulation and government enforcement in the environmental area. The necessity that the Company's clients comply with these laws and implementing regulations subjects the Company to substantial liability. The Company believes that, to the best of its information and knowledge, it is in compliance with all material federal, state and local laws and regulations governing its construction operations. COMMUNICATIONS BUSINESSES REGULATION Overview. Both OnTera and ParaComm's services, while operated as subsidiaries of the Company, were subject to government regulation at various levels. (See "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations" relating to the Company's completion of the discontinuance of its communications business, which was completed in August 2003.) Federal and state regulation affected OnTera's access to inside wiring in the MDUs that made up its primary target market. OnTera's access to inside wiring was potentially affected by (1) definitions of the point dividing inside wiring ownership between the traditional telephone company and the property owner or (2) regulatory decisions regulating the telephone company's unbundled network elements (UNEs) (i.e., various portions of a traditional telephone company's network that a CLEC needs to build or fill in missing parts of its facilities network). The jurisdictional reach of the various federal, state, and local authorities is subject to ongoing controversy and judicial review. The outcome of such reviews cannot be predicted. Federal Regulation. OnTera was required to comply with the requirements of the Communications Act of 1934, as amended by the 1996 Telecommunications Act, as well as applicable FCC regulations. The applicable FCC regulations impose on the traditional telephone companies various requirements that are intended to foster competition by entrants such as OnTera. Local Regulation. To the extent OnTera provided regulated intrastate services or decided to otherwise submit itself to the jurisdiction of the relevant state telecommunications regulatory commission, OnTera may have been subject to such jurisdiction. There are many state commission proceedings underway to determine the rates, charges and terms and conditions for UNEs and, in some cases, owner control of inside wiring. Any decisions to increase the cost of UNEs or restrict a property owner's ability to make inside wiring available to OnTera could have negatively affected OnTera's business. The effect of state regulation on OnTera's business varied from state to state. For instance, states (or municipalities) sometimes accord to the franchised cable companies (that are OnTera's competitors not only for its television services but also potentially for data, including Internet Access) rights of access to MDUs, which could have reduced OnTera's penetration rates and may adversely affect its business. Like OnTera, ParaComm's business was potentially affected by the state or municipal actions granting rights of access to franchised cable companies and by FCC and state regulation respecting inside wiring. Additionally, federal legislation that confers rights on tenants to purchase and operate their own satellite signal reception equipment could have resulted in tenant bypass of ParaComm's services and could, in some cases, adversely affected penetration rates. The Company's communications segment discontinued its telephone business in New York City and, in April 2002, informed their telephone customers and the FCC that telephone services would be phased out starting June 2002. In fiscal 2003, the Company informed the FCC that all telephone services ceased. The foregoing does not purport to describe all present and proposed federal, state and local regulations and legislation affecting the telecommunications industry or that could have affected OnTera or ParaComm. Judicial review of existing regulations, legislative hearings, legislation, and administrative proposals could negatively influence U.S. communications companies' operations, including those of OnTera. OnTera and ParaComm were unable to predict the impact, if any, that future regulation or regulatory changes may have had on their respective businesses and were unable to offer assurances that any such future regulation or regulatory changes would not harm their respective businesses. -5- EMPLOYEES. As of June 30, 2003, the Company employed 282 full-time employees, of which 17 are engaged in administration and finance. Of the remaining full-time employees, 259 are employed by the various construction subsidiaries of the Company, with 258 engaged in manufacturing, engineering and production and 1 in marketing and sales. The remaining 14 employees were engaged in the communications business of the Company, which was discontinued in August 2003. Many of the Company's employees have overlapping responsibilities in these job descriptions. The Company believes that its future success will depend, in part, upon its continued ability to recruit and retain qualified management and technical personnel. Competition for qualified personnel is significant, particularly in the geographic areas in which DualStar and its subsidiaries are located. The Company depends upon its ability to retain the services of key employees. The loss of services of one or more key employees could have a material adverse impact on the Company. As of June 30, 2003, the Company had 242 employees that were represented by labor organizations. The Company has never experienced a work stoppage. Management of the Company believes that it has a healthy relationship with its employees. -6- RISK FACTORS AN INVESTMENT IN THE COMPANY'S SECURITIES INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY INVESTORS WHO CAN AFFORD THE RISK OF LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE INVESTING IN THE COMPANY'S SECURITIES. SEE ALSO NOTE ON FORWARD-LOOKING STATEMENTS. THE COMPANY MAY BE UNABLE TO CONTINUE OPERATIONS The Company incurred significant losses in the last several fiscal years, primarily in the communications segment. The Company completed the discontinuance of its communications business in August 2003. There can be no assurance that the construction segment will sustain profitability or positive cash flow from future operations. Given the current U.S. economic climate and market conditions and the financial condition of the Company, there is a substantial likelihood that the Company will be unable to raise additional funds on terms satisfactory to it, if at all, to fund any future operating losses that may occur through the operation of the construction business. The outstanding principal and accrued interest with respect to the Madeleine Loan totals approximately $13.1 million in September 2003. The Company is in default under the terms of the Madeleine Loan agreement. Madeleine may call the loan due and payable at any time, and, if it is not paid, foreclose on significant assets of the Company's subsidiaries that secure such loan. If the Company cannot raise additional funds for continuing operations or if Madeleine demands payment on its loan, the Company will likely be forced to cease operations. Accordingly, there is substantial doubt about the Company's ability to continue as a going concern. In June 2003, the Company entered into an agreement in principle with Madeleine, whereby Madeleine would exchange all of the outstanding principal and accrued interest of the Madeleine Loan for the Company's interests in certain real estate and certain private cable television assets and for common equity of the Company. The agreement in principle provides that the outstanding principal and accrued interest with respect to the Madeleine Loan is to be exchanged for (a) certain private cable television systems and associated assets related to properties in Florida of ParaComm in consideration of a reduction of indebtedness equal to the fair market value of such assets (which transaction was consummated in August 2003); (b) certain real estate owned by the Company located in Long Island City, New York in consideration of the reduction of indebtedness equal to the fair market value of such real estate; and (c) issuance of approximately 7.6 million shares of the Company's common stock to Madeleine for the balance of the indebtedness. Such number of shares issuable to Madeleine represents all of the authorized and unissued shares of common stock of the Company less shares reserved for issuance pursuant to the exercise of outstanding stock options and warrants to purchase common stock that are not surrendered and cancelled. In connection with the transaction, certain members of management of the Company and an affiliate of Madeleine, respectively, are to surrender options and warrants to be cancelled. The agreement also provides for the issuance of new options to such management members at a subsequent date, subject to approval by the stockholders of the Company of an increase in the number of shares of authorized Common Stock. Upon such issuance to Madeleine, Madeleine will own approximately 32% of the total outstanding stock of the Company. The Company and Madeleine are presently negotiating definitive agreements for transactions (b) and (c), which are subject to approval by the Board of Directors of the Company. There can be no assurance that definitive agreements will be reached. As part of the June 2003 agreement in principle, the Company and ParaComm consummated the sale to an affiliate of Madeleine of substantially all of ParaComm's satellite television and private cable services business assets in Florida, pursuant to an Asset Purchase Agreement dated as of July 2003 by and among the Company, ParaComm, Madeleine, and PCM Acquisitions Corp. The consideration for the sale was the reduction of $3.2 million of the principal amount of the Madeleine Loan, plus waiver of accrued and unpaid interest on the Madeleine Loan. Such reduction is subject to certain post-closing adjustments, which are not expected to be material. THE COMPANY IS IN DEFAULT ON THE MADELEINE LOAN The outstanding principal and accrued interest with respect to the Madeleine Loan totals approximately $13.1 million in September 2003. The Company is in default under the terms of the Madeleine Loan agreement. Madeleine may call the loan due and payable at any time, and, if it is not paid, foreclose on significant assets of the Company's subsidiaries that secure such loan. If the Company cannot raise additional funds for continuing operations or if Madeleine demands payment on its loan, the Company will likely be forced to cease operations. Accordingly, there is substantial doubt about the Company's ability to continue as a going concern. -7- OPERATING LOSSES AND CAPITAL REQUIREMENTS The Company incurred significant losses in fiscal years 2003 and 2002 primarily in the communications segment. The Company completed the discontinuance of its communications business in August 2003. There can be no assurance either that the construction segment will sustain profitability or positive cash flow from future operations. Given the current U.S. economic climate and market conditions and the financial condition of the Company, there is a substantial likelihood that the Company will be unable to raise additional funds on terms satisfactory to it, if at all, to fund any future operating losses that may occur through the operation of the construction business. NO ASSURANCE OF FUTURE PROFITABILITY OR PAYMENT OF DIVIDENDS No assurance can be given that the future operations of the Company will be profitable. Should the future operations of the Company be profitable, it is likely that the Company would retain much or all of its earnings in order to finance future growth and expansion. As a result, the Company does not presently intend to pay dividends and it is not likely that any dividends will be paid in the foreseeable future. SUBSTANTIAL COMPETITION Electrical and mechanical contracting, which represent the Company's core businesses, are characterized by intense and substantial competition. As a result of the competition in those areas, the bidding process whereby the Company seeks to obtain new contracts has also become more competitive and the profit margins capable of being achieved through such contracts fluctuate based upon competitive and economic conditions. There can be no assurance that the Company will continue to obtain new contracts with satisfactory profit margins. SURETY BONDS Due to the downturn affecting corporate America, the bonding industry has come under increased pressure and claims, and in general, the bonding market has tightened. Consequently, it has become more difficult for the Company to secure surety bonds due to the Company's financial position and overall market conditions. The Company is currently considering ways to improve its ability to obtain bonding. There can be no assurance that the Company will be able to obtain bonding or, if so, at a reasonable cost. If the Company is unable to obtain surety bonds as needed, this may have a material adverse effect on the Company. SOCIAL, POLITICAL AND ECONOMIC RISKS AFFECTING OPERATIONS Acts of terrorism have caused major instability in the U.S. and other financial markets. There could be further acts of terrorism in the United States or elsewhere that could have a similar impact. Leaders of the U.S. government have announced their intention to actively pursue and take military and other action against those behind the September 11, 2001 attacks and to initiate broader action against national and global terrorism. Armed hostilities or further acts of terrorism would cause further instability in financial markets and could directly impact the Company's financial condition and results of operations. Furthermore, such terrorist attacks and future developments may result in reduced demand from the Company's customers for its services. These developments will subject the Company's operations to increased risks and, depending on their magnitude, could have a material adverse effect on the Company's business. There can be no assurance as to the future effect of changes in social, political and economic conditions on the Company's business or financial condition. DEPENDENCE ON MAJOR CUSTOMERS The Company's construction customers, which are concentrated in the New York Metropolitan area, include various general contractors, real estate developers, hotels, governmental agencies, and subcontractors. For the year ended June 30, 2003, revenue from two customers (Bovis Lend Lease, Inc. (formerly Lehrer McGovern Bovis, Inc.), and HRH Construction Corporation) amounted to approximately 37% and 17% of the Company's total revenues, respectively. For the year ended June 30, 2002, revenue from one customer (Bovis Lend Lease, Inc. (formerly Lehrer McGovern Bovis, Inc.)) amounted to approximately 64% of the Company's total revenues. For the year ended June 30, 2001, revenue from two customers (Bovis Lend Lease, Inc. and Rockrose Construction Corp.) amounted to approximately 60% and 15% of the Company's total revenues, respectively. In addition, as of June 30, 2003, contract and retainage receivables from Bovis Lend Lease, Inc. and HRH Construction Corporation amounted to approximately 15% and 28% of the Company's total contract and retainage receivables, respectively. As of June 30, 2002 and 2001, contract and retainage receivables from Bovis Lend Lease, Inc. amounted to approximately 52% and 58% of the Company's total contract and retainage receivables, respectively. In addition, for the fiscal years ended June 30, 2002 and 2001, approximately 0.2% and 2.0% of the Company's total revenues, respectively, were derived from HRH Construction Corp. DualStar's President and Chief Executive Officer -8- is also the Chairman of HRH Construction Corp. HRH Construction Corp. is an affiliate of Blackacre. The dependence on major customers subjects the Company to significant financial risks in the operation of its business should a major customer terminate, for any reason, its business relationship with the Company. In such event, the financial condition of the Company may be adversely affected and the Company may be required to seek additional financing. DEPENDENCE ON MANAGEMENT The Company's business is dependent upon a small number of key executives and, in some instances, the licenses they hold. Each of the loss of the services of key executives, the loss of a license held by one of them or the inability of the Company to attract additional qualified personnel could have a material adverse effect on the Company. Some employment agreements of key executives have expired and renewal discussions are ongoing. There is no assurance such agreements will be reached. See Item 11 - Executive Compensation, under the subcaption "Employment Agreements." POTENTIAL LIABILITY AND INSURANCE In general, the Company's operations involve electrical, mechanical and building control contracting of major residential, commercial and institutional buildings and facilities. The Company is exposed to a significant risk of liability for damage and personal injury. The Company maintains quality control programs in an attempt to reduce the risk of potential damage to persons and property and any associated potential liability. In addition, the Company maintains general liability insurance covering damage resulting from bodily injury or property damage to third parties. The policy, however, does not include coverage for comprehensive environmental impairment or professional liability, which may be caused by the Company's actions. The Company endeavors contractually to limit its potential liability to the amount and terms of its insurance policy and to be indemnified by its clients from potential liability to third parties. However, the Company is not always able to obtain such limitations on liability or indemnification, and such provisions, when obtained, may not adequately shelter the Company from liability. Consequently, a partially or completely uninsured claim, if successful and of sufficient magnitude, may have a material adverse effect on the Company and its financial condition. ENVIRONMENTAL RISK FACTORS Substantial environmental laws have been enacted in the United States and in the New York Metropolitan area in response to public concern over the environment. These federal, state and local laws and the implementing regulations affect nearly every customer of the Company. Efforts to comply with the requirements of these laws may increase demand for the Company's services, and the Company believes that there will be a trend toward increasing regulation and government enforcement in the environmental area. The necessity that the Company's clients comply with these laws and implementing regulations subjects the Company to substantial liability. The Company believes that, to the best of its information and knowledge, it is in compliance with all material federal, state and local laws and regulations governing its operations. ITEM 2 - PROPERTIES In August 1996, PCI acquired real property, including a building containing approximately 22,000 square feet of office and warehouse space, at 11-30 47th Avenue, Long Island City, New York 11101. The cost of the real property was $1.1 million, of which $0.9 million was financed by a mortgage loan. The five-year mortgage loan was refinanced on November 22, 1999, thereby increasing the loan balance to $1.75 million. In March 2003, the Company satisfied its mortgage obligation in the amount of $1.7 million. CMA leases, on a month-to-month basis, approximately 7,500 square feet of manufacturing space located at 88 Dobbin Street, Brooklyn, New York 11222. The Company believes that adequate office and warehouse space is available in the market in which it currently transacts its construction business and in the markets in which it intends to transact business. In June 2003, the Company entered into an agreement in principle with Madeleine, whereby Madeleine would exchange all of the outstanding principal and accrued interest of the Madeleine Loan for the Company's interests in certain real estate and certain private cable television assets and for common equity of the Company. As part of this agreement in principle, the Company and PCI may transfer to an affiliate of Madeleine the building located at 11-30 47th Avenue, Long Island City, NY in consideration of a reduction of indebtedness equal to the fair market value of such real estate. The Company and Madeleine are presently negotiating definitive agreements for such transaction, which is subject to approval by the Board of Directors of the Company. -9- The Company currently uses approximately 65% of its facilities' available capacity The Company could continue to operate at its current facilities, or could relocate after the consummation of the Madeleine agreement in principle. Total rental expense for the Company for recent periods is as follows: PERIOD EXPENSE ----------- ------------- Year ended June 30, 2003.......................$124,000 Year ended June 30, 2002.......................$440,000 ITEM 3 - LEGAL PROCEEDINGS (a) Until 1995, Centrifugal was a partner with DAK Electric Contracting Corp. ("DAK") in a joint venture that performed mechanical and electrical services for a general contractor on a construction project in Manhattan known as the Lincoln Square project. Centrifugal was responsible for the mechanical portion of the contract, and its co-venturer, DAK, was responsible for the electrical portion. In 1995, DAK became insolvent, thereby obligating Centrifugal to complete the work on this project. As a result, in fiscal 1996 the Company wrote off approximately $3.7 million with respect to accounts receivable, loans receivable, claims and other costs that the Company incurred on behalf of DAK in fulfillment of DAK's obligations under the contract on the Lincoln Square project. As of June 30, 1996, all of the known claims and liens of subcontractors of the joint venture were settled and discharged, and all of the vendor lawsuits which arose out of these claims were also settled with the exception of the following: The joint venture's bonding companies have claims over for indemnity against Centrifugal and under a guarantee agreement against the Company in the event that a judgment is rendered against the bonding companies in a suit brought by an employee benefit fund for DAK's employees' union seeking contributions to the fund which the fund claims were due but not paid by DAK. The complaint alleges several causes of action against several defendants in connection with several projects and seeks a total of approximately $450,000 in damages on all of these causes against the named defendants; however, only one of the several causes of action, which seeks an unspecified portion of the total damages demanded, relates to the Company. In February 2003, the Company was informed that the bonding company reached a settlement with the union on account of the claim for unpaid benefits on the Lincoln Square project in the amount of $270,000. The bonding company expressed its intent to pursue reimbursement for such settlement amount through the cross-claims alleged against the Company in such action. Additionally, the Company may be exposed to such legal fees and other expenses as the Company's bonding company may have incurred or will incur in connection with this claim. Centrifugal and the Company have asserted, among other defenses, that such contributions were not guaranteed under the terms of the joint venture's bonds. (b) In August 2001, OnTera signed a promissory note and security agreement with Nokia to finance the purchase of various network equipment totaling approximately $668,000. The note bears interest at a rate of 11% per annum and requires eighteen monthly installments effective April 1, 2001. The note is secured by the network equipment financed by the note. OnTera has not made monthly installments since June 2001, therefore the Company is in default of the agreement. As such, the remaining balance at March 31, 2003 of $564,370 is included in accrued expenses and other current liabilities. In August 2002, Nokia filed suit in the District Court of Dallas County, Texas, claiming damages of approximately $607,000 plus interest, costs and attorneys on the promissory note. (c) In 1999, ParaComm purchased from Golden Sky Systems (GSS) GSS's contract with DirecTV which authorized it to be a DirecTV Master Systems Operator (MSO). Along with the contract so purchased, ParaComm acquired a GSS contract with one of its System Operators, Cable America, Inc. In May, 2002 Cable America, Inc. filed suit in the Circuit Court of Cook County, Illinois against ParaComm, OnTera, DirecTV, GSS and Pegasus Communications Inc., which had subsequently acquired GSS. The suit claims damages for allegedly unpaid commissions in the claimed amount of $339,000 and also seeks an accounting. (d) In July 2002, plaintiff Harvey Wayne filed a verified shareholders' derivative complaint against directors and officers of the Company, various other entities and the Company as a nominal defendant, in the United States District Court for the Eastern District of New York. The complaint alleges breach of fiduciary duties and seeks to compel the Company to hold a shareholders' meeting for the election of directors. The complaint seeks injunctive relief and unspecified damages. Motions to dismiss have been filed by the Company and other defendants and are pending before the Court. -10- (e) In the ordinary course of business, the Company is involved in claims concerning personal injuries and property damage, all of which the Company refers to its insurance carriers. The Company believes that the claims are covered under its liability policies and that no loss to the Company is probable. No provision for such claims has been made in the accompanying financial statements. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the NASD Over-the-Counter (OTC) Bulletin Board under the symbol DSTR. . The following table sets forth, on a per share basis, the range of reported high and low bid quotations on the OTC Bulletin Board, as derived from publicly available sources on the Internet, for the fiscal years ended June 30, 2002 and June 30, 2003 and for the first quarter (through September 19, 2003) of the Company's fiscal year ending June 30, 2004. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions. Bid Quotations -------------- High Low ---- --- Fiscal 2002 ----------- First Quarter $0.37 $0.23 Second Quarter $0.33 $0.18 Third Quarter $0.27 $0.20 Fourth Quarter $0.26 $0.10 Fiscal 2003 ----------- First Quarter $0.28 $0.06 Second Quarter $0.18 $0.06 Third Quarter $0.12 $0.08 Fourth Quarter $0.65 $0.08 Fiscal 2004 ----------- First Quarter (through September 19, 2003) $0.41 $0.25 As of September 19, 2003, there were 127 record holders of the Company's Common Stock. The Company has not declared any dividends since its incorporation. The Company does not anticipate the declaration or payment of dividends in the foreseeable future. Future dividend policy will be subject to the discretion of the Board of Directors and will be contingent upon future earnings, the Company's financial condition, capital requirements, general business conditions and other factors. -11- ITEM 6 - SELECTED FINANCIAL DATA DUALSTAR TECHNOLOGIES CORPORATION SELECTED FINANCIAL DATA(1) (Dollars in thousands, except per share data)

(1) The Selected Financial Data represent the consolidated data for the years ended June 30, 2003, 2002, 2001, 2000 and 1999. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Financial Statements and notes thereto. See item 15 of this Annual Report on Form 10-K. GENERAL DualStar Technologies Corporation ("DualStar" or the "Company"), through its wholly owned subsidiaries, operates construction-related businesses. The Company completed the discontinuance of its communications business in August 2003. The Company's communications segment's telephone service business was discontinued in August 2002. In April 2002, the Company sold its communications network equipment for $0.4 million. The transaction resulted in a loss of $0.5 million. In August 2002, the Company sold certain access agreements on properties located in the Los Angeles area and the communications assets located in the properties for $0.4 million. The transaction resulted in a gain of $0.1 million. A $2.5 million charge for the impairment of certain remaining communications assets was recorded in fiscal year 2002. In January 2003, the Company sold the network infrastructure assets in conjunction with its exit out of the Internet service business for a nominal amount. The net book value of the assets sold was $0.6 million. -12- In August 2003, the Company and its wholly owned subsidiary, ParaComm, Inc. ("ParaComm"), consummated the sale to an affiliate of its senior lender, Madeleine, LLC ("Madeleine"), of substantially all of ParaComm's assets. Such assets related to ParaComm's satellite television and private cable services business in Florida. The consideration for the sale was the reduction of $3.2 million of the principal amount of a note of the Company to Madeleine, plus waiver of accrued and unpaid interest on such principal amount. Such reduction is subject to certain post-closing adjustments, which are not expected to be material. CAPITAL RESOURCES AND LIQUIDITY The Company incurred significant losses in the last several fiscal years, primarily in the communications segment. The Company completed the discontinuance of its communications business in August 2003. There can be no assurance that the construction segment will sustain profitability or positive cash flow from future operations. Given the current U.S. economic climate and market conditions and the financial condition of the Company, there is a substantial likelihood that the Company will be unable to raise additional funds on terms satisfactory to it, if at all, to fund any future operating losses that may occur through the operation of the construction business. On November 8, 2000, the Company consummated a $12.5 million senior secured loan transaction with Madeleine, an affiliate of Blackacre Capital Management L.L.C. ("Blackacre") (the "Madeleine Loan").The outstanding principal and accrued interest with respect to the senior secured indebtedness owed by the Company to Madeleine totals approximately $13.1 million in September 2003. The Company has not made payments to Madeleine pursuant to the Madeleine Loan agreement and is presently in default under the terms of the agreement relating to the outstanding debt to Madeleine. The de-listing of the Company's common shares from the Nasdaq National Market in June 2001 also created a default under the Madeleine Loan agreement. Madeleine may call the loan due and payable at any time, and, if it is not paid, foreclose on significant assets of the Company's subsidiaries that secure such loan. If the Company cannot raise additional funds for continuing operations or if Madeleine demands payment on its loan, the Company will likely be forced to cease operations. Accordingly, there is substantial doubt about the Company's ability to continue as a going concern. In June 2003, the Company entered into an agreement in principle with Madeleine, whereby Madeleine would exchange all of the outstanding principal and accrued interest of the Madeleine Loan for the Company's interests in certain real estate and certain private cable television assets and for common equity of the Company. The agreement in principle provides that the outstanding principal and accrued interest with respect to the Madeleine Loan is to be exchanged for (a) certain private cable television systems and associated assets related to properties in Florida of ParaComm, in consideration of a reduction of indebtedness equal to the fair market value of such assets (which transaction was consummated in August 2003); (b) certain real estate owned by the Company located in Long Island City, New York in consideration of the reduction of indebtedness equal to the fair market value of such real estate; and (c) issuance of approximately 7.6 million shares of the Company's common stock to Madeleine for the balance of the indebtedness. Such number of shares issuable to Madeleine represents all of the authorized and unissued shares of common stock of the Company less shares reserved for issuance pursuant to the exercise of outstanding stock options and warrants to purchase common stock that are not surrendered and cancelled. In connection with the transaction, certain members of management of the Company and an affiliate of Madeleine, respectively, are to surrender options and warrants to be cancelled. The agreement also provides for the issuance of new options to such management members at a subsequent date, subject to approval by the stockholders of the Company of an increase in the number of shares of authorized Common Stock. Upon such issuance to Madeleine, Madeleine will own approximately 32% of the total outstanding stock of the Company. The Company and Madeleine are presently negotiating definitive agreements for transactions (b) and (c), which are subject to approval by the Board of Directors of the Company. There can be no assurance that definitive agreements will be reached. As part of the June 2003 agreement in principle, the Company and ParaComm consummated the sale to an affiliate of Madeleine of substantially all of ParaComm's television and private cable services business assets in Florida. The consideration for the sale was the reduction of $3.2 million of the principal amount of the Madeleine Loan, plus waiver of accrued and unpaid interest on the Madeleine Loan. Such reduction is subject to certain post-closing adjustments, which are not expected to be material. Cash balances at June 30, 2003 and 2002 were approximately $3.0 million and $2.5 million, respectively. In fiscal 2003, $2.0 million of net cash was provided by the Company's operating activities. In fiscal 2002 and 2001, the Company used approximately $1.6 million and $12.7 million, respectively, of net cash in its operating activities. These net uses of cash were primarily to pay trade payables and fund operating losses incurred in the Company's communications businesses. During the quarter ended September 30, 2002, the Company acquired capital assets of approximately $0.2 million, of which approximately $0.1 million was primarily for investment in communications infrastructure systems for multiple dwelling unit -13- ("MDU") buildings in return for rights to provide Internet and television services to the MDU buildings' residents in Florida. During fiscal 2002, the Company acquired capital assets of approximately $0.4 million, primarily for investment in communications infrastructure systems for buildings in return for rights to provide Internet and television services to the buildings' residents in Florida. During fiscal 2001, the Company acquired capital assets of approximately $3.3 million, of which approximately $0.7 million was financed by a note. The capital assets acquired during fiscal 2001 were primarily for investment in communications infrastructure systems for MDU buildings in return for rights to provide telephone, Internet, television and other services to the buildings' residents in various states. All of the Company's remaining communications assets were held for sale at June 30, 2003. These assets, which were approximately $0.5 million, were sold in August 2003. Due to the downturn affecting corporate America, the bonding industry has come under increased pressure and claims, and in general, the bonding market has tightened. Consequently, it has become more difficult for the Company to secure surety bonds due to the Company's financial position and overall market conditions. The Company is currently considering ways to improve its ability to obtain bonding. There can be no assurance that the Company will be able to obtain bonding or, if so, at a reasonable cost. If the Company is unable to obtain surety bonds as needed, this may have a material adverse effect on the Company. The following table provides a summary of the effect on liquidity and cash flows from the Company's contractual obligation as of June 30, 2003.

See Notes H & M to the Financial Statements, at Item 15 hereto, for a summary of the effect on liquidity and cash flows from the Company's contractual obligations as of June 30, 2003. Senior Secured Promissory Note See also the discussion in this Item under the subcaption "Capital Resources and Liquidity." On November 8, 2000, the Company consummated a $12.5 million senior secured loan transaction with Madeleine, an affiliate of Blackacre Capital Management L.L.C. ("Blackacre") (the "Madeleine Loan"). The Madeleine Loan, which is due and payable in November 2007, bears interest at a fixed rate of 11% per annum. The Madeleine Loan is a senior secured obligation of the Company and is guaranteed by certain subsidiaries of the Company, which have pledged substantially all of their respective assets to collateralize such guarantee. In connection with the Madeleine Loan, the Company issued warrants to purchase 3,125,000 shares of common stock at an exercise price of $4.00 per share, subject to antidilution provisions, expiring in December 2007, to an affiliate of Madeleine. A portion of the Madeleine Loan was used to retire existing indebtedness of the Company in the principal amount of $7 million owed to Madeleine and to pay expenses of obtaining the Madeleine Loan. The remaining proceeds were used for the Company's working capital purposes. No value was allocated to the warrants because the value was deemed immaterial. The outstanding principal and accrued interest with respect to the senior secured indebtedness owed by the Company to Madeleine totals approximately $13.1 million in September 2003. The Company has not made payments to Madeleine pursuant to the Madeleine Loan agreement and is presently in default under the terms of the agreement relating to the outstanding debt to Madeleine. The de-listing of the Company's common shares from the Nasdaq National Market in June 2001 also created a default under the Madeleine Loan agreement. Madeleine may call the loan due and payable at any time, and, if it is not paid, foreclose on significant assets of the Company's subsidiaries that secure such loan. If the Company cannot raise additional funds for continuing operations or if Madeleine demands payment on its loan, the Company will likely be forced to cease operations. Accordingly, there is substantial doubt about the Company's ability to continue as a going concern. -14- In June 2003, the Company entered into an agreement in principle with Madeleine, whereby Madeleine would exchange all of the outstanding principal and accrued interest of the Madeleine Loan for the Company's interests in certain real estate and certain private cable television assets and for common equity of the Company. The agreement in principle provides that the outstanding principal and accrued interest with respect to the Madeleine Loan is to be exchanged for (a) certain private cable television systems and associated assets related to properties in Florida of ParaComm in consideration of a reduction of indebtedness equal to the fair market value of such assets (which transaction was consummated in August 2003); (b) certain real estate owned by the Company located in Long Island City, New York in consideration of the reduction of indebtedness equal to the fair market value of such real estate; and (c) issuance of approximately 7.6 million shares of the Company's common stock to Madeleine for the balance of the indebtedness. Such number of shares issuable to Madeleine represents all of the authorized and unissued shares of common stock of the Company less shares reserved for issuance pursuant to the exercise of outstanding stock options and warrants to purchase common stock that are not surrendered and cancelled. In connection with the transaction, certain members of management of the Company and an affiliate of Madeleine, respectively, are to surrender options and warrants to be cancelled. The agreement also provides for the issuance of new options to such management members at a subsequent date, subject to approval by the stockholders of the Company of an increase in the number of shares of authorized Common Stock. Upon such issuance to Madeleine, Madeleine will own approximately 32% of the total outstanding stock of the Company. The Company and Madeleine are presently negotiating definitive agreements for transactions (b) and (c), which are subject to approval by the Board of Directors of the Company. There can be no assurance that definitive agreements will be reached. As part of the June 2003 agreement in principle, the Company and ParaComm consummated the sale to an affiliate of Madeleine of substantially all of ParaComm's satellite television and private cable services business assets in Florida. The consideration for the sale was the reduction of $3.2 million of the principal amount of the Madeleine Loan, plus waiver of accrued and unpaid interest on the Madeleine Loan. Such reduction is subject to certain post-closing adjustments, which are not expected to be material. Mortgage payable In March 2003, the Company satisfied its mortgage obligation on real property at 11-30 47th Avenue, Long Island City, New York, in the amount of $1.7 million. CHANGE OF INDEPENDENT ACCOUNTANTS On April 30, 2002, the Company dismissed Grant Thornton LLP ("Grant Thornton") as the Company's independent accountants. As previously reported on the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 6, 2002 (SEC File No. 000-25552) (to which reference is made), Grant Thornton's reports on the financial statements of the Company for the fiscal year ended June 30, 2001 did not contain an adverse opinion or a disclaimer of opinion; they were not qualified or modified as to uncertainty, audit scope, or accounting principles; and there were no reportable events or disagreements with Grant Thornton on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreement(s), if not resolved to the satisfaction of Grant Thornton, would have caused Grant Thornton to make reference to the subject matter of such disagreement(s) in connection with their report. On May 2, 2002, the Company engaged Grassi & Co., CPAs, P.C. as the Company's independent accountants to review the Company's financial statements for the quarter ended March 31, 2002 and to audit the Company's financial statements for the fiscal years ended June 30, 2003 and 2002. INFLATION The Company has continued to experience the benefits of a low inflation economy in the New York Metropolitan area. In general, the Company's construction-related businesses enter into long-term fixed price contracts which are largely labor intensive. Accordingly, future wage rate increases may affect the profitability of its long-term contracts. Short-term contracts are less susceptible to inflationary conditions. RESULTS OF OPERATIONS The Company incurred significant losses in the last several fiscal years, primarily in the communications segment. The Company completed the discontinuance of its communications business in August 2003. There can be no assurance that the construction segment will sustain profitability or positive cash flow from future operations. Given the current U.S. economic climate and market conditions and the financial condition of the Company, there is a substantial likelihood that the Company will be unable to raise additional funds on terms satisfactory to it, if at all, to fund any future operating losses that may occur through the operation of the construction business. -15- The outstanding principal and accrued interest with respect to the Madeleine Loan totals approximately $13.1 million in September 2003. The Company is in default under the terms of the Madeleine Loan agreement. Madeleine may call the loan due and payable at any time, and, if it is not paid, foreclose on significant assets of the Company's subsidiaries that secure such loan. If the Company cannot raise additional funds for continuing operations or if Madeleine demands payment on its loan, the Company will likely be forced to cease operations. Accordingly, there is substantial doubt about the Company's ability to continue as a going concern. As part of an agreement in principle to reduce or eliminate the Company's indebtedness under the Madeleine Loan, the Company and ParaComm consummated the sale to an affiliate of Madeleine of substantially all of ParaComm's satellite television and private cable services business assets in Florida. The consideration for the sale was the reduction of $3.2 million of the principal amount of the Madeleine Loan, plus waiver of accrued and unpaid interest on the Madeleine Loan. Such reduction is subject to certain post-closing adjustments, which are not expected to be material. Net Revenues from Continuing Operations ----------------------------------------------- 2003 2002 2001 ---------------- -------------- --------------- ($ million) ($ million) ($ million) ---------------- -------------- --------------- 59.8 77.9 79.7 ================ ============== =============== Income (Loss) from Continuing Operations ----------------------------------------------- 2003 2002 2001 ---------------- -------------- --------------- ($ million) ($ million) ($ million) ---------------- -------------- --------------- (0.3) (2.2) (3.7) ================ ============== =============== Revenue from continuing operations decreased $18.1 million or 23.2% from $77.9 million in 2002 to $59.8 million in 2003. The decrease was primarily due to fewer and smaller construction contracts started in 2003. Revenues on long-term construction contracts are recognized under the percentage-of-completion method. Under this method, progress towards completion is recognized according to engineering estimates. This method is used because management considers this method the most appropriate in the circumstances. Changes in job performance, job conditions, and estimated profitability, including those arising from final contract settlements, may result in revisions to costs and income, and such changes are recognized in the period in which the revisions are determined. An amount equal to costs incurred attributable to pending change orders is included in revenues when recovery is probable. Management determines these estimates quarterly through discussions with the construction managers of each contract and with customers for changes and final contract settlement. These estimates require the best judgment by management utilizing the information available, and it is possible that final results could be materially different than those estimated. Cost of revenue decreased $19.8 million or 28.8% from $68.8 million in 2002 to $49.0 million in 2003. In addition to the decrease in revenue, the decrease in costs in 2003 over 2002 was due primarily to fewer and smaller construction contracts started in 2003. Gross margin percentage increased to 18.1% in 2003 from 11.7% in 2002. The improvement in gross margin percentage was due primarily to better control of direct costs. Operating income increased $0.6 million or 66.7% from $0.9 million in 2002 to $1.5 million in 2003. The improvement was due primarily to the increase in gross profit margin in 2003. There can be no assurance that the Company will sustain profitability or positive cash flow from future operations. General and administrative expenses increased $1.2 million or 15.4% from $7.8 million in 2002 to $9.0 million in 2003. The increase in general and administrative expenses included a $1.1 million increase in payroll and related costs, and a $0.1 million increase in professional fees. Depreciation and amortization remained unchanged from $0.3 million in 2002 to $0.3 million in 2003. Interest income decreased $0.2 million or 100% from $0.2 million in 2002 to an immaterial amount in 2003. The decrease was due to a decrease in investment of the Company's excess cash that was used to reduce the Company's accounts payable, satisfy the Company's mortgage obligation, and fund the operating losses during the discontinuance of the Company's communications business. Interest expense increased $0.1 million or 5.6% from $1.8 million in 2002 to $1.9 million in 2003. The increases were due primarily to the capitalization of unpaid interest on the senior secured promissory note to Madeleine. See also Notes O and P to the Financial Statements, at Item 15, attached hereto. -16- Fiscal 2002 Compared to Fiscal 2001 Revenue decreased $1.8 million or 2.3% from $79.7 million in 2001 to $77.9 million in 2002. The decrease was primarily due to fewer construction contracts started in 2002. Cost of revenue decreased $3.0 million or 4.2% from $71.8 million in 2001 to $68.8 million in 2002. In addition to the decrease in construction revenue, the decrease in costs in 2002 over 2001 was due primarily to fewer construction contracts started in 2002. Gross margin percentage increased to 11.7% in 2002 from 10.0% in 2001. The improvement in gross margin percentage was due primarily to better control of direct costs. Operating income from increased $3.1 million from $(2.2) million in 2001 to $0.9 million in 2002. The improvement was due primarily to the increase in gross profit margin in 2002. There can be no assurance that the company will sustain profitability or positive cash flow from future operations. General and administrative expenses decreased $2.0 million or 20.4% from $9.8 million in 2001 to $7.8 million in 2002. The decrease in general and administrative expenses included a $0.5 million decrease in payroll and related costs, a $1.0 million decrease in professional fees, a $0.1 million decrease in travel, meal and entertainment, and a $0.4 million decrease in miscellaneous, office supplies and telephone. Depreciation and amortization remained unchanged from $0.3 million in 2001 to $0.3 million in 2002. Interest income decreased $0.4 million or 66.7% from $0.6 million in 2001 to $0.2 million in 2002. The decrease was due to a decrease in investment of the Company's excess cash that was used instead to fund the operating losses of the communications business prior to its discontinuance. Interest expense increased $0.5 million or 38.5% from $1.3 million in 2001 to $1.8 million in 2002. The increases were due primarily to the Company's issuance of a $12.5 million senior secured promissory note to Madeleine in November 2000 and the unpaid interest that was capitalized and added to the principal due to the proposed amendment to the promissory note. In 2002, the Company sold marketable securities to continue to provide working capital to the communications business prior to its discontinuance. The transaction resulted in a capital loss of $0.3 million. The Company increased its deferred tax benefit valuation allowance by $1.1 million to $21.4 million at June 30, 2002. Accordingly, a provision for deferred income taxes of $1.1 million was recorded in 2002. In 2001, the Company increased its valuation allowance by $0.7 million and recorded a provision for deferred income taxes of $0.7 million. New Accounting Standards Adopted In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure requirements apply to all companies for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The adoption of SFAS No. 148 had no impact on the Company's financial statements. In June 2002, the FASB issued SFAS No.146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullified Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. A fundamental conclusion reached by the FASB in this statement is that an entity's commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 had no impact on the Company's financial statements. -17- In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees." FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a liability it has undertaken in issuing the guarantee. In addition, FIN 45 requires a guarantor to make disclosures of its obligations under the guarantees that a company has issued. The disclosure requirements of FIN 45 are effective for financial statements for periods ending after December 15, 2002. The initial recognition and initial measurement provision of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company adopted FIN 45 in fiscal year 2003. Our adoption of FIN 45 did not have a material impact on the Company's financial statements. In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (SFAS 149), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies accounting for derivative instruments and hedging activities under Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 149 is effective for contracts entered into or modified and for hedging relationships designated after June 30, 2003. The Company believes the adoption of SFAS 149 will not have a material impact on the Company's financial statements. In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (SFAS 150), "Accounting for Certain Financial Instruments and Characteristics of both Liabilities and Equity." SFAS 150 establishes standards on the classification and measurement of financial instruments with characteristics as both liabilities and assets. SFAS 150 is effective for instruments entered into or modified after May 31, 2003 and pre-existing instruments as of the beginning of the first interim period after June 15, 2003. The adoption of SFAS 150 had no material impact on the Company's financial statements. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates. As of June 30, 2003, the Company had debt of $17.5 million with a fixed interest rate of 11.0%. The fixed rate debt may have its fair value adversely affected if interest rates decline; however, the amount is not expected to be material. The Company's cash is primarily invested in an institutional money market mutual fund. The Company does not have any derivative financial instruments as of June 30, 2003. The Company believes that the interest rate risk associated with its investments is not material to the results of operations of the Company. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Financial Statements following Item 15 herein. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On April 30, 2002, the Company dismissed Grant Thornton LLP ("Grant Thornton") as the Company's independent accountants. As previously reported on the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 6, 2002 (to which reference is made), Grant Thornton's reports on the financial statements of the Company for the fiscal year ended June 30, 2001did not contain an adverse opinion or a disclaimer of opinion; they were not qualified or modified as to uncertainty, audit scope, or accounting principles; and there were no reportable events or disagreements with Grant Thornton on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreement(s), if not resolved to the satisfaction of Grant Thornton, would have caused Grant Thornton to make reference to the subject matter of such disagreement(s) in connection with their report. On May 2, 2002, the Company engaged Grassi & Co., CPAs, P.C. as the Company's independent accountants to review the Company's financial statements for the quarter ended March 31, 2002 and to audit the Company's financial statements for the fiscal years ended June 30, 2003 and 2002. The decision to change accountants was approved by the Board of Directors. ITEM 9A - CONTROLS AND PROCEDURES Disclosure controls and procedures. Based on an evaluation of the Company's disclosure controls and procedures as of the end of the period covered by this Annual Report, the Company's Chief Executive Officer and Chief Financial Officer have determined that the Company's current disclosure controls and procedures are effective. Changes in internal control over financial reporting. -18- There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rule 13a-15(f) or Rule 15d-15(f) under the Exchange Act) during the fourth quarter of fiscal year ended June 30, 2003 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information concerning each of the Company's directors and executive officers: NAME AGE POSITION WITH THE COMPANY Jared E. Abbruzzese 49 Director(1)(2)(3) Gregory Cuneo 44 President, Chief Executive Officer and Director Raymond Steele 68 Director(1)(2) Robert Birnbach 38 Executive Vice President and Chief Financial Officer Michael Giambra 38 Vice President and Chief Accounting Officer Ronald Fregara 54 President of CMA & Vice President of DualStar Stephen Yager 51 Vice President of CMA & Vice President & Secretary of DualStar Barry Halpern 51 President of High-Rise & Vice President of DualStar Nicholas Ahel 60 Vice President of High-Rise & Vice President of DualStar Peter Aiello __ President of ICE & BMS and Vice President & Assistant Secretary of DualStar Vincent D'Onofrio 43 President - OnTera & ParaComm (1) Member of the Compensation and Governance Committee. The Compensation and Governance Committee (the Compensation Committee) reviews and approves management's recommendations as to executive compensation, reviews, approves and administers executive compensation and DualStar's 1994 Stock Option Plan, as amended, reviews and approves management's recommendation for organizational structure and recommends to the DualStar board nominees for election as directors of DualStar, including nominees recommended by stockholders. (2) Member of the Audit Committee. The Audit Committee recommends to the DualStar board independent auditors to serve DualStar, reviews the scope and results of the annual audit, assures that the independent auditors act independently, reviews with management and the independent auditors DualStar's internal accounting controls, and reviews DualStar's annual and quarterly reports. (3) Jared E. Abbruzzese was a director of DualStar from September 1999 until September 10, 2003. Jared E. Abbruzzese was a director of DualStar from September 1999 until September 10, 2003. He had served as Chairman from February 2000 to June 2001. Mr. Abbruzzesse is a founder and Chairman of TechOne Capital Group LLC, a consulting and private investment firm concentrating in the telecommunications and technology sectors. Mr. Abbruzzese was the founder and served as Chairman and Chief Executive Officer of CAI Wireless Systems, Inc., an MMDS operator located in Albany, New York, from August 1991 until CAI's acquisition by WorldCom, Inc. in August 1999 (Mr. Abbruzzese served in such capacities for CAI during CAI's 1998 Chapter 11 proceeding). Gregory Cuneo has been President and Chief Executive Officer of DualStar since the Company was founded in August 1994. He has also served as a director since August 1994 and served as Chairman of the Company from December 1998 until February 2000. Mr. Cuneo is also (non-Director) Chairman of Starrett Corporation, an affiliate of Blackacre, since August 1999, Chairman of HRH Construction Corp., an affiliate of Starrett and Blackacre, since August 1999, and Chairman of HRH Construction LLC, an affiliate of Blackacre and possibly TIG and/or Brad Singer, since January 2001. Mr. Cuneo and Mr. Birnbach are first cousins. -19- Raymond L. Steele, a retired businessman, has been a director of the Company since December 1998. In addition to the Company, Mr. Steele has been a member of the board of directors of ICH Corp. since June 1997. From August 1997 until October 2000, Mr. Steele served as a board member of Video Services Corp. Prior to his retirement, Mr. Steele held various senior positions such as Executive Vice President of Pacholder Associates, Inc. (from August 1990 until September 1993), Executive Advisor at the Nickert Group (from 1989 through 1990), and Vice President, Trust Officer and Chief Investment Officer of the Provident Bank (from 1984 through 1988). Robert Birnbach, a founder of the Company, has been Chief Financial Officer of DualStar since December 1996 and Executive Vice President since July 1999.. He was a member of DualStar's board of directors from September 1999 until February 2000 and Secretary from February 2000 until July 2003. From December 1996 until July 1999, Mr. Birnbach served as Vice President of DualStar and from August 1994 until December 1996, he was DualStar's Director of Corporate Development/Mergers & Acquisitions. Mr. Birnbach was President and Chief Executive Officer and a member of the board of directors of Starrett Corporation, an affiliate of Blackacre, from January 2000 until November 2000. He was also a member of the board of directors of HRH Construction Corp., an affiliate of Starrett and Blackacre, from January 2000 until November 2000. Prior to joining DualStar, Mr. Birnbach was an advisor with the financial advisory and consulting firm of Coopers & Lybrand from 1991 to August 1994. Michael Giambra has been Chief Accounting Officer of DualStar since January 2003 and Vice President since July 2003. He has been Controller of DualStar since October 2002. He was controller of DualStar's construction segment from May 2000 to October 2002. Prior to joining the Company, Mr. Giambra was a controller with the Weeks Lerman Group from April 1999 to May 2000. He acted as a certified public accountant prior to April 1999. Ronald Fregara, a founder of the Company, was named Vice President of the Company in July 2003. He served as an Executive Vice President of the Company from December 1996 until February 2000, and served as a Vice President from August 1994 until December 1996. Mr. Fregara has been President of CMA since December 1996. Mr. Fregara was a member of the Company's board of directors from August 1994 until February 2000. Stephen Yager, a founder of the Company, was named Vice President and Secretary of the Company in July 2003. He served as an Executive Vice President of the Company from August 1994 until February 2000, and served as Secretary of the Company from August 1994 until February 2000. Mr. Yager was the Company's Chief Financial Officer from August 1994 until November 1996. Mr. Yager has been Vice President of CMA since December 1996. Mr. Yager was a member of the Company's board of directors from August 1994 until February 2000. Barry Halpern has served as President of High-Rise since July 1995 and Vice President of DualStar since July 2003. Nicholas Ahel has served as Vice President of High-Rise since July 1995 and Vice President of DualStar since July 2003. Peter Aiello has served as President of ICE since August 1996 and President of BMS since July 2000. He was named Vice President and Assistant Secretary of the Company in July 2003. Vincent M. D'Onofrio has served as President and Chief Technology Officer of OnTera (f/k/a DualStar Communications, Inc.) since February 2001 and was responsible for the day-to-day operations of OnTera. From March 2000 to February 2001, Mr. D'Onofrio served as OnTera's Executive Vice President and Chief Technology Officer. From March 1996 until February 2000, Mr. D'Onofrio served as President and Chief Executive Officer of DualStar Communications, Inc. Mr. D'Onofrio has also served as President of ParaComm since March 2001. -20- ITEM 11 - EXECUTIVE COMPENSATION The following table sets forth certain summary information concerning the compensation paid or awarded for each of DualStar's last three completed fiscal years to DualStar's Chief Executive Officer and its four most highly compensated officers (collectively, the "Named Executives") for the year ended June 30, 2003.

(1) Includes the value of personal benefits, such as disability insurance, automobile expenses and/or director fees, pursuant to each officer's employment agreement. See Employment Agreements. COMPENSATION OF DIRECTORS Directors of the Company are paid an annual fee up to $25,000 and may also be eligible for fees of up to $1,000 per board meeting attended in person, and $600 per telephonic meeting or committee meeting (regardless of attendance in person or by telephone), plus, in all cases, reimbursement of out-of-pocket expenses. In fiscal 2003, the Company paid no director fees to Messrs. Abbruzzese and Cuneo, but paid Mr. Steele $10,337. OPTION GRANTS IN LATEST FISCAL YEAR No stock options were granted to any of the Named Executives during fiscal year 2003. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth certain information with regard to the outstanding options to purchase DualStar Common Stock as of the end of the fiscal year ended June 30, 2003 for the five Named Executives in the Summary Compensation Table above.

EMPLOYMENT AGREEMENTS Effective August 1994, DualStar entered into employment agreements with Messrs. Cuneo, Yager and Fregara. The employment agreements expired in August 1997 and have been renewed for three additional three-year terms through August 2006. Mr. Cuneo's current salary is $275,000, with a guaranteed minimum bonus of $25,000, up to a maximum of $100,000 based on certain -21- performance objectives which are to be determined by the Board and the Compensation Committee. Messrs. Fregara and Yager's current salaries are each $235,000, with a guaranteed minimum bonus of $25,000, up to a maximum of $100,000 based on certain performance objectives which are to be determined by the Board and the Compensation Committee. The salaries under these executive's employment agreements, as amended, may be increased to reflect annual cost of living increases and may be supplemented by discretionary merit and performance increases as determined by the Compensation Committee. The employment agreements provide, among other things, for participation in an equitable manner in any profit-sharing or retirement plan for employees or executives and for participation in other employee benefits applicable to employees and executives of the Company. The employment agreements provide that the Company will establish a performance incentive bonus plan providing each executive the opportunity to earn an annual bonus of up to five percent of the increase, if any, in the Company's pretax income, based upon the attainment of performance goals to be established by the Compensation Committee. The employment agreements further provide for the use of an automobile and other fringe benefits commensurate with their duties and responsibilities, and for benefits in the event of disability. Pursuant to the employment agreements, employment may be terminated by the Company with cause or by the executive with or without good reason. Termination by the Company without cause, or by the executive for good reason, would subject the Company to liability for liquidated damages in an amount equal to the terminated executive's current salary for the remainder of the scheduled term of employment and bonuses for the remainder of the scheduled term of employment based upon the prior year's annual bonus and the maximum incentive bonus payable. Such amounts shall be payable in equal monthly installments, without any set-off for compensation received from any new employment. In addition, the terminated executive would be entitled to continue to participate in and accrue benefits under all employee benefit plans and to receive supplemental retirement benefits to replace benefits under any qualified plan for the remaining term of the employment agreements to the extent permitted by law. The employment agreements provide for the purchase by the Company of insurance policies in the amount of $1,000,000 on the lives of each of Messrs. Cuneo, Yager and Fregara. The Company will pay the premiums under these policies, and a portion of the payment will be treated as taxable income to the insured executive. Upon the death of any of the insureds, the Company would be paid from the insurance proceeds an amount equal to the total premiums it paid under the policy, with the remaining proceeds to be paid to the deceased executive's designated beneficiary. To date, each of Messrs. Cuneo, Yager and Fregara has declined to have the Company purchase such insurance. On June 1, 2000, the Company entered into employment agreements with each of Barry Halpern and Nicholas Ahel, President and Vice President, respectively, of High-Rise, which agreements expired on July 1, 2002. The Company and the executives continue to discuss new employment agreements, but there can be no assurance that the parties will reach agreement. If the parties do not reach agreement and the Company loses the services of Mr. Halpern or Mr. Ahel, there may be a material adverse effect on the Company's business. Mr. Halpern continues to serve as President of High-Rise at a current annual base salary of $260,000. Mr. Ahel continues to serve as Vice President of High-Rise at a current annual base salary of $260,000. Each of Messrs. Halpern and Ahel continue to receive such other benefits, including medical, disability, pension and severance plans, as are made generally available to executive employees of the Company from time to time, and a life insurance benefit in the amount of one times such executive's current annual base salary. In connection with Robert Birnbach's role as the Company's Executive Vice President, Chief Financial Officer and Secretary, the Company and Mr. Birnbach entered into an employment agreement dated June 7, 2000, but effective as of June 1, 1999. Under the terms of his employment agreement, Mr. Birnbach agreed to serve as Executive Vice President, Chief Financial Officer and Secretary of the Company at a current base salary of $220,000. Mr. Birnbach's agreement contemplates that he is eligible for a bonus of up to 50% of his annual base salary upon the achievement by the Company and Mr. Birnbach of performance targets agreed-upon by the Board of Directors and Mr. Birnbach. Mr. Birnbach's annual base salary and bonus percentage may be increased, but not decreased by the Company's Board of Directors. Mr. Birnbach's employment with the Company may be terminated by the Company with Cause (as defined in the agreement) or by Mr. Birnbach with or without good reason (as defined in the agreement). Upon termination, all vested options remain exercisable for the duration of the option. Termination of employment by the Company without cause, or by Mr. Birnbach with good reason would entitle Mr. Birnbach to severance in the amount of two times Mr. Birnbach's annual base salary, plus other perquisites for the one-year period following the date of termination; additionally, all unvested options to purchase Company Common Stock would vest immediately. In fiscal year 2000, OnTera entered into an employment agreement with Vincent D'Onofrio, currently President and Chief Technology Officer, at a current annual base salary of $250,000; in addition, he is eligible for a bonus of up to 40% of his annual base salary, upon -22- the achievement of specified performance targets. Annual base salary and bonus percentage may be increased, but not decreased, by the OnTera board of directors. Pursuant to the OnTera employment agreement, employment may be terminated by OnTera with Cause (as defined in the agreements) or by Mr. D'Onofrio with or without good reason (as defined in the agreements). Termination of employment by OnTera without Cause, or by Mr. D'Onofrio with good reason would entitle the executive to severance in the amount of executive's then annual base salary, plus a pro rata portion of the bonus that would be payable in the year of termination. In the event of a termination of employment by OnTera with Cause, the Mr. D'Onofrio is entitled to receive all base salary through the date of termination. All unvested options lapse. In the event of a voluntary termination of employment by the executive, the executive is entitled to receive his annual base salary through the date of termination and be eligible for a pro rata portion of any bonus. THE 1994 STOCK OPTION PLAN On October 17, 1994, the Board of Directors adopted, and the stockholders subsequently approved and amended, the 1994 Stock Option Plan (as amended, the 1994 Plan) pursuant to which officers, directors, employees and consultants of the Corporation and its affiliates are eligible to be granted stock option awards (Awards). Stockholders approved the amendments to the 1994 Plan at the 1998 Annual Meeting of Stockholders. On April 13, 2000, the Company's Board of Directors approved an amendment to the 1994 Plan providing that for all Awards granted under the 1994 Plan from and after April 13, 2000, the Compensation Committee shall determine the definition of Change of Control and the treatment of such Awards upon a Change of Control, in the Committee's sole and absolute discretion. This amendment does not require stockholder approval. The 1994 Plan is currently being administered by the Compensation Committee, which has the authority to grant awards, including Stock Options, Stock Appreciation Rights, Restricted Stock, or any combination of the foregoing, and to determine the terms and conditions of the Awards. Options under the 1994 Plan generally shall be exercisable for a term fixed by the Compensation Committee, not to exceed 10 years from date of grant, unless any such options are terminated earlier pursuant to the terms of the 1994 Plan. The total number of shares of Company Common Stock presently reserved for such Awards and available for distribution under the 1994 Plan is 3,500,000. As of June 30, 2003, 2,937,067 options were outstanding under the 1994 Plan. The outstanding options have exercise prices ranging from $0.75 to $10.25 per share. No stock options were exercised by any executive officer during fiscal year 2003. 401(K) PLAN The Company maintains a retirement savings plan, effective as of January 1995, in which eligible employees of the Company may elect to participate. The plan is an individual account plan providing for deferred compensation as defined in Section 401(k) of the Internal Revenue Code, and is subject to, and intended to comply with, the Employee Retirement Income Security Act of 1974. Each eligible employee is permitted to defer receipt of up to 15% of eligible compensation, subject to maximum statutory limits and nondiscrimination testing prescribed by the Internal Revenue Code. The Company may, in its discretion, match employee deferrals in cash of DualStar stock, or make discretionary profit sharing plan contributions in cash or DualStar stock, subject to current IRS limits and nondiscrimination testing. For the year ended June 30, 2003, DualStar made no contribution to the plan. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No Compensation Committee interlock relationship existed during the fiscal year ended June 30, 2003. -23- ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information with respect to beneficial ownership of DualStar Common Stock as of September 19, 2003 by each stockholder of the Company who, based on public filings, is known to the Company to be the beneficial owner of more than 5% of DualStar Common Stock. NAME AND ADDRESS OF AMOUNT AND NATURE OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS ------------------------------------ ------------------------- ----------------- Technology Investors Group, LLC 560 Sylvan Way Englewood Cliffs, NJ 07632 1,791,000 10.9% Lawrence Roman WDF,Inc. 30 N. MacQuenten Pkwy. Mt. Vernon, NY 10550 1,267,400 6.6% The following table sets forth certain information with respect to beneficial ownership of DualStar Common Stock as of September 19, 2003 by all directors and all Named Executives identified in the Summary Compensation Table above in Item 11. Executive Compensation, individually, and by all directors and all executive officers of DualStar as a group. AMOUNT AND NATURE OF PERCENT OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS ------------------------------------- ---------------------- --------------- Gregory Cuneo 595,000(1) 3.1% Jared E. Abbruzzese --- * Raymond Steele 115,000(2) * Ronald Fregara 595,000(1) 3.1% Stephen Yager 595,000(1) 3.1% Barry Halpern 301,000(2) 1.6% Nicholas Ahel 226,000(2) 1.2% All directors and executive officers as a group (11 persons) 3,435,200(3) 17.8% * Less than 1%. (1) Consists of (i) options to purchase 160,000 shares of Company common stock granted under the Company's 1994 Stock Option Plan, as amended (the Plan), exercisable within 60 days of September 19, 2003 and (ii) 435,000 shares of Company common stock. (2) Consists of options granted under the Plan, exercisable within 60 days of September 19, 2003. (3) Consists of (i) options to purchase 2,127,200 shares of Company common stock granted under the Plan, exercisable within 60 days of September 19, 2003, and (ii) 1,308,000 shares of Company common stock. -24- The Company maintains the DualStar Technologies Corporation 1994 Stock Option Plan, as amended (the "1994 Plan"), pursuant to which it may grant equity awards to eligible persons. Additionally, it has entered into individual arrangements outside of the equity plans with DSTR Warrant Co., LLC, providing for the award of warrants to purchase Company common stock. The 1994 Plan and the terms of DSTR Warrant Co., LLC's equity award are described in the table more fully below.

In addition, subject to stockholder approval, the Company granted warrants to purchase 750,000, 625,000, 200,000 and 200,000 shares of Company common stock to TechOne Capital Group LLC, Technology Investors Group LLC, Gregory Cuneo and Robert Birnbach, respectively. Exercise price of the warrants granted to TechOne Capital Group LLC and Technology Investors Group LLC is $4.06. Exercise price of the warrants granted to Gregory Cuneo and Robert Birnbach is $6.50. The Company has no present plan to hold a stockholder meeting for the purpose of seeking approval for the warrants. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (a) TechOne Capital Group LLC ("TechOne"), a private consulting and investment firm of which Jared E. Abbruzzese, a director of the Company until his resignation on September 10, 2003, is a principal, had provided consulting services to the Company from August 12, 1999 until June 30, 2001, pursuant to letter agreements dated August 12, 1999 and March 24, 2000 and pursuant to a consulting agreement dated June 1, 2000. The consulting fee payable under the consulting agreement was $30,000 per month, plus reimbursement of expenses. In November 2001, TechOne gave the Company a written notice to terminate the agreement effective on June 30, 2001 and waived any subsequent consulting fees that might be due by the Company to TechOne under the agreement. For the year ended June 30, 2001, in connection with the agreement, the Company paid TechOne consulting fees in the amount of $360,000. For the years ended June 30, 2003 and 2002, the Company made no payments to TechOne. Subject to stockholder approval and other conditions, Class D Warrants to purchase 750,000 shares of Company Common Stock were granted to TechOne on April 13, 2000. The Class D Warrants are exercisable for $4.063 per share and vest and become fully exercisable when the 30-day average closing price of the Company Common Stock has been at or above $14.00, and a material third party acquisition or merger, material equity investment in the Company or joint venture or other material third party transaction having a substantially similar economic effect as the foregoing has been effected (excluding, in each instance, the transactions contemplated by the Blackacre Securities Purchase Agreement). Additionally, regardless of the vesting requirement discussed above, the Class D Warrants vest and become fully exercisable upon a change of control (excluding the transactions contemplated by the Blackacre Securities Purchase Agreement). The Warrants will expire on the seventh anniversary of issuance. The Company has no present plan to hold a stockholders meeting for the purpose of seeking stockholder approval for the Class D Warrants. In connection with the consummation of the November 8, 2000 financing transaction with Madeleine L.L.C., to ensure that DualStar had a sufficient number of authorized but unissued shares of common stock for issuance upon the exercise of such warrants, TechOne irrevocably surrendered any rights it had to Class D Warrants to purchase 375,000 shares of DualStar common stock. (b) The Company is a party to a consulting agreement dated June 1, 2000 with Hades Advisors LLC ("Hades"), an affiliate of TIG. The consulting fee payable under the consulting agreement is $20,000 per month, plus reimbursement of expenses. The consulting agreement provides that other than termination as a result of a material breach by Hades, the Company may terminate this consulting agreement only by giving written notice to Hades of the Company's intention to terminate this consulting agreement accompanied by payment of (i) all unpaid amounts due hereunder from the Company to Hades for the consulting services (as defined therein) rendered -25- through the date of termination, plus all reimbursable amounts for which Hades has delivered to the Company an invoice on or before the termination date, (ii) $25,000, which will be used by Hades for reimbursable expenses incurred prior to the termination date and not yet invoiced, and (iii) an amount equal to the product of $20,000 times the greater of (A) the number of months remaining in the 3-year term thereof, and (B) 24. For the year ended June 30, 2001, the Company paid Hades consulting fees in the amount of $240,000 for consulting services in connection with the agreement. For the years ended June 30, 2003 and 2002, the Company made no payments to Hades. (c) Subject to stockholder approval and other conditions, Class D Warrants to purchase 625,000 shares of Company Common Stock were granted to TIG on April 13, 2000, on the same terms and conditions discussed above in paragraph (b). The Company has no present plan to hold a stockholders meeting for the purpose of seeking stockholder approval for the Class D Warrants. (d) The Company's electrical contracting subsidiary obtained consulting services from M & E Advisors, LLC, an affiliate of TIG in fiscal year 2001. For the year ended June 30, 2001, the Company paid M&E Advisors, LLC consulting fees in the amount of $170,000. For the years ended June 30, 2003 and 2002, the Company made no payments to M & E Advisors, LLC. (e) At June 30, 2003, the Company had outstanding loans to Messrs. D'Onofrio and Cuneo in the amounts of $96,000 and $60,000, respectively. (i) An original loan of $171,000 was due on demand, with an unstated interest rate. In September 2000, the loan amount was reduced by $75,000 to offset bonuses earned by the officer in the prior periods and a promissory note was signed by Mr. D'Onofrio for the remaining loan balance of $96,000. The note bears interest rate of 7.75% per annum and is due in August 2006. In addition, Mr. D'Onofrio provided all stock options granted to him by the Company as the collateral and security of the note. (ii) The $60,000 loan is due on demand, with an interest rate of 7.75% per annum. Mr. Cuneo had borrowed $350,000 from the Company in June 2001 and repaid such loan with interest in June 2001. In addition, Mr. Cuneo had purchased various services from the Company totaling $134,000 during fiscal year 2001, of which $84,000 was paid through September 2001. (f) For the fiscal years ended June 30, 2003, 2002 and 2001, approximately 17.1%, 0.2% and 2.0% of the Company's total revenues were derived from HRH Construction Corporation ("HRH"), respectively. Mr. Cuneo is also the Chairman of HRH. In addition, DualStar's President and Chief Executive Officer is (non-Director) Chairman of Starrett Corporation, an affiliate of HRH and Blackacre, and is compensated as Chairman of Starrett Corporation under a consulting agreement between Starrett Corporation and Starrett Consulting, L.L.C. (of which Mr. Cuneo is a 50% member). The remaining interest in Starrett Consulting, L.L.C. is held by Mr. Brad Singer, the President of HRH and a member of TIG. In exchange for various services, including management services, Starrett Consulting, L.L.C. receives an annual fee of $750,000 from Starrett Corporation in equal monthly installments, plus an additional fee may be earned in certain circumstances. In the last fiscal year, DualStar has been awarded new contracts in the approximate amount of $23.9 million from HRH. ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES. AUDIT AND NON-AUDIT FEES For the fiscal years ended June 30, 2003 and June 30, 2002, aggregate fees for services provided by Grassi & Co., CPAs, P.C., were as follows: Fiscal year Fiscal year Ended Ended June 30, 2003 June 30, 2002 ------------- ------------- Audit fees $52,500 $ -- Audit related fees 22,500 7,500 Tax fees 27,500 -- All other fees -- -- -------- ------ $102,500 $7,500 The audit committee pre-approves all non-audit fees paid to the accountant. -26- PART IV ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) DOCUMENTS FILED AS PART OF THIS REPORT: 1. Financial Statements and Financial Statement Schedules See the Index to Financial Statements appearing on page F-1 of this Report following this Item 15. No financial statement schedules are included in this Report. 2. Exhibits Set forth below is a list of exhibits being filed with this Report. EXHIBIT NO. AND DESCRIPTION IN THE EXHIBIT LIST FOR THIS REPORT NUMBER TITLE ------ ----- 2.1 Securities Purchase Agreement dated as of March 28, 2000 by and among the Registrant, Cerberus Capital Management, L.P. and Blackacre Capital Management, L.L.C. (2) 2.2 Stock Purchase Agreement dated as of March 28, 2000 between the Registrant and M/E Contracting Corp. (2) 2.3 Agreement and Plan of Merger dated as of May 11, 2000 between the Registrant, DCI Acquisition Co. and ParaComm, Inc. (2) 2.4 Securities Purchase Agreement dated as of November 8, 2000 by and among Registrant, DSTR Warrant Co., LLC and Madeleine L.L.C. (4) 3.1 Certificate of Incorporation, filed June 14, 1994, as restated. (1) 3.2 Amended and Restated Bylaws. (2) 4.1 Specimen Copy of Common Stock Certificate. (1) 4.2 DualStar Technologies Corporation 1994 Stock Option Plan, as amended. (1) 4.3 1994 Stock Option Plan Amendment. (3) 10.1 Employment Agreement between the Registrant and Gregory Cuneo, dated August 31, 1994. (1) 10.2 Employment Agreement between the Registrant and Stephen J. Yager, dated August 31, 1994. (1) 10.3 Employment Agreement between the Registrant and Ronald Fregara, dated August 31, 1994. (1) 10.4 Employment Agreement between the Registrant and Robert J. Birnbach dated June 7, 2000. (3) 10.5 Employment Agreement between the Registrant and Nicholas Ahel dated June 1, 2000. (3) 10.6 Employment Agreement between the Registrant and Barry Halpern dated June 1, 2000. (3) 10.7 Second Amended and Restated Note, having an original issued dated as of December 1, 1999, made by Registrant in favor of Madeleine L.L.C. (5) 10.8 Stockholders Agreement dated March 28, 2000 among DualStar Technologies Corporation, Blackacre Capital Management L.L.C., Cerberus Capital Management, L.P., Gregory Cuneo and Robert J. Birnbach. (2) 10.9 Stockholders Agreement dated as of November 8, 2000 by and among Registrant, DSTR Warrant Co., LLC, Technology Investors Group, LLC and certain members of Registrant's management. (5) 10.10 Class E Warrant Agreement dated as of November 8, 2000 by and between Registrant and DSTR Warrant Co., LLC. (4) 10.11 Registration Rights Agreement dated as of November 8, 2000 by and among Registrant, DSTR Warrant Co., LLC and Technology Investors Group, LLC. (5) 10.12 Master Surety Agreement dated November 3, 1997 by the Company and its subsidiaries in favor of United States Fidelity and Guaranty Company, Fidelity and Guaranty Insurance Company, Fidelity and Guaranty Insurance Underwriters, Inc. (3) 10.13 Registration Rights and Lock-Up Agreement dated as of May 10, 2000 by and among the Company and the former ParaComm stockholders.(3) 10.14 Voting Agreement dated as of May 10, 2000 by and among the Company, Donald Johnson, Mark Mayhook and Geneva Associates Merchant Banking Partners I, LLC. (3) 10.15 Consulting Agreement dated as of June 1, 2000 between the Company and TechOne. (3) -27- NUMBER TITLE ------ ----- 10.16 Consulting Agreement dated as of June 1, 2000 between the Company and Hades Advisors, LLC. (3) 10.17 Asset Purchase Agreement, dated as of July 9, 2003 by and among the Company, ParaComm, Madeleine, and PCM Acquisitions Corp. (6) 10.18 Global Bonding general agreement of indemnity. (7) 21.1 Subsidiaries of the Registrant.(7) 23.1 Consent of Grassi & Co., CPAs, P.C. (7) 23.2 Consent of Grant Thornton LLP.(7) 31.1 Rule 13a-14(a)/15d-14(a) Certification. (7) 31.2 Rule 13a-14(a)/15d-14(a) Certification. (7) 32.1 Section 1350 Certification. (7) 32.2 Section 1350 Certification. (7) (1) Incorporated herein by reference to Registrant's Registration Statement on Form S-1, File No. 33-83722, ordered effective by the Securities and Exchange Commission on February 13, 1995. (2) Incorporated herein by reference to Registrant's Quarterly Report on Form 10-Q (File No. 0-25552) for the quarter ended March 31, 2000. (3) Incorporated herein by reference to Registrant's Annual Report on Form 10-K (File No. 0-25552) for the period ended June 30, 2000. (4) Incorporated herein by reference to Registrant's Form 13D filed by Stephen Feinberg on November 21, 2000. (5) Incorporated herein by reference to Registrant's Quarterly Report on Form 10-Q (File No. 0-25552) for the quarter ended December 31, 2000. (6) Incorporated herein by reference to Registrant's Current Report on Form 8-K (File No. 000-25552) filed on August 19, 2003. (7) Attached hereto. (B) REPORTS ON FORM 8-K A Current Report on Form 8-K was filed on June 18, 2003, reporting an Item 5 and 7 event. (C) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K The exhibits listed under (a)(2) of this Item 15 are filed with this Report. (D) FINANCIAL STATEMENT SCHEDULES REQUIRED BY REGULATION S-X WHICH ARE EXCLUDED FROM THE COMPANY'S ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR ENDED JUNE 30, 2003 None. -28- DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS PAGE ---- Reports of Independent Certified Public Accountants............ F-2 -- F-3 Financial Statements Consolidated Balance Sheets............................... F-4 Consolidated Statements of Operations..................... F-5 Consolidated Statement of Shareholders' Equity (Deficit).. F-6 Consolidated Statements of Cash Flows..................... F-7 -- F-8 Notes to Consolidated Financial Statements................ F-9 -- F-30 F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders DualStar Technologies Corporation and Subsidiaries We have audited the accompanying consolidated balance sheets of DualStar Technologies Corporation and Subsidiaries as of June 30, 2003 and 2002, and the related consolidated statements of operations, shareholders' deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of DualStar Technologies Corporation and Subsidiaries as of June 30, 2003 and 2002, and the consolidated results of their operations and their consolidated cash flows for the years then ended, in conformity with accounting standards generally accepted in the United States of America. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As more fully discussed in Notes A and E to the financial statements, the Company has suffered recurring losses and is in default of its senior secured promissory note payable that permits the holder to accelerate the maturity and demand payment. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters is also discussed in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. GRASSI & CO., CPAs, P.C. Lake Success, New York September 23, 2003 F-2 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES We have audited the accompanying consolidated statements of operations, shareholders' equity and cash flows for the year ended June 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated result of operations and consolidated cash flow of DualStar Technologies Corporation and Subsidiaries for the year ended June 30, 2001, in conformity with accounting standards generally accepted in the United States of America. GRANT THORNTON LLP New York, New York September 28, 2003 F-3 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these statements. F-4 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these statements. F-5 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) YEARS ENDED JUNE 30, 2003, 2002 AND 2001

The accompanying notes are an integral part of this statement. F-6 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30,

The accompanying notes are an integral part of this statement. F-7 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED JUNE 30, 2003, 2002, AND 2001 NON-CASH INVESTING AND FINANCING TRANSACTIONS: (1) In connection with an agreement in exchange for access rights, the Company issued 25,000 shares of Company common stock and warrants to purchase 2,676 shares of Company common stock in the year ended June 30, 2001. The warrants are non-forfeitable, fully vested and immediately exercisable at a price of $4.446 per share. Accordingly, the Company's common stock was increased by $250 and additional paid-in capital was increased by $87,871. (2) In November 2000, the Company issued to Madeleine L.L.C. a $12.5 million senior secured promissory note. The note, due and payable on November 8, 2007, bears interest at a fixed rate of 11% per annum. A portion of the proceeds was used to retire existing indebtedness of the Company in the principal amount of $7.0 million owed to Madeleine L.L.C. (3) The Company acquired equipment related to the delivery of communications services which was financed by a note in the amount of $668,265 during the year ended June 30, 2001. (4) The Company acquired marketable securities in March 2001 for $892,500. As of June 30, 2001, an unrealized loss on the Company's available-for-sale securities was $202,500 and had been reported as a component of shareholders' equity. The Company subsequently sold the securities in fiscal 2002 and the unrealized loss was reversed. The accompanying notes are an integral part of this statement. F-8 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- COMPANY BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES Background and Financial Statement Presentation DualStar Technologies Corporation ("DualStar" or the "Company"), is a holding company which was incorporated on June 17, 1994. Effective August 1, 1994, DualStar entered into share acquisition agreements with Centrifugal Associates, Inc. ("Centrifugal"), Centrifugal Service, Inc. ("Service") and Mechanical Associates, Inc. ("Mechanical"), whereby 2,610,000 shares of DualStar were issued to the shareholders of Centrifugal, Service and Mechanical in exchange for all of the stock of Centrifugal, Service and Mechanical and these companies became wholly owned subsidiaries of DualStar. Subsequently, DualStar formed new wholly owned subsidiaries, including Centrifugal/Mechanical Associates, Inc., Property Control, Inc., High-Rise Electric, Inc., OnTera, Inc. ("OnTera", formerly known as DualStar Communications, Inc.), Integrated Controls Enterprises, Inc. and BMS Electric, Inc. In May 2000, the Company issued shares of common stock and warrants in exchange for all of the outstanding stock of ParaComm, Inc. The accompanying financial statements for the years ended June 30, 2003, 2002 and 2001 reflect the consolidated operations of DualStar Technologies Corporation and subsidiaries (collectively the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. DualStar, through its wholly owned subsidiaries, operates construction-related businesses. The Company completed the discontinuance of its communications business in August 2003. The Company's communications segment's telephone service business was discontinued in August 2002. In April 2002, the Company sold communications network equipment for $0.4 million. The transaction resulted in a loss of $0.5 million. In August 2002, the Company sold certain access agreements on properties located in the Los Angeles area and the communications assets located in the properties for $0.4 million. The transaction resulted in a gain of $0.1 million. A $2.5 million charge for the impairment of certain remaining communications assets was recorded in fiscal year 2002. In August 2003, the Company and its wholly owned subsidiary, ParaComm, Inc. ("ParaComm"), consummated the sale to an affiliate of its senior lender, Madeleine, LLC ("Madeleine"), of substantially all of ParaComm's assets, pursuant to an Asset Purchase Agreement dated as of July 2003 by and among the Company, ParaComm, Madeleine, and PCM Acquisitions Corp. Such assets related to ParaComm's satellite television and private cable services business in Florida. The consideration for the sale was the reduction of $3.2 million of the principal amount of a note of the Company to Madeleine, plus waiver of accrued and unpaid interest on such principal amount. Such reduction is subject to certain post-closing adjustments, which are not expected to be material. The Company incurred significant losses in the last several fiscal years, primarily in the communications business. The Company completed the discontinuance of its communications business in August 2003. There can be no assurance that the construction segment will sustain profitability or positive cash flow from future operations. Given the current U.S. economic climate and market conditions and the financial condition of the Company, there is a substantial likelihood that the Company will be unable to raise additional funds on terms satisfactory to it, if at all, to fund any operating losses that may occur through the operation of the construction business. On November 8, 2000, the Company consummated a $12.5 million senior secured loan transaction with Madeleine, an affiliate of Blackacre Capital Management L.L.C. ("Blackacre") (the "Madeleine Loan"). The Madeleine Loan, which is due and payable in November 2007, bears interest at a fixed rate of 11% per annum. The Madeleine Loan is a senior secured obligation of the Company and is guaranteed by certain subsidiaries of the Company, which have pledged substantially all of their respective assets to collateralize such guarantee. In connection with the Madeleine Loan, the Company issued warrants to purchase 3,125,000 shares of common stock at an exercise price of $4.00 per share, subject to antidilution provisions, expiring in December 2007, to an affiliate of Madeleine. A portion of the Madeleine Loan was used to retire existing indebtedness of the Company in the principal amount of $7 million owed to Madeleine and to pay expenses of obtaining the Madeleine Loan. The remaining proceeds were used for the Company's working capital purposes. No value was allocated to the warrants because the value was deemed immaterial. The outstanding principal and accrued interest with respect to the senior secured indebtedness owed by the Company to Madeleine totals approximately $13.1 million in September 2003. F-9 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE A -- COMPANY BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company has not made payments to Madeleine pursuant to the Madeleine Loan agreement and is presently in default under the terms of the agreement relating to the outstanding debt to Madeleine. The de-listing of the Company's common shares from the Nasdaq National Market in June 2001 also created a default under the Madeleine Loan agreement. Madeleine may call the loan due and payable at any time, and, if it is not paid, foreclose on significant assets of the Company's subsidiaries that secure such loan. If the Company cannot raise additional funds or if Madeleine demands payment on its loan, the Company will likely be forced to cease operations. Accordingly, there is substantial doubt about the Company's ability to continue as a going concern. In June 2003, the Company entered into an agreement in principle with Madeleine, whereby Madeleine would exchange all of the outstanding principal and accrued interest of the Madeleine Loan for the Company's interests in certain real estate and certain private cable television assets and for common equity of the Company. The agreement in principle provides that the outstanding principal and accrued interest with respect to the senior secured indebtedness owed by the Company to Madeleine is to be exchanged for (a) certain private cable television systems and associated assets related to properties in Florida of ParaComm, Inc., a wholly-owned subsidiary of the Company, in consideration of a reduction of indebtedness equal to the fair market value of such assets (which transaction was consummated in August 2003); (b) certain real estate owned by the Company located in Long Island City, New York in consideration of the reduction of indebtedness equal to the fair market value of such real estate; and (c) issuance of approximately 7.6 million shares of the Company's common stock to Madeleine for the balance of the indebtedness. Such number of shares issuable to Madeleine represents all of the authorized and unissued shares of common stock of the Company less shares reserved for issuance pursuant to the exercise of outstanding stock options and warrants to purchase common stock that are not surrendered and cancelled. In connection with the transaction, certain members of management of the Company and an affiliate of Madeleine, respectively, are to surrender options and warrants to be cancelled. The agreement also provides for the issuance of new options to such management members at a subsequent date, subject to approval by the stockholders of the Company of an increase in the number of shares of authorized Common Stock. Upon such issuance to Madeleine, Madeleine will own approximately 32% of the total outstanding stock of the Company. The Company and Madeleine are presently negotiating definitive agreements for transactions (b) and (c), which are subject to approval by the Board of Directors of the Company. There can be no assurance that definitive agreements will be reached. A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows: (1) REVENUE AND COST RECOGNITION Revenues on long-term construction contracts are recognized under the percentage-of-completion method. Under this method, progress towards completion is recognized according to engineering estimates. This method is used because management considers this method the most appropriate in the circumstances. Revenue on service contracts is recorded on the accrual basis as services are performed. The length of the Company's contracts varies but typically ranges from one to two years. In accordance with normal construction industry practice, the Company includes in current assets and current liabilities amounts relating to construction contracts realizable and payable over a period in excess of one year. Contract costs include all direct materials, direct labor and other indirect costs such as tools, supplies and site office expenses. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from final contract settlements, may result in revisions to costs and income, and such changes are recognized in the period in which the revisions are determined. An amount equal to costs incurred attributable to pending change orders is included in revenues when recovery is probable. F-10 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE A -- COMPANY BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (2) USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (3) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash, marketable securities, contracts and retainage receivable, accounts payable and current debt approximates fair value, principally because of the short-term maturity of these items. The fair value of the Company's long-term debt approximates carrying value as the interest rates on the related debt approximate the Company's current borrowing rate. (4) PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided for, on a straight-line basis, in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, which range from three to fifteen years. (5) IMPAIRMENT OF LONG-TERM ASSETS On an ongoing basis, the Company reviews the valuation and amortization of long-term assets. As part of this review, the Company estimates the undiscounted future cash flow expected to be generated by the related assets to determine whether an impairment has occurred. In fiscal 2003, the carrying value of communication equipment was written off by $0.9 million as a result of the Company's decision to discontinue its communications business. In the third quarter of fiscal 2002, the carrying value of communication equipment was written off by $2.5 million as a result of the Company's decision of further limiting its communications business efforts and resources to the Internet and subscription video businesses in the New York City Metropolitan area and in Florida. In the fourth quarter of fiscal 2001, the carrying value of intangible assets was written down by $1.2 million as a result of the Company's consideration of the estimated undiscounted future cash flow of ParaComm, Inc., a communications subsidiary. In determining the amount of impairment loss, the Company considered the estimated market value of the subsidiary's subscriber list, access rights and related equipment. (6) INCOME TAXES The Company files consolidated federal, state and local income tax returns. Deferred income taxes are principally the result of net operating loss carryforwards and differences related to different bases of accounting for financial accounting and tax reporting purposes. F-11 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE A -- COMPANY BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (7) CASH AND CASH EQUIVALENTS The Company considers its money market funds with an original maturity of three months or less to be cash equivalents. (8) RECLASSIFICATION The Company completed the discontinuance of its communications business in August 2003. Accordingly the financial results of this business for the fiscal years ended June 30, 2003, 2002, and 2001 are presented as discontinued operations. (9) OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) includes unrealized gains and losses on marketable securities classified as available-for-sale. The marketable securities were acquired in March 2001 for $892,500. As of June 30, 2001, the unrealized loss on the Company's available-for-sale securities was $202,500 and had been reported as a component of shareholders' equity. The Company subsequently sold the securities in fiscal 2002 and the unrealized loss was reversed. Comprehensive loss for the years ended June 30, 2002 and 2001 were $9,380,903 and $15,915,688, respectively. (10) RECENT ACCOUNTING PRONOUNCEMENTS In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees." FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a liability it has undertaken in issuing the guarantee. In addition, FIN 45 requires a guarantor to make disclosures of its obligations under the guarantees that a company has issued. The disclosure requirements of FIN 45 are effective for financial statements for periods ending after December 15, 2002. The initial recognition and initial measurement provision of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company adopted FIN 45 in fiscal year 2003. Our adoption of FIN 45 did not have a material impact on the Company's financial statements. In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (SFAS 149), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies accounting for derivative instruments and hedging activities under Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 149 is effective for contracts entered into or modified and for hedging relationships designated after June 30, 2003. The Company believes the adoption of SFAS 149 will not have a material impact on the Company's financial statements. In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (SFAS 150), "Accounting for Certain Financial Instruments and Characteristics of both Liabilities and Equity." SFAS 150 establishes standards on the classification and measurement of financial instruments with characteristics as both liabilities and assets. SFAS 150 is effective for instruments entered into or modified after May 31, 2003 and pre-existing instruments as of the beginning of the first interim period after June 15, 2003. The adoption of SFAS 150 had no material impact on the Company's financial statements. F-12 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE B -- ACCOUNTS RECEIVABLE Included in accounts receivable at June 30, 2003 and June 30, 2002, are unbilled receivables from completed contracts aggregating $314,448 and $446,821, respectively. Retained contract receivables at June 30, 2003 and 2002 of $3,050,000 and $3,474,000, respectively, include approximately $1,500,000 and $1,100,000, respectively, that is not expected to be collected within one year. In a prior year, the Company filed a claim of approximately $2,494,000 for costs incurred by the Company relating to specific items of additional work that the owner required the Company to perform. Included in accounts receivable is $1,245,000 relating to the claim, which represents contract costs attributable to the claim and the minimum amount expected to be recovered. In the opinion of the Company's counsel, the contract provides a legal basis to support the claim. It is at least reasonably possible that the estimated claim revenue for this contract will be further revised in the near term. The Company reduces its receivables by an allowance for future uncollectible accounts. The reconciliation of these balances is as follows: Allowance for Doubtful Accounts: YEARS ENDED ----------- JUNE 30, JUNE 30, JUNE 30, 2003 2002 2001 ---- ---- ---- Beginning Balance................ $532,000 $586,000 $646,000 Additions Charged to Expenses.... -- 473,121 112,894 Deductions....................... (112,000) (527,121) (172,894) -------- -------- -------- Ending Balance................... $420,000 $532,000 $586,000 ======== ======== ======== F-13 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE C -- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following: JUNE 30, -------- 2003 2002 ---- ---- Compensation................................. $1,340,904 $1,142,197 Current portion of lease payables............ 655,664 655,664 Unearned revenues............................ 49,874 218,613 Interest..................................... 60,000 108,064 Professional fees............................ 381,500 380,500 Communication taxes payable.................. 257,391 386,868 Other........................................ 1,776,580 648,893 --------- ------- $4,521,913 $3,540,799 ========== ========== F-14 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE D -- PROPERTY AND EQUIPMENT Property and equipment consist of the following: JUNE 30, -------- 2003 2002 ---- ---- Network infrastructure and equipment............... $ -- $3,066,659 Building and building improvements................. 1,627,669 1,596,719 Computer equipment................................. 639,753 945,380 Office furniture and equipment..................... 264,835 307,564 Automobiles........................................ 299,134 282,941 Machinery and equipment............................ 79,048 79,048 ------ ----- 2,910,439 6,278,311 Less accumulated depreciation and amortization.....(2,081,157) (3,434,421) --------- --------- 829,282 2,843,890 Land............................................... 315,000 315,000 ------- ------- $1,144,282 $3,158,890 ========== ========== NOTE E -- DEBT (1) SENIOR SECURED PROMISSORY NOTE On November 8, 2000, the Company consummated a $12.5 million senior secured loan transaction with Madeleine, an affiliate of Blackacre Capital Management L.L.C. ("Blackacre") (the "Madeleine Loan"). The Madeleine Loan, which is due and payable in November 2007, bears interest at a fixed rate of 11% per annum. The Madeleine Loan is a senior secured obligation of the Company and is guaranteed by certain subsidiaries of the Company, which have pledged substantially all of their respective assets to collateralize such guarantee. In connection with the Madeleine Loan, the Company issued warrants to purchase 3,125,000 shares of common stock at an exercise price of $4.00 per share, subject to antidilution provisions, expiring in December 2007, to an affiliate of Madeleine. A portion of the Madeleine Loan was used to retire existing indebtedness of the Company in the principal amount of $7 million owed to Madeleine and to pay expenses of obtaining the Madeleine Loan. The remaining proceeds were used for the Company's working capital purposes. No value was allocated to the warrants because the value was deemed immaterial. The outstanding principal and accrued interest with respect to the senior secured indebtedness owed by the Company to Madeleine totals approximately $13.1 million in September 2003. The Company has not made payments to Madeleine pursuant to the Madeleine Loan agreement and is presently in default under the terms of the agreement relating to the outstanding debt to Madeleine. The de-listing of the Company's common shares from the Nasdaq National Market in June 2001 also created a default under the Madeleine Loan agreement. Madeleine may call the loan due and payable at any time, and, if it is not paid, foreclose on significant assets of the Company's subsidiaries that secure such loan. If the Company cannot raise additional funds or if Madeleine demands payment on its loan, the Company will likely be forced to cease operations. Accordingly, there is substantial doubt about the Company's ability to continue as a going concern. In June 2003, the Company entered into an agreement in principle with Madeleine, whereby Madeleine would exchange all of the outstanding principal and accrued interest of the Madeleine Loan for the Company's interests in certain real estate and certain private cable television assets and for common equity of the Company. The agreement in principle provides that the outstanding principal and accrued interest with respect to the senior secured indebtedness owed by the Company to Madeleine is to be exchanged for (a) certain private cable television systems and associated assets related to properties in Florida of ParaComm, Inc., a wholly-owned subsidiary of the Company, in consideration of a reduction of indebtedness equal to the fair market value of such assets (which transaction was consummated in August 2003); (b) certain real estate owned by the Company located in Long Island City, New York in consideration of the reduction of indebtedness equal to the fair market value of such real estate; and (c) issuance of approximately 7.6 million shares of the Company's common stock to Madeleine for the balance F-15 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE E -- DEBT (CONTINUED) of the indebtedness. Such number of shares issuable to Madeleine represents all of the authorized and unissued shares of common stock of the Company less shares reserved for issuance pursuant to the exercise of outstanding stock options and warrants to purchase common stock that are not surrendered and cancelled. In connection with the transaction, certain members of management of the Company and an affiliate of Madeleine, respectively, are to surrender options and warrants to be cancelled. The agreement also provides for the issuance of new options to such management members at a subsequent date, subject to approval by the stockholders of the Company of an increase in the number of shares of authorized Common Stock. Upon such issuance to Madeleine, Madeleine will own approximately 32% of the total outstanding stock of the Company. The Company and Madeleine are presently negotiating definitive agreements for transactions (b) and (c), which are subject to approval by the Board of Directors of the Company. There can be no assurance that definitive agreements will be reached. (2) MORTGAGE PAYABLE In March 2003, the Company satisfied its mortgage obligation in the amount of $1.7 million. F-16 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE F -- SHAREHOLDERS' EQUITY In March 2000, options to purchase 617,500 shares of the Company's common stock were granted to employees with an exercise price lower than the closing price of the Company stock. One-third of the options vested at the date of the grant and the remaining two-thirds would have vested ratably on a monthly basis beginning on the last day of each of the 24 calendar months following March 2001. As a result of the grants, a compensation charge of $1.7 million was incurred, of which $600,000 was recognized in the year of grant. Accordingly, additional paid-in capital was increased by $1.7 million, deferred compensation was increased by $1.1 million, and general and administrative expenses were increased by $600,000 for the year ended June 30, 2000. In February 2001, such employees resigned and forfeited the stock options, and the unamortized deferred compensation was reversed. Accordingly, both additional paid-in capital and deferred compensation were decreased by $1.1 million for the year ended June 30, 2001. NOTE G -- INCOME TAXES Deferred income taxes reflect the impact of "temporary differences" between the amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws, and relate primarily to the net operating loss carryforward, allowance for doubtful accounts and accumulated depreciation. Management believes that the Company will less than likely generate sufficient taxable earnings or utilize tax planning opportunities to realize any of the deferred tax benefits and, therefore, has recorded a valuation allowance. The following is a summary of the items giving rise to no deferred tax benefits at June 30, 2003 and 2002: JUNE 30, -------- 2003 2002 ---- ---- Current Allowance for doubtful accounts......... $213,000 $213,000 -------- -------- Long-term Net operating loss carryforward......... 18,500,000 17,000,000 Accumulated depreciation................ 105,000 105,000 ------- ------- 18,605,000 17,105,000 ---------- ---------- Total deferred tax assets................. 18,818,000 17,318,000 Less valuation allowance.................. (18,818,000) (17,318,000) ------------ ------------ Net deferred tax assets................... -- -- ============ ============ F-17 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE G -- INCOME TAXES (CONTINUED) The provision (benefit) for income taxes differs from the amount computed by applying the statutory federal income tax rate to income (loss) before provision (benefit) for income taxes due to the following: JUNE 30, -------- 2003 2002 2001 ---- ---- ---- Statutory federal income tax... $(1,051,000) $(2,865,000) $(5,342,000) State and local income taxes... (652,000) (1,517,000) (2,357,000) Valuation allowance............ 1,607,000 5,458,000 8,375,000 State capital taxes............ 79,993 80,325 74,787 ----------- ----------- $(16,007) $1,156,325 $750,787 =========== =========== The Company has net operating loss carryforwards of approximately $37 million available for federal, state and local income tax purposes, expiring in the years 2011 to 2023. The Company's ability to utilize net operating loss carryforwards to offset future taxable income may be limited if the Company changes control as defined in Internal Revenue Code Section 382. NOTE H -- COMMITMENTS AND CONTINGENCIES (1) The Company leases certain equipment and fabrication shop space under operating leases expiring at various dates through June 2007. At June 30, 2003, minimum rental commitments under noncancellable operating leases are as follows: 2004.................. $163,000 2005.................. 96,000 2006.................. 56,000 2007.................. 15,000 2008.................. 0 - $330,000 ======== Equipment rent expense under operating leases for the years ended June 30, 2003, 2002 and 2001 was approximately $124,000, $135,000 and $369,000, respectively. Rent expense for fabrication shop space under an operating lease for the years ended June 30, 2003 and 2002, was $60,000 and $30,000, respectively, (2) The Company contributes to multiemployer pension plans for employees covered by collective bargaining agreements. These plans are not administered by the Company and contributions are determined in accordance with provisions of the agreements. Information with respect to the Company's proportionate share of the excess, if any, of the actuarially computed value of vested benefits over the total of the pension plans' net assets is not available from the plans' administrators. For the years ended June 30, 2003, 2002 and 2001, the Company contributed $10.6 million, $13.3 million, and $13.6 million, respectively, for various union employee benefits, including pension benefit, and medical and workers' compensation insurance. The Multiemployer Pension Plan Administration Act of 1980 (the "Act") significantly increased the pension responsibilities of participating employers. Under the provisions of the Act, if the Company were to withdraw from any of these plans or should any of the plans be terminated, the Company could be liable for a proportionate share of the unfunded actuarial present value of plan benefits at the date of withdrawal or termination. The amount of such unfunded liability is not known. (3) In connection with its construction-related businesses, the Company is contingently liable to sureties under a general indemnity agreement. The Company agrees to indemnify the sureties for any payments made on contracts of suretyship, guarantee or indemnity. That is, on certain work at the request F-18 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE H -- COMMITMENTS AND CONTINGENCIES (CONTINUED) of the Company, the sureties provide a full guarantee of performance and/or payment to third parties in the form of a bond. If the sureties pay an amount to third parties pursuant to such bond, the Company is obligated to fully reimburse the sureties. There is no dollar amount limit on the amount of the indemnity provided to the sureties. Management believes that all such contingent liabilities, if they occur, will be satisfied by performance on the specific bonded contracts. (4) Until 1995, Centrifugal was a partner with DAK Electric Contracting Corp. ("DAK") in a joint venture that performed mechanical and electrical services for a general contractor on a construction project in Manhattan known as the Lincoln Square project. Centrifugal was responsible for the mechanical portion of the contract, and its co-venturer, DAK, was responsible for the electrical portion. In 1995, DAK became insolvent, thereby obligating Centrifugal to complete the work on this project. As a result, in fiscal 1996 the Company wrote off approximately $3.7 million with respect to accounts receivable, loans receivable, claims and other costs that the Company incurred on behalf of DAK in fulfillment of DAK's obligations under the contract on the Lincoln Square project. As of June 30, 1996, all of the known claims and liens of subcontractors of the joint venture were settled and discharged, and all of the vendor lawsuits which arose out of these claims were also settled with the exception of the following: The joint venture's bonding companies have claims over for indemnity against Centrifugal and under a guarantee agreement against the Company in the event that a judgment is rendered against the bonding companies in a suit brought by an employee benefit fund for DAK's employees' union seeking contributions to the fund which the fund claims were due but not paid by DAK. The complaint alleges several causes of action against several defendants in connection with several projects and seeks a total of approximately $450,000 in damages on all of these causes against the named defendants; however, only one of the several causes of action, which seeks an unspecified portion of the total damages demanded, relates to the Company. In February 2003, the Company was informed that the bonding company reached a settlement with the union on account of the claim for unpaid benefits on the Lincoln Square project in the amount of $270,000. The bonding company expressed its intent to pursue reimbursement for such settlement amount through the cross-claims alleged against the Company in such action. Additionally, the Company may be exposed to such legal fees and other expenses as the Company's bonding company may have incurred or will incur in connection with this claim. Centrifugal and the Company have asserted, among other defenses, that such contributions were not guaranteed under the terms of the joint venture's bonds. (5) In August 2001, OnTera signed a promissory note and security agreement with Nokia to finance the purchase of various network equipment totaling approximately $668,000. The note bears interest at a rate of 11% per annum and requires eighteen monthly installments effective April 1, 2001. The note is secured by the network equipment financed by the note. OnTera has not made monthly installments since June 2001, therefore the Company is in default of the agreement. As such, the remaining balance at June 30, 2003 of $564,370 is included in accrued expenses and other current liabilities. In August 2002, Nokia filed suit in the District Court of Dallas County, Texas, claiming damages of approximately $607,000 plus interest, costs and attorneys on the promissory note. The Company believes that the final amount will not exceed amounts accrued. F-19 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE H -- COMMITMENTS AND CONTINGENCIES (CONTINUED) (6) In 1999, ParaComm purchased from Golden Sky Systems (GSS) GSS's contract with DirecTV which authorized it to be a DirecTV Master Systems Operator (MSO). Along with the contract so purchased, ParaComm acquired a GSS contract with one of its System Operators, Cable America, Inc. In May, 2002 Cable America, Inc. filed suit in the Circuit Court of Cook County, Illinois against ParaComm, OnTera, DirecTV, GSS and Pegasus Communications Inc., which had subsequently acquired GSS. The suit claims damages for allegedly unpaid commissions in the claimed amount of $339,000 and also seeks an accounting. (7) In July 2002, plaintiff Harvey Wayne filed a verified shareholders' derivative complaint against directors and officers of the Company, various other entities and the Company as a nominal defendant, in the United States District Court for the Eastern District of New York. The complaint alleges breach of fiduciary duties and seeks to compel the Company to hold a shareholders' meeting for the election of directors. The complaint seeks injunctive relief and unspecified damages. Motions to dismiss have been filed by the Company and other defendants and are pending before the Court. (8) In the ordinary course of business, the Company is involved in claims concerning personal injuries and property damage, all of which the Company refers to its insurance carriers. The Company believes that the claims are covered under its liability policies and that no loss to the Company is probable. No provision for such claims has been made in the accompanying financial statements. NOTE I -- RELATED PARTY TRANSACTIONS (1) TechOne Capital Group LLC ("TechOne"), a private consulting and investment firm of which Jared E. Abbruzzese, a director of the Company until his resignation on September 10, 2003, is a principal, had provided consulting services to the Company from August 12, 1999 until June 30, 2001, pursuant to letter agreements dated August 12, 1999 and March 24, 2000 and pursuant to a consulting agreement dated June 1, 2000. The consulting fee payable under the consulting agreement was $30,000 per month, plus reimbursement of expenses. In November 2001, TechOne gave the Company a written notice to terminate the agreement effective on June 30, 2001 and waived any subsequent consulting fees that might be due by the Company to TechOne under the agreement. For the year ended June 30, 2001, the Company paid TechOne $360,000 for consulting services in connection with the agreement. For the years ended June 30, 2002 and June 30, 2003, the Company made no payments to TechOne. Subject to stockholder approval and other conditions, Class D Warrants to purchase 750,000 shares of Company Common Stock were granted to TechOne on April 13, 2000. The Class D Warrants are exercisable for $4.063 per share and vest and become fully exercisable when the 30-day average closing price of the Company Common Stock has been at or above $14.00, and a material third party acquisition or merger, material equity investment in the Company or joint venture or other material third party transaction having a substantially similar economic effect as the foregoing has been effected (excluding, in each instance, the transactions contemplated by the Blackacre Securities Purchase Agreement). Additionally, regardless of the vesting requirement discussed above, the Class D Warrants vest and become fully exercisable upon a change of control (excluding the transactions contemplated by the Blackacre Securities Purchase Agreement). The Warrants will expire on the seventh anniversary of issuance. The Company has no present plan to hold a stockholders meeting for the purpose of seeking stockholder approval for the Class D Warrants. In connection with the consummation of the November 8, 2000 financing transaction with Madeleine L.L.C., to ensure that DualStar had a sufficient number of authorized but unissued shares of common stock for issuance upon the exercise of such warrants, TechOne irrevocably surrendered any rights it had to Class D Warrants to purchase 375,000 shares of DualStar common stock. (2) The Company is a party to a consulting agreement dated June 1, 2000 with Hades Advisors LLC ("Hades"), an affiliate of TIG. The consulting fee payable under the consulting agreement is $20,000 per month, plus reimbursement of expenses. The consulting agreement provides that other than termination as a result of a material breach by Hades, the Company may terminate this consulting agreement only by giving written notice to Hades of the Company's intention to terminate this consulting agreement accompanied by payment of (i) all unpaid amounts due hereunder from the Company to Hades for the consulting services (as defined therein) rendered through the date of termination, plus all reimbursable amounts for which Hades has delivered to the Company an invoice on or before the termination date, (ii) $25,000, which will be used by Hades for reimbursable expenses incurred prior to the termination date and not yet invoiced, and (iii) an amount equal to the product of F-20 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE I -- RELATED PARTY TRANSACTIONS (CONTINUED) $20,000 times the greater of (A) the number of months remaining in the 3-year term thereof, and (B) 24. For the year ended June 30, 2001, the Company paid Hades $240,000 for consulting services in connection with the agreement. For the years ended June 30, 2003 and 2002, the Company made no payments to Hades. (3) Subject to stockholder approval and other conditions, Class D Warrants to purchase 625,000 shares of Company Common Stock were granted to TIG on April 13, 2000, on the same terms and conditions discussed above in paragraph (2). The Company has no present plan to hold a stockholder meeting for the purpose of seeking stockholder approval for the Class D Warrants. (4) The Company's mechanical contracting business leased manufacturing space, on a month-to-month basis, from a company in which Messrs. Cuneo and Fregara own a majority interest. The lease was terminated in March 2002. Rent expense in connection with the lease for the years ended June 30, 2002 and 2001 was $35,000 and $46,000, respectively. (5) The Company's electrical contracting subsidiary obtained consulting services from M & E Advisors, LLC, an affiliate of TIG in fiscal 2001. For the year ended June 30, 2001, consulting fee for the services was $170,000. For the years ended June 30, 2003 and 2002, the Company made no payments to M & E Advisors, LLC. (6) At June 30, 2003, the Company had loans to Messrs. D'Onofrio and Cuneo in the amounts of $96,000 and $60,000, respectively. (a) An original loan of $171,000 was due on demand, with an unstated interest rate. In September 2000, the loan amount was reduced by $75,000 to offset bonuses earned by Mr. D'Onofrio in the prior periods and a promissory note was signed by Mr. D'Onofrio for the remaining loan balance of $96,000. The note bears an interest rate of 7.75% per annum and is due in August 2006. In addition, Mr. D'Onofrio provided all stock options granted to him by the Company as the collateral and security of the note. (b) The $60,000 loan is due on demand, with an interest rate of 7.75% per annum. Mr. Cuneo had also borrowed $350,000 from the Company in June 2001 and repaid the loan with interest in June 2001. In addition, Mr. Cuneo had purchased various services from the Company totaling $134,000 during fiscal 2001, of which $84,000 was paid through September 2001. (7) For the fiscal years ended June 30, 2003, 2002, and 2001, approximately 17.1%, 0.2%, and 2.0% of the Company's total revenues were derived from HRH Construction Corporation ("HRH"), respectively. Mr. Cuneo is also the Chairman of HRH. In addition, DualStar's President and Chief Executive Officer is (non-Director) Chairman of Starrett Corporation, an affiliate of HRH and Blackacre, and is compensated as Chairman of Starrett Corporation under a consulting agreement between Starrett Corporation and Starrett Consulting, L.L.C. (of which Mr. Cuneo is a 50% member). The remaining interest in Starrett Consulting, L.L.C. is held by Mr. Brad Singer, the President of HRH and a member of TIG. In exchange for various services, including management services, Starrett Consulting, L.L.C. receives an annual fee of $750,000 from Starrett Corporation in equal monthly installments, plus an additional fee may be earned in certain circumstances. NOTE J -- CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of cash, marketable securities, trade accounts receivable and retainage receivable. The Company maintains cash balances with large U.S. commercial banks. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000 per institution. The Company's balances may exceed this limit. At June 30, 2003, uninsured cash balances were approximately $2.6 million. The Company believes it is not exposed to any significant credit risk for cash. F-21 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE J -- CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS (CONTINUED) The Company's construction customers, which are concentrated in the New York Metropolitan area, include various general contractors, real estate developers, hotels, governmental agencies, and subcontractors. For the year ended June 30, 2003, revenue from two customers (Bovis Lend Lease, Inc. (formerly Lehrer McGovern Bovis, Inc.), and HRH Construction Corporation) amounted to approximately 37% and 17% of the Company's total revenues, respectively. For the year ended June 30, 2002, revenue from one customer (Bovis Lend Lease, Inc. (formerly Lehrer McGovern Bovis, Inc.)) amounted to approximately 64% of the Company's total revenues. For the year ended June 30, 2001, revenue from two customers (Bovis Lend Lease, Inc. and Rockrose Construction Corp.) amounted to approximately 60% and 15% of the Company's total revenues, respectively. In addition, as of June 30, 2003, contract and retainage receivables from Bovis Lend Lease, Inc. and HRH Construction Corporation amounted to approximately 15% and 28% of the Company's total contract and retainage receivables, respectively. As of June 30, 2002 and 2001, contract and retainage receivables from Bovis Lend Lease, Inc. amounted to approximately 52% and 58% of the Company's total contract and retainage receivables, respectively. In addition, for the fiscal years ended June 30, 2002 and 2001, approximately 0.2% and 2.0% of the Company's total revenues, respectively, were derived from HRH Construction Corp. DualStar's President and Chief Executive Officer is also the Chairman of HRH Construction Corp. HRH Construction Corp. is an affiliate of Blackacre. NOTE K -- STOCK OPTION PLAN On October 17, 1994, the Board of Directors adopted, and the stockholders subsequently approved and amended, the 1994 Stock Option Plan (as amended, the "1994 Plan") pursuant to which officers, directors, employees and consultants of the Corporation and its affiliates are eligible to be granted stock option awards ("Awards"). Stockholders approved the amendments to the 1994 Plan at the 1998 Annual Meeting of Stockholders. On April 13, 2000, the Company's Board of Directors approved an amendment to the 1994 Plan providing that for all Awards granted under the 1994 Plan from and after April 13, 2000, the Compensation Committee shall determine the definition of Change of Control and the treatment of such Awards upon a Change of Control, in the Committee's sole and absolute discretion. This amendment does not require stockholder approval. The 1994 Plan is currently being administered by the Compensation Committee, which has the authority to grant awards, including Stock Options, Stock Appreciation Rights, Restricted Stock, or any combination of the foregoing, and to determine the terms and conditions of the Awards. Options under the 1994 Plan generally shall be exercisable for a term fixed by the Compensation Committee, not to exceed 10 years from date of grant, unless any such options are terminated earlier pursuant to the terms of the 1994 Plan. The total number of shares of Company Common Stock presently reserved for such Awards and available for distribution under the 1994 Plan is 3,500,000. As of June 30, 2003, 2,937,067 options were outstanding under the 1994 Plan. The outstanding options have exercise prices ranging from $0.75 to $10.25 per share. No stock options were exercised by any executive officer during fiscal year 2003. F-22 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE K -- STOCK OPTION PLAN (CONTINUED) Effective July 1, 1996, the Company adopted the provisions of Statement No. 123, "Accounting for Stock-Based Compensation." As permitted by the Statement, the Company has chosen to continue to account for stock-based compensation using the intrinsic value method. Accordingly, no compensation cost has been recognized for the plan under the fair value method of SFAS 123. Had compensation cost of the plan been determined based on the fair value of the options at the grant dates consistent with the method of SFAS 123, the Company's net loss and loss per share would have been:

The computation of basic and diluted net income (loss) per share is based on the weighted average number of shares of common stock outstanding. For diluted net income per share, when dilutive, stock options and warrants are included as share equivalents using the treasury stock method, and shares available for conversion under the convertible note are included as if converted at the date of issuance. For the years ended June 30, 2003, 2002, and 2001, stock options and warrants have been excluded from the calculation of diluted loss per share as their effect would have been antidilutive. This pro forma impact only takes into account options granted since July 1, 1994 and is likely to increase in future years as additional options are granted and amortized ratably over the vesting periods. The fair market value of each option grant is estimated on the date of granting using the Black-Scholes options-pricing model with the following weighted-average assumptions used for grants in fiscal 2003 and 2002: risk-free interest rate of approximately 5.0%, expected life of seven years, volatility of 100% and no dividend yield. A summary of information relative to the Company's stock option plan follows: WEIGHTED NUMBER OF SHARES AVERAGE PRICE ---------------- ------------- Outstanding at June 30, 2000......... 3,500,000 $3.29 Granted in fiscal 2001............... 663,225 $6.27 Forfeited in fiscal 2001............. (945,000) $5.52 --------- Outstanding at June 30, 2001......... 3,218,225 $2.88 Forfeited in fiscal 2002............. (127,025) $5.10 --------- Outstanding at June 30, 2002......... 3,091,200 $2.78 Forfeited in fiscal 2003............. (154,133) $4.21 --------- Outstanding at June 30, 2003......... 2,937,067 $2.72 ========= Weighted average fair values of option grants in fiscal 2001were $0.32. In March 2000, options to purchase 617,500 shares of the Company's common stock were granted to employees with an exercise price lower than the closing price of the Company stock. One-third of the options vested at the date of the grants and the remaining two-thirds would have vested ratably on a monthly basis beginning on the last day of each of the 24 calendar months following March 2001. As a result of the grants, a compensation charge of $1.7 million was incurred, of which $600,000 was recognized in the year of grant. Accordingly, additional paid-in capital was increased by $1.7 million, deferred F-23 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE K -- STOCK OPTION PLAN (CONTINUED) compensation was increased by $1.1 million, and general and administrative expenses were increased by $600,000. In February 2001, the employees resigned and forfeited the stock options, and the unamortized deferred compensation was reversed. Accordingly, both additional paid-in capital and deferred compensation were decreased by $1.1 million. The following information applies to options outstanding and exercisable at June 30, 2003:

NOTE L -- EMPLOYEE BENEFIT PLAN The Company maintains a retirement savings plan, effective as of January 1995, in which eligible employees of the Company may elect to participate. The plan is an individual account plan providing for deferred compensation as defined in Section 401(k) of the Internal Revenue Code, and is subject to, and intended to comply with, the Employee Retirement Income Security Act of 1974. Each eligible employee is permitted to defer receipt of up to the lesser of $12,000 or 100% of eligible compensation, subject to maximum statutory limits and nondiscrimination testing prescribed by the Internal Revenue Code. The Company may, in its discretion, match employee deferrals in cash or DualStar stock, or make discretionary profit sharing plan contributions in cash or DualStar stock, subject to current IRS limits and nondiscrimination testing. For the year ended June 30, 2003, 2002, and 2001, DualStar made no contribution to the plan. NOTE M -- EMPLOYMENT AGREEMENTS Effective August 1994, DualStar entered into employment agreements with Messrs. Cuneo, Yager and Fregara. The employment agreements expired in August 1997 and have been renewed for three additional three-year terms through August 2006. Mr. Cuneo's current salary is $275,000, with a guaranteed minimum bonus of $25,000, up to a maximum of $100,000 based on certain performance objectives which are to be determined by the Board and the Compensation Committee. Messrs. Fregara and Yager's current salaries are each $235,000, with a guaranteed minimum bonus of $25,000, up to a maximum of $100,000 based on certain performance objectives which are to be determined by the Board and the Compensation Committee. The salaries under these executive's employment agreements, as amended, may be increased to reflect annual cost of living increases and may be supplemented by discretionary merit and performance increases as determined by the Compensation Committee. The employment agreements provide, among other things, for participation in an equitable manner in any profit-sharing or retirement plan for employees or executives and for participation in other employee benefits applicable to employees and executives of the Company. The employment agreements provide that the Company will establish a performance incentive bonus plan providing each executive the opportunity to earn an annual bonus of up to five percent of the increase, if any, in the Company's pretax income, based upon the attainment of performance goals to be established by the Compensation Committee. The employment agreements further provide for the use of an automobile and other fringe benefits commensurate with their duties and responsibilities, and for benefits in the event of disability. Pursuant to the employment agreements, employment may be terminated by the Company with cause or by the executive with or without good reason. Termination by the Company without cause, or by the executive for good reason, would subject the Company to liability for liquidated damages in an amount equal to the terminated executive's current salary for the remainder of the scheduled term of employment and bonuses for the remainder of the scheduled term of employment based upon the prior year's annual bonus and the maximum incentive bonus payable. Such amounts shall be payable in equal monthly installments, without any set-off for compensation received from any new employment. In addition, the terminated executive would be entitled to continue to participate in and accrue benefits under all employee benefit plans and to receive supplemental retirement benefits to replace benefits under any qualified plan for the remaining term of the employment agreements to the extent permitted by law. F-24 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE M -- EMPLOYMENT AGREEMENTS (CONTINUED) The employment agreements provide for the purchase by the Company of insurance policies in the amount of $1,000,000 on the lives of each of Messrs. Cuneo, Yager and Fregara. The Company will pay the premiums under these policies, and a portion of the payment will be treated as taxable income to the insured executive. Upon the death of any of the insureds, the Company would be paid from the insurance proceeds an amount equal to the total premiums it paid under the policy, with the remaining proceeds to be paid to the deceased executive's designated beneficiary. To date, each of Messrs. Cuneo, Yager and Fregara has declined to have the Company purchase such insurance. On June 1, 2000, the Company entered into employment agreements with each of Barry Halpern and Nicholas Ahel, President and Vice President, respectively, of High-Rise, which agreements expired on July 1, 2002. The Company and the executives continue to discuss new employment agreements, but there can be no assurance that the parties will reach agreement. If the parties do not reach agreement and the Company loses the services of Mr. Halpern or Mr. Ahel, there may be a material adverse effect on the Company. Mr. Halpern continues to serve as President of High-Rise at a current annual base salary of $260,000. Mr. Ahel continues to serve as Vice President of High-Rise at a current annual base salary of $260,000. Each of Messrs. Halpern and Ahel continue to receive such other benefits, including medical, disability, pension and severance plans, as are made generally available to executive employees of the Company from time to time, and a life insurance benefit in the amount of one times such executive's current annual base salary. In connection with Robert Birnbach's role as the Company's Executive Vice President, Chief Financial Officer and Secretary, the Company and Mr. Birnbach entered into an employment agreement dated June 7, 2000, but effective as of June 1, 1999. Under the terms of his employment agreement, Mr. Birnbach agreed to serve as Executive Vice President, Chief Financial Officer and Secretary of the Company at a current base salary of $220,000. Mr. Birnbach's agreement contemplates that he is eligible for a bonus of up to 50% of his annual base salary upon the achievement by the Company and Mr. Birnbach of performance targets agreed-upon by the Board of Directors and Mr. Birnbach. Mr. Birnbach's annual base salary and bonus percentage may be increased, but not decreased by the Company's Board of Directors. Mr. Birnbach's employment with the Company may be terminated by the Company with Cause (as defined in the agreement) or by Mr. Birnbach with or without good reason (as defined in the agreement). Upon termination, all vested options remain exercisable for the duration of the option. Termination of employment by the Company without cause, or by Mr. Birnbach with good reason would entitle Mr. Birnbach to severance in the amount of two times Mr. Birnbach's annual base salary, plus other perquisites for the one-year period following the date of termination; additionally, all unvested options to purchase Company Common Stock would vest immediately. In fiscal year 2000, OnTera entered into an employment agreement with Vincent D'Onofrio, currently President and Chief Technology Officer, at a current annual base salary of $250,000; in addition, he is eligible for a bonus of up to 40% of his annual base salary, upon the achievement of specified performance targets. Annual base salary and bonus percentage may be increased, but not decreased, by the OnTera board of directors. Pursuant to the OnTera employment agreement, employment may be terminated by OnTera with Cause (as defined in the agreements) or by Mr. D'Onofrio with or without good reason (as defined in the agreements). Termination of employment by OnTera without Cause, or by Mr. D'Onofrio with good reason would entitle the executive to severance in the amount of executive's then annual base salary, plus a pro rata portion of the bonus that would be payable in the year of termination. In the event of a termination of employment by OnTera with Cause, the Mr. D'Onofrio is entitled to receive all base salary through the date of termination. All unvested options lapse. In the event of a voluntary termination of employment by the executive, the executive is entitled to receive his annual base salary through the date of termination and be eligible for a pro rata portion of any bonus. F-25 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE N -- COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Costs and estimated earnings on uncompleted contracts consist of the following: JUNE 30, -------- 2003 2002 ---- ---- Costs incurred on uncompleted contracts..... $60,945,907 $53,899,529 Estimated earnings.......................... 14,454,584 7,655,621 ---------- --------- 75,400,491 61,555,150 Less billings to date....................... 77,420,902 65,963,482 ---------- ---------- $(2,020,411) $(4,408,332) ============ ============ Costs and estimated earnings on uncompleted contracts are included in the accompanying consolidated balance sheets as follows:

F-26 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE O -- UNAUDITED QUARTERLY DATA SELECTED QUARTERLY FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

F-27 DUALSTAR TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE P - DISCONTINUED OPERATIONS In November 2002, the Company announced its intent to sell substantially all of the assets of ParaComm. The carrying value of the ParaComm assets held for sale at June 30, 2003, represented, substantially, all of the assets of the Company's communications business. Since the Company intended on selling the ParaComm assets within twelve months of November 2002, the ParaComm assets are reported as a separate line item, "Assets held for sale" on the Company's consolidated balance sheet at June 30, 2003. The communications operations for the year ended June 30,2003 are reported as discontinued on the Company's consolidated statement of operations for the year ended June 30, 2003. Additionally, the Company's consolidated statements of operations for the years ended June 30, 2002 and 2001 have been restated to report the communications operations as discontinued. Selected quarterly unaudited financial data from continued and discontinued operations is presented in Note O. The results of operations for the Company's discontinued communications business were as follows (in thousands): YEARS ENDED JUNE 30, -------------------------------------------------------------------------------- 2003 2002 2001 ---- ---- ---- Revenues earned................................. $1,334 $3,296 $3,480 ------ ------ ------ Loss from discontinued communications business 2,779 7,369 12,062 Income tax (benefit) -- -- -- ------ ------ ------ Loss from discontinued operations 2,779 7,369 12,062 ------ ------ ------ The major classes of assets and liabilities for the Company's discontinued communications business were as follows (in thousands): JUNE 30, -------- 2003 2002 ------- ------- Accounts receivable - net ................................... $ 37 $ 546 ------- ------- Property and equipment -- net (held for sale at June 30,2003) 484 2,150 Total Current Assets .................................... 521 546 Property and equipment -- net (held for sale at June 30,2003) -- 2,150 ------- ------- Total Assets ............................................ $ 521 $ 2,696 ======= ======= Due to affiliates ........................................... $24,695 $23,994 Accounts payable ............................................ 1,274 1,169 Accrued expenses ............................................ 1,408 1,635 ------- ------- Total Current Liabilities ............................... 27,377 26,798 ------- ------- Total Liabilities ....................................... $27,377 $26,798 ======= ======= The sale of ParaComm's assets was consummated in August 2003, pursuant to an asset purchase agreement dated as of July 2003 by and among the Company, ParaComm, Madeleine, and PCM Acquisitions Corp. The ParaComm sale finalized the Company's discontinuance of its communications business. Details of the asset purchase agreement are presented in Notes A and E. F-28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DUALSTAR TECHNOLOGIES CORPORATION By /s/ GREGORY CUNEO -------------------------- Gregory Cuneo President and Chief Executive Officer Dated: September 29, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated. Signature Title Date ----------- ----- ---- /s/ GREGORY CUNEO President, Chief September 29, 2003 Executive Officer and Director -------------------- Gregory Cuneo /s/ ROBERT BIRNBACH Executive Vice President and September 29, 2003 Chief Financial Officer -------------------- [Principal Financial Robert Birnbach Officer] /s/ MICHAEL GIAMBRA Vice President and Chief September 29, 2003 Accounting Officer -------------------- [Principal Accounting Michael Giambra Officer] /s/ RAYMOND STEELE Director September 29, 2003 -------------------- Raymond Steele SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 EXHIBITS TO FORM 10-K COMMISSION FILE NUMBER 0-25552 11-30 47TH AVENUE, LONG ISLAND CITY, NEW YORK 11101 (Address of principal executive offices) (Zip Code) DELAWARE 13-3776834 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) (718) 340-6655 (Registrant's telephone number, including area code) EXHIBIT INDEX Number Title 2.1 Securities Purchase Agreement dated as of March 28, 2000 by and among the Registrant, Cerberus Capital Management, L.P. and Blackacre Capital Management, L.L.C. (2) 2.2 Stock Purchase Agreement dated as of March 28, 2000 between the Registrant and M/E Contracting Corp. (2) 2.3 Agreement and Plan of Merger dated as of May 11, 2000 between the Registrant, DCI Acquisition Co. and ParaComm, Inc. (2) 2.4 Securities Purchase Agreement dated as of November 8, 2000 by and among Registrant, DSTR Warrant Co., LLC and Madeleine L.L.C. (4) 3.1 Certificate of Incorporation, filed June 14, 1994, as restated. (1) 3.2 Amended and Restated Bylaws. (2) 4.1 Specimen Copy of Common Stock Certificate. (1) 4.2 DualStar Technologies Corporation 1994 Stock Option Plan, as amended. (1) 4.3 1994 Stock Option Plan Amendment. (3) 10.1 Employment Agreement between the Registrant and Gregory Cuneo, dated August 31, 1994. (1) 10.2 Employment Agreement between the Registrant and Stephen J. Yager, dated August 31, 1994. (1) 10.3 Employment Agreement between the Registrant and Ronald Fregara, dated August 31, 1994. (1) 10.4 Employment Agreement between the Registrant and Robert J. Birnbach dated June 7, 2000. (3) 10.5 Employment Agreement between the Registrant and Nicholas Ahel dated June 1, 2000. (3) 10.6 Employment Agreement between the Registrant and Barry Halpern dated June 1, 2000. (3) 10.7 Second Amended and Restated Note, having an original issued dated as of December 1, 1999, made by Registrant in favor of Madeleine L.L.C. (5) 10.8 Stockholders Agreement dated March 28, 2000 among DualStar Technologies Corporation, Blackacre Capital Management L.L.C., Cerberus Capital Management, L.P., Gregory Cuneo and Robert J. Birnbach. (2) 10.9 Stockholders Agreement dated as of November 8, 2000 by and among Registrant, DSTR Warrant Co., LLC, Technology Investors Group, LLC and certain members of Registrant's Management. (5) 10.10 Class E Warrant Agreement dated as of November 8, 2000 by and between Registrant and DSTR Warrant Co., LLC. (4) Number Title 10.11 Registration Rights Agreement dated as of November 8, 2000 by and among Registrant, DSTR Warrant Co., LLC and Technology Investors Group, LLC. (5) 10.12 Master Surety Agreement dated November 3, 1997 by the Company and its subsidiaries in favor of United States Fidelity and Guaranty Company, Fidelity and Guaranty Insurance Company, Fidelity and Guaranty Insurance Underwriters, Inc. (3) 10.13 Registration Rights and Lock-Up Agreement dated as of May 10, 2000 by and among the Company and the former ParaComm stockholders.(3) 10.14 Voting Agreement dated as of May 10, 2000 by and among the Company, Donald Johnson, Mark Mayhook and Geneva Associates Merchant Banking Partners I, LLC. (3) 10.15 Consulting Agreement dated as of June 1, 2000 between the Company and TechOne. (3) 10.16 Consulting Agreement dated as of June 1, 2000 between the Company and Hades Advisors, LLC. (3) 10.17 Asset Purchase Agreement, dated as of July 9, 2003 by and among the Company, ParaComm, Madeleine, and PCM Acquisition Corp. (6) 10.18 Global Bonding general agreement of indemnity. (7) 21.1 Subsidiaries of the Registrant.(7) 23.1 Consent of Grassi & Co., CPAs, P.C. (7) 23.2 Consent of Grant Thornton LLP.(7) 31.1 Rule 13a-14(a)/15d-14(a) Certification. (7) 31.2 Rule 13a-14(a)/15d-14(a) Certification. (7) 32.1 Section 1350 Certification. (7) 32.2 Section 1350 Certification. (7) (1) Incorporated herein by reference to Registrant's Registration Statement on Form S-1, File No. 33-83722, ordered effective by the Securities and Exchange Commission on February 13, 1995. (2) Incorporated herein by reference to Registrant's Quarterly Report on Form 10-Q (File No. 0-25552) for the quarter ended March 31, 2000. (3) Incorporated herein by reference to Registrant's Annual Report on Form 10-K (File No. 0-25552) for the period ended June 30, 2000. (4) Incorporated herein by reference to Registrant's Form 13D filed by Stephen Feinberg on November 21, 2000. (5) Incorporated herein by reference to Registrant's Quarterly Report on Form 10-Q (File No. 0-25552) for the quarter ended December 31, 2000. (6) Incorporated herein by reference to Registrant's Current Report on Form 8-K (File No. 000-25552) filed on August 19, 2003. (7) Attached hereto.

DUALSTAR TECHNOLOGIES CORP 10-K