APPNET INC /DE/, S-1, 1999-10-28

APPNET INC /DE/
S-1, 1999-10-28
BUSINESS SERVICES, NEC

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<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

APPNET, INC.
(Exact name of Registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 7373 52-2077860
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

6707 DEMOCRACY BOULEVARD
BETHESDA, MD 20817
(301) 493-8900
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

KEN S. BAJAJ, PRESIDENT AND CHIEF EXECUTIVE OFFICER
APPNET, INC.
6707 DEMOCRACY BOULEVARD
BETHESDA, MD 20817
(301) 493-8900

(Name, address, including zip code, and telephone number, including
area code, of agent for service)
--------------------------
COPIES TO:

<TABLE>
<S> <C>
LUKE E. SIMS, ESQ. WILLIAM J. WHELAN, III, ESQ.
FOLEY & LARDNER CRAVATH, SWAINE & MOORE
777 EAST WISCONSIN AVE. 825 EIGHTH AVENUE
MILWAUKEE, WISCONSIN 53202 NEW YORK, NY 10019
(414) 271-2400 (212) 474-1000
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If this is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED
MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $0.0005 per share...... 4,600,000 $45.25 $208,150,000 $57,866
</TABLE>

(1) Includes a maximum of 600,000 shares that may be purchased by the
underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933 based upon the
average of the high and low prices reported on the Nasdaq National Market on
October 27, 1999.
--------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

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<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 28, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
4,000,000 Shares

[LOGO]

APPNET, INC.

Common Stock

-----------

We are selling 1,500,000 shares of our common stock and the selling
stockholders named under "Selling Stockholders" are selling 2,500,000 shares of
our common stock. We will not receive any of the proceeds from shares of our
common stock sold by the selling stockholders.

The underwriters have an option to purchase a maximum of 600,000 additional
shares from the selling stockholders to cover over-allotments of shares.

Our common stock is traded on The Nasdaq Stock Market's National Market
under the symbol "APNT". On October 26, 1999, the last reported sale price of
our common stock was $49.00 per share.

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 4.

<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS PROCEEDS TO
PRICE TO AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS APPNET, INC. STOCKHOLDERS
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Per Share............................................ $ $ $ $
Total................................................ $ $ $ $
</TABLE>

Delivery of the shares of common stock will be made on or about ,
1999.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

CREDIT SUISSE FIRST BOSTON

HAMBRECHT & QUIST

FIRST UNION SECURITIES, INC.

THE ROBINSON-HUMPHREY COMPANY

The date of this prospectus is , 1999.
<PAGE>

[APPNET LOGO] SOME OF OUR CLIENTS

[BURTON SNOWBOARDS LOGO]

SUPPLY-CHAIN INTEGRATION

BURTON SNOWBOARDS

CHALLENGE: Design and implement an on-line inventory and supply-chain
management system.

SOLUTION: We designed and implemented an on-line inventory and supply-chain
management system that Burton management uses to control changing inventory,
manage materials and track product placement. Our solution accommodates
multiple languages and currencies and is able to generate detailed reports.
Our solution is designed to improve Burton's efficiency in managing its
inventory and supply-chain and reducing production overruns and overall costs.

[TOSHIBA, ELECTRONIC IMAGING DIVISION LOGO]

EXTRANET DEVELOPMENT

THE ELECTRONIC IMAGING DIVISION OF TOSHIBA AMERICA INFORMATION SYSTEMS, INC.

CHALLENGE: Design and implement a restricted access dealer extranet system.

SOLUTION: We developed the community, Web-interface and database elements of
Toshiba's FYI Dealer Extranet, an on-line system for dealers that provides a
common interface in addition to customized information that meets each
individual dealer's requirements. We designed security features which protect
market-sensitive information from unauthorized users. A conditional access
system, driven by a complex database user-authorization scheme, offers
multiple read-and-write user access levels. Employees, dealers and
distributors have the opportunity to build relationships on this Dealer
Extranet. This electronic commerce and informational site is designed to
simplify ordering and shipping of more than 10,000 spare-part SKUs for fax
machines and copiers.

[MULTEX.COM LOGO]

INTERACTIVE ROI MARKETING

MULTEX.COM

CHALLENGE: Design and develop a Web-based ad campaign to increase site
traffic and trading volume and decrease the per customer acquisition cost.

SOLUTION: We crafted a media plan which included the creation of multiple
banner ads. Using our proprietary service, AdMaximize, we served banner ads,
tracked banner ad performance and collected real-time data on click-through,
lead generation, customer acquisition and sales. Based on multex.com's and
our collective analysis of this data, we were able to make real-time
adjustments to multex.com's ad campaign. Our solution is designed to increase
overall membership for multex.com, increase its revenues per new member and
decrease multex.com's cost to acquire new members via the Web.
<PAGE>
--------------

TABLE OF CONTENTS

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<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUMMARY.................... 1
RISK FACTORS.......................... 4
USE OF PROCEEDS....................... 14
PRICE RANGE OF OUR COMMON STOCK AND
DIVIDEND POLICY..................... 14
CAPITALIZATION........................ 15
DILUTION.............................. 16
PRO FORMA CONSOLIDATED FINANCIAL
DATA................................ 17
SELECTED FINANCIAL DATA............... 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 25
BUSINESS.............................. 36
</TABLE>

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
MANAGEMENT............................ 50
CERTAIN RELATIONSHIPS AND
TRANSACTIONS........................ 59
PRINCIPAL STOCKHOLDERS................ 63
SELLING STOCKHOLDERS.................. 64
DESCRIPTION OF CAPITAL STOCK.......... 65
SHARES ELIGIBLE FOR FUTURE SALE....... 70
U.S. FEDERAL TAX CONSIDERATIONS FOR
NON-U.S. HOLDERS.................... 72
UNDERWRITING.......................... 76
NOTICE TO CANADIAN RESIDENTS.......... 78
LEGAL MATTERS......................... 79
EXPERTS............................... 79
WHERE YOU CAN FIND ADDITIONAL
INFORMATION......................... 79
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>

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

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS
DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. YOU SHOULD
ASSUME THAT THE INFORMATION IN THIS DOCUMENT IS ACCURATE ONLY AS OF THE DATE OF
THIS DOCUMENT.

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

Unless otherwise indicated, (a) all references to "AppNet," "we," "us" and
"our" refer to AppNet, Inc. and, after their respective acquisitions or
formations, its subsidiaries and (b) all references to "GTCR" refer to GTCR
Golder Rauner, L.L.C. and its affiliates, including GTCR Fund VI, L.P., GTCR VI
Executive Fund, L.P. and GTCR Associates VI.

AppNet has filed for trademark registration of "AppNet" and the related
logo. This prospectus also includes trademarks and tradenames of other parties.

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

CAUTIONARY NOTICE
REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains statements that we believe are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All statements other than statements of historical fact in this
prospectus, including statements regarding our competitive strengths, business
strategy, expected benefits of any acquisition, future financial position,
budgets, projected costs and plans and objectives of management are
forward-looking statements. In addition, forward-looking statements generally
can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "should," "intend," "estimate," "anticipate," "believe,"
"plan," "continue" or similar terminology. These forward-looking statements are
not guarantees of future performance and are subject to risks, uncertainties and
other factors, some of which are beyond our control, that could cause actual
results to differ materially from those we express or imply in those
forward-looking statements. These factors include those we describe in "Risk
Factors" and elsewhere in this prospectus, and these factors expressly qualify
all written and oral forward-looking statements attributable to us.

--------------
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE
IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS BEFORE DECIDING WHETHER
TO INVEST IN OUR COMMON STOCK. THE INFORMATION IN THIS PROSPECTUS HAS BEEN
ADJUSTED TO GIVE EFFECT TO A 2.85-FOR-ONE REVERSE STOCK SPLIT OF OUR COMMON
STOCK WHICH BECAME EFFECTIVE ON JUNE 15, 1999. EXCEPT AS OTHERWISE INDICATED,
THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE OVER-ALLOTMENT
OPTION TO PURCHASE ADDITIONAL SHARES OF COMMON STOCK GRANTED TO THE
UNDERWRITERS.

APPNET, INC.

AppNet provides Internet and electronic commerce professional services and
solutions to medium-sized and large businesses. AppNet develops electronic
commerce solutions that facilitate and promote communication and commerce
between businesses and consumers as well as among businesses and their trading
partners. We focus on maximizing the opportunities presented by the Internet and
electronic commerce to enhance all aspects of our clients' operations, from the
front end of their business, creative Website design, to the back end,
back-office integration of existing systems and electronic commerce outsourcing,
creating an end-to-end solution. Our professional services include:

- strategic consulting;

- interactive media services such as creative Website design and
development, branding, which is the creation of a unique corporate
identity for a client and its products, media planning and buying;

- Internet-based application development, which is the development of
software applications that are capable of running on the Internet and are
written in languages such as Java, C++ and Visual Basic;

- electronic commerce systems integration, which is the integration of
electronic commerce systems, which are systems that automate the receipt,
processing and delivery of transaction data and other information, with
other corporate software and computer-based applications; and

- electronic commerce outsourcing, which is the performance of electronic
commerce services that would otherwise be handled by the client's internal
staff using the client's resources.

The rapid growth in the use of the Internet and electronic commerce has
transformed the way businesses operate and interact with their customers and
trading partners. Technology industry research firms predict that the market for
Internet and electronic commerce services worldwide will grow significantly over
the next few years. International Data Corporation estimates that this market
will increase from $7.8 billion in 1998 to $78.6 billion by 2003, which
represents a compound annual growth rate of 59%.

Over the past several years, we have completed more than 500 projects for
over 200 clients. Our client base is highly diverse and includes corporations
such as @rts @lliance, Baxter Healthcare, Ciena, Comshare, Dial, Ford,
GeoCities, Harmony House, Hyundai, K*B Toys, NEC, Norwest and Unilever.

AppNet was founded in late 1997 and, therefore, we have a brief operating
history upon which you can evaluate our business and prospects. We have incurred
substantial losses since AppNet was founded, and we anticipate we will continue
to incur substantial losses for the foreseeable future. See "Risk Factors--Our
brief operating history makes it difficult to predict our success" and "Risk
Factors--We have an accumulated deficit of $74.4 million and anticipate future
losses."

We compete in the highly competitive markets for Internet and electronic
commerce professional services. To compete more effectively, we plan to: expand
our client relationships; increase repeat and recurring revenues; build and
enhance complementary skill sets and maintain our technological

1
<PAGE>
expertise; pursue client-driven geographic expansion; expand and develop
industry-specific expertise; and attract and retain a highly specialized
workforce.

We currently have offices in 15 U.S. locations, including the metropolitan
areas of Boston, Denver, Detroit, Los Angeles, New York and Washington, DC. Our
principal executive office is located at 6707 Democracy Boulevard, Suite 1000,
Bethesda, Maryland 20817, and our telephone number is (301) 493-8900. We
maintain a site on the World Wide Web at http://www.appnet.com; however, the
information found on our Website is not part of this prospectus.

THE OFFERING

<TABLE>
<S> <C> <C>
Common stock offered...................... 1,500,000 shares by us

2,500,000 shares by the selling stockholders
---------

4,000,000
=========
</TABLE>

<TABLE>
<S> <C>
Common stock to be outstanding after this
offering................................ 32,497,027 shares. This number is based on the number of
shares outstanding as of September 30, 1999 and excludes
5,347,831 shares of common stock reserved for issuance
upon the exercise of options, warrants and convertible
notes and in connection with contingent payments payable
to former owners of five of the companies we acquired,
New Media Publishing, Inc., Sigma6, Inc., Salzinger &
Company, Inc., Internet Outfitters, Inc. and TransForm
IT, Incorporated, assuming, where applicable, the market
price of our common stock when the contingent payments
are paid is $49.00 per share, the last reported sale
price of our common stock on October 26, 1999.

Use of proceeds........................... Repay debt under our existing credit facility and for
general corporate purposes, including the funding of
working capital and potential acquisitions. We will not
receive any of the proceeds from the sale of shares of
common stock by the selling stockholders.

Nasdaq National Market Symbol............. "APNT".
</TABLE>

2
<PAGE>
SUMMARY ACTUAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA

The following summary actual and pro forma consolidated financial data have
been derived from:

- the audited financial statements of AppNet for the year ended
December 31, 1998;

- the unaudited financial statements of AppNet for the nine months ended
September 30, 1999; and

- the unaudited pro forma consolidated financial data included elsewhere in
this prospectus.

The pro forma consolidated financial data have been adjusted to reflect the
sale of the common stock offered by us at an assumed public offering price of
$49.00 per share, the last reported sale price of our common stock on
October 26, 1999.

You should read the information set forth below in conjunction with our
consolidated financial statements and the related notes, "Use of Proceeds,"
"Capitalization," "Pro Forma Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus.

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
---------------------------- --------------------------
PRO FORMA PRO FORMA
ACTUAL AS ADJUSTED ACTUAL AS ADJUSTED
-------- ----------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................... $ 17,674 $ 69,182 $ 74,802 $ 77,430
Cost of revenues........................... 11,699 41,941 42,205 43,880
-------- -------- -------- --------
Gross profit........................... 5,975 27,241 32,597 33,550
Total operating expenses(a)................ 18,779 105,683 87,766 79,451
-------- -------- -------- --------
Loss from operations....................... (12,804) (78,442) (55,169) (45,901)
Interest and other expense................. 1,775 1,801 4,507 2,287
Income tax provision (benefit)............. (200) (100) 328 328
Dividends on and accretion of preferred
stock.................................... 873 -- 2,139 --
-------- -------- -------- --------
Net loss attributable to common
stockholders............................. $(15,252) $(80,143) $(62,143) $(48,516)
======== ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-------------------------
ACTUAL AS ADJUSTED(B)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,236 $ 68,701
Total assets................................................ 142,928 208,393
Total debt.................................................. 17,585 13,925
Stockholders' equity........................................ 89,687 158,812
</TABLE>

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

(a) Total operating expenses, on a pro forma as adjusted basis, include pro
forma stock-based and acquisition-related compensation of $23.1 million and
pro forma depreciation and amortization of $60.3 million for the year ended
December 31, 1998 and $11.2 million and $38.2 million, respectively, for the
nine months ended September 30, 1999.

(b) As adjusted to reflect the issuance of 1,500,000 shares at an assumed public
offering price of $49.00 per share, the last reported sale price of our
common stock on October 26, 1999.

3
<PAGE>
RISK FACTORS

INVESTING IN OUR COMMON STOCK INVOLVES RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS,
INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES, BEFORE
YOU PURCHASE ANY OF OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES,
INCLUDING THOSE THAT WE DO NOT KNOW ABOUT NOW OR THAT WE CURRENTLY DEEM
IMMATERIAL, MAY ALSO ADVERSELY AFFECT OUR BUSINESS.

OUR BRIEF OPERATING HISTORY MAKES IT DIFFICULT TO PREDICT OUR SUCCESS.

AppNet was formed in late 1997. We have a brief operating history upon which
you can evaluate our business and prospects. Our historical results of
operations do not fully give effect to the operations of the companies we have
acquired and the pro forma financial information included in this prospectus is
based in part on the separate pre-acquisition financial information of the
acquired companies. As a result, our historical results of operations and pro
forma financial information may not give you an accurate indication of our
future results of operations or prospects. Companies like us in an early stage
of development frequently encounter risks, expenses and difficulties associated
with starting a new business, many of which may be beyond their control. These
risks and difficulties apply particularly to AppNet because our markets,
Internet and electronic commerce professional services, are new and rapidly
changing.

WE HAVE AN ACCUMULATED DEFICIT OF $74.4 MILLION AND ANTICIPATE FUTURE LOSSES.

We have incurred substantial losses since AppNet was founded, and we
anticipate we will continue to incur substantial losses for the foreseeable
future. We had an accumulated deficit of approximately $74.4 million as of
September 30, 1999 and a net loss attributable to common stockholders of
$15.3 million and $62.1 million for the year ended December 31, 1998 and the
nine months ended September 30, 1999, respectively. We intend to continue to
invest in internal expansion, infrastructure, integration of our acquired
companies into our existing operations, acquisitions and our marketing and sales
efforts. We cannot predict when we will operate profitably, if at all.

AS OF SEPTEMBER 30, 1999, WE HAD APPROXIMATELY $102.0 MILLION OF INTANGIBLE
ASSETS NET OF ACCUMULATED AMORTIZATION, AND WE EXPECT TO INCUR SIGNIFICANT
ACQUISITION-RELATED COMPENSATION CHARGES.

We cannot assure you that we will have earnings or cash flow sufficient to
cover our fixed charges or to comply with the financial covenants in our credit
facilities. Our acquisitions significantly increased our intangible assets, such
as goodwill, which represent a significant portion of our assets, and the
charges we expect to incur in connection with the amortization of these
intangible assets will have a material adverse impact on our net income for the
foreseeable future. At September 30, 1999, we had goodwill and other intangible
assets of approximately $102.0 million, net of accumulated amortization. In
addition, in connection with the acquisitions we have completed, we expect to
continue to incur through the end of the year 2000 acquisition-related
compensation charges which will fluctuate based on the market price of our
common stock and the level of achievement of agreed-upon operating targets. If
all of the operating targets are fully met, the aggregate amounts of
compensation expense and additional goodwill that will be recognized will be
approximately $32.9 million and $11.9 million, respectively, assuming, for all
shares issued in connection with these contingent payments, a price per share of
our common stock of $26.25 in the case of New Media Publishing, which was the
last reported sale price of our stock on the measurement date of October 1,
1999, and a price per share of $49.00 in the case of the other companies, which
was the last reported sale price of our stock on October 26, 1999. The
compensation expense will be recognized during 1999 and 2000. See "--Our
intangible assets represent a significant portion of our assets; amortization of
our intangible assets will adversely impact our net income and we may never
realize the full value of our intangible assets" for a discussion of accounting
treatment issues regarding intangible assets that will affect our future results
of operations.

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<PAGE>
QUARTER-TO-QUARTER FLUCTUATIONS IN OUR REVENUES AND OPERATING RESULTS COULD
AFFECT THE MARKET PRICE OF OUR COMMON STOCK.

Our revenues and operating results may vary from quarter-to-quarter as a
result of a number of factors including:

- number, size and type of client engagements commenced or completed during
a quarter;

- effectiveness of integrating acquisitions with existing operations;

- our ability to attract, train and retain skilled management, technical and
creative personnel;

- timing of acquisitions and related costs; and

- timing and size of acquisition-related compensation charges which
fluctuate based on the market price of our common stock.

Because a high percentage of our expenses is fixed, such as compensation and
rent, any of the factors listed above could cause significant variations in our
operating results in any given quarter. Any decline in revenues or earnings or a
greater than expected loss for any quarter could materially adversely affect the
market price of our common stock, even if not reflective of any long-term
problems with our business.

OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO EFFECTIVELY INTEGRATE ACQUIRED
COMPANIES AND MANAGE OUR GROWTH.

Our growth has placed, and will continue to place, significant demands on
our management and operational and financial resources. We have acquired 12
companies since March 1998. Our number of employees has increased from eight as
of March 15, 1998 to 959 as of September 30, 1999. We are in the process of
integrating the companies we have acquired since March 1998 into our
operational, financial and managerial systems. Members of our senior management
may be required to devote considerable amounts of their time to this integration
process, which will decrease the time they will have to service current clients,
attract new clients and develop new products and services. Our business,
financial condition or results of operations could be adversely affected if any
of the companies we have acquired experienced problems in the past of which we
are not currently aware. Claims asserted against us relating to the operation of
the companies we acquired prior to acquisition could exceed the indemnification
we are entitled to or can obtain from the former owners of the acquired
companies.

As we continue to grow, we expect we will hire more employees and expand the
scope of our operating and financial systems, which will increase our operating
complexity and the level of responsibility exercised by our management
personnel. To manage our growth effectively, we must continue to develop and
improve our own operational and financial systems, including our internal
systems and controls as well as those of the companies we acquired. The failure
to manage our growth effectively could have a material adverse effect on our
business, financial condition or results of operations.

WE MUST ATTRACT AND RETAIN PROFESSIONAL STAFF IN ORDER TO COMPLETE OUR PROJECTS
AND OBTAIN NEW PROJECTS.

Our failure to attract and retain qualified employees could impair our
ability to complete existing projects and bid for or obtain new projects and, as
a result, could have a material adverse effect on our business, financial
condition or results of operations. Our ability to grow and increase our market
share largely depends on our ability to hire, train, retain and manage highly
skilled employees, including project managers and technical, creative,
consulting and marketing and sales personnel. There is a significant shortage
of, and intense competition for, personnel who are qualified to perform the
services we provide. This shortage will probably continue for the foreseeable
future. In addition, to maintain our position as a provider of Internet and
electronic commerce end-to-end solutions, we must make sure our employees
maintain their technical expertise and business skills. We cannot assure you
that we

5
<PAGE>
will be able to attract a sufficient number of qualified employees or that we
will successfully train and manage the employees we hire.

In addition, our employees, including key technical personnel, may leave us
to join our competitors or start new businesses which may compete with us. We
cannot assure you that we will be able to prevent the unauthorized disclosure or
use of our proprietary knowledge, practices and procedures if our employees
leave us.

WE ARE DEPENDENT ON ADDITIONAL CAPITAL FOR FUTURE GROWTH.

Our ability to remain competitive and expand our operations through
acquisitions and internal growth largely depends on our access to capital.
Historically, we have financed capital expenditures and acquisitions primarily
by incurring debt and issuing equity securities. We may incur additional debt
and issue equity securities in the future to finance our growth strategy or
capital expenditures. We cannot assure you that additional financing will be
available to us on satisfactory terms, or at all. Additional indebtedness would
make us more vulnerable to economic downturns and may limit our ability to
withstand competitive pressures. The terms of any additional indebtedness may
include restrictive financial and operating covenants which would limit our
ability to compete and expand. Additional issuances of our common stock may
significantly dilute the equity interests of our existing stockholders. Our
failure to obtain any required additional financing, on satisfactory terms, or
at all, could have a material adverse effect on our business, financial
condition or results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a further discussion of our
liquidity and capital requirements over the next 18 months.

OUR REVENUES ARE DIFFICULT TO PREDICT BECAUSE THEY ARE PRIMARILY GENERATED ON A
PROJECT-BY-PROJECT BASIS AND OUR PROJECTS CAN BE TERMINATED.

If our existing agreements with clients are terminated before we complete
our engagements, or if we are unable to enter into new engagements, our
business, financial condition or results of operations could be materially
adversely affected. Our success will depend on our ability to establish
relationships with additional medium-sized and large businesses and other
corporate users of Internet and electronic commerce professional services. We
derive our revenues in large part from fees for services generated on a
project-by-project basis. These projects vary in size, scope and duration. A
client that accounts for a significant portion of our revenues in a particular
period may not account for a similar portion of our revenues in future periods.
A client may or may not engage us for further services once a project is
completed. As a result, our revenues are not recurring from period to period,
which makes them more difficult to predict.

OUR CONTRACTS CONTAIN PRICING RISKS.

Generally, we charge our clients for the time, materials and expenses
incurred. Although we have limited experience pricing and managing fixed-price
contracts, we intend to increase the percentage of our work that is billed at a
fixed price. However, if we underestimate the resources and time required to
complete our projects, we could be subject to cost overruns leading to losses on
our engagements.

LOSS OF THE SERVICES OF OUR SENIOR MANAGEMENT COULD ADVERSELY AFFECT OUR
BUSINESS.

The loss of our senior managers' services or other key members of management
could have a material adverse effect on our business, financial condition or
results of operations. Our success depends heavily on the efforts of the members
of our senior management team. We cannot assure you that we will be able to
prevent the unauthorized disclosure or use of our proprietary knowledge,
practices and procedures if our senior managers leave us. See "Management" for
additional information about our senior managers.

6
<PAGE>
WE FACE INTENSE COMPETITION.

The markets for Internet and electronic commerce professional services are
relatively new, intensely competitive, quickly evolving and subject to rapid
technological change. We expect competition to continue and intensify in the
foreseeable future. Our competitors can be divided into several groups:

- Internet professional services providers, such as Agency.com, iXL,
Proxicom, Razorfish, Scient, US Interactive, USWeb and Viant;

- large information technology consulting services providers, such as
Andersen Consulting, Cambridge Technology Partners, CSC, EDS, IBM and
Sapient;

- interactive advertising agencies, such as Darwin Digital, Giant Step, Grey
Interactive, Modem Media . Poppe Tyson and Thunderhouse;

- electronic commerce software and service providers, such as BroadVision,
Harbinger, Open Market and Sterling Commerce; and

- Internet access and service providers, such as Abovenet, Exodus and
Frontier/Global.

Our competitors have begun to offer multiple Internet and electronic
commerce professional services, rather than specialize in one area, or have
announced their intention to do so. These companies may continue to expand their
operations so that they offer a full range of Internet and electronic commerce
professional services and products. Some of our competitors, IBM, USWeb and EDS,
currently provide all of the services that we provide.

Many of our competitors have longer operating histories and client
relationships, greater financial, technical, marketing and public relations
resources, larger client bases and greater brand or name recognition than we
have. Our competitors may be able to respond more quickly to technological
developments and changes in clients' needs. We must promote and enhance our
reputation and brand in order to attract new clients and differentiate ourselves
from our competitors. See "Business--Competition" for a further discussion of
competition within our industry.

THE BARRIERS TO ENTER OUR BUSINESS ARE LOW.

There are relatively low barriers to entry into our business. We do not own
any technologies that preclude or inhibit competitors from entering our markets.
Our competitors may independently develop and patent or copyright technologies
that are superior or substantially similar to our technologies. The costs to
develop and provide Internet or electronic commerce professional services are
low. Therefore, we expect to continue to face additional competition from new
entrants into our markets.

WE MUST RESPOND TO RAPID TECHNOLOGICAL ADVANCES.

Our success will depend, in part, on our ability to keep pace with:

- rapidly changing technology;

- evolving industry standards and practices;

- frequent new service and product introductions and enhancements; and

- changing user and client requirements and preferences.

Any delay or failure on our part in responding quickly, cost-effectively and
sufficiently to these developments could render our existing products and
services obsolete and have a material adverse effect on our business, financial
condition or results of operations. We may have to incur substantial
expenditures to modify or adapt our services or infrastructure to respond to the
widespread adoption of new Internet, networking or telecommunications
technologies or other technological changes. We must stay abreast of
cutting-edge technological developments and evolving service offerings to remain
competitive, increase the utility of our services and attract and retain
qualified employees. We must be

7
<PAGE>
able to incorporate new technologies into the Internet and electronic commerce
solutions we design and develop to address the increasingly complex and varied
needs of our customer base.

OUR BUSINESS IS DEPENDENT ON THE CONTINUED USE AND GROWTH OF THE INTERNET AND
ELECTRONIC COMMERCE.

Our business would be adversely affected if use of the Internet and
electronic commerce does not continue to develop, or develops more slowly than
expected. Our market is relatively new and rapidly evolving. Our future success
depends on the acceptance by current and future clients of Internet and
electronic commerce professional services as an integral part of their
businesses. Demand and market acceptance for these new technological services
are subject to a high level of uncertainty.

In addition, if use of the Internet grows, the Internet infrastructure may
not be able to support the demands placed on it. The performance and reliability
of the Internet may decline as the number of users and the amount of traffic
increases. Internet sites have experienced interruptions in their service as a
result of outages and other delays occurring throughout the Internet network
infrastructure. To cope with growth in the use of the Internet, the Internet
will require a reliable network backbone with the necessary speed, data capacity
and security and the timely development of complementary products, such as
high-speed modems, for providing reliable Internet access and services. If the
necessary infrastructure, products, services or facilities are not developed or
if use of the Internet as a medium for communication and commerce does not
develop, our business, financial condition or results of operations could be
materially and adversely affected.

WE HAVE POTENTIAL LIABILITY TO CLIENTS WHO ARE DISSATISFIED WITH OUR SERVICES.

We design, develop, implement and manage Internet and electronic commerce
solutions that are crucial to the operation of our clients' businesses. Defects
in the solutions we develop could result in delayed or lost revenues, adverse
customer reaction and negative publicity about us or our services or require
expensive corrections, any of which could have a material adverse effect on our
business, financial condition or results of operations. Clients who are not
satisfied with our services could bring claims against us for substantial
damages. Any claims asserted against us could exceed the level of our insurance.
We cannot assure you that the insurance we carry will continue to be available
on economically reasonable terms, or at all. The successful assertion of one or
more large claims against us that are uninsured, exceed our insurance coverage
or result in changes to our insurance policies, including premium increases,
could have a material adverse effect on our business, financial condition or
results of operations.

OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR MAINTAIN OUR RIGHTS
TO USE LICENSED INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT OUR BUSINESS.

We believe our success depends, in part, on protecting our proprietary
intellectual property. We have not received patent or copyright protection for
most of our intellectual property. We cannot assure you that we will be able to
prevent infringement or detect misappropriation of our intellectual property. A
failure to protect our intellectual property in a meaningful manner could have a
material adverse effect on our business, financial condition or results of
operations.

We rely on technologies licensed from third parties. We cannot assure you
that these licenses will continue to be available to us on commercially
reasonable terms. The loss of these technologies could require us to obtain
substitute technologies of lower quality or performance standards or at greater
cost, which could have a material adverse effect on our business, financial
condition or results of operations.

Third parties may assert or prosecute infringement claims against us in
connection with the services and products we offer, and we may or may not be
able to successfully defend any such claims. We generally indemnify our clients
against any third-party intellectual property claims. Any significant claim
against us or for which we have indemnified others could have a material adverse
effect on our business, financial condition or results of operations.

8
<PAGE>
In connection with our Internet and electronic commerce professional
services, we develop intellectual property for our clients. We frequently assign
ownership of such intellectual property to the client and retain only a license
for limited uses. Issues relating to ownership of and rights to use intellectual
property can be complicated. We may become involved in disputes that affect our
ability to resell or reuse this intellectual property. In addition, many of our
projects involve the use of material that is confidential or proprietary client
information. The successful assertion of one or more large claims against us by
our clients or other third parties could adversely affect us.

WE SOMETIMES AGREE NOT TO PERFORM SERVICES FOR OUR CLIENTS' COMPETITORS.

Our customer contracts may contain restrictive provisions which are in
effect during the term of the contract and may remain in effect for a limited
period, generally one year, thereafter. The scope of the restrictive provisions
varies. They can include provisions restricting our employees who are engaged on
a project for a client from performing the same or substantially similar
services for a competitor of that client. They may also include provisions
prohibiting us from developing products or performing services for our clients'
competitors. These restrictive provisions may limit our ability to enter into
engagements with new clients for specified periods of time.

OUR INTERNATIONAL OPERATIONS AND EXPANSION INVOLVE FINANCIAL AND OPERATIONAL
RISKS.

We intend to expand our business into international markets. Revenues from
our existing international operations were insignificant in 1998. We may incur
significant costs in connection with our international expansion.

There are also risks inherent in doing business in foreign countries, such
as:

- changes in legal and regulatory requirements;

- export and import restrictions, tariffs and other trade barriers;

- currency fluctuations and the on-going conversion to the euro in several
member states of the European Union;

- difficulties in staffing and managing foreign offices as a result of,
among other things, distance, language and cultural differences;

- longer payment cycles and problems in collecting accounts receivable;

- political and economic instability;

- seasonal reductions in business activity; and

- potentially adverse tax consequences.

Any of these factors could have a material adverse effect on our
international and domestic business, financial condition or results of
operations.

OUR ELECTRONIC COMMERCE OUTSOURCING CENTERS COULD BE VULNERABLE TO SECURITY AND
TECHNICAL RISKS AND MAY REQUIRE ADDITIONAL INVESTMENT.

We provide electronic commerce outsourcing services to our customers. We
perform electronic commerce functions that would otherwise be handled by the
customer's internal staff using the customer's resources.

Our electronic commerce outsourcing services rely on encryption and
authentication technology licenses from third parties to provide the security
and authentication needed to safely transmit confidential information. Although
we have designed and implemented a variety of network security measures,
unauthorized access, computer viruses, accidental or intentional acts and other
disruptions may occur. Our electronic commerce outsourcing centers may
experience delays or service interruptions

9
<PAGE>
as a result of the accidental or intentional acts of Internet users, current and
former employees or others. Such acts could potentially jeopardize the security
of confidential information, such as credit card and bank account numbers,
stored in our and our clients' computer systems. Such a breach in security could
result in liability to us and in the loss of existing clients or the deterrence
of potential clients.

Although we plan to continue using industry-standard security measures, such
measures have been circumvented in the past, and ours may be circumvented in the
future. The costs required to eliminate computer viruses and alleviate other
security problems could be prohibitively expensive, and efforts to address such
problems could result in delays or interruption of service to our clients. These
could in turn have a material adverse effect on our business, financial
condition or results of operations.

In the event our hardware malfunctions and our back-up systems fail, we may
not be able to maintain our standard of service to our customers. In addition,
each of our electronic commerce outsourcing centers has been configured to
provide services that facilitate commerce and communication either between
businesses and consumers, known as business-to-consumer services, or between
businesses and their trading partners, known as business-to-business services,
but not both. If we were unable to provide outsourcing services at one of our
outsourcing centers, it would materially adversely impact our ability to
continue to provide the type of electronic commerce outsourcing services
processed through that center. We may be required to make additional investments
in our electronic commerce outsourcing centers in order to increase capacity and
respond to technological developments.

OUR INTANGIBLE ASSETS REPRESENT A SIGNIFICANT PORTION OF OUR ASSETS;
AMORTIZATION OF OUR INTANGIBLE ASSETS WILL ADVERSELY IMPACT OUR NET INCOME AND
WE MAY NEVER REALIZE THE FULL VALUE OF OUR INTANGIBLE ASSETS.

Our acquisitions have resulted in significant goodwill and other intangible
assets, which are being amortized over various periods, primarily two to three
years. At September 30, 1999, we had goodwill and other intangible assets of
approximately $102.0 million, net of accumulated amortization. Charges we would
have incurred in connection with the amortization of intangible assets during
the year ended December 31, 1998 and the nine months ended September 30, 1999,
after giving pro forma effect to the acquisitions we made in 1998 and 1999,
would have increased our net loss by $49.1 million and decreased our net loss by
$4.7 million, respectively. We expect the amount of goodwill associated with the
acquisitions we made in 1998 and 1999 will increase in the future as a result of
a portion of the contingent purchase consideration that may become payable if
the agreed-upon operating targets for the following three acquired companies are
fully met: New Media Publishing, Internet Outfitters and TransForm IT. The
actual amount of goodwill that will be recorded will depend in part on the price
per share of our common stock and such goodwill will be recorded through the end
of the year 2000. We will continue to incur non-cash charges in connection with
the amortization of our intangible assets over their respective useful lives,
and we expect such charges will have a significant adverse impact on our net
income for the foreseeable future.

We cannot assure you that we will ever realize the value of these intangible
assets. In the future, as events or changes in circumstances indicate that the
carrying amount of our intangible assets may not be recoverable, we will
evaluate the carrying value of our intangible assets and may take an additional
charge to our earnings. Any future determination requiring the write-off of a
significant portion of unamortized intangible assets could have a material
adverse effect on our business, financial condition or results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a further discussion of our intangible assets.

THE YEAR 2000 PROBLEM MAY ADVERSELY AFFECT OUR BUSINESS.

The risks posed by the Year 2000 problem could adversely affect our business
in a number of significant ways. Many of our clients and potential clients
maintain their operations on systems that

10
<PAGE>
could be impacted by Year 2000 problems. If our clients fail to ensure their
systems are Year 2000 compliant and Year 2000 problems materially adversely
affect them, our business could be materially adversely affected, particularly
if demand for our services declines while companies redirect their resources to
upgrade their computer systems. We also depend heavily on the availability of
the Internet infrastructure to conduct our business and provide services to our
clients. Disruptions in the Internet infrastructure arising from Year 2000
problems could materially affect our business, financial condition or results of
operations.

In addition, our business could be materially adversely affected if we
cannot obtain products, services or systems that are Year 2000 compliant when we
need them. We rely on our suppliers for hardware, software and services. We are
in the process of obtaining assurances from our suppliers that they are
Year 2000 compliant. Our internal information systems may experience operations
difficulties because of undetected errors or defects in the technology used. The
expense to correct such defects could have a material adverse effect on our
business, results of operations or financial condition.

Because we provide computer-related services, the risk we will be involved
in a lawsuit relating to Year 2000 issues is likely to be greater than that of
companies in other industries. Because the solutions we deliver are sometimes
dependent upon third-party products and components, it may be difficult to
determine which component of our solution may cause a Year 2000 problem. As a
result, we may become involved in litigation concerning our services or products
and components of a third party. We sometimes provide an express warranty to
clients that our work is Year 2000 compliant. However, even absent an express
Year 2000 warranty, there is a risk that clients for whom we have provided
services will try to hold us liable for damages caused by the Year 2000 problem.

We cannot guarantee that we will be Year 2000 compliant in a timely manner.
Moreover, the costs related to Year 2000 compliance could be significant. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a further discussion of the potential effects of the Year 2000
problem on our business.

GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATING TO THE INTERNET COULD
ADVERSELY AFFECT OUR BUSINESS.

Increased regulation of the Internet might slow the growth in use of the
Internet, which could decrease demand for our services, increase our cost of
doing business or otherwise have a material adverse effect on our business,
financial condition or results of operations. Congress has recently passed
legislation regulating certain aspects of the Internet, including on-line
content, children's protection, copyright infringement, user privacy, taxation,
access charges, liability for third-party activities, transmission of sexually
explicit material and jurisdiction. In addition, federal, state and local
governmental organizations as well as foreign governments are considering other
legislative and regulatory proposals that would regulate the Internet. Areas of
potential regulation include libel, pricing, quality of products and services
and intellectual property ownership. We do not know how courts will interpret
laws governing the Internet or the extent to which they will apply existing laws
regulating issues such as property ownership, libel and personal privacy to the
Internet. Therefore, we are not certain how new laws governing the Internet or
other existing laws will affect our business.

APPNET WILL CONTINUE TO BE EFFECTIVELY CONTROLLED BY ITS SIGNIFICANT
STOCKHOLDERS.

Upon completion of this offering and depending upon the number of selling
stockholders, Ken Bajaj, AppNet's President and Chief Executive Officer, and
GTCR will beneficially own at least 8.3% and 35.5%, respectively, of our
outstanding common stock. As a result, GTCR and Mr. Bajaj will be able to
exercise a controlling influence over the outcome of matters submitted to our
stockholders for approval, including the election of directors, appointment of
new management, amendments to our certificate of incorporation and mergers or
sales of all of our assets. GTCR and Mr. Bajaj will have substantial power to
delay, defer or prevent a change in control of AppNet. See "Management--Board

11
<PAGE>
of Directors," "Principal Stockholders" and "Certain Relationships and
Transactions" for a further discussion of Mr. Bajaj's and GTCR's ownership of
our capital stock and their respective relationships with us.

INVESTORS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE DILUTION.

If you purchase common stock in this offering, you will pay more for your
shares than the amounts paid by existing stockholders for their shares. As a
result, assuming a price to the public of $49.00 per share, the last reported
sale price of our common stock on October 26, 1999, you will experience
immediate dilution of approximately $47.25, representing the difference between
such assumed price and our net tangible book value per share as of
September 30, 1999, after giving effect to this offering at the same assumed
price to the public. In addition, you may experience future dilution to the
extent that shares of our common stock are issued upon the exercise of stock
options and warrants, the conversion of promissory notes and the achievement of
targets for contingent payment consideration in connection with the following
four acquisitions: New Media Publishing, Sigma 6, Salzinger & Company and
Internet Outfitters. We expect that shares issued in connection with these
acquisitions will be issued at an effective price less than the public offering
price per share in this offering. See "Dilution" for a more complete description
of how the value of your investment in our common stock will be diluted upon
completion of this offering.

EXTERNAL FACTORS COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.

The market price of our common stock could fluctuate significantly as a
result of:

- variations in our operating results which may cause us to fail to meet
analysts' or investors' expectations;

- general economic and stock market conditions;

- changes in financial estimates by securities analysts;

- earnings and other announcements by, and changes in market evaluations of,
providers of Internet and electronic commerce professional services;

- changes in business or regulatory conditions affecting us;

- announcements by us or our competitors of technological innovations or new
products or services; and

- trading of our common stock.

The securities of many companies have experienced extreme price and volume
fluctuations in recent years, often unrelated to the companies' operating
performance. For example, market prices for securities of Internet-related and
technology companies have frequently reached elevated levels, often following
these companies' initial public offerings. In many cases these levels have
subsequently proven to be unsustainable and, in those cases, share prices often
declined significantly. The trading price of our common stock has increased
significantly since our June 1999 initial public offering and could decline
significantly in the future. In the past, following periods of volatility in the
market price of a company's securities, that company's stockholders have often
instituted securities class action litigation against the company. If we were
involved in such a class action suit, it could have a material adverse effect on
our business, financial condition or results of operations.

THE SALE OR AVAILABILITY FOR SALE OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK
COULD ADVERSELY AFFECT ITS MARKET PRICE.

Sales of substantial amounts of our common stock in the public market after
the completion of this offering, or the perception that such sales could occur,
could adversely affect the market price of

12
<PAGE>
our common stock and could materially impair our future ability to raise capital
through offerings of our common stock.

In connection with this offering, we, our officers, our directors and the
selling stockholders have agreed not to offer or transfer any shares of common
stock for 90 days after completion of this offering without the underwriters'
consent. However, the underwriters may release these shares from these
restrictions at any time. We cannot predict what effect, if any, market sales of
shares held by GTCR or any other stockholder or the availability of these shares
for future sale will have on the market price of our common stock. See "Shares
Eligible for Future Sale" for a more detailed description of the restrictions on
selling shares of our common stock after this offering.

ANTI-TAKEOVER PROVISIONS OF DELAWARE'S GENERAL CORPORATION LAW AND OUR
CERTIFICATE OF INCORPORATION COULD DELAY OR DETER A CHANGE IN CONTROL.

Our amended and restated certificate of incorporation and our bylaws, as
well as various provisions of the Delaware General Corporation Law, may make it
more difficult to effect a change in control of our company. The existence of
these provisions may adversely affect the price of our common stock, discourage
third parties from making a bid for our company or reduce any premiums paid to
our stockholders for their common stock. For example, our certificate of
incorporation authorizes our Board of Directors to issue up to 5,000,000 shares
of "blank check" preferred stock and to attach special rights and preferences to
such preferred stock. The issuance of this preferred stock may make it more
difficult for a third party to acquire control of us. See "Description of
Capital Stock--Preferred stock," and "Description of Capital
Stock--Anti-takeover effects of AppNet's certificate of incorporation and bylaws
and provisions of Delaware law" for a more complete description of our capital
stock, our certificate of incorporation and the effects of the Delaware General
Corporation Law which could hinder a third party's attempts to acquire control
of us.

13
<PAGE>
USE OF PROCEEDS

We estimate the net proceeds we will receive from the sale of the 1,500,000
shares of our common stock we are offering to be approximately $69.1 million,
based upon an assumed public offering price of $49.00 per share, which was the
last reported sale price of our common stock on October 26, 1999, after
deducting underwriting discounts and commissions and estimated offering expenses
payable by AppNet. We will not receive any of the proceeds from the sale of
shares of common stock by the selling stockholders.

We expect to use the net proceeds from this offering to:

- repay all of the approximately $4.7 million of aggregate indebtedness
($3.7 million of which was outstanding as of September 30, 1999),
including accrued interest under our existing credit facility, which is a
$20 million revolving credit facility with BankBoston, N.A. and Antares
Capital Corporation; and

- for general corporate purposes, including the funding of working capital
requirements and potential acquisitions.

The amounts borrowed under our credit facility are due in full on
August 24, 2001. The interest rate on indebtedness under our credit facility is
variable and ranges from the prime rate plus 0.25% to the prime rate plus 1.5%
or from LIBOR plus 2.25% to LIBOR plus 3.5%. Amounts we repay may be reborrowed
under the revolving credit facility. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and capital
resources" for a discussion of our future liquidity.

We anticipate that, in addition to the underwriting discounts and
commissions, we will pay fees and expenses of approximately $0.7 million in
connection with this offering. The principal components of that amount will be
the fees and expenses of our accountants and attorneys, the costs of printing
this prospectus and other offering materials, The Nasdaq Stock Market listing
fees and Securities and Exchange Commission and National Association of
Securities Dealers filing fees. The selling stockholders will not pay any
portion of such expenses.

PRICE RANGE OF OUR COMMON STOCK AND

DIVIDEND POLICY

Our common stock is traded on the Nasdaq National Market under the symbol
"APNT." We have set forth in the following table the high and low bid prices of
our common stock from the date of our initial public offering through
October 26, 1999, as reported by the Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Fiscal 1999
Second Quarter (beginning June 18, 1999)................. $13.75 $ 8.63
Third Quarter............................................ 40.00 10.00
Fourth Quarter (through October 26, 1999)................ 67.25 25.75
</TABLE>

These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
On October 26, 1999, the last reported sale price of our common stock was
$49.00, and there were approximately 176 record holders of our common stock.

We have never declared or paid any cash dividends on our common stock and do
not expect to do so in the foreseeable future. The terms of our credit
facilities restrict our ability to pay dividends on our common stock. We intend
to retain any earnings to finance the expansion and development of our business.
Subject to the restriction on dividends in our credit facilities, any future
determination to pay dividends will be made at the discretion of our Board of
Directors and will be based upon our earnings, financial condition and capital
requirements and any other conditions our Board of Directors deems relevant. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and capital resources" for a discussion of our credit
facility and how it restricts our ability to pay dividends on our common stock.

14
<PAGE>
CAPITALIZATION

We have set forth in the following table AppNet's capitalization as of
Setember 30, 1999 on an actual basis and on an as adjusted basis to reflect the
sale of 1,500,000 shares of common stock by AppNet in this offering at an
assumed public offering price of $49.00 per share, the last reported sale price
of our common stock on October 26, 1999, and the application of the net proceeds
of $69.1 million.

You should read this table in conjunction with "Use of Proceeds," "Pro Forma
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the related notes included elsewhere in this prospectus.

The amount shown for stockholders' equity and common stock excludes:

- 3,636,756 shares of common stock reserved for issuance in connection with
AppNet's stock incentive plans;

- 70,175 shares of common stock reserved for issuance at an exercise price
of $0.3007 per share in connection with outstanding warrants to purchase
common stock;

- 828,702 shares of common stock reserved for issuance in connection with
outstanding promissory notes convertible into shares of our common stock
at a weighted average conversion price of $11.20 per share; and

- 812,197 shares of common stock reserved or to be reserved for issuance in
connection with contingent payments payable to the former owners of four
of the companies we acquired, New Media Publishing, Sigma6, Salzinger &
Company and Internet Outfitters, assuming, in the case of Sigma6, that the
market price of our common stock at the time the contingent payments are
made is $49.00, the last reported sale price of our common stock on
October 26, 1999.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>

Cash and cash equivalents................................... $ 3,236 $ 68,701
======== ========
Credit facilities........................................... 3,660 --
Other long-term debt(a)..................................... 4,640 4,640
Convertible notes........................................... 9,285 9,285

Stockholders' equity:
Common stock, $0.0005 par value, 75,000,000 shares
authorized; actual, 31,162,465 shares issued and
30,997,027 shares outstanding; as adjusted, 32,497,027
shares outstanding...................................... 16 16
Additional paid-in capital................................ 165,135 234,260
Treasury stock............................................ (50) (50)
Notes receivable.......................................... (617) (617)
Accumulated deficit....................................... (74,383) (74,383)
Deferred compensation..................................... (414) (414)
-------- --------
Total stockholders' equity.............................. 89,687 158,812
-------- --------
Total capitalization.................................... $107,272 $172,737
======== ========
</TABLE>

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

(a) Other long-term debt includes current and non-current debt obligations and
capital lease obligations.

15
<PAGE>
DILUTION

AppNet's net tangible book value as of September 30, 1999 was a deficit of
$12.3 million or $(0.40) per share of common stock. Net tangible book value per
share of common stock represents the amount of total tangible assets less the
sum of total liabilities. After giving effect to the sale of 1,500,000 shares of
our common stock in this offering at an assumed public offering price of $49.00
per share, the last reported sale price of our common stock on October 26, 1999,
and the application of the estimated net proceeds from this offering, AppNet's
adjusted net tangible book value at September 30, 1999 would have been
approximately $56.8 million or $1.87 per share of common stock. This represents
an immediate increase in net tangible book value of $2.15 per share of common
stock to existing stockholders and an immediate dilution in net tangible book
value of $47.13 per share of common stock to new investors purchasing shares in
this offering. Dilution is determined by subtracting net tangible book value per
share after the offering from the amount of cash paid by a new investor for a
share of common stock. The following table illustrates this per share dilution
as of September 30, 1999:

<TABLE>
<CAPTION>
PER SHARE
-------------------
<S> <C> <C>
Assumed offering price (last reported sale price on
October 26, 1999)......................................... $49.00
Net tangible book value as of September 30, 1999.......... $(0.40)
Increase in net tangible book value attributable to new
investors............................................... 2.15
------
Net tangible book value per share after this offering..... 1.75
------
Dilution to new investors................................. $47.25
======
</TABLE>

As of September 30, 1999, there were outstanding options to purchase
2,556,842 shares of common stock at a weighted average exercise price of $12.14
per share, outstanding warrants to purchase 70,175 shares of common stock at a
weighted average exercise price of $0.3007 per share and convertible notes to
purchase 828,702 shares of common stock at a weighted average conversion price
of $11.20 per share. To the extent that these options and warrants are
exercised, and the convertible notes are converted, there will be further
dilution to new investors. We expect new investors to experience further
dilution as a result of the issuance of shares of common stock to the former
owners of four of the businesses we have acquired in connection with contingent
payments payable to them. These acquired businesses are New Media Publishing,
Sigma6, Salzinger & Company and Internet Outfitters.

The following table sets forth, as of September 30, 1999, the number of
shares of our common stock purchased from AppNet, the total consideration paid
to AppNet and the average price paid per share by existing stockholders and by
new investors at the assumed public offering price of $49.00 per share, the last
reported sale price of our common stock on October 26, 1999.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 30,997,027 95.4% $150,793,000 67.2% $ 4.86
New investors........................... 1,500,000 4.6 73,500,000 32.8 49.00
---------- ----- ------------ -----
Total................................. 32,477,027 100.0% $224,293,000 100.0%
========== ===== ============ =====
</TABLE>

16
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL DATA

The following tables set forth the unaudited pro forma consolidated
statements of operations of AppNet for the year ended December 31, 1998 and for
the nine months ended September 30, 1999. The pro forma consolidated statements
of operations for the year ended December 31, 1998 give effect on a pro forma
basis to the following transactions as if they had all occurred on January 1,
1998:

- the acquisitions we made in 1998 and 1999;

- GTCR's investment in AppNet;

- the reduction of interest expense due to the conversion into shares of our
common stock of a $406,000 note payable, which occurred in June 1999 upon
our initial public offering;

- the reduction of the dividends on and accretion of preferred stock
resulting from the exchange of 45,430 and 11,576 shares of Class A and
Class B Preferred Stock, respectively, plus related accrued dividends, for
shares of common stock in June 1999 upon our initial public offering; and

- the reduction of interest expense resulting from the repayment of amounts
formerly outstanding under our previous credit facilities with a portion
of the proceeds of our initial public offering.

This offering will not result in any additional pro forma adjustments for
the year ended December 31, 1998.

The pro forma consolidated statements of operations for the nine months
ended September 30, 1999 give effect to the following transactions as if they
had all occurred on January 1, 1998:

- the acquisitions we made in 1998 and 1999;

- the reduction of interest expense due to the conversion into shares of our
common stock of a $406,000 note payable, which occurred in June 1999 upon
our initial public offering;

- the reduction of interest expense resulting from the repayment of amounts
formerly outstanding under our previous credit facilities with a portion
of the proceeds of our initial public offering.

The pro forma consolidated statements of operations for the nine months
ended September 30, 1999 give effect on a pro forma as adjusted basis to the
reduction in interest expense from the repayment of approximately $3.7 million
of indebtedness outstanding under our credit facilities as of September 30, 1999
using an assumed 74,694 shares of the 1,500,000 shares we are selling in this
offering. The effect of the remaining 1,425,306 shares have not been reflected
in these pro forma statements of operations.

The information in the pro forma consolidated statement of operations for
the year ended December 31, 1998 has been derived from the audited statements of
operations for the year ended December 31, 1998 of AppNet, i33 communications
corp., Salzinger & Company, Inc. and Internet Outfitters, Inc., the unaudited
statements of operations of Sigma6, Inc. and TransForm IT, Incorporated for the
year ended December 31, 1998 and the audited statements of operations of the
companies we acquired in 1998 for the periods during 1998 prior to acquisition,
all of which, except the statements of operations for Sigma6, Inc. and TransForm
IT, Incorporated, are included elsewhere in this prospectus.

The information in the pro forma consolidated statement of operations for
the nine months ended September 30, 1999 has been derived from the unaudited
statement of operations of AppNet for the nine months ended September 30, 1999,
included elsewhere in this prospectus, and the unaudited

17
<PAGE>
statements of operations for the companies acquired in 1999 for the periods
during 1999 prior to their acquisition.

The acquisitions we made were accounted for using the purchase method of
accounting. The purchase method of accounting allocates the aggregate purchase
price to the assets acquired and liabilities assumed based upon their respective
fair values. The excess of purchase price over the fair value of tangible and
identifiable intangible assets acquired, net of liabilities assumed, has been
reflected as goodwill. AppNet believes that the preliminary allocations set
forth herein are reasonable; however, in some cases the final allocations will
be based upon valuations and other studies that are not yet complete. As a
result, the allocations set forth herein are subject to revision as additional
information becomes available, and such revised allocations could differ from
those set forth herein.

The unaudited pro forma consolidated statements of operations are based upon
currently available information and assumptions and estimates which management
believes are reasonable. These assumptions and estimates, however, are subject
to change, including, without limitation, adjustments for potential cost savings
or other synergies arising from the acquisitions we made in 1998 and 1999 and
the impact of fluctuations in the market price of our common stock. These
statements are presented for comparative purposes only and do not purport to be
indicative of the actual results of operations that might have occurred or
expected future results. You should read the unaudited consolidated pro forma
financial data in conjunction with our consolidated financial statements and the
related notes and the audited financial statements and the related notes of the
companies we acquired included elsewhere in this prospectus.

18
<PAGE>
APPNET, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>

CONSOLIDATED
APPNET ARBOR(A) SSC(A) CENTURY(A) NMP(A) R&P(A)
------------ -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................................. $ 17,674 $ 688 $10,788 $10,040 $3,711 $5,303
Cost of revenues......................................... 11,699 471 7,392 6,192 1,542 2,667
---------- ----- ------- ------- ------ ------
Gross profit........................................... 5,975 217 3,396 3,848 2,169 2,636

Operating expenses:
Selling and marketing.................................. 964 14 567 112 227 260
General and administrative............................. 6,507 226 1,856 2,639 1,868 644
Stock-based and other acquisition-related
compensation......................................... 1,157 465 2,654 953 -- --
Depreciation and amortization.......................... 10,151 29 230 156 123 80
---------- ----- ------- ------- ------ ------
Total operating expenses............................. 18,779 734 5,307 3,860 2,218 984
---------- ----- ------- ------- ------ ------

Income (loss) from operations............................ (12,804) (517) (1,911) (12) (49) 1,652
Interest expense (income)................................ 1,052 29 28 (41) -- (11)
Other expense, net....................................... 723 211 372 423 -- 99
---------- ----- ------- ------- ------ ------
Income (loss) before income taxes........................ (14,579) (757) (2,311) (394) (49) 1,564
Income taxes............................................. (200) -- (598) (135) 13 29
---------- ----- ------- ------- ------ ------
Net income (loss)........................................ $ (14,379) $(757) $(1,713) $ (259) $ (62) $1,535
========== ===== ======= ======= ====== ======

Dividends on and accretion of preferred stock............ 873
----------
Net loss attributable to common stockholders............. $ (15,252)
==========

Basic and diluted net loss per common share.............. $ (1.41)
==========
Weighted average common shares outstanding (h)........... 10,785,424
==========

<CAPTION>
OTHER
INTERNET ACQUIRED
KODIAK(A) I33(A) SALZINGER(A) OUTFITTERS(A) COMPANIES(A)
--------- -------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................................................. $6,289 $4,360 $3,110 $2,343 $4,876
Cost of revenues......................................... 3,221 2,251 1,738 1,287 3,481
------ ------ ------ ------ ------
Gross profit........................................... 3,068 2,109 1,372 1,056 1,395
Operating expenses:
Selling and marketing.................................. 66 985 2 47 83
General and administrative............................. 1,691 1,343 425 859 973
Stock-based and other acquisition-related
compensation......................................... 250 -- -- 57 --
Depreciation and amortization.......................... 136 114 13 57 62
------ ------ ------ ------ ------
Total operating expenses............................. 2,143 2,442 440 1,020 1,118
------ ------ ------ ------ ------
Income (loss) from operations............................ 925 (333) 932 36 277
Interest expense (income)................................ 2 11 (20) 47 (9)
Other expense, net....................................... 8 35 -- -- 15
------ ------ ------ ------ ------
Income (loss) before income taxes........................ 915 (379) 952 (11) 271
Income taxes............................................. 5 (34) -- 52 (85)
------ ------ ------ ------ ------
Net income (loss)........................................ $ 910 $ (345) $ 952 $ (63) $ 356
====== ====== ====== ====== ======
Dividends on and accretion of preferred stock............

Net loss attributable to common stockholders.............

Basic and diluted net loss per common share..............

Weighted average common shares outstanding (h)...........

<CAPTION>
PRO FORMA INITIAL PUBLIC
ACQUISITION OFFERING PRO FORMA
ADJUSTMENTS ADJUSTMENTS CONSOLIDATED
----------- -------------- ------------
<S> <C> <C> <C>
Revenues................................................. $ -- $ -- $ 69,182
Cost of revenues......................................... -- -- 41,941
-------- ------- -----------
Gross profit........................................... -- -- 27,241
Operating expenses:
Selling and marketing.................................. -- -- 3,327
General and administrative............................. -- -- 19,031
Stock-based and other acquisition-related
compensation......................................... 17,517 (b) -- 23,053
Depreciation and amortization.......................... 49,121 (c) -- 60,272
-------- ------- -----------
Total operating expenses............................. 66,638 -- 105,683
-------- ------- -----------
Income (loss) from operations............................ (66,638) -- (78,442)
Interest expense (income)................................ 4,774 (d) (4,840)(i) 1,022
Other expense, net....................................... (1,107)(e) -- 779
-------- ------- -----------
Income (loss) before income taxes........................ (70,305) 4,840 (80,243)
Income taxes............................................. 853 (f) -- (100)
-------- ------- -----------
Net income (loss)........................................ (71,158) 4,840 (80,143)

Dividends on and accretion of preferred stock............ 2,731 (g) (3,604)(j) --
-------- ------- -----------
Net loss attributable to common stockholders............. $(73,889) $ 8,444 $ (80,143)
======== ======= ===========
Basic and diluted net loss per common share.............. $ (2.72)
===========
Weighted average common shares outstanding (h)........... 29,454,481
===========
</TABLE>

19
<PAGE>
APPNET, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER PRO FORMA INITIAL PUBLIC
CONSOLIDATED INTERNET ACQUIRED ACQUISITION OFFERING
APPNET I33(A) SALZINGER(A) OUTFITTERS(A) COMPANIES(A) ADJUSTMENTS ADJUSTMENTS
------------ -------- ------------ ------------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 74,802 $103 $ 417 $ 663 $1,445 $ -- $ --
Cost of revenues........ 42,205 48 214 431 982 -- --
---------- ---- ------- ----- ------ -------- --------
Gross profit.......... 32,597 55 203 232 463 -- --

Operating expenses:
Selling and
marketing........... 5,832 19 48 15 81 -- --
General and
administrative...... 23,347 70 161 232 185 -- --
Stock-based and other
acquisition-related
compensation........ 15,730 -- 675 21 -- (5,184)(b) --
Depreciation and
amortization........ 42,857 3 3 18 8 (4,670)(c) --
---------- ---- ------- ----- ------ -------- --------
Total operating
expenses.......... 87,766 92 887 286 274 (9,854) --
---------- ---- ------- ----- ------ -------- --------
Income (loss) from
operations............ (55,169) (37) (684) (54) 189 9,854 --
Interest expense
(income).............. 3,948 -- (2) 17 3 196 (d) (2,284)(i)
Other expense, net...... 559 -- 472 -- -- (472)(e) --
---------- ---- ------- ----- ------ -------- --------
Income (loss) before
income taxes.......... (59,676) (37) (1,154) (71) 186 10,130 2,284
Income taxes............ 328 -- -- (27) 70 (43)(f) --
---------- ---- ------- ----- ------ -------- --------
Net income (loss)....... $ (60,004) $(37) $(1,154) $ (44) $ 116 $ 10,173 $ 2,284
========== ==== ======= ===== ====== ======== ========

Dividends on and
accretion of preferred
stock................. 2,139 93(g) (2,232)(j)
---------- -------- --------
Net loss attributable to
common stockholders... $ (62,143) $ 10,080 $ 4,516
========== ======== ========

Basic and diluted net
loss per common
share................. $ (2.57)
==========
Weighted average common
shares outstanding
(h)................... 24,200,397
==========

PRO FORMA OFFERING PRO FORMA
CONSOLIDATED ADJUSTMENTS AS ADJUSTED
------------ ----------- -----------
<S> <C> <C> <C>
Revenues................ $ 77,430 $ -- $ 77,430
Cost of revenues........ 43,880 -- 43,880
---------- ------- -----------
Gross profit.......... 33,550 -- 33,550
Operating expenses:
Selling and
marketing........... 5,995 -- 5,995
General and
administrative...... 23,995 -- 23,995
Stock-based and other
acquisition-related
compensation........ 11,242 -- 11,242
Depreciation and
amortization........ 38,219 -- 38,219
---------- ------- -----------
Total operating
expenses.......... 79,451 -- 79,451
---------- ------- -----------
Income (loss) from
operations............ (45,901) -- (45,901)
Interest expense
(income).............. 1,878 (150 )(k) 1,728
Other expense, net...... 559 -- 559
---------- ------- -----------
Income (loss) before
income taxes.......... (48,338) 150 (48,188)
Income taxes............ 328 -- 328
---------- ------- -----------
Net income (loss)....... $ (48,666) $ 150 $ (48,516)
========== ======= ===========
Dividends on and
accretion of preferred
stock................. -- -- --
---------- ------- -----------
Net loss attributable to
common stockholders... $ (48,666) $ 150 $ (48,516)
========== ======= ===========
Basic and diluted net
loss per common
share................. $ (1.53) $ (1.52)
========== ===========
Weighted average common
shares outstanding
(h)................... 31,879,257 31,953,951
========== ===========
</TABLE>

20
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)

The following adjustments were applied to AppNet's consolidated statement of
operations and the financial data of the companies we acquired in 1998 and 1999
to arrive at the unaudited pro forma consolidated statement of operations.

(a) In the pro forma consolidated statement of operations for the year ended
December 31, 1998, these columns reflect the actual results of operations for
the acquisitions we completed in 1998 from January 1, 1998 to the date prior to
which each respective acquisition was consummated and for the companies we
acquired in 1999 for the full year ended December 31, 1998. In the pro forma
consolidated statement of operations for the nine months ended September 30,
1999, these columns reflect the actual results of operations for the
acquisitions we completed in 1999 from January 1, 1999 to the date prior to
which each respective acquisition was consummated as if they had occurred on
January 1, 1998.

(b) This adjustment was made to reflect a full year of the estimated
compensation charge for contingent payments in connection with our acquisitions
in 1998 and 1999 and to reduce pro forma expense for stock-based and other
acquisition-related compensation expense recorded by the acquired companies
prior to their acquisition by AppNet which arose as a direct result of their
acquisition by AppNet:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Additional contingent payment compensation
expense.......................................... $21,896 $(4,488)
Less: Acquisition-related compensation expense
recorded by acquired businesses.................. (4,379) (696)
-------- -------
$17,517 $(5,184)
======== =======
</TABLE>

The compensation arrangements have periods over which the compensation
amounts are earned ranging from twelve to twenty-four months. When the
compensation arrangements are reflected as if the acquisitions occurred
January 1, 1998, a portion of the stock-based and other compensation expense
recognized by AppNet in its historical statement of operations as of
September 30, 1999 is included in the pro forma statement of operations as of
December 31, 1998. This occurs because, on a pro forma basis, several of the
compensation arrangements would have been fully earned and recorded as of
December 31, 1998. As a result, there is a pro forma adjustment which reduces
stock-based and other acquisition-related compensation expense in the pro forma
statement of operations for the nine months ended September 30, 1999 and
increases stock-based and other acquisition-related compensation expense in the
pro forma statement of operations for the year ended December 31, 1998.

See Note 16 of AppNet's historical consolidated financial statements
included elsewhere in this prospectus which further explains the amount shown as
contingent payment compensation expense. This pro forma amount has been
calculated assuming the operating targets related to the contingent payments
payable to the former owners of five of the companies we acquired, New Media
Publishing, Sigma6, Salzinger & Company, Internet Outfitters and TransForm IT,
are fully met. This also assumes a price per share of our common stock of $26.25
in the case of New Media Publishing, which was the last reported sale price of
our common stock on the measurement date of October 1, 1999, and a per share
price of $49.00 in the case of the other companies, which was the last reported
sale price of our common stock on October 26, 1999. Total contingent payments,
which have a fair value of approximately $44.7 million based on the above per
share prices, will be reflected as compensation

21
<PAGE>
expense over a weighted average period of 18 months. These charges will be fully
recognized by the end of the year 2000.

(c) This adjustment was made to record amortization expense related to
acquired identifiable intangible assets and goodwill. Such amounts are being
amortized over the estimated useful life of each asset, primarily two to three
years. Six of the acquisitions, LOGEX International, New Media Publishing,
Sigma6, Salzinger & Company, Internet Outfitters and TransForm IT, provide for
additional purchase consideration, primarily cash and stock, which is payable
upon the attainment of agreed-upon operating targets. A portion of this amount
will be recorded as additional goodwill. If the operating targets are fully met,
the aggregate amount of additional goodwill will be approximately
$11.9 million, assuming a per share price of common stock at the time the
contingency is resolved of $26.25 in the case of New Media Publishing, which was
the last reported sale price of our common stock on the measurement date of
October 1, 1999, and $49.00 in the case of the other companies, which was the
last reported sale price of our common stock on October 26, 1999. See "Risk
Factors--Our intangible assets represent a significant portion of our assets;
amortization of our intangible assets will adversely impact our net income and
we may never realize the full value of our intangible assets" for additional
information on these amortization expenses.

(d) This adjustment was made to reflect a full year of interest expense on
acquisition debt financing. The increase in the interest expense is a result of
the amounts drawn under the credit facilities to the balance outstanding at the
time of our initial public offering of approximately $59.4 million at a weighted
average interest rate of 8.0%. Additionally, the increase results from notes
issued to former owners of the acquired businesses with a principal balance of
approximately $15.6 million at the time of our initial public offering which had
a weighted average interest rate of 5.7%. The adjustment is as follows:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Interest on credit facility............................... $4,550 $ 1,178
Interest on notes to former owners of the acquired
businesses............................................... 948 237
Less: interest recorded by AppNet and acquired
businesses............................................... (724) (1,219)
------- -------
$4,774 $ 196
======= =======
</TABLE>

(e) This adjustment was made to eliminate costs of investment advisors and
other professionals incurred by the companies we acquired in 1998 and 1999 which
were directly attributable to the sale of those companies to AppNet.

(f) This adjustment was made to record the estimated tax benefit for the
full year of 1998 and the estimated tax provision for the nine months ended
September 30, 1999 and to reflect the tax impact of the previous pro forma
adjustments, net of an applicable valuation allowance.

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Income taxes...................................... $(100) $ 328
Less: historical tax (benefit)/provision recorded
by AppNet and the acquired businesses....... (953) 371
----- -----
Net adjustment.................................... $ 853 $ (43)
===== =====
</TABLE>

(g) For the pro-forma statement of operations as of December 31, 1998, this
adjustment was made to reflect a full year of preferred stock dividends on the
preferred stock issued to finance our acquisitions. For the pro forma statement
of operations for the nine months ended September 30, 1999, this adjustment was
made to reflect preferred stock dividends on the preferred stock issued to
finance our 1999 acquisitions as if the preferred stock was outstanding from
January 1, 1998 to the date of our initial public offering in June 1999. At the
time of the initial public offering, we exchanged the preferred stock and the
preferred stock dividends for common stock. See Note (j).

22
<PAGE>
(h) Pro forma weighted average common shares outstanding for the year ended
December 31, 1998 reflects the effects of shares we issued in connection with
the acquisitions we made in 1998 and 1999 and GTCR's investment in AppNet, as if
all of these shares had been issued as of January 1, 1998. Pro forma weighted
average common shares outstanding for the nine months ended September 30, 1999
reflects the effects of shares we issued in connection with the acquisitions we
made in 1999 as if all these shares had been issued as of January 1, 1998, and
also reflects shares we expect to issue in connection with contingent payment
arrangements. Based on the measurement periods of the contingent payment
arrangements, the dates that conditions would have been met for shares to be
earned and therefore included in the weighted-average shares outstanding
calculation would have been January 1, 1999 and June 30, 1999 had the
acquisitions occurred January 1, 1998. As such, these shares have been included
in the pro forma weighted average shares outstanding calculation for the nine
months ended September 30, 1999 for the periods in 1999 for which they would
have been outstanding.

In addition, the pro forma weighted average shares outstanding for the year
ended December 31, 1998, and for the nine months ended September 30, 1999,
reflects the following shares we issued in connection with our initial public
offering:

- the 6,000,000 shares we issued in our initial public offering;

- the conversion of a $406,000 note payable into 42,310 shares of common
stock; and

- the issuance of 4,936,808 shares of common stock in connection with the
exchange of Class A and Class B Preferred Stock and related accrued
dividends.

The pro forma, as adjusted, weighted average shares outstanding for the nine
months ended September 30, 1999 reflects 74,694 of the 1,500,000 shares of
common stock to be issued in connection with this offering, the proceeds of
which will be used to repay indebtedness of approximately $3.7 million under our
credit facility.

(i) This adjustment was made to eliminate interest expense as a result of
the repayment of our former credit facilities and the conversion of a $406,000
note payable and $1.0 million notes payable into shares of our common stock in
connection with our initial public offering:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Repayment of former credit facilities....................... $(4,769) $(2,257)
Other....................................................... (71) (27)
------- -------
$(4,840) $(2,284)
======= =======
</TABLE>

(j) This adjustment was made to eliminate dividends on and accretion of
preferred stock as a result of the exchange of preferred stock in connection
with our initial public offering, as follows:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Class A Preferred Stock..................................... $(2,909) $(1,889)
Class B Preferred Stock..................................... (695) (343)
------- -------
$(3,604) $(2,232)
======= =======
</TABLE>

(k) This adjustment was made to eliminate interest expense as a result of
the repayment of the credit facility borrowings of approximately $3.7 million
outstanding at September 30, 1999 from the proceeds AppNet expects to receive in
this offering.

23
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The following tables contain selected financial data of AppNet as of and for
the year ended December 31, 1998, as of and for the nine months ended September
30, 1999 and for the nine months ended September 30, 1998, and for its
predecessor, Software Services Corporation, as of and for each of the years in
the four-year period ended December 31, 1997, as of August 24, 1998 and for the
period from January 1, 1998 to August 24, 1998. The consolidated statement of
operations data and balance sheet data for AppNet for the year ended
December 31, 1998 are derived from financial statements audited by Arthur
Andersen LLP, independent public accountants, and are included elsewhere in this
prospectus. The statement of operations data for AppNet for the nine months
ended September 30, 1999 and 1998 and the balance sheet data for AppNet as of
September 30, 1999 are derived from the unaudited financial statements of AppNet
included elsewhere in this prospectus. The statement of operations data for
Software Services Corporation for the years ended December 31, 1996 and 1997 and
for the period from January 1, 1998 to August 24, 1998 and the balance sheet
data as of December 31, 1996 and 1997 and August 24, 1998 are derived from the
financial statements of Software Services Corporation, which have been audited
by Arthur Andersen LLP and are included elsewhere in this prospectus. The
statement of operations data for the years ended December 31, 1994 and 1995 and
the balance sheet data as of December 31, 1994 and 1995 are unaudited and have
been prepared on the same basis as the audited consolidated financial statements
of Software Services Corporation included elsewhere in this prospectus. In the
opinion of management, this unaudited information includes all adjustments,
consisting of only normally recurring adjustments, necessary for a fair
presentation of such information. The historical results are not necessarily
indicative of results to be expected for any future period. You should read the
data set forth below in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," our consolidated financial
statements and the related notes and Software Services Corporation's financial
statements and the related notes, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SOFTWARE SERVICES CORPORATION APPNET
--------------------------------------------------------------- -----------------------------
PERIOD NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED YEAR ENDED ENDED
------------------------------------------------- AUGUST 24, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996 1997 1998 1998 1998
---------- ---------- ---------- ---------- ----------- ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................... $ 9,563 $ 11,065 $ 11,789 $ 13,298 $ 10,788 $ 17,674 $ 3,508
Net income (loss)............ 282 181 (53) 431 (1,713) (14,379) (4,586)
Dividends on and accretion of
preferred stock............ -- -- -- -- -- 873 (110)
Net income (loss)
attributable to common
stockholders............... 282 181 (53) 431 (1,713) (15,252) (4,696)
PER SHARE AMOUNTS:
Basic and diluted net income
(loss) per common share.... $ 0.05 $ 0.03 $ (0.01) $ 0.08 $ (0.30) $ (1.41) $ (0.59)
Weighted average common
shares outstanding......... 6,000,000 6,000,000 5,727,000 5,705,000 5,697,000 10,785,424 8,018,434

<CAPTION>
APPNET
--------------
NINE MONTHS
ENDED
SEPTEMBER 30,
1999
--------------
(UNAUDITED)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................... $ 74,802
Net income (loss)............ (60,004)
Dividends on and accretion of
preferred stock............ (2,139)
Net income (loss)
attributable to common
stockholders............... (62,143)
PER SHARE AMOUNTS:
Basic and diluted net income
(loss) per common share.... $ (2.57)
Weighted average common
shares outstanding......... 24,200,397
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------- AUGUST 24, DECEMBER 31,
1994 1995 1996 1997 1998 1998
---------- ---------- ---------- ---------- ------------- ------------

<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............... $ 2,239 $ 3,217 $ 3,155 $ 3,667 $ 4,973 $ 118,370
Total debt(1).............. 6 575 992 666 -- 43,792
Class A Preferred Stock.... -- -- -- -- -- 37,646
Stockholders' equity....... 1,641 1,811 1,458 1,886 3,487 23,608

SEPTEMBER 30,
1999
--------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets............... $ 142,928
Total debt(1).............. 17,585
Class A Preferred Stock.... --
Stockholders' equity....... 89,687
</TABLE>

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

(1) Total debt includes the current and long-term portions of notes payable and
capital lease obligations for Software Services Corporation and includes the
current and long-term portions of long-term debt, convertible notes, capital
lease obligations and credit facilities for AppNet.

24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION MAY INCLUDE
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES WHICH COULD
RESULT IN OPERATING PERFORMANCE THAT IS MATERIALLY DIFFERENT FROM MANAGEMENT'S
PROJECTIONS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO THESE DIFFERENCES INCLUDE
THOSE DISCUSSED IN "RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS. YOU SHOULD READ THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF APPNET AND ITS PREDECESSOR, SOFTWARE SERVICES
CORPORATION, IN CONJUNCTION WITH THEIR RESPECTIVE CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES, "PRO FORMA CONSOLIDATED FINANCIAL DATA" AND
"SELECTED FINANCIAL DATA" INCLUDED ELSEWHERE IN THIS PROSPECTUS.

OVERVIEW

AppNet provides Internet and electronic commerce professional services and
solutions to medium-sized and large businesses. We develop end-to-end electronic
commerce solutions that improve communication and commerce between businesses
and consumers as well as among businesses and their trading partners. Through
strategic acquisitions and internal growth, we have built a company with the
ability to design, develop, implement and manage end-to-end Internet and
electronic commerce solutions.

AppNet's financial statements for the period from inception, November 6,
1997, through December 31, 1997, reflect immaterial transactions and, therefore,
these transactions have been included in our 1998 financial statements to
facilitate presentation. From inception through March 11, 1998, our operating
activities primarily consisted of developing a preliminary business plan,
recruiting personnel, engaging in discussions with prospective lenders and
strategic investors, identifying potential acquisition targets and developing
preliminary technical and marketing materials. Our strategic plan identified the
specific professional services which are required to provide clients with
end-to-end solutions. We then identified a group of companies which focused on
providing services in one or more of these professional services areas. After
reviewing and evaluating over 100 companies, we ultimately acquired a set of
companies that we believe fit together strategically and culturally and which,
when integrated with one another, could design, develop, implement and manage
end-to-end solutions. In March 1998, we completed our first acquisition. Since
that time, AppNet has completed 11 additional acquisitions.

Typically, the consideration we paid to make our acquisitions included cash,
shares of our common stock, promissory notes, promissory notes convertible into
shares of our common stock and, in six of our acquisitions, LOGEX International,
New Media Publishing, Sigma6, Salzinger & Company, Internet Outfitters and
TransForm IT, contingent payments payable in cash and/or shares of our common
stock payable upon the attainment of agreed-upon operating targets. The cash
portion of such consideration was financed primarily by an investment in our
company by GTCR and Smart Technology and borrowings under our credit facilities.
Our acquisitions have been accounted for using the purchase method of
accounting. Accordingly, the purchase price has been allocated, based on
preliminary estimates of fair value, to the tangible assets and liabilities
assumed, and in most cases, with the advice of independent valuation experts, to
the identifiable intangible assets, as of the acquisition dates. Final estimates
of fair value will be made upon the completion of independent valuations for our
1999 acquisitions and the final determination of preexisting contingencies.
Since the Internet and the electronic commerce industries are in an early stage
of development and continue to evolve rapidly and because competition in these
industries is expected to increase, the recorded goodwill and identified
intangibles from each of the acquisitions are being amortized on a straight-line
basis primarily over two to three years, the estimated period of benefit.

25
<PAGE>
AppNet's revenues are comprised primarily of fees generated for professional
services billed. We also generate fees from outsourcing services although these
fees currently represent a small portion of our revenues. One of our strategies
is to increase the percentage of our revenues generated by fees from outsourcing
services. During the development of our outsourcing business, we may incur
losses and operating margins may be reduced as we build our operations and
infrastructure to support this line of business.

In general, we bill our professional services on a time and materials basis;
however, a portion of our services is billed on a fixed-price basis. AppNet
recognizes revenue from time and materials projects based on fixed hourly rates
for direct labor hours expended and revenues from fixed-price projects based on
the percentage-of-completion method of accounting, with costs and estimated
profits recorded as work is performed. Provisions for estimated losses on
uncompleted contracts are made in the period in which the losses are determined.
Changes in contract scope and estimated profitability, including final contract
settlements, may result in adjustments to costs and revenues and are recognized
in the period in which the adjustments are determined.

AppNet's cost of revenues includes all direct labor and other direct costs
related to contract performance. Cost of revenues consists primarily of salaries
and related employee benefits of billable employees.

Selling and marketing expenses are comprised of the salaries and related
employee benefits of sales and marketing employees and the costs of sales,
marketing and advertising activities. We compensate our sales employees with a
combination of base salaries and commissions. We anticipate that selling and
marketing expenses may increase as a percentage of our revenues in future
periods as we continue to build our corporate sales team and expand our
marketing strategy.

AppNet's general and administrative costs include salaries and related
employee benefits for finance, legal, human resources and administrative
personnel. The general and administrative expenses also include facilities
costs, recruiting, training and other corporate costs. As a result of
anticipated additional hiring costs associated with the integration of the
businesses we acquired in 1998 and 1999, our general and administrative expenses
will increase, although they may decline as a percentage of our revenues.

Stock-based and other acquisition-related compensation includes expenses
related to the cash and stock-based contingent payments payable to former owners
of five businesses, New Media Publishing, Sigma6, Salzinger & Company, Internet
Outfitters and TransForm IT, we acquired if agreed-upon operating targets are
achieved and these former stockholders remain employed by AppNet. These
contingent payments are accounted for as operating expenses in accordance with
Emerging Issues Task Force 95-08, "Accounting for Contingent Consideration Paid
to the Shareholders of an Acquired Company in a Purchase Business Combination,"
instead of as additional purchase consideration at the time of the acquisition
because many of the former owners to whom payments are payable must remain
employed by AppNet in order for them to receive these payments. The amount of
this compensation expense recorded periodically will fluctuate based on the
probability of achievement of the operating targets by each of the acquired
businesses and the market price of our common stock at the end of each reporting
period. This expense is recognized over the period during which these former
stockholders must remain employed by us to be eligible to receive the contingent
payments. The remaining portion of these contingent payments that is payable to
former stockholders who are not our employees or who are not required to remain
employed by us during the contingent payment period will be recorded as
additional goodwill when such targets are met. If all of the operating targets
are fully met, the aggregate amounts of compensation expense and additional
goodwill that will be recognized will be approximately $32.9 million and
$11.9 million, respectively, assuming for all shares issued in connection with
these contingent payments a price per share of our common stock of $26.25 in the
case of New Media Publishing, which was the last reported sale price of our
common stock on

26
<PAGE>
the measurement date of October 1, 1999, and a price per share of $49.00 in the
case of the other companies, which was the last reported sale price of our
common stock on October 26, 1999. The compensation expense will be recognized
during 1999 and 2000.

A compensation charge of $2.5 million was recorded in June 1999 within
stock-based and acquisition-related compensation upon completion of our initial
public offering in connection with the termination of our right to repurchase
shares of our common stock from Mr. Bajaj. The amount of the compensation charge
was determined based on the number of common shares that we could have
repurchased from him and the difference between $0.3007 and the $12.00 per share
initial public offering price of our common stock. In addition, an interest
charge of approximately $1.1 million related to the beneficial conversion of
convertible notes was recorded upon completion of our initial public offering.

Operating results may fluctuate from quarter to quarter and from year to
year based on such factors as the number, size, type and profitability of
projects in which we are engaged. Other factors that could cause our quarterly
results to fluctuate include:

- effectiveness of integrating acquisitions with existing operations;

- our ability to attract, train and retain skilled management, technical and
creative personnel;

- the entrance of new competitors; and

- timing and size of acquisition-related compensation charges which
fluctuate based on the market price of our stock and the level of
achievement of the agreed upon operating targets.

APPNET PRO FORMA RESULTS OF OPERATIONS

The pro forma statement of operations for the year ended December 31, 1998
gives effect to the 12 acquisitions we made in 1998 and 1999, GTCR's investment
in AppNet and our June 1999 initial public offering as if these transactions had
occurred on January 1, 1998. The pro forma statement of operations for the nine
months ended September 30, 1999 gives effect to the acquisitions we made in 1998
and 1999 and our June 1999 initial public offering as if these transactions had
occurred on January 1, 1998. Our pro forma nine month and annual results may not
be indicative of future operations as a result of our continued integration of
acquired companies and the development of our corporate infrastructure.

NINE MONTHS ENDED SEPTEMBER 30, 1999

REVENUES. Pro forma revenues for the nine months ended September 30, 1999
were $77.4 million.

COST OF REVENUES. For the nine months ended September 30, 1999, cost of
revenues was $43.9 million, or 57% of pro forma revenues.

SELLING AND MARKETING. Pro forma selling and marketing expenses for the
nine months ended September 30, 1999 were $6.0 million, or 8% of pro forma
revenues.

GENERAL AND ADMINISTRATIVE. Pro forma general and administrative expenses
were $24.0 million for the nine months ended September 30, 1999 or 31% of pro
forma revenues.

STOCK-BASED AND OTHER ACQUISITION-RELATED COMPENSATION. For the nine months
ended September 30, 1999, pro forma stock-based and other acquisition-related
compensation was $11.2 million. This amount was computed as if the 1999
acquisitions had occurred on January 1, 1998 and based on the assumption that
operating targets of the entities we acquired in 1998 and 1999 will be fully
met. It was also based on a price per share of our common stock of $26.25 in the
case of New Media Publishing, which was the last reported sale price of our
common stock on the measurement date of October 1, 1999, and a

27
<PAGE>
price per share of $49.00 in the case of the other companies, which was the last
reported sale price of our common stock on October 26, 1999.

DEPRECIATION AND AMORTIZATION. Pro forma depreciation and amortization for
the nine months ended September 30, 1999 was $38.2 million, of which
$36.3 million represents amortization of intangible assets.

INTEREST EXPENSE. For the nine months ended September 30, 1999, pro forma
interest expense was $1.9 million, the majority of which is a result of the
financing of acquisitions. We expect to repay existing borrowings under our
credit facilities with a portion of the proceeds from this offering which would
have reduced interest expense on a pro forma as adjusted basis to $1.7 million.

YEAR ENDED DECEMBER 31, 1998

REVENUES. Pro forma revenues for the year ended December 31, 1998 were
$69.2 million. This amount consists primarily of revenues from fees for
professional services. We also generated revenues from fees for outsourcing
services; the amount of these fees represented a small portion of our revenues
for this period.

COST OF REVENUES. For the year ended December 31, 1998, pro forma cost of
revenues was $41.9 million, or 61% of revenues.

SELLING AND MARKETING. Pro forma selling and marketing expenses were $3.3
million for the year ended December 31, 1998, or 5% of revenues.

GENERAL AND ADMINISTRATIVE. For the year ended December 31, 1998, pro forma
general and administrative expenses were $19.0 million, or 28% of revenues.

STOCK-BASED AND OTHER ACQUISITION-RELATED COMPENSATION. Pro forma
stock-based and other acquisition-related compensation for the year ended
December 31, 1998 was $23.1 million. This amount represents an accrual for the
estimated amount of the cash and stock-based contingent consideration to be paid
to former owners of five of our acquired businesses, New Media Publishing,
Sigma6, Salzinger & Company, Internet Outfitters and TransForm IT, during the
12-month period following acquisition. The amount is based on assumptions that
operating targets will be fully met and that the fair market value of our common
stock is $26.25 in the case of New Media Publishing, which was the last sale
price of our common stock on the measurement date of October 1, 1999, and a
price per share of $49.00 in the case of the other companies, which was the last
sale price of our common stock on October 26, 1999.

DEPRECIATION AND AMORTIZATION. For the year ended December 31, 1998, pro
forma depreciation and amortization was approximately $60.3 million, the
majority of which represents amortization expense of our intangible assets.

INTEREST EXPENSE. Pro forma interest expense for the year ended
December 31, 1998 was $1.0 million.

OTHER EXPENSE, NET. For the year ended December 31, 1998, pro forma other
expense includes a charge of $0.3 million related to the refinancing of our
credit facilities during 1998 and the write-off of approximately $0.3 million
related to an investment in a joint venture that was deemed to have no value due
to the failure of the venture to generate a customer base and to generate
sufficient revenues to cover operating expenses, which resulted in the
abandonment of the operations of the venture.

INCOME TAXES. Pro forma income tax benefit for the year ended December 31,
1998 was $0.1 million. The effective income tax rate of 0.1% was lower than the
blended federal and statutory rate primarily as a result of amortization of a
portion of our intangible assets which are not deductible for

28
<PAGE>
income tax purposes and the recognition of a valuation allowance in accordance
with generally accepted accounting principles.

APPNET HISTORICAL RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998

REVENUES. Revenues for the nine months ended September 30, 1999 increased
$71.3 million to $74.8 million from $3.5 million for the nine months ended
September 30, 1998 due to acquisitions we made during the second half of 1998
and the first quarter of 1999, as well as internal growth.

COST OF REVENUES. Cost of revenues for the nine months ended September 30,
1999 increased $38.9 million to $42.2 million from $3.3 million for the nine
months ended September 30, 1998. The increase in cost of revenues was primarily
driven by an increase in average billable headcount resulting from the
acquisitions that occurred during 1998 and 1999, as well as internal growth.

OPERATING EXPENSES. Operating expenses for the nine months ended
September 30, 1999 increased $83.6 million to $87.8 million from $4.2 million
for the nine months ended September 30, 1998. The increase in operating expenses
for the nine months ended September 30, 1999 was attributable primarily to an
increase in selling and marketing, general and administrative, and stock-based
and other acquisition-related compensation expenses as well as depreciation and
amortization expenses.

SELLING AND MARKETING. Selling and marketing expenses for the nine months
ended September 30, 1999 increased $5.6 million to $5.8 million from
$0.2 million for the nine months ended September 30, 1998. As a percentage of
revenues, selling and marketing expenses for the nine months ended
September 30, 1999 increased to 8% from 6% for the nine months ended
September 30, 1998. The increase in selling and marketing expenses is a result
of the acquisitions we completed during the second half of 1998 and the first
quarter of 1999 and the development of our corporate sales and marketing staff.

GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
nine months ended September 30, 1999 increased $21.0 million to $23.3 million
from $2.3 million for the nine months ended September 30, 1998. The increase in
general and administrative expenses is a result of the build up of corporate
infrastructure through 1998 and into 1999 to assist in the integration of
acquisitions. As a result of anticipated additional hiring costs associated with
the integration of the businesses we acquired in the second half of 1998 and the
first quarter of 1999, our general and administrative expenses are expected to
continue to increase, although they may decline as a percentage of our revenues.
As a percentage of revenue, general and administrative expenses for the nine
months ended September 30, 1999 decreased to 31% from 67% for the nine months
ended September 30, 1998.

STOCK-BASED AND OTHER ACQUISITION-RELATED COMPENSATION. Stock-based and
other acquisition-related compensation expenses for the nine months ended
September 30, 1999 was $15.7 million. Approximately $12.6 million is
attributable to the contingent payments due to former shareholders of businesses
acquired that must remain employed by AppNet to receive the contingent payments.
The amount is computed based on the fair market value of our common stock at the
end of the reporting period and assumes that operating targets will be fully
met. The amount of this compensation expense may fluctuate in future periods
based on the probability of achievement of the operating targets by each of the
acquired businesses and the market price of our common stock at the end of each
reporting period. In addition, we recognized a compensation charge of
$2.5 million during the nine months ended September 30, 1999, recorded as
stock-based and acquisition-related compensation expense, upon completion of the
initial public offering in connection with the termination of our right to
repurchase shares of our common stock from one of our officers. The amount of
the compensation charge was determined based on the number of common shares that
we could have repurchased from

29
<PAGE>
the officer and the difference between $0.3007, the repurchase price, and the
initial public offering price of $12.00 per share.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for
the nine months ended September 30, 1999 increased $41.2 million to
$42.9 million from $1.7 million for the nine months ended September 30, 1998.
The increase is primarily due to the amortization of intangible assets resulting
from the acquisitions made during the second half of 1998 and the first quarter
of 1999. Our goodwill and related amortization may increase in future periods if
AppNet is required to pay additional consideration for its acquisitions based on
attainment of certain operating targets.

INTEREST EXPENSE. Interest expense for the nine months ended September 30,
1999 increased $3.6 million to $3.9 million from $0.3 for the nine months ended
September 30, 1998 due to additional borrowings under our credit facilities and
issuance of notes payable to former owners of businesses acquired during the
second half of 1998 and the first quarter of 1999. In connection with our
initial public offering, we recorded an interest charge of $1.1 million during
the nine months ended September 30, 1999 related to beneficial conversion rights
of notes which contained conversion features at a discount from the initial
public offering price of the common stock.

OTHER EXPENSE, NET. Other expense of $0.6 million for the nine months ended
September 30, 1999 includes the write-off of deferred financing costs in
connection with the refinancing of our credit facilities during the period.
During the nine months ended September 30, 1998, other expense of $0.4 million
included the write-off of approximately $0.3 million related to an investment in
a joint venture that was deemed to have no value due to the failure of the
venture to generate a customer base and to generate sufficient revenues to cover
operating expenses, which resulted in the abandonment of operations of the
venture.

INCOME TAX PROVISION. The provision for income taxes was $0.3 million for
the nine months ended September 30, 1999 and is related to state income taxes.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO SOFTWARE SERVICES CORPORATION
(PREDECESSOR) FOR THE YEAR ENDED DECEMBER 31, 1997

REVENUES. Revenues for the year ended December 31, 1998 were $17.7 million
as compared with revenues of $13.3 million of Software Services Corporation for
the year ended December 31, 1997. The difference of $4.4 million is a result of
the acquisitions by AppNet during 1998, as well as internal growth which
increased headcount and operations.

COST OF REVENUES. For the year ended December 31, 1998, cost of revenues of
AppNet was $11.7 million as compared to the cost of revenues of Software
Services Corporation for the year ended December 31, 1997 of $8.4 million. The
change of $3.3 million was primarily driven by the increase in billable
headcount resulting from the acquisitions that occurred during 1998 and internal
growth.

SELLING AND MARKETING. Selling and marketing expenses for the year ended
December 31, 1998 were $1.0 million as compared to $1.0 million for Software
Services Corporation for the year ended December 31, 1997.

GENERAL AND ADMINISTRATIVE. General and administrative expenses of AppNet
were $6.5 million for the year ended December 31, 1998 as compared to
$3.0 million of Software Services Corporation for the year ended December 31,
1997. The difference is primarily a result of the acquisitions that occurred
during 1998.

STOCK-BASED AND OTHER ACQUISITION-RELATED COMPENSATION. For the year ended
December 31, 1998, stock-based and other acquisition-related compensation of
AppNet was $1.2 million, which represents

30
<PAGE>
an accrual for the estimated amount of cash and stock-based contingent
consideration to be paid to former stockholders of acquired businesses.

DEPRECIATION AND AMORTIZATION. For the year ended December 31, 1998,
depreciation and amortization of AppNet was $10.2 million as compared with
$0.3 million for the year ended December 31, 1997. The change is primarily a
result of the amortization of intangible assets recorded by AppNet in connection
with the acquisitions made in 1998.

INTEREST EXPENSE. Interest expense of AppNet for the year ended
December 31, 1998 was $1.1 million that primarily resulted from the interest on
the outstanding balance on the credit facility during the period.

OTHER EXPENSE, NET. Other expense of $0.7 million includes a charge of
$0.3 million related to the refinancing of our credit facilities in 1998. Other
expense also includes the write-off of $0.3 million related to an investment in
a joint venture that was deemed to have no value due to the failure of the
venture to generate a customer base and to generate sufficient revenues to cover
operating expenses, which resulted in the abandonment of the operations of the
venture.

INCOME TAXES. Income tax benefit for the year ended December 31, 1998 was
$0.2 million. The effective income tax rate of 1% was lower than the blended
federal and state statutory rate primarily as a result of amortization of a
portion of our intangible assets which are not deductible for income tax
purposes and the recognition of a valuation allowance in accordance with
generally accepted accounting principles.

SOFTWARE SERVICES CORPORATION (PREDECESSOR)

PERIOD ENDED AUGUST 24, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997

REVENUES. Revenues for the period ended August 24, 1998 were
$10.8 million, compared to $13.3 million for the year ended December 31, 1997.
The decrease is primarily due to the fact that we are comparing a 12-month
period to an eight-month period, offset by increased activity in SSC's technical
consulting group.

COST OF REVENUES. Cost of revenues for the period ended August 24, 1998 was
$7.4 million, compared to $8.4 million for the year ended December 31, 1997. The
amount as a percentage of revenues remained relatively consistent between the
respective periods.

OPERATING EXPENSES. Total operating expenses for the period ended
August 24, 1998 were $5.3 million, compared to $4.4 million for the year ended
December 31, 1997, representing an increase of $0.9 million. The increase is a
result of a $2.7 million stock-based and acquisition-related compensation charge
incurred in connection with the acquisition of SSC by AppNet. The offsetting
decrease is a result of the decrease in selling and marketing and general and
administrative expenses of $1.6 million as larger projects required less overall
support.

INCOME TAXES. An income tax benefit of $0.6 million was recorded for the
period ended August 24, 1998, compared with an income tax provision of
$0.4 million for the year ended December 31, 1997 based on the income (loss)
before income taxes for the respective period.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996

REVENUES. Revenues for the year ended December 31, 1997 were
$13.3 million, compared to $11.8 million for the year ended December 31, 1996.
The increase of $1.5 million is a result of an increase in the number of
projects completed and amount of professional services rendered during 1997.

31
<PAGE>
COST OF REVENUES. Cost of revenues for the year ended December 31, 1997 was
$8.4 million, compared to $7.7 million for the year ended December 31, 1996. The
amount as a percentage of revenues remained substantially consistent.

OPERATING EXPENSES. Total operating expenses for the year ended
December 31, 1997 were $4.4 million, compared to $4.0 million for the year ended
December 31, 1996, representing an increase of $0.4 million. The increase is a
result of the overall increase in general and administrative expenses for the
year ended December 31, 1997.

INCOME TAXES. An income tax provision of $0.4 million was recorded for the
year ended December 31, 1997, compared with a provision of $0.1 million for the
year ended December 31, 1996. The increase is a result of the increase in income
before income taxes for the respective period.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1999, we had approximately $3.2 million in cash and cash
equivalents. AppNet has financed its operations and acquisitions primarily
through the issuance of common stock, borrowings under credit facilities and the
issuance of preferred stock. For the year ended December 31, 1998, cash used in
operations was $2.6 million and $71.7 million was used in investing activities.
For the nine months ended September 30, 1999, cash used in operating activities
was $4.0 million and cash used in investing activities was $32.4 million. The
principal use of cash in investing activities was to finance acquisitions. As
AppNet continues to grow its business and integrate the businesses it has
acquired, AppNet expects to use cash from operations to fund these activities.

Net cash provided by financing activities was $76.7 million and $37.1
million during the year ended December 31, 1998 and the nine months ended
September 30, 1999, respectively. We received proceeds from net borrowings under
our credit facilities of $37.5 million during the year ended December 31, 1998.
In addition, we received $36.3 million and $3.0 million as consideration for the
issuance of our preferred and common stock, respectively, during the year ended
December 31, 1998. Additionally, we received $7.0 million during the nine months
ended September 30, 1999 as consideration for the issuance of preferred stock.

In connection with our initial public offering, we also issued 4,936,808
shares of common stock in exchange for 45,430 shares of Class A Preferred Stock
and 11,576 shares of Class B Preferred Stock, including accrued dividends, at an
exchange rate based on our June 1999 initial public offering price of $12.00 per
share. We also issued 123,210 shares of common stock on conversion of promissory
notes of approximately $1.0 million plus accrued interest at a conversion price
of $8.55 per share and issued 75,129 shares of common stock on conversion of
promissory notes of approximately $0.7 million plus accrued interest at a
conversion price at 80% of our June 1999 initial public offering price of $12.00
per share.

In connection with five of our acquisitions, LOGEX International, Century
Computing, Incorporated, Research & Planning, Inc., The Kodiak Group and i33
communications corp., we issued notes to the former owners some of which are
convertible into shares of our common stock. The balance of the notes at
September 30, 1999 was approximately $13.8 million, $9.3 million of which is
convertible into shares of our common stock. These notes have varying
maturities, from October 1999 through April 2003, and bear interest at rates
between 4.33% and 8.0% as of September 30, 1999.

At December 31, 1998, our revolving credit facilities provided for
borrowings up to $40 million. In January 1999, we replaced these facilities with
two new revolving credit facilities which provided for up to $66 million in
borrowings, $40 million of which was guaranteed by an affiliate. Upon completion
of our initial public offering, we terminated the $40 million credit facility
and amended the $26 million credit facility to provide for maximum aggregate
revolving borrowings of up to $20 million. The revolving credit facility will
expire on August 24, 2001. The credit facility bears interest, at our option,

32
<PAGE>
at LIBOR or the lenders' prime rate plus an applicable margin based on our
operating performance. The credit facility is secured by all of our assets and
contains various restrictive covenants that, among other things, require us to
maintain specified financial ratios and levels of working capital and restrict
us from paying dividends to our common stockholders. At September 30, 1999,
approximately $11.8 million remained available for borrowing under our credit
facility based on the level of financial ratios, as set forth in the credit
facility.

We plan to use the proceeds of this offering to repay all outstanding
borrowings under our credit facility which were $3.7 million as of
September 30, 1999.

AppNet's capital expenditures for 1998 were approximately $1.2 million.
Historically, capital expenditures have been used to make leasehold improvements
to AppNet's leased office space and to purchase computer hardware and software
and furniture and fixtures. AppNet does not have any material commitments for
capital expenditures for the foreseeable future. However, AppNet does plan to
make capital expenditures, which may include office space, over the next two
years to further develop our electronic commerce outsourcing services.

During the period from the consummation of this offering through
November 2000, we may be required to make contingent payments to former owners
of four of the businesses we acquired, Sigma6, Salzinger & Company, Internet
Outfitters and TransForm IT. These contingent payments are payable in cash and
stock, in one case at the option of the former owners. The amount of these
payments will depend on the level of achievement of the operating targets and
the market price of our common stock. The majority of the former owners must
remain employed by us in order to remain eligible to receive these payments. The
maximum aggregate amount of the cash portion of these payments, assuming the
operating targets are fully met, is approximately $11.5 million.

In connection with our acquisition of New Media Publishing, contingent
purchase payments based upon the achievement of certain operating targets during
New Media Publishing's 12 months ended October 1, 1999 are payable in
January 2000. Based on the preliminary results of New Media Publishing's
operating performance during the applicable period, we expect to pay contingent
consideration of approximately $8.4 million in cash and 654,971 shares of our
common stock.

Based upon current expectations, we believe amounts which may be borrowed
under our credit facility and cash flow from operations will be adequate for us
to meet our capital requirements, to finance the cash portion of our contingent
payments and pursue our business strategy for the next 18 months. To the extent
AppNet is unable to fund its operations from cash flows and existing credit
facilities during or following the next 18 months, it may need to obtain
financing from external sources either by issuing additional equity or incurring
additional indebtedness.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities", which establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133, as amended, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. We have not yet determined whether the adoption
of SFAS No. 133 will have a material effect on our results of operations,
financial position or cash flows.

YEAR 2000

We have completed an assessment of our Year 2000 readiness and have made
substantial progress in making our systems Year 2000 compliant. The risks posed
by the Year 2000 issue could adversely affect our business in a number of
significant ways. Many of our clients and potential clients maintain their
operations on systems that could be impacted by Year 2000 problems. If our
clients fail to ensure

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their systems are Year 2000 compliant and Year 2000 problems materially
adversely affect them, our business could be adversely affected, particularly if
demand for our services declines as companies spend their resources to upgrade
their computer systems. We rely on our suppliers for hardware, software and
services. Our business could be adversely affected if we cannot obtain products,
services or systems that are Year 2000 compliant when we need them. We also
depend on the availability of the Internet infrastructure to conduct our
business and provide services to our clients. Disruptions in the Internet
infrastructure arising from Year 2000 problems could materially adversely affect
our business, financial condition and results of operations. In addition, our
solutions are sometimes dependent upon third-party products and components.
Failure of a third party whose products or services we employ to adequately
address Year 2000 issues could result in our involvement in litigation
concerning our products and services or those of a third party. Futhermore,
because we provide computer-related services, the risk we will be involved in a
lawsuit relating to Year 2000 issues is likely to be greater than that of
companies in other industries. We sometimes provide express warranties to
clients that our work is Year 2000 compliant.

We have received assurances from all of our major suppliers that they are
Year 2000 compliant. We have established a Year 2000 Executive Steering
Committee, appointed a Year 2000 Compliance Program Manager and adopted a formal
compliance program to oversee and coordinate our Year 2000 compliance efforts
throughout our organization. This program is designed to ensure consistency and
minimize the impact of Year 2000 problems on our operations. Our Year 2000
compliance program consists of the following five phases: awareness, assessment,
remediation, testing and implementation. We have completed the awareness and
assessment phases of our Year 2000 compliance program. We estimate that we are
approximately 90% complete in our Year 2000 remediation efforts across the
entire organization. We have completed our testing and implementation phases at
a number of our locations and have begun this process at several others.

In the event we do not complete the phases of our program, we may fail to
meet contractual obligations, provide adequate service or meet customer
requirements. The result of such failures could subject us to litigation for
which the amount of potential liability and lost revenue cannot be reasonably
estimated at this time.

Our costs in connection with Year 2000 compliance to date have been
approximately $0.4 million. At this time, we estimate the potential additional
costs of becoming Year 2000 compliant to be between $0.2 million and $0.4
million, which includes the cost to replace hardware and software, outside
consulting services and some internal labor costs. However, as we continue to
implement our Year 2000 compliance program, these cost estimates may need to be
significantly revised, which could have a material adverse effect on our
business, financial condition or results of operations.

As part of our plan to integrate the back-office functions of the businesses
we have acquired, we are implementing new, uniform internal information systems,
such as general ledger, billing, accounts payable and payroll, throughout our
organization. Although we have received assurances from our vendors that these
new systems are Year 2000 compliant, our internal systems may experience
operational difficulties because of undetected errors or defects in the
technology used.

If we fail to address a Year 2000 compliance problem in one of our systems,
the result could be a failure or interruption of normal business operations. We
believe that our Year 2000 compliance program, when fully implemented, should
minimize the risk of significant interruptions to our operations. Currently, we
do not have an expected completion date for our compliance program. At this
point, we believe that the most reasonably likely worst case scenario may
involve circumstances we do not directly control, such as:

- Our suppliers may provide inaccurate or misleading information to us with
respect to their products' and/or services' Year 2000 compliance. If we
had to replace every information

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technology system developed by a third party throughout our organization,
we estimate the cost to be $7.2 million and that it would result in
significant interruption of our operations.

- Our clients may fail to ensure that their systems are Year 2000 compliant,
which may cause the Year 2000 problem to materially adversely affect them.
If this did occur, demand for our services could decline as companies
spend their resources to upgrade their computer systems.

- The failure of third-party products and components upon which our
solutions are sometimes dependent could result in our involvement in
litigation concerning our solutions or the products and components of
third parties. We cannot accurately predict the outcome of any legal
claims in which we may become involved as a result of such failure.

- Critical utilities such as electrical power and telecommunications may be
interrupted for a significant and protracted period of time. We have taken
steps to mitigate these risks by installing back-up power supplies and
redundant telecommunications. However, we could still be adversely
impacted by failures at companies that provide us with Internet services.

We currently do not have contingency plans in place in the event we do not
complete all phases of our Year 2000 compliance program. If we do not develop
our contingency plans, our potential Year 2000 liabilities may be materially
increased.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

AppNet is exposed to market risk related to changes in interest rates on its
long-term credit facility. AppNet is able to manage its interest rate risk to
some degree through management's option to select the factor used to determine
its interest rate. AppNet's credit facility is a variable rate credit facility.
The credit facility bears interest, at our option, at LIBOR or the lenders'
prime rate plus an applicable margin based on our operating performance. The
balance outstanding as of December 31, 1998 was $37.5 million, of which $19.7
million bore interest at a rate of 8.25% and $17.8 million bore interest at a
rate of 7.75%. Assuming the amount outstanding at September 30, 1999, which was
$3.7 million, was outstanding for the entire year, we estimate that a one
percentage point change to the weighted average interest rate at September 30,
1999 (9.75%) would equal a $0.6 million change in interest expense. If the
interest rate increased, the net loss attributable to common stockholders for
the nine months ended September 30, 1999 would have increased by $0.1 million to
$62.2 million.

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BUSINESS

OVERVIEW

AppNet provides Internet and electronic commerce professional services and
solutions to medium-sized and large businesses. We develop electronic commerce
solutions that improve communication and commerce between businesses and
consumers as well as among businesses and their trading partners. We focus on
maximizing the opportunities presented by the Internet and electronic commerce
to enhance all aspects of our clients' operations, from the front end of their
business, creative Website design, to the back end, back-office integration of
existing systems and electronic commerce outsourcing, creating an end-to-end
solution. We were formed in 1997 as a Delaware corporation.

Our professional services include:

- strategic consulting;

- interactive media services such as creative Website design and
development, branding, which is the creation of a unique corporate
identity for a client and its products, media planning and buying;

- electronic commerce outsourcing, which is the performance of electronic
commerce services that would otherwise be handled by the client's internal
staff using the client's resources.

None of these services is more critical to our business operations and
revenues than the other services.

INDUSTRY BACKGROUND

The rapid growth in the use of the Internet and electronic commerce has
revolutionized the way businesses operate and interact with their customers and
trading partners. The Internet and electronic commerce have created new channels
of communication and distribution which raise the level and increase the speed
of interaction between a business and its trading partners and customers. The
demand for Internet and electronic commerce services is increasing as more and
more companies develop on-line businesses and employ Internet and electronic
commerce solutions.

The Internet enables businesses to establish an on-line presence through
which they can offer new and complementary products and services to new and
existing markets. As a result, businesses have been able to create new sources
of revenue, improve customer care and retention and streamline their internal
operations by processing orders and payments on-line.

To date, businesses have primarily focused on using Internet and electronic
commerce solutions to improve business-to-consumer relationships. However,
businesses are increasingly using the Internet and electronic commerce to open
cost-effective, reliable, highly efficient channels of communication and
commerce with their suppliers and distributors. Internet and electronic commerce
solutions can improve the way businesses interact with their trading partners by
linking businesses' back-office systems through electronic data interchange, or
EDI, and the Internet to trading partners and suppliers. EDI is a process
through which data is transferred from a paper format into a standard electronic
format and electronically transmitted to trading partners over a private network
or the Internet. Businesses are increasingly finding that they can reliably and
cost-effectively manage a high volume of transactions on a real-time basis using
EDI and the Internet. In addition, by using EDI and the Internet for
communication with both consumers and trading partners, businesses are creating
electronically integrated supply chains that significantly improve their
operating efficiency.

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Businesses are increasingly discovering that implementing Internet and
electronic commerce solutions is necessary to remain competitive and are
demanding end-to-end Internet and electronic commerce solutions that can improve
every aspect of their operations. As a result, technology industry research
firms predict that the market for Internet and electronic commerce services
worldwide will grow significantly over the next few years. International Data
Corp. estimates that this market will increase from $7.8 billion in 1998 to
$78.6 billion by 2003, which represents a compound annual growth rate of 59%.
According to a 1998 Dataquest survey of selected Fortune 1000 companies, 83% of
such companies in North America are currently investing, or plan to invest, in
Internet solutions and 48% are currently investing, or plan to invest, in
electronic commerce solutions.

Most businesses rely on outside specialists to design and develop Internet
and electronic commerce solutions for a number of compelling reasons. Because
Internet and electronic commerce technologies have developed so rapidly, few
businesses have employees with the advanced skills necessary to effectively
evaluate and implement these technologies successfully. Given the pressure to
get to market quickly, waiting for in-house employees to be trained to use these
technologies is not practicable. In addition, hiring trained professionals is
difficult because they are in great demand. At the same time, as business
challenges grow increasingly complex, so must the Internet and electronic
commerce solutions required to address them. Given the significant cost to
design, develop, implement and manage Internet and electronic commerce
solutions, businesses cannot afford to expend resources developing solutions
themselves. Hiring a firm that provides a comprehensive range of Internet and
electronic commerce professional services is often the most efficient and
cost-effective solution for many companies.

THE APPNET SOLUTION

Our goal in founding AppNet was to address the growing need for end-to-end
Internet and electronic commerce solutions. We offer a comprehensive range of
services involving the design, development, implementation and management of
Internet and electronic commerce solutions that facilitate and promote
communication and commerce between businesses and consumers as well as among
businesses and their trading partners. Key elements of the AppNet solution are:

- END-TO-END SERVICE OFFERING

We can provide clients with end-to-end Internet and electronic commerce
solutions. Our clients recognize significant cost and time savings and receive
integrated solutions because they can obtain all of the Internet and electronic
commerce professional services they need from one company.

- UNIQUE ELECTRONIC COMMERCE OUTSOURCING SERVICES

We offer our clients an extensive range of electronic commerce outsourcing
services as part of our overall service offering. We perform electronic commerce
services that would otherwise be handled by the client's internal staff using
the client's resources. Our business-to-business outsourcing services include
processing transactions for our clients using our resources and infrastructure.
We also operate electronic data interchange programs through which businesses
and their trading partners exchange information electronically. We monitor and
analyze the transactions processed through these programs. Our
business-to-consumer outsourcing services include managing on-line stores,
processing transactions, managing and hosting Websites and operating and
managing electronic commerce systems. Our Website managing and hosting services
include adding and editing material on a Website and making sure the Website is
operating according to its specifications. Our outsourcing services include
maintaining security at a Website by ensuring only authorized users have access
to the Website. We also store data that is generated by activity at the Website.
Clients who take advantage of these services get to market quickly; do not have
to make the significant financial and technological investments required to
effectively build and manage their own infrastructures; receive reliable and
secure services; and can focus their attention and resources on their core
competencies.

- ABILITY TO SOLVE INCREASINGLY COMPLEX BUSINESS PROBLEMS

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Our business-level and process-level strategic consulting services help our
clients solve their increasingly complex business problems with sophisticated,
vendor-neutral Internet and electronic commerce solutions. We employ
business-level strategic consulting services to develop and redefine clients'
business models to incorporate Internet and electronic commerce strategies. We
employ process-level strategic consulting services to improve the business
processes of clients who have already incorporated Internet and electronic
commerce strategies into their business models. These services, together with
the knowledge and experience we gain designing, developing, implementing and
managing each electronic commerce solution, enable us to develop comprehensive
strategies for growing on-line ventures, streamlining on-line marketing and
distribution strategies, improving operating efficiencies and reducing costs.

- ENHANCED SERVICES THROUGH THE USE OF ADVANCED PROPRIETARY TECHNOLOGIES

We use advanced proprietary technologies to design and develop more
effective Internet and electronic commerce solutions. ClientLink, a secure
Website we developed that is accessible only by us and our clients, also known
as an extranet, gives our clients on-line access to, and engages their active
participation in, the development of their Internet and electronic commerce
solutions. Within ClientLink, clients can, on a real-time basis, view any
changes that have been made to their solutions, communicate electronically with
project team members and check a calendar for information regarding product
reviews and launches. We use ClientLink to raise the level of interaction
between us and our clients, which, in turn, improves the quality, functionality
and adaptability of the solution we create.

AdMaximize, our proprietary interactive media service, enables us to
measure, on a real-time basis, a client's return on investment for its on-line
advertising dollars. AdMaximize tracks the performance of ads on the Internet
and collects real-time data on the number of users who click on the ad, the
number of new customers and the amount of sales generated by the ad. Based on
their analysis of this information, clients can make real-time adjustments to
their advertising campaigns to maximize the number of users who visit their
Websites and reduce the costs of acquiring new customers and generating sales.

As part of the outsourcing services we offer, we utilize proprietary
software, EDI Control/400 and STAR, in order to more effectively manage
electronic data interchange programs that process a high volume of transactions.
EDI Control/400 enables us to monitor and analyze our clients' transactions and
communications with their trading partners with fewer people and higher service
levels. Our client support services team uses STAR, or the Service Tracking and
Reporting System, to log, track and report on all aspects of a transaction.

- REUSABLE BUSINESS SOLUTIONS

We have developed reusable business solutions in the process of designing,
developing, implementing and managing end-to-end Internet and electronic
commerce solutions for clients in a number of industries. These reusable
business solutions were developed based on our industry-specific expertise and
utilize reusable software code and content objects. These solutions enable us to
give our clients the benefit of our knowledge and experience in addressing
complex business challenges, develop and implement Internet and electronic
commerce solutions more quickly and efficiently, focus our efforts on
customizing solutions to meet our clients' specific needs and deliver reliable
solutions based on components that have been tested and perfected through
repeated use in other solutions.

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OUR STRATEGY

Our goal is to become the most recognized and sought-after provider of
Internet and electronic commerce services to medium-sized and large business
clients. To achieve this goal we plan to:

- EXPAND CLIENT RELATIONSHIPS

We plan to cross-sell our comprehensive range of Internet and electronic
commerce professional services to existing clients. We believe that if we
continue to provide sophisticated solutions to our clients:

- our existing clients will increase the amount, scope and complexity of
services they obtain from us;

- we will strengthen our reputation as a creative source for Internet and
electronic commerce solutions; and

- we will attract new clients through referral-driven sales.

This strategy should increase our revenue predictability and result in
additional and more extensive engagements with our clients.

- INCREASE REPEAT AND RECURRING REVENUES

Our strategy is to increase the proportion of our revenues which represents
repeat business with the same clients as well as the proportion of our recurring
revenues from our electronic commerce outsourcing services. We intend to
generate repeat revenues by cross-selling services and entering into multiple
engagements with our existing clients. In addition, we plan to increase
recurring revenues by selling additional electronic commerce outsourcing
services to our new and existing clients. We charge clients who use our
electronic commerce outsourcing services either a fixed monthly rate or on a per
transaction basis, or both. Our target contract length for electronic commerce
services is one year. Increasing repeat and recurring revenues will enable us to
predict our revenues with greater accuracy and improve our operating margins.

- BUILD AND ENHANCE COMPLEMENTARY SKILL SETS AND MAINTAIN TECHNOLOGICAL
EXPERTISE

Each additional skill set we develop improves our ability to better serve
our existing and future clients. We believe it is imperative for us to stay
abreast of the newest technological developments and evolving service offerings
in order to maintain the high level of quality of our services, increase the
effectiveness of our solutions and attract and retain qualified employees. We
continually research, test and evaluate new Internet and electronic commerce
technologies which we can incorporate into our solutions. Each engagement we
complete broadens our expertise and increases our knowledge, thereby enhancing
our ability to provide the most effective Internet and electronic commerce
solutions.

- PURSUE CLIENT-DRIVEN GEOGRAPHIC EXPANSION

We intend to open additional offices both domestically and internationally
in order to better serve clients in locations where we have already attracted
business. This allows us to serve clients locally, cross-sell services to
existing local clients and win more local business. Each new office we have
opened has enhanced our ability to attract and service large clients and to hire
additional staff without relocation burdens. We currently have offices in 15
locations in the U.S., including the metropolitan areas of Boston, Denver,
Detroit, Los Angeles, New York City and Washington, DC.

- EXPAND AND DEVELOP INDUSTRY-SPECIFIC EXPERTISE

Through our experience designing, developing, implementing and managing
Internet and electronic commerce solutions for a wide variety of companies, we
have gained significant strategic knowledge and created industry-specific
reusable business solutions. This industry-specific expertise significantly
enhances our ability to help other companies in the same industries successfully
adopt Internet and electronic commerce solutions. To date, we have developed
reusable business solutions for the retail services, financial services,
healthcare, manufacturing and telecommunications industries. We intend to
broaden the range of industries in which we have specialized knowledge and
maximize the benefits to

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our clients of such knowledge by creating additional industry-specific solution
templates and reusable software. We employ strategic consultants, sales,
marketing and technical staff with expertise in industries which we believe can
realize significant benefits from Internet and electronic commerce solutions.
Further developing and strengthening this expertise will increase our knowledge
of industry specific business challenges and increase the industry-targeted
services we can offer, thereby improving our ability to penetrate specific
industries.

- ATTRACT AND RETAIN A HIGHLY SPECIALIZED WORKFORCE

We will continue to recruit highly skilled and experienced professionals who
have industry-specific expertise and who are proficient in a broad range of
technological and business skills. We intend to continue to ensure that our
employees have the requisite expertise to provide our clients with a
comprehensive range of Internet and electronic commerce professional services.
We have 16 full-time recruiters and often use recruitment firms as well. We also
attract employees through referral bonus programs and advertising on the
Internet. We plan to retain and motivate our employees by giving them the
opportunity to work with cutting-edge technologies, paying competitive
compensation packages, granting stock options, reimbursing tuition expenses and
encouraging a corporate culture that is results-driven and rewards creativity,
communication and cooperation.

SERVICES

We offer a comprehensive range of professional services involving the
design, development, implementation and management of end-to-end Internet and
electronic commerce solutions. Our services include strategic consulting,
interactive media services, Internet-based application development, electronic
commerce systems integration and electronic commerce outsourcing, each of which
is described below. Our engagements generally include more than one of these
services.

- STRATEGIC CONSULTING

Our business- and process-level strategic consulting services help our
clients successfully develop on-line businesses and improve their overall
business processes. We employ business-level strategic consulting to study
and analyze our clients' market position, operating requirements, systems
and capabilities to determine how our clients should use the Internet and
electronic commerce to accomplish their objectives. We work with clients to
incorporate Internet and electronic commerce solutions into their businesses
and assist in developing on-line businesses and on-line marketing
strategies. We employ process-level strategic consulting with clients that
have already incorporated Internet and electronic commerce solutions into
their businesses to assist them in improving their overall business
processes by incorporating on-line system architecture and design with
existing Internet and electronic commerce solutions, thereby improving
operating efficiencies and reducing costs.

- INTERACTIVE MEDIA SERVICES

Our interactive media services include creative Website design and
development, branding, which is the creation of a unique corporate identity
for a client and its products, and developing on-line advertising
strategies. Developing on-line advertising strategies includes media buying
and planning, on-line ad placement, management, tracking and reporting and
on-line promotion and campaign development. As part of an on-line
advertising strategy, we also develop affinity programs that link businesses
by rewarding one business' clients with products and services of another
business. These services are designed to maximize our clients' return on
their investments in on-line businesses by generating and increasing the
number of visitors to a Website, enhancing user experience and increasing
the effectiveness of our clients' marketing efforts. We integrate these
services into our clients' overall solutions.

- INTERNET-BASED APPLICATION DEVELOPMENT

Internet-based application development is the development of software
applications that are capable of running on the Internet and are written in
languages such as Java, C++ and Visual

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Basic. These services are designed to help our clients rapidly develop
highly flexible and cost-effective business applications. We develop
corporate intranets, which are secure Websites accessible only within a
particular company, and electronic commerce systems and we Web-enable legacy
systems, which are existing systems, so that they can operate on the
Internet. We design and develop more effective Internet and electronic
commerce solutions by giving our clients on-line access to the development
of their solutions. We design, build and implement solutions that are
secure, adaptable and easy to use and manage.

- ELECTRONIC COMMERCE SYSTEMS INTEGRATION

Electronic commerce systems integration is the integration of electronic
commerce systems, which are systems that automate the receipt, processing
and delivery of transaction data and other information, with other corporate
software and computer-based applications such as Websites and accounting and
financial systems. These services are designed to rapidly install and
integrate our solutions with our clients' existing operations so our
solutions become an integral part of our clients' critical business systems.
We install our solution, convert all necessary data, perform acceptance
testing and put the system into operation. We also integrate the solution
with back-office existing legacy systems to ensure that each client's
computer-based applications operate seamlessly and with maximum security.

- ELECTRONIC COMMERCE OUTSOURCING

We perform electronic commerce services that would otherwise be handled
by the client's internal staff using the client's internal resources. Our
electronic commerce outsourcing services help clients rapidly launch and
implement electronic commerce solutions and then cost-effectively manage,
operate, maintain and continue to develop those solutions. We provide
business-to-business outsourcing services such as operating electronic data
interchange programs and transaction processing at our outsourcing center in
Pittsfield, MA, as well as at our customer's sites. We provide
business-to-consumer outsourcing services such as managing on-line stores,
transaction processing, managing and hosting Websites and the ongoing
management, technical operation, maintenance and development of electronic
commerce solutions at our outsourcing center in Laurel, MD, as well as at
our customer's sites.

ELECTRONIC COMMERCE OUTSOURCING CENTERS

We believe our outsourcing capabilities are a key component of our full
range of Internet and electronic commerce professional service offerings and
differentiate us from our competitors. Outsourcing enables us to effectively
manage, operate and maintain the electronic commerce systems we have developed
for our clients. Fees from outsourcing services currently represent a small
portion of our revenues. However, we expect that demand for outsourcing services
will increase over time as customers recognize that outsourcing is a
cost-effective solution. For example, outsourcing is an attractive choice for
those customers who lack the internal resources required to effectively build
and manage their own infrastructure or their critical business processes and who
are under pressure to get to market quickly.

At our business-to-business electronic commerce outsourcing center, we
process and manage thousands of transactions among hundreds of trading partners
on a variety of hardware and software platforms, over private networks, and the
Internet. We use EDI Control/400, our administrative software product, to
operate, monitor and analyze electronic data interchange programs through which
businesses and their trading partners exchange information electronically. EDI
Control/400 provides our customers with detailed transaction reporting, on-line
storage of data about the transactions, and multiple levels of security ensuring
only authorized users have access to and can exchange information. At our
business-to-consumer electronic commerce outsourcing center we manage on-line
stores, process transactions and manage and host Websites. Our Website managing
and hosting services include adding and editing material on a Website and making
sure the Website is operating according to its specifications.

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Our outsourcing centers operate seven days a week, 24 hours a day. Our
outsourcing center staff proactively manages and monitors the operation of each
center using network management software, including proprietary technologies we
developed. We collect, process and respond to systems-level event information
and build and maintain a central repository for inventory and asset management
information. In addition, each of our outsourcing centers features multiple
levels of security which we believe protect our clients' private information by
isolating our electronic commerce outsourcing centers from public network
infrastructures.

CLIENTS

We market our services to medium-sized and large companies from a range of
industries which we believe can benefit from Internet and electronic commerce
solutions. Our engagements vary in scope from strategic consulting assignments
to designing and implementing complex and highly functional intranets and
extranets. Because we can offer every client a complete spectrum of Internet and
electronic commerce professional services, we can customize each of our
engagements to fit a client's specific needs. Two of our clients, Ford and the
U.S. Government, accounted for 15% and 12%, respectively, of our total revenues
for 1998. After giving pro forma effect to the acquisitions we made in 1998 and
1999 as if they had occurred on January 1, 1998, our top ten customers would
have represented approximately 35% of our 1998 pro forma revenues.

Because of the strategic and competitively sensitive nature of the services
we perform for our clients, in many cases we have agreed to keep our clients'
identities confidential. Set forth below is a partial list of the clients to
whom we have provided services since 1998 that we believe is representative of
our overall client base:

<TABLE>
<S> <C>
RETAIL AND CONSUMER SERVICES TELECOMMUNICATIONS AND TECHNOLOGY
Biztravel.com Computer Sciences Corp.
Burton Snowboards Ciena
Harmony House Comshare
Hertz Lockheed Martin Integrated Business Solutions
K*B Toys FINANCIAL SERVICES
MANUFACTURING AND INDUSTRIAL @rts @lliance
Ciba Specialty Chemicals Ford Motor Credit
Dial multex.com
Hyundai Norwest
Johnson Controls HEALTHCARE AND PHARMACEUTICALS
NEC Acuson
Norrell Allergan Services
The Electronic Imaging Division of Toshiba Blue Cross and Blue Shield of Michigan
America Information Systems, Inc. Baxter Healthcare
Unilever 3M
MEDIA AND ENTERTAINMENT GOVERNMENT AND NONPROFIT
Cablevision AAA
Cisneros Group INTELSAT
GeoCities NASA
Grey Interactive National Library of Medicine
McCann-Erickson University of Michigan
Playboy Enterprises World Wildlife Fund
</TABLE>

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EXAMPLES OF OUR INTERNET AND ELECTRONIC COMMERCE SOLUTIONS

The following examples illustrate the kinds of Internet and electronic
commerce solutions we have developed for specific clients.

THE ELECTRONIC IMAGING DIVISION OF TOSHIBA AMERICA INFORMATION SYSTEMS, INC.

Challenge: Design and implement a restricted access dealer extranet system.

Solution: We developed the community, Web-interface and database elements of
Toshiba's FYI Dealer Extranet, an on-line system for dealers that provides a
common interface in addition to customized information that meets each
individual dealer's requirements. We designed security features which protect
market-sensitive information from unauthorized users. A conditional access
system, driven by a complex database user-authorization scheme, offers multiple
read-and-write user access levels. Employees, dealers and distributors have the
opportunity to build relationships on this Dealer Extranet. This electronic
commerce and informational site is designed to simplify ordering and shipping of
more than 10,000 spare-part SKUs for fax machines and copiers.

BURTON SNOWBOARDS

Challenge: Design and implement an on-line inventory and supply-chain
management system.

Solution: We designed and implemented an on-line inventory and supply-chain
management system that Burton management uses to control changing inventory,
manage materials and track product placement. Our solution accommodates multiple
languages and currencies and is able to generate detailed reports. Our solution
is designed to improve Burton's efficiency in managing its inventory and
supply-chain and reducing production overruns and overall costs.

AMERICA ONLINE, INC. OR AOL

Challenge: Develop a content investment strategy.

Solution: We helped AOL launch the AOL Greenhouse, a division of AOL
Studios. Our work included assisting the President of AOL Greenhouse to
establish a process for selecting and managing a portfolio of content
investments. We assisted with the development of the division's organizational
structure and portfolio management strategy. AOL invested in Internet companies,
including The Motley Fool, Inc., Hecklers On-Line and iVillage.

RETIRED PERSONS SERVICES, INC. OR RPS

Challenge: Provide technical assistance to Retired Persons Services, Inc.,
provider of the AARP Pharmacy Service, in the ongoing design, implementation and
management of its on-line pharmacy.

Solution: RPSPharmacy.com provides AARP members and others with the option
of ordering prescription refills and nonprescription pharmacy products over the
Internet. The on-line pharmacy incorporates features such as health information
to facilitate condition management and product selection, comparison of
brand-name and generic alternatives, information about related products and
special offers, patient profiling for drug utilization review and links to other
sources of health information.

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<PAGE>
GOVERNMENT TECHNOLOGY SERVICES, INC. OR GTSI

Challenge: Design and implement an on-line computer store.

Solution: We designed and implemented an on-line computer store that enables
Federal customers to price and purchase approximately 150,000 computer products
over the Internet. The solution we developed provides customized shopping
experiences for many customers. Using our solution, GTSI hopes to streamline the
purchasing process for its customers.

K*B TOYS

Challenge: Design, implement and operate an EDI program that would
accurately process and track orders, shipping notices, invoices and other time
sensitive data, including point-of-sale information, to support streamlined
procurement and distribution center operations.

Solution: We designed and implemented an EDI program for K*B Toys to manage
inventory levels and merchandise replenishment at over 1300 mall-based stores.
Our solution incorporated features such as mapping schemes for translation of
data and network and Internet routing schemes for data delivery. Our solution is
designed to reduce communications costs, improve the efficiency of K*B Toys'
business processes and allow it to focus on its core retailing business.

HARMONY HOUSE

Challenge: Design and develop an on-line music store which would complement
its 34 retail outlets.

Solution: We designed and implemented an on-line music store that enables
customers to search for, listen to and purchase music products over the
Internet. Our solution incorporated features such as searchable databases and
music guides, selectable music samples and management features for site update
and promotion and order management. Our solution is designed to build brand
recognition and loyalty and establish an additional distribution channel.

MULTEX.COM

Challenge: Design and develop a Web-based ad campaign to increase site
traffic and trading volume and decrease the per customer acquisition cost.

Solution: We crafted a media plan which included the creation of multiple
banner ads. Using our proprietary service, AdMaximize, we served banner ads,
tracked banner ad performance and collected real-time data on click-through,
lead generation, customer acquisition and sales. Based on multex.com's and our
collective analysis of this data, we were able to make real-time adjustments to
multex.com's ad campaign. Our solution is designed to increase overall
membership for multex.com, increase its revenues per new member and decrease
multex.com's cost to acquire new members via the Web.

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<PAGE>
SALES AND MARKETING

As of September 30, 1999, we employed 60 full-time sales professionals and
support personnel. Our sales professionals concentrate on our Internet and
electronic commerce professional services to clients in the industries in which
they have extensive expertise.

Our marketing strategy is to demonstrate to our potential clients the
advantages of Internet and electronic commerce solutions, and our expertise and
success in designing, developing, implementing and managing end-to-end
solutions. In addition, we have retained an outside public relations and
advertising firm to assist us with our marketing efforts on a company-wide
basis. As of September 30, 1999 we employed 24 full-time marketing professionals
and support personnel. Our marketing professionals concentrate on promoting and
enhancing our brand on a nationwide basis.

In each of our professional services engagements, a client can contract for
the specific services it requires. We bill most of our engagements on a time and
materials basis, although we have entered into several engagements on a
fixed-price basis. Clients who use our electronic commerce outsourcing services
are charged either a fixed monthly rate or on a per transaction basis, or both.

COMPETITION

Our competitors can be divided into several groups:

- Internet professional services providers, such as Agency.com, iXL,
Proxicom, Razorfish, Scient, US Interactive, USWeb and Viant;

- large information technology consulting services providers, such as
Andersen Consulting, Cambridge Technology Partners, CSC, EDS, IBM and
Sapient;

- interactive advertising agencies, such as Darwin Digital, Giant Step, Grey
Interactive, Modem Media . Poppe Tyson and Thunderhouse;

- electronic commerce software and service providers, such as BroadVision,
Harbinger, Open Market and Sterling Commerce; and

- Internet access and service providers, such as Abovenet, Exodus and
Frontier/Global.

We believe we can distinguish ourselves from our competitors by offering our
clients end-to-end Internet and electronic commerce solutions. We believe we can
compete effectively on the basis of our comprehensive range of services,
technical expertise, creative talent, brand or name recognition and the speed,
reliability and price of the services we provide. However, our competitors have
also begun to offer a variety of Internet and electronic commerce professional
services, rather than specialize in one area, or have announced their intention
to do so. These companies may continue to expand their operations so that they
offer a full range of business-to-business and business-to-consumer Internet and
electronic commerce professional services and products. Some of our competitors,
IBM, USWeb and EDS, currently provide all of the services that we provide.

There are relatively low barriers to entry into our business. We do not own
any patent technology that precludes or inhibits competitors from entering our
markets. The costs to develop and provide Internet or electronic commerce
professional services are low. Therefore, we expect to continue to face
additional competition from new entrants into our markets. Many of our
competitors have greater financial, technical, marketing and public relations
resources than AppNet. A number of our outsourcing competitors have made
substantial capital investments in their infrastructure. Because many of our
competitors have longer operating histories than we do, many of them also have
greater brand

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<PAGE>
or name recognition, larger client bases and longer client relationships on
which they can rely for generating business.

ACQUIRED COMPANIES

Our goal in founding AppNet was to build a company that could offer a
comprehensive range of Internet and electronic commerce professional services.
We began by developing a detailed strategic plan that identified the specific
professional services that are required to provide clients with end-to-end
solutions. These services were strategic consulting, interactive media services,
Internet-based application development, electronic commerce systems integration
and electronic commerce outsourcing. We then identified a group of companies
that excelled in providing services in one or more of these professional
services areas. After reviewing and evaluating over 100 companies, we ultimately
acquired a set of companies that we believe fit together strategically and
culturally and that, when integrated with one another, could design, develop,
implement and manage end-to-end solutions.

ARBOR INTELLIGENT SYSTEMS, INC. We acquired substantially all of the assets
of Arbor Intelligent Systems on March 12, 1998. Arbor specialized in
Internet-based applications development, providing object-oriented development
services to our customers. It had approximately 30 consulting professionals as
of the date of the acquisition. We paid approximately $3.1 million for Arbor
with a combination of cash and shares of our Series A-1 Preferred Stock that
have since been converted into our common stock. During 1997, Arbor had revenues
of approximately $3.1 million.

LOGEX INTERNATIONAL, L.L.C. We acquired substantially all of the assets of
LOGEX International on April 30, 1998. LOGEX specialized in electronic commerce
systems integration and outsourcing, providing electronic commerce systems
integration services to our customers. It had approximately nine consulting
professionals as of the date of the acquisition. We paid approximately $800,000
for LOGEX with a combination of cash and a convertible promissory note,
including $200,000 related to a contingent payment based on the achievement of
agreed-upon performance criteria for the one-year period ending on April 30,
1999.

SOFTWARE SERVICES CORPORATION. We acquired Software Services Corporation on
August 25, 1998. Software Services specialized in Internet-based applications
development, providing applications development, network architecture and design
services to our customers. It had approximately 190 consulting professionals as
of the date of the acquisition. We paid approximately $22.9 million for Software
Services with a combination of cash and shares of our common stock and Class B
Preferred Stock. During 1997, Software Services had revenues of approximately
$13.3 million.

NEW MEDIA PUBLISHING, INC. We acquired New Media Publishing on October 2,
1998. New Media Publishing specialized in interactive media services, providing
interactive community-building services to our customers. It had approximately
40 consulting professionals as of the date of the acquisition. We paid
approximately $19.0 million for New Media Publishing with a combination of cash,
shares of our common stock and options to purchase shares of our common stock.
The former New Media Publishing stockholders are also entitled to an additional
performance-based payment in January 2000 of $14.0 million, $8.4 million of
which is payable in cash and $5.6 million of which is payable in 654,971 shares
of our common stock, based on a contract price of $8.55 per share. During 1997,
New Media Publishing had revenues of approximately $3.0 million.

CENTURY COMPUTING, INCORPORATED. We acquired Century Computing on
October 12, 1998. Century specialized in electronic commerce systems integration
and outsourcing, providing systems integration and processing services to our
customers. It had approximately 81 consulting professionals as of the date of
the acquisition. We paid approximately $29.0 million for Century with a
combination of cash, a convertible promissory note and options to purchase
shares of our common stock. During 1997, Century had revenues of approximately
$10.9 million.

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<PAGE>
RESEARCH & PLANNING, INC. We acquired Research & Planning on October 20,
1998. Research & Planning specialized in electronic commerce systems integration
and outsourcing, providing enterprise resource planning and integration and data
warehousing services to our customers. It had approximately 40 consulting
professionals as of the date of the acquisition. We paid approximately
$20.5 million for Research & Planning with a combination of cash, promissory
notes and shares of our common stock. During 1997, Research & Planning had
revenues of approximately $4.8 million.

THE KODIAK GROUP, INC. We acquired The Kodiak Group on December 14, 1998.
Kodiak specialized in electronic commerce systems integration and outsourcing,
providing EDI integration and processing services to our customers. It had
approximately 35 consulting professionals as of the date of the acquisition. We
paid approximately $15.6 million for Kodiak with a combination of cash,
convertible promissory notes and shares of our common stock. In addition, the
former Kodiak stockholders are entitled to a potential contingent payment
payable in cash of up to $4.0 million in the event that, during the three-year
period ending on December 14, 2001, Kodiak sells or licenses technology it
developed. During 1997, Kodiak had revenues of approximately $3.7 million.

I33 COMMUNICATIONS CORP. We acquired i33 communications corp. on
January 8, 1999. i33 communications specialized in interactive media services,
providing media buying and planning services to our customers. It had
approximately 40 consulting professionals as of the date of the acquisition. We
paid approximately $21.6 million for i33 communications with a combination of
cash and convertible promissory notes. During 1998, i33 communications had
revenues of approximately $4.4 million.

SIGMA6, INC. We acquired Sigma6, Inc. on March 4, 1999. Sigma6 specialized
in interactive media services, providing brand identity services to our
customers. Sigma6 had approximately 25 consulting professionals as of the date
of the acquisition. We paid approximately $2.5 million for Sigma6 with a
combination of cash and shares of our common stock. The former Sigma6
stockholders are also entitled to a potential contingent payment payable in cash
and in shares of our common stock of up to $2.8 million based on the achievement
of agreed-upon performance criteria during the 12-month period ending on
December 31, 1999. During 1998, Sigma6 had revenues of approximately
$1.8 million.

SALZINGER & COMPANY, INC. We acquired substantially all of the assets of
Salzinger & Company on March 15, 1999. Salzinger & Company specialized in
strategic consulting, providing business-level strategic consulting services to
our customers. It had approximately eight consulting professionals as of the
date of the acquisition. We paid approximately $8.5 million for Salzinger &
Company with a combination of cash and shares of our common stock. Salzinger &
Company is also entitled to a potential contingent payment, payable in cash or,
at the seller's option, in cash and in shares of our common stock, of up to
$5.0 million based on the achievement of agreed-upon performance criteria during
the period beginning on April 1, 1999 and ending on September 30, 2000. During
1998, Salzinger & Company had revenues of approximately $3.1 million.

INTERNET OUTFITTERS, INC. We acquired Internet Outfitters on March 26,
1999. Internet Outfitters specialized in interactive media services, providing
localization and creative Web-development services to our customers. It had
approximately 25 consulting professionals as of the date of the acquisition. We
paid approximately $9.5 million for Internet Outfitters with a combination of
cash, shares of our common stock and options to purchase shares of our common
stock. The former Internet Outfitters stockholders are also entitled to receive
a potential contingent payment payable in cash and in shares of our common stock
of up to $3.5 million based on the achievement of agreed-upon performance
criteria for the year ending on December 31, 1999. During 1998, Internet
Outfitters had revenues of approximately $2.3 million.

In connection with our acquisition of Internet Outfitters, approximately
$1.45 million of the purchase price, based upon the fair value of $17.10 per
share at the date of acquisition, in the form of shares of our common stock was
pledged to us and escrowed to be available to satisfy any potential

47
<PAGE>
liability in connection with a license dispute. We also held back $750,000 of
the cash purchase price to be used to satisfy indemnification claims, including
any potential liability arising from such license dispute. These amounts will be
paid on the earlier of the date the dispute is resolved in a manner satisfactory
to us or June 30, 2001. A licensor of software used by a client of Internet
Outfitters has asserted that Internet Outfitters caused the client to underpay
the licensor in the amount of $2.2 million. Outfitters has denied any liability
for those additional amounts. In management's opinion, based on all known facts,
the software licensor's claim is without merit, however, if disposed of
unfavorably to Appnet, it could materially adversely affect us.

TRANSFORM IT, INCORPORATED. We acquired substantially all of the assets of
TransForm IT on March 29, 1999. TransForm IT specialized in strategic
consulting, providing process-level strategic consulting services to our
customers. It had approximately 10 consulting professionals as of the date of
the acquisition. We paid approximately $5.1 million for TransForm IT with a
combination of cash and shares of our common stock. TransForm IT is also
entitled to receive potential contingent payments payable in cash of up to $3.5
million based on the achievement of agreed-upon performance criteria during the
12-month period ending on March 31, 2000. In addition, the employees of
Transform Acquisition Corp., a subsidiary formed by AppNet to acquire TransForm
IT, are entitled to receive potential contingent payments payable in options to
purchase shares of our common stock based on the achievement of various revenue
levels during the 12-month period ending on March 31, 2000. During 1998,
TransForm IT had revenues of approximately $3.1 million.

We have developed a detailed process to fully integrate each acquisition
into our existing operations and create one seamless organization. We have begun
completing the integration tasks laid out in this detailed process. This
detailed process focuses on integrating the delivery of our professional
services, our sales and marketing functions, our knowledge management system and
our back-office functions.

By integrating the delivery of professional services, we can more
efficiently manage projects, provide better quality control, increase the
quality of our work and provide better customer service. By integrating our
sales and marketing functions, we can more efficiently generate leads and win
new business, provide superior customer service, coordinate the delivery of more
effective marketing messages and better train our sales personnel. By
integrating the way we manage our knowledge on a company-wide basis, we can more
efficiently interact and share information with our employees and customers,
reduce the time it takes to develop solutions for our clients, increase the
quality of our work and provide better customer service. By integrating our
back-office functions we can more efficiently monitor and manage our business,
recruit and retain employees, and administer corporate-wide benefit programs.

EMPLOYEES

As of September 30, 1999, we had 959 employees. Our continuing success will
depend in large part on our ability to attract, motivate and retain employees
who are qualified to offer the services we provide. Competition for qualified
employees is intense. We believe we have been successful to date in attracting
and retaining qualified employees. Our strategy for attracting, motivating and
retaining our employees is to pay competitive salaries and cash bonuses, grant
stock options, reimburse tuition expenses and encourage a corporate culture that
is results-driven and rewards creativity, communication and cooperation.

We believe our relationship with our employees is satisfactory. None of our
employees is represented by a union. Generally, our employees are retained on an
at-will basis and many of our key employees are subject to employment
agreements. All of our senior managers, as well as most of our key employees,
are required to sign confidentiality agreements and non-competition agreements
which prohibit them from competing with us during their employment and for
various periods thereafter.

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<PAGE>
PROPERTIES

Our headquarters are located in Bethesda, MD and consist of approximately
13,400 square feet of leased space, the lease for which expires in May 2005. We
also lease office space in Santa Monica, CA, Golden, CO, Stamford, CT, Laurel,
MD, Cambridge, MA, Pittsfield, MA, Ann Arbor, MI, Detroit, MI, two locations in
New York, NY, Charlottesville, VA, two locations in Falls Church, VA, Vienna, VA
and Amsterdam, The Netherlands. We do not own any real estate. We do not
consider any specific leased location to be material to our operations and we
believe that equally suitable alternative locations are available in all areas
where we currently do business.

LEGAL PROCEEDINGS

We are not a party to any pending material legal proceedings.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Information regarding our executive officers and directors as of
October 28, 1999 is set forth below. Each director's term of office will expire
at our next annual meeting of stockholders. Each officer's term of office will
expire at the first Board of Directors meeting held after our next annual
meeting of stockholders.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Ken S. Bajaj................ 57 Chairman of the Board of Directors, President and Chief
Executive Officer

Jack Pearlstein............. 35 Senior Vice President, Chief Financial Officer and
Treasurer

Toby Tobaccowala............ 60 Executive Vice President--e-Business Services

John Cross.................. 57 Director, Executive Vice President--Strategic Consulting

William S. Dawson........... 44 Secretary, Vice President and General Counsel

Philip A. Canfield.......... 31 Director

Thomas M. Davidson.......... 62 Director

Bruce V. Rauner............. 43 Director

Richard N. Perle............ 58 Director
</TABLE>

KEN S. BAJAJ. Mr. Bajaj has been Chairman of our Board of Directors,
President and Chief Executive Officer since November 1997. Mr. Bajaj was Vice
Chairman of Wang Laboratories, Inc. from March 1997 until November 1997. He
joined Wang Laboratories, Inc. when that company acquired I-NET, Inc. in 1996;
at that time he was President of I-NET, Inc., a position he held from 1988 until
1996. Before joining I-NET, Inc., Mr. Bajaj had been a Vice President at
Electronic Data Systems, Inc. since 1978. Mr. Bajaj has an M.S. in electrical
engineering from the University of Toronto and a Ph.D. in systems science from
Michigan State University.

JACK PEARLSTEIN. Mr. Pearlstein has been our Senior Vice President since
July 1998 and our Chief Financial Officer and Treasurer since May 1999. Prior to
that time, Mr. Pearlstein was a Managing Director and principal of Foxhall
Capital, LLC from November 1996 until July 1998. Prior to that time, he was
Director--Mergers and Acquisitions at Digicon Corporation from November 1995 to
November 1996. From September 1994 until November 1995, he was a senior
associate at Merge Global, Inc. From June 1993 until August 1994, he was a
financial analyst at Legg Mason. Mr. Pearlstein has a B.S. in Accounting from
New York University and an M.B.A. in Finance from the George Washington
University.

TOBY TOBACCOWALA. Mr. Tobaccowala has been our Executive Vice
President--e-Business Services since September 1999. Prior to that, he served as
our Senior Vice President since August 1998. Prior to August 1998,
Mr. Tobaccowala was Chief Executive Officer and a director of Commerce Direct
International for one year. Before joining Commerce Direct International,
Mr. Tobaccowala was employed by the Media Strategic Business Unit of Electronic
Data Systems, Inc. from 1973 until 1996, most recently as President. He has an
M.B.A. from the Bajaj Institute of Management Studies.

JOHN CROSS. Mr. Cross has been on our Board of Directors since June 1998
and our Executive Vice President--Strategic Consulting since March 1999.
Mr. Cross was the Group Vice President of Information Technology for BP Amoco
Corporation from 1998 until 1999. Mr. Cross was the Chief Information Officer
for the British Petroleum Group from 1993 until 1998. Prior to 1993, he was

50
<PAGE>
General Manager for information technology in the Exploration and Production
Company of British Petroleum. Mr. Cross has a B.S. in economics and business
management from the University of Natal, South Africa.

WILLIAM S. DAWSON. Mr. Dawson has been our Vice President and General
Counsel since May 1999 and our Secretary since June 1999. Mr. Dawson was General
Counsel and Secretary of SPACEHAB, Inc. from April 1996 until May 1999. From
February 1989 until April 1996, Mr. Dawson was Senior Counsel, and subsequently
Associate General Counsel, of Government Technology Services, Inc. Prior to
joining Government Technology Services, Inc., Mr. Dawson was an attorney with
Seyfarth, Shaw, Fairweather & Geraldson from February 1986 until February 1989
and Watt, Tieder, Killian & Hoffar from May 1984 until February 1986.
Mr. Dawson has a B.A. from Gordon College and a J.D. from Catholic University
Law School.

PHILIP A. CANFIELD. Mr. Canfield has been on our Board of Directors since
June 1998. He has been a principal at GTCR Golder Rauner, L.L.C. since 1997 and
an associate from 1992 until 1997. Prior to 1992, Mr. Canfield worked in the
corporate finance department of Kidder, Peabody & Co. He has a B.S. in finance
from the Honors Business Program at the University of Texas at Austin and an
M.B.A. from the University of Chicago. Mr. Canfield is also a director of AETEA
Information Technology, Inc., VISTA Information Technologies, Inc. and several
other private companies in GTCR's portfolio.

THOMAS M. DAVIDSON. Mr. Davidson has been on our Board of Directors since
June 1998. Mr. Davidson has been President and Chief Executive Officer of
Davidson Capital Group LLC since June 1998. From June 1997 until April 1998,
Mr. Davidson was a Managing Director of Washington Equity Partners. Prior to
that, he was a partner at the law firm of Reed, Smith, Shaw & McClay. From 1995
until March 1997, Mr. Davidson was a partner at the law firm of Coffield,
Ungaretti & Harris. Mr. Davidson was a partner at the law firm of Verner,
Liipfert, Bernhard, McPherson & Hand from 1993 until 1995. He has a B.A. from
Williams College and an LL.D. from Duke University.

BRUCE V. RAUNER. Mr. Rauner has been on our Board of Directors since June
1998. Mr. Rauner is a managing principal of GTCR Golder Rauner, L.L.C. and has
been a principal of GTCR since 1981. Mr. Rauner has a B.A. from Dartmouth
College and an M.B.A. from Harvard University. Mr. Rauner is also a director of
AnswerThink Consulting Group, Inc., Lason, Inc., Coinmach Laundry Corporation,
Polymer Group, Inc., Province Healthcare, Inc., Esquire Communications Ltd. and
several private companies in GTCR's portfolio.

RICHARD N. PERLE. Mr. Perle has been on our Board of Directors since June
1999. Mr. Perle is also director of the American Enterprise Institute's
Commission on Future Defenses. From 1981 until 1987, he was Assistant Secretary
of Defense for International Security Policy of the U.S. Department of Defense.
Mr. Perle is currently the Chairman of Hollinger Digital, Inc. and a director of
Hollinger International, Inc., Geobiotics, American Interactive Media, Inc. and
Morgan Crucible, PLC. Mr. Perle has a B.A. in International Relations from the
University of Southern California and an M.A. from Princeton University.

BOARD OF DIRECTORS

Our Board of Directors is currently composed of six directors. We intend to
expand the Board to include one additional outside director after this offering.
AppNet and GTCR are party to an agreement that provides that as long as GTCR
owns at least 15% of the shares owned by it immediately after the consummation
of our June 1999 initial public offering, AppNet will, subject to any
limitations imposed by Delaware law, use its best efforts to nominate at least
one GTCR designee to the Board.

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<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS

We have an Audit Committee and a Compensation Committee, each composed of a
majority of independent directors. The Audit Committee recommends the annual
appointment of our auditors with whom the Audit Committee reviews the scope of
audit and non-audit assignments and related fees, accounting principles we use
in financial reporting, internal auditing procedures and the adequacy of our
internal control procedures. The Compensation Committee makes recommendations to
the Board of Directors regarding compensation for our executive officers. AppNet
has agreed to use its best efforts, subject to any limitations imposed by
Delaware law, to ensure that GTCR will be entitled to appoint its designee to
the Compensation Committee.

COMPENSATION OF DIRECTORS

Directors who are also employees of AppNet receive no additional
compensation for their services as directors. Directors who are not AppNet
employees do not receive a fee for attendance in person at meetings of the Board
of Directors or committees of the Board of Directors, but they are reimbursed
for travel expenses and other out-of-pocket costs incurred in connection with
the attendance of meetings. Non-employee directors receive options to purchase
our common stock in connection with their appointment to the Board of Directors.
Non-employee directors also receive automatic grants of options to purchase our
common stock each year that they are re-elected to the Board of Directors.

LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS

The Delaware General Corporation Law provides that a company may indemnify
its directors and officers against liabilities they may incur as a result of
their service as a director of officer. Our certificate of incorporation and
bylaws provide for the indemnification of our directors and officers to the
fullest extent permitted by law. The effect of such provisions is to indemnify
our directors and officers against all costs, expenses and liabilities incurred
by them in connection with actions, suits or proceedings in which they are
involved because of their affiliation with us. In addition, we intend to obtain
director and officer liability insurance to effectuate these provisions.

EXECUTIVE COMPENSATION

The following table sets forth a summary of compensation for services
rendered in all capacities to us by the Chief Executive Officer and President
and each of our four other most highly paid executive officers for the year
ended 1998.

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<PAGE>
SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
OTHER
ANNUAL COMPENSATION ANNUAL
------------------------------------ COMPEN-
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS SATION
- ---------------------------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Ken S. Bajaj
President and Chief Executive
Officer(a)................................ 1998 -- -- --

Toby Tobaccowala
Senior Vice President..................... 1998 $ 90,278(b) $ 15,000 --

Ronald B. Alexander
Senior Vice President--Finance(c)......... 1998 63,333 10,000 $50,000(e)

Robert G. Harvey
Senior Vice President--Software
Development Services(d)................... 1998 114,250 -- 40,000(f)

Robert D. McCalley
Senior Vice President--Electronic
Commerce(d)............................... 1998 114,330 -- 40,000(f)

Terrence M. McManus
Senior Vice President, Secretary &
Treasurer(d).............................. 1998 124,048 -- 40,000(f)
</TABLE>

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

(a) Mr. Bajaj began to receive an annual base salary of $300,000 in May 1999.
Prior to May 1999, Mr. Bajaj elected not to receive any compensation.

(b) Mr. Tobaccowala began to work for us in July 1998. The salary set forth
above for 1998 represents his salary for the six-month period from July to
December 1998.

(c) Mr. Alexander's employment with us began in September 1998 and ended in July
1999. The salary set forth above for 1998 represents his salary for the
four-month period from September to December 1998.

(d) Messrs. Harvey, McCalley and McManus each began to work for us in
February 1998. The salaries set forth above for 1998 represents their
respective salaries for the eleven-month period from February to
December 1998. Mr. Harvey's employment with us ended in September 1999.
Mr. McCalley resigned as Senior Vice President--Electronic Commerce in
August 1999 but continues to be an employee. Mr. McManus' employment with us
ended in December 1998.

(e) Mr. Alexander earned a $50,000 signing bonus in 1998.

(f) Messrs. Harvey, McCalley and McManus each received 56,140 shares of our
common stock as partial compensation for services rendered from February 1,
1998 to May 31, 1998.

OPTION GRANTS AND EXERCISES DURING 1998

No stock options to purchase our common stock were granted to or exercised
by the executive officers named in the table above during 1998.

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EMPLOYMENT AGREEMENTS

We have entered into a senior management agreement with Mr. Bajaj, dated as
of June 29, 1998, which provides for his employment as our President and Chief
Executive Officer until he resigns, is disabled, as determined by the Board of
Directors in its good faith judgment, dies or is terminated by the Board of
Directors for any reason. Mr. Bajaj began to receive an annual base salary of
$300,000 in May 1999, subject to increases as determined by the Board of
Directors based upon AppNet's achievement of budgetary and other objectives set
by the Board of Directors. He will also be eligible to receive a bonus of up to
50% of his salary based upon AppNet's achievement of budgetary and other
objectives set by the Board of Directors.

The senior management agreement contains provisions requiring Mr. Bajaj to
protect the confidentiality of our proprietary and confidential information. In
addition, Mr. Bajaj is prohibited, during his employment at AppNet and for
18 months after such employment ends, from competing with AppNet, soliciting any
of our employees or interfering with any of our business relationships.

The senior management agreement also restricts the transfer of all shares of
AppNet common stock Mr. Bajaj owned as of the date of the agreement until
June 29, 2003, subject to specific exceptions, including:

- sales in a registered public offering; and

- sales, subject to volume limitations imposed by the senior management
agreement, under Rule 144 under the Securities Act.

The registration agreement dated as of June 29, 1998 to which substantially all
of the stockholders of AppNet who acquired their shares prior to our June 1999
initial public offering are party provides that Mr. Bajaj may request that his
shares of AppNet common stock be included on any registration statement filed by
AppNet:

- to register common stock held by GTCR and Smart Technology; or

- on its own behalf.

The senior management agreement provides that if Mr. Bajaj's employment with
us terminates before June 30, 2001, AppNet may repurchase shares of its common
stock owned by Mr. Bajaj or his permitted transferees at a price of $0.0029 per
share. The number of shares which AppNet may repurchase upon these terms is
1,358,109 until June 29, 2000 and 679,004 until June 29, 2001, after which
AppNet's right to repurchase Mr. Bajaj's common stock terminates. If AppNet does
not exercise its repurchase right, GTCR and Smart Technology may repurchase
these shares at a price of $0.0029 per share and contribute them to AppNet in
exchange for a promissory note equal to the aggregate purchase price of such
shares. GTCR's and Smart Technology's repurchase right terminates upon the
earliest of:

- the sale of capital stock with the voting power to elect a majority of the
Board of Directors to persons or entities other than GTCR and Smart
Technology, other than in a public offering;

- the sale of all or substantially all of our assets;

- GTCR and its affiliates failing to own more than 50% of the common stock
GTCR purchased under the Purchase Agreement dated June 29, 1998, as
amended; and

- June 30, 2001.

We entered into senior management agreements with each of
Messrs. Tobaccowala and McCalley in July 1998 and June 1998, respectively. These
agreements provide for their respective employment by AppNet until resignation,
disability, as determined by the Board of Directors in its good faith judgment,
death or termination by the Board of Directors for any reason. Each senior
management agreement sets forth the annual base salary the executive is entitled
to receive, subject to increases as determined by the Board of Directors based
upon AppNet's achievement of budgetary and other

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objectives set by the Board of Directors. Each executive is eligible to receive
a bonus of up to 50% of his salary based upon AppNet's achievement of budgetary
and other objectives set by the Board of Directors.

If an executive's employment is terminated without cause, he is entitled to
receive his annual salary and life, medical and disability insurance benefits
for one year. Cause is defined generally as:

- commission of a felony or crime involving moral turpitude;

- fraud, gross negligence or willful misconduct with respect to AppNet;

- substantial and repeated failure to perform duties; or

- breach of the confidentiality or noncompete provisions of the senior
management agreement.

Each senior management agreement contains provisions requiring the executive
to protect the confidentiality of our proprietary and confidential information.
In addition, each executive is prohibited, during his employment at AppNet and
for two years after such employment ends if he resigns or is terminated for
cause or for one year after such employment ends, if he is terminated without
cause, from competing with AppNet, soliciting any of our employees or
interfering with any of our business relationships.

The senior management agreements with Messrs. Tobaccowala and McCalley
provided for the sale of 175,439 and 110,175 shares, respectively, or 285,614
shares in the aggregate, of our common stock to these individuals at a per share
price of $0.3007, for an aggregate consideration of $85,884. In connection with
these stock purchases, each executive delivered a promissory note to AppNet for
the full amount of the purchase price, less the par value of the stock
purchased. Each promissory note is secured by a pledge of the purchased stock.

Each senior management agreement restricts the transfer of the AppNet common
stock owned by the executive as of the date of the agreement until June 29,
2003, subject to specific exceptions, including:

- sales in a registered public offering; and

- sales, subject to volume limitations imposed by the senior management
agreement, under Rule 144 under the Securities Act.

The registration agreement dated June 29, 1998 provides that each executive may
request that his shares of AppNet common stock be included in any registration
statement filed by AppNet:

- to register common stock held by GTCR and Smart Technology; or

- on its own behalf.

Each senior management agreement also provides that upon termination of the
executive's employment, AppNet may repurchase all or any portion of its common
stock owned by such executive or his permitted transferees. A portion of the
executive's common stock may be repurchased at original cost, which is defined
as the price originally paid by the executive for such common stock. If the
executive's employment is terminated for any reason before the first anniversary
of his senior management agreement, the amount of common stock which may be
repurchased at the original cost ranges from 75% to 100%, depending on the
particular executive. The portion of common stock to be repurchased at the
original cost decreases ratably each year until it reaches zero after the fourth
anniversary of the senior management agreement. If AppNet does not exercise its
repurchase right, GTCR, Smart Technology or Mr. Bajaj may repurchase the
executive's AppNet common stock upon the same terms and contribute them to
AppNet in exchange for a promissory note equal to the aggregate purchase price
of such shares. This repurchase right terminates upon:

- the sale of capital stock with the voting power to elect a majority of the
Board of Directors to persons or entities other than GTCR and Smart
Technology, other than in a public offering; or

- the sale of all or substantially all of our assets.

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We also entered into senior management agreements with Messrs. Alexander,
McManus and Haney, each of whose employment has subsequently ceased. We are
making severance payments to each of these former employees in accordance with
the terms of their management agreements.

STOCK INCENTIVE PLANS

1999 STOCK INCENTIVE PLAN

We have adopted the AppNet, Inc. 1999 Stock Incentive Plan. The purpose of
the 1999 Stock Incentive Plan is to strengthen AppNet by providing an incentive
to its employees, officers, consultants, directors and advisors through the
granting or awarding of incentive and nonqualified stock options, stock
appreciation and dividend equivalent rights, restricted stock, performance
units, performance shares, share awards and phantom stock awards, thereby
encouraging these individuals to devote their abilities and energies to the
success of AppNet.

The 1999 Stock Incentive Plan is administered by the Board of Directors.
Under the 1999 Stock Incentive Plan, the Board has the authority to, among other
things:

- select the employees to whom stock options and other incentive awards will
be granted;

- determine the type, size and the terms and conditions of stock options and
other incentive awards; and

- establish the terms for treatment of stock options and other incentive
awards upon a termination of employment.

The Board has authorized 2,000,000 shares of common stock for issuance under
the 1999 Stock Incentive Plan for the grant of stock options and other incentive
awards to eligible individuals. The amount of common stock authorized for
issuance under the 1999 Stock Incentive Plan may be increased annually by the
Board. The total amount of shares authorized under the plan may not exceed
10,000,000. The 1999 Stock Incentive Plan will terminate on the day preceding
the tenth anniversary of the date of its adoption by the Board of Directors. The
Board of Directors is able to amend or terminate the 1999 Stock Incentive Plan;
provided, however, that, to the extent necessary under applicable law or the
rules and regulations of the Nasdaq National Market, no such change will be
effective without the requisite approval of the stockholders. In addition, no
such change will alter or adversely impair any rights or obligations under any
stock options and other incentive awards previously granted, except with the
written consent of the grantee.

As of September 30, 1999, options to purchase a total of 1,015,812 shares of
our common stock were outstanding under the 1999 Stock Incentive Plan and remain
unexercised, no shares of our common stock have been issued upon exercise of
options granted under the 1999 Stock Incentive Plan and options to purchase
10,920 shares of our common stock granted under the 1999 Stock Incentive Plan
are currently exercisable. As of September 30, 1999, the weighted average
exercise price of the options outstanding under this plan was $14.41.

1998 STOCK OPTION AND INCENTIVE PLAN

Our 1998 Stock Option and Incentive Plan has 1,570,631 shares of our common
stock reserved for issuance in connection with awards granted under such plan.

As of September 30, 1999, options to purchase a total of 1,476,967 shares of
our common stock were outstanding under the 1998 Stock Option and Incentive Plan
and remain unexercised, 8,316 shares of our common stock have been issued upon
the exercise of options granted under the 1998 Stock Option and Incentive Plan
and options to purchase 233,081 shares of our common stock granted under the
1998 Stock Option and Incentive Plan are currently exercisable. As of
September 30, 1999, the weighted average exercise price of the options
outstanding under this plan was $11.04.

The Board of Directors or a Board-appointed committee is authorized to
construe, interpret and implement the provisions of the 1998 Stock Option and
Incentive Plan, to determine the terms and

56
<PAGE>
provisions of awards and, with the consent of the grantee, to amend the terms of
any outstanding award. The determinations of the Board of Directors or a
Board-appointed committee are made in its sole discretion and are conclusive.

The 1998 Stock Option and Incentive Plan has no termination date, however,
no incentive stock options may be granted under such plan on or after
August 25, 2008. The Board of Directors may at any time and from time to time
amend, suspend or terminate the 1998 Stock Option and Incentive Plan; provided,
however, that, to the extent necessary under applicable law, no such change will
be effective without the requisite approval of the stockholders. In addition, no
such change will alter or adversely impair any rights or obligations under
awards previously granted, except with the written consent of the grantee. No
further awards will be made under the 1998 Stock Option and Incentive Plan.

CENTURY COMPUTING, INCORPORATED INCENTIVE STOCK OPTION PLAN

In connection with our acquisition of Century Computing, we assumed its
Incentive Stock Option Plan and related award agreements with each grantee. Each
outstanding option to purchase the common stock of Century Computing was
converted into an incentive stock option to purchase our common stock based on a
conversion ratio. Originally, we reserved a total of 704,127 shares of our
common stock for issuance in connection with options granted under the Century
Incentive Stock Option Plan.

As of September 30, 1999, options to purchase a total of 43,648 shares of
our common stock were outstanding under the Century Incentive Stock Option Plan
and remain unexercised, 660,479 shares of our common stock have been issued upon
the exercise of options granted under the Century Incentive Stock Option Plan
and options to purchase 43,648 shares of our common stock granted under the
Century Incentive Stock Option Plan are currently exercisable. As of
September 30, 1999, the weighted average exercise price of the options
outstanding under this plan was $0.84.

The Century Incentive Stock Option Plan is administered by Century
Computing's Board of directors unless the Board of directors delegates the power
and authorities related to the administration of the Century Incentive Stock
Option Plan to a Board-appointed committee. The Board of directors or a
Board-appointed committee is authorized to construe, interpret and implement the
provisions of the Century Incentive Stock Option Plan, to determine the terms
and provisions of awards and, with the consent of the grantee, to amend the
terms of any outstanding award. The determinations of the Board of directors or
a Board-appointed committee are made in its sole discretion and are conclusive.

The Century Incentive Stock Option Plan has no termination date, however, no
incentive stock options may be granted under the Century Incentive Stock Option
Plan after the expiration of the ten-year period beginning on the date the
Century Incentive Stock Option Plan was adopted. The Board of Directors may at
any time and from time to time amend or terminate the Century Incentive Stock
Option Plan; provided, however, that, to the extent necessary under applicable
law, no such change will be effective without the requisite approval of the
stockholders. AppNet does not intend to make any new grants under the Century
Incentive Stock Option Plan.

INTERNET OUTFITTERS, INC. 1996 INCENTIVE STOCK OPTION PLAN

In connection with our acquisition of Internet Outfitters, Inc., we assumed
its 1996 Incentive Stock Option Plan and related award agreements with each
grantee. Each outstanding option to purchase the common stock of Internet
Outfitters was converted into an incentive stock option to purchase our common
stock based on a conversion ratio. Originally, we reserved a total of 22,300
shares of our common stock for issuance in connection with options granted under
the Internet Outfitters Incentive Stock Option Plan.

As of September 30, 1999, options to purchase a total of 20,415 shares of
our common stock were outstanding under the Internet Outfitters Incentive Stock
Option Plan and remain unexercised, 177

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<PAGE>
options have been exercised and options to purchase 9,625 shares of our common
stock granted under the Internet Outfitters Incentive Stock Option Plan are
currently exercisable. As of September 30, 1999, the weighted average exercise
price of the options outstanding under this plan was $3.15.

The Internet Outfitters Incentive Stock Option Plan is administered by the
Internet Outfitters Board of Directors unless the Board of Directors delegates
the power and authorities related to the administration of the Internet
Outfitters Incentive Stock Option Plan to a Board-appointed committee. The Board
of Directors or a Board-appointed committee is authorized to construe, interpret
and implement the provisions of the Internet Outfitters Incentive Stock Option
Plan, to determine the terms and provisions of awards and, with the consent of
the grantee, to amend the terms of any outstanding award. The determinations of
the Board of Directors or a Board-appointed committee are made in its sole
discretion and are conclusive.

The Internet Outfitters Incentive Stock Option Plan will terminate upon the
expiration of the ten-year period beginning on the date the Internet Outfitters
Incentive Stock Option Plan was adopted. The Board of Directors may at any time
and from time to time amend or terminate the Internet Outfitters Incentive Stock
Option Plan; provided, however, that, to the extent necessary under applicable
law, no such change will be effective without the requisite approval of the
stockholders. AppNet does not intend to make any new grants under the Internet
Outfitters Incentive Stock Option Plan.

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<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS

GTCR AND SMART TECHNOLOGY PURCHASE AGREEMENT

GTCR, Smart Technology and AppNet are parties to a purchase agreement, dated
as of June 29, 1998, as amended and supplemented which provided for the purchase
by GTCR and Smart Technology, L.L.C., an entity controlled by Mr. Bajaj's
spouse, of 11,326,228 and 232,916 shares of our common stock, respectively, at a
price of $0.3007 per share. At that time, GTCR and Smart Technology also agreed
from time to time to purchase up to an aggregate of 96,500 shares of Class A
Preferred Stock at a price of $1,000 per share in the future on the terms
described below. GTCR was required to purchase Class A Preferred Stock at the
request of AppNet's Board of Directors and the approval of GTCR to fund AppNet's
working capital requirements and acquisitions. GTCR and Smart Technology
purchased aggregate amounts of approximately 44,167 and 900 shares of Class A
Preferred Stock, respectively, under the purchase agreement for aggregate
purchase prices of approximately $44,167,000 and $900,000, respectively. In June
1999 in connection with our initial public offering, the parties to the purchase
agreement entered into a reorganization agreement dated as of June 16, 1999,
providing for the exchange of all of the shares of Class A Preferred Stock and
accumulated and unpaid dividends on such shares purchased by GTCR and Smart
Technology for 3,813,864 and 77,834 shares of our common stock, respectively.
The purchase agreement with GTCR and Smart Technology currently provides that as
long as GTCR owns at least 15% of the securities purchased under the purchase
agreement, AppNet must obtain GTCR's prior written consent before amending or
waiving any provision of the senior management agreements or the agreements
between AppNet and the Fairfax entities. Additionally, as long as GTCR owns at
least 15% of the shares owned by it immediately after the consummation of the
offering, AppNet will, subject to any limitations imposed by Delaware law, use
its best efforts to nominate at least one GTCR designee to the Board.

In connection with AppNet's acquisition of Software Services Corporation and
the issuance of 11,576 shares of Class B Preferred Stock to the former
stockholders of that company, GTCR and Smart Technology transferred an aggregate
of 1,387,097 shares of AppNet common stock to us in exchange for an aggregate of
417.066 shares of our Class A Preferred Stock. In connection with a revolving
credit agreement between AppNet and BankBoston, N.A., GTCR and Smart Technology
sold an aggregate of 123,538 shares of our common stock and an aggregate of
approximately 362 shares of our Class A Preferred Stock to FSC Corp., an
affiliate of BankBoston, for an aggregate purchase price of $375,000.

REGISTRATION AGREEMENT

The registration agreement provides that the holders of a majority of our
common stock issued to GTCR and Smart Technology under the purchase agreement
with GTCR and Smart Technology may have the right to demand the filing of a
registration statement with the Securities and Exchange Commission to register
all or any portion of this common stock. Substantially all of the stockholders
of AppNet who acquired their shares prior to our June 1999 initial public
offering have the right to include all or any portion of their AppNet common
stock on registration statements filed by AppNet to register shares of the
common stock issued to GTCR and Smart Technology under the purchase agreement
with GTCR and Smart Technology; subject, however, to the ability of the
underwriters of any offering to limit the number of shares included in such
registration. Holders of the majority of our common stock issued to GTCR and
Smart Technology under the purchase agreement with GTCR and Smart Technology may
require AppNet to file, and pay the expenses in connection with, up to four
registration statements on Form S-1 and an unlimited number of registration
statements on Forms S-2 and S-3, if AppNet qualifies to use such forms. If
AppNet proposes to register securities for its own account, GTCR, Smart
Technology and substantially all of AppNet's other stockholders who are parties
to the registration agreement are entitled to notice of, and to include their
shares in, such registration; subject, however, to the ability of the
underwriters of any offering to limit the number of shares included in such
registration. These registration rights cover all of the shares of our common
stock

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<PAGE>
owned by the parties to the registration agreement. The existence and exercise
of these registration rights may make it more difficult for AppNet to arrange
future financing and may have an adverse effect on the market price of our
common stock.

In addition, our acquisition agreement with Arbor Intelligent Systems, Inc.
grants the former Arbor stockholders rights to have their shares of our common
stock included in any registration statement we file; subject, however, to the
ability of the underwriters of any offering to limit the number of shares
included in such registration.

BAJAJ SENIOR MANAGEMENT AGREEMENT

The senior management agreement with Mr. Bajaj provided for the sale of
1,251,228 shares of our common stock to Mr. Bajaj at a per share price of
$0.3007. Mr. Bajaj pledged the 1,251,228 shares of common stock which he
purchased in accordance with the terms of his senior management agreement to
AppNet to secure a promissory note in the principal amount of $374,430 which
Mr. Bajaj delivered in partial payment for these shares. The senior management
agreement between Mr. Bajaj and AppNet gave AppNet the right, if it issues or
sells common stock or rights to acquire common stock, to its employees, to
repurchase these shares, whether held by Mr. Bajaj or his permitted transferees,
to be issued or sold to such employees at a price of $0.3007 per share. Prior to
our June 1999 initial public offering, AppNet repurchased a total of 1,041,109
of these shares from Mr. Bajaj for an aggregate purchase price of $313,035
reducing the principal amount of his promissory note to $62,878.

PROFESSIONAL SERVICES AGREEMENT WITH FAIRFAX MANAGEMENT COMPANY II, L.L.C. AND
FAIRFAX CONSULTING COMPANY, L.L.C.

Stephen W. Ritterbush, a former vice chairman of our Board of Directors and
Bruce Gouldey, our former chief financial officer, are members of Fairfax
Consulting Company, L.L.C. They resigned their positions on June 29, 1998 in
connection with the GTCR and Smart Technology purchases of stock in AppNet under
the purchase agreement. We entered into a professional services agreement, dated
as of June 29, 1998, with Fairfax Management Company II, L.L.C. and Fairfax
Consulting Company, L.L.C., in which Fairfax Consulting Company agreed to
provide to AppNet the services of a financial and management consultant. In
return for the consultant's services, AppNet agreed to pay Fairfax Consulting
Company a monthly retainer of $16,667 as well as any fees for consulting
services in excess of the monthly retainer. The agreement also provided that if
AppNet acquired a company which was introduced to it by Fairfax Consulting
Company, AppNet would pay a finder's fee to Fairfax Consulting Company equal to
1% of the purchase price for the acquired company. We did not pay any finder's
fees to Fairfax Consulting Company in 1998. In 1998, AppNet paid approximately
$336,000 in consulting fees to Fairfax Consulting Company. The professional
services agreement prohibited Fairfax Management Company from owning,
controlling, rendering services to or otherwise doing business with our
competitors while the agreement was in effect and for a period of 18 months
after its termination. We terminated the professional services agreement with
Fairfax Management Company and Fairfax Consulting Company effective as of
November 20, 1998.

Fairfax Management Company purchased 2,052,632 shares of our common stock in
March 1998 for an aggregate purchase price of $5,850. AppNet repurchased
1,350,877 of these shares on June 29, 1998 in exchange for a convertible
promissory note in the principal amount of $406,175. The professional services
agreement with Fairfax Management Company and Fairfax Consulting Company
restricts the transfer of the 684,211 shares of our common stock that Fairfax
Management Company retained until June 29, 2003, except:

- in a public offering;

- under Rule 144 through a broker, dealer or market maker (other than under
Rule 144(k)), in proportion to sales by GTCR and Smart Technology under
Rule 144;

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- in the event of the sale of our capital stock with the voting power to
elect a majority of the Board of Directors to persons or entities other
than GTCR or Smart Technology, other than in a public offering; or

- in the event of the sale of all or substantially all of our assets.

The principal balance of the convertible promissory note held by Fairfax
Management Company was converted into 42,309 shares of AppNet common stock upon
our June 1999 initial public offering at a conversion rate equal to 80% of the
$12.00 per share initial public offering price.

DAVIDSON AGREEMENT

Thomas M. Davidson, one of our directors, and AppNet are parties to an
agreement dated as of June 29, 1998, under which Mr. Davidson received $350,000
in cash and 52,632 shares of common stock from AppNet as a finder's fee in
connection with the GTCR and Smart Technology investments in AppNet. Under this
agreement Mr. Davidson earned a total of approximately $685,000 of additional
commissions through March 31, 1999, based upon the total amount invested in
AppNet by GTCR and Smart Technology.

The Davidson agreement also provided for the purchase by Mr. Davidson of
86,651 shares of our common stock at a price of $0.3007 per share and a
consulting relationship with Mr. Davidson. Mr. Davidson received consulting fees
of $200,000 under this arrangement, which terminated in June 1999.

OTHER GTCR RELATIONSHIPS

Prior to our June 1999 initial public offering, GTCR and AppNet were parties
to a professional services agreement under which GTCR received $200,000 per year
in exchange for financial and management consulting services. This agreement
also entitled GTCR to receive an investment fee equal to 1% of the purchase
price of the common stock and Class A Preferred Stock purchased from AppNet by
GTCR under the purchase agreement with GTCR and Smart Technology. GTCR earned
approximately $475,000 in investment fees under this agreement. The GTCR
professional services agreement terminated upon the consummation of our initial
public offering.

OTHER SMART TECHNOLOGY RELATIONSHIPS

During 1998, Smart Technology loaned approximately $1.1 million to AppNet.
On May 31, 1998, AppNet issued a warrant to purchase 35,088 shares of its common
stock for an aggregate purchase price of $50,000 to Smart Technology as
consideration, in part, for this loan. On June 29, 1998, a portion of the
$1.1 million loan equal to the purchase price of the common stock Smart
Technology acquired from AppNet under the purchase agreement with GTCR and Smart
Technology was canceled, and AppNet issued a new promissory note in the
principal amount of $903,567 to Smart Technology. This note bore interest at the
rate of 12% per annum. The principal amount of this note was reduced from time
to time by the amount of the purchase price of Class A Preferred Stock purchased
by Smart Technology under the purchase agreement with GTCR and Smart Technology.
The amount outstanding under this note was reduced to $3,300, which was repaid
with a portion of the proceeds of our June 1999 initial public offering. Also on
June 29, 1998, in accordance with the purchase agreement with GTCR and Smart
Technology, the original warrant issued to Smart Technology was canceled and
AppNet issued a new warrant to Smart Technology to purchase 70,175 shares of
AppNet common stock for an exercise price of $0.3007 per share.

In 1998, we paid Smart Technology approximately $25,000 in exchange for
consulting services.

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CROSS SENIOR MANAGEMENT AGREEMENT

We entered into a senior management agreement with John Cross, one of our
directors, in March 1999, which provides for his employment as an Executive Vice
President until he resigns, is disabled, as determined by the Board of Directors
in its good faith judgment, dies or is terminated by the Board of Directors for
any reason. Mr. Cross is entitled to receive a salary of $300,000 per year,
subject to increases as determined by the Board of Directors based upon AppNet's
achievement of budgetary and other objectives set by the Board of Directors.
Mr. Cross is eligible to receive a bonus of up to 50% of his salary based upon
AppNet's achievement of budgetary and other objectives set by the Board of
Directors.

If Mr. Cross' employment is terminated without cause, he is entitled to
receive his annual salary and life, medical and disability insurance benefits
for one year. Cause is defined generally as:

- commission of a felony or crime involving moral turpitude;

- fraud, gross negligence or willful misconduct with respect to AppNet;

- substantial and repeated failure to perform duties; or

- breach of the confidentiality or noncompete provisions of the senior
management agreement.

The senior management agreement contains provisions requiring Mr. Cross to
protect the confidentiality of our proprietary and confidential information. In
addition, Mr. Cross is prohibited, during his employment at AppNet and for two
years after his employment ends if he resigns or is terminated for cause or for
one year after his employment ends if he is terminated without cause, from
competing with AppNet, soliciting any of our employees or interfering with any
of our business relationships.

Pursuant to his management agreement, Mr. Cross also received options to
purchase 337,776 shares of AppNet common stock at an exercise price of $12.825
per share. The fair value of the common stock underlying these options as of the
date of grant was $14.25 per share.

OTHER RELATIONSHIPS AND TRANSACTIONS

Foxhall Capital, LLC, an entity controlled by Jack Pearlstein, our Senior
Vice President and Chief Financial Officer, and AppNet signed an agreement dated
January 18, 1998, under which Foxhall Capital, LLC received approximately
$450,000 in cash from AppNet as a finder's fee in connection with AppNet's
acquisition of Century Computing, Incorporated in October 1998.

In 1998, AppNet loaned AppNet Commerce Services, Inc., in which AppNet owns
a 50% interest, an aggregate of $0.2 million to fund its operations. Three
officers of AppNet have also been officers of this subsidiary.

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PRINCIPAL STOCKHOLDERS

The following table sets forth, as of September 30, 1999, information with
respect to the beneficial ownership of our common stock by:

- each person known to AppNet to beneficially own more than 5% of the
outstanding shares of our common stock;

- each director of AppNet and each executive officer named in the Summary
Compensation Table; and

- all directors and executive officers as a group.

Unless otherwise indicated, each stockholder has sole voting and investment
power with respect to the shares beneficially owned by the stockholder and has
the same address as AppNet.

<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP
NUMBER OF SHARES OF ---------------------------------------------
COMMON STOCK
BENEFICIALLY OWNED BEFORE
THIS OFFERING BEFORE THIS OFFERING AFTER THIS OFFERING(A)
------------------------- -------------------- ----------------------
<S> <C> <C> <C>
GTCR (b)............................... 13,738,470 44.3% 35.5%(c)
Ken S. Bajaj (d)....................... 2,993,271 9.6 8.3(c)
Toby Tobaccowala....................... 193,182 * *
Ronald B. Alexander (e)................ -- -- --
Robert D. McCalley..................... 166,315 * *
Robert G. Harvey (e)................... 119,298 * *
Philip A. Canfield (b)(f).............. -- -- --
John Cross............................. -- -- --
Richard N. Perle....................... 5,000 * *
Thomas M. Davidson (g)................. 125,354 * *
Bruce V. Rauner (b)(f)................. -- -- --
Terrence McManus (e)................... 29,824 * *
All executive officers and directors as
a group (12 persons)................. 3,415,052 11.0% 9.6%
</TABLE>

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

* Less than 1%.

(a) Gives effect to the sale of 1,500,000 shares of common stock by AppNet in
this offering.

(b) The address for GTCR and Messrs. Canfield and Rauner is 6100 Sears Tower,
Chicago, Illinois 60606.

(c) Assumes that GTCR and Mr. Bajaj are the only selling stockholders in this
offering. If all of the stockholders with registration rights elect to
paticipate in this offering, then the percentage for GTCR would be 38.2% and
the percentage for Mr. Bajaj would be 8.3%.

(d) All of these shares are beneficially owned by Bajaj Enterprises, LLC, a
Maryland limited liability company, over which Mr. Bajaj exercises voting
and investment control. These shares exclude 701,754 shares owned by family
trusts over which Mr. Bajaj does not exercise any voting or investment
control.

(e) Information regarding beneficial ownership by Mr. Alexander, our former
Senior Vice President--Finance, Mr. Harvey, our former Senior Vice
President--Software Development, and Mr. McManus, our former Senior Vice
President, Secretary and Treasurer, is based on information known to us as
of September 30, 1999.

(f) Each of Messrs. Canfield and Rauner is a principal of GTCR and therefore may
be deemed to share investment and voting control over the shares of our
common stock held, directly or indirectly, by GTCR. Each of
Messrs. Canfield and Rauner disclaims beneficial ownership of the shares of
our common stock held by GTCR.

(g) All of these shares are beneficially owned by Davidson Technology Investment
Group, L.L.C., a Delaware limited liability company, over which Mr. Davidson
exercises voting and investment control.

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SELLING STOCKHOLDERS

We have set forth in the following table information about the beneficial
ownership of our common stock as of September 30, 1999 by each selling
stockholder. The registration agreement between us, GTCR, Bajaj Enterprises, and
certain of our other stockholders provides these stockholders the right to elect
to sell in this offering a ratable portion of the shares of our common stock
that they own. If any of these stockholders (other than GTCR and Bajaj
Enterprises) exercise this right, a ratable portion of their shares of common
stock will be included in this offering, and the shares to be sold by the GTCR
entities and Bajaj Enterprises will be reduced ratably. If none of these other
stockholders elect to sell their ratable portion of their common stock in this
offering, the terms of the registration agreement would provide Bajaj
Enterprises, which is controlled by Ken Bajaj, AppNet's President and Chief
Executive Officer, the right to sell up to 447,244 shares of common stock in
this offering. However, regardless of whether or not other stockholders elect to
sell shares in this offering, Bajaj Enterprises has determined that it will not
sell more than 299,327, or approximately 10% of the shares it currently owns.

<TABLE>
<CAPTION>
SHARES OF
SHARES OF COMMON SHARES OF
COMMON STOCK STOCK COMMON STOCK
BENEFICIALLY OWNED BEING BENEFICIALLY OWNED
BEFORE OFFERING OFFERED AFTER CLOSING
--------------------- --------- ---------------------
SELLING STOCKHOLDER NUMBER PERCENT NUMBER NUMBER PERCENT
- ------------------- ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
GTCR Fund VI, L.P. (a)..................... 13,610,085 43.9% 2,180,108 11,429,977 35.2%
GTCR Executives Fund, L.P. (a)............. 97,570 * 15,629 81,941 *
GTCR Associates VI (a)..................... 30,815 * 4,936 25,879 *
Bajaj Enterprises, LLC (b)................. 2,993,271 9.6% 299,327 2,693,944 8.3%
</TABLE>

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

* Less than 1%.

(a) Phillip A. Canfield and Bruce V. Rauner, two of our directors, are
principals of the GTCR entities. Also, the GTCR entities entered into a
purchase agreement with us by which they purchased shares of our common
stock which places certain continuing obligations on us. We've described
those obligations and other relationships with the GTCR entities under
"Certain Relationships and Transactions."

(b) Bajaj Enterprises, LLC is controlled by Ken S. Bajaj, our President and
Chief Executive Officer. Please see "Management," "Certain Relationships and
Transactions" and "Principal stockholders" for further information regarding
our relationships with Mr. Bajaj.

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DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock of consists of 75,000,000 shares of common
stock, par value $0.0005 per share, and 5,000,000 shares of preferred stock, par
value $0.01 per share. Upon consummation of this offering, there will be issued
and outstanding 32,497,027 shares of common stock. As of September 30, 1999,
there were 176 stockholders of record. In addition,

- 3,636,756 shares of common stock have been reserved for issuance in
connection with AppNet's stock incentive plans;

- 70,175 shares of common stock have been reserved for issuance in
connection with warrants issued to Silicon Valley Bank and Smart
Technology, L.L.C.;

- 812,197 shares of common stock have been reserved or will be reserved for
issuance in connection with contingent payments payable to the former
owners of five of the companies we acquired, New Media Publishing, Sigma6,
Salzinger & Company, Internet Outfitters and TransForm IT, assuming that
the market price of our common stock at the time the contingent payments
are made is, in the case of Sigma6, $49.00, the last reported sale price
of our common stock on October 26, 1999; and

- 121 shares of preferred stock designated as Class A Preferred Stock have
been reserved for issuance in connection with a warrant issued to Silicon
Valley Bank.

COMMON STOCK

Each share of our common stock is identical in all respects and entitles the
holder thereof to the same rights and privileges enjoyed by all other holders of
shares of common stock, and subjects them to the same qualifications,
limitations and restrictions to which all such other holders are subject.

VOTING RIGHTS. Holders of our common stock are entitled to one vote per
share on all matters to be voted on by AppNet's stockholders and may act by
written consent if the consent is signed by the holders of common stock having
at least the minimum votes necessary to authorize or take such action at
meetings. Holders of common stock do not have cumulative rights, so that holders
of a plurality of the shares of common stock present at a meeting at which a
quorum is present are able to elect all of AppNet's directors eligible for
election in a given year. The holders of a majority of the voting power of the
issued and outstanding common stock constitutes a quorum. Our certificate of
incorporation provides that a vote of two-thirds of the holders of our issued
and outstanding common stock is required to remove a director or amend our
bylaws.

DIVIDENDS. Holders of our common stock are entitled to receive ratably such
dividends, if any, as are declared by AppNet's Board of Directors out of funds
legally available for the declaration of dividends, subject to the preferential
rights of any holder of preferred stock that may from time to time be
outstanding. The terms of our credit facilities restrict AppNet's ability to pay
dividends on the common stock.

LIQUIDATION. Upon the liquidation, dissolution or winding up of AppNet, the
holders of our common stock are entitled to share pro rata in the distribution
of all of AppNet's assets available for distribution after satisfaction of all
of AppNet's liabilities and the payment of the liquidation preference of any
preferred stock that may be outstanding.

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OTHER PROVISIONS. The holders of our common stock have no preemptive or
other subscription rights to purchase common stock, and there are no redemptive
rights or sinking fund provisions. The holders of our common stock are not
liable for any calls or assessments.

REGISTRATION RIGHTS. AppNet is a party to a registration agreement, dated
as of June 29, 1998, to which substantially all of the stockholders of AppNet
who acquired their shares prior to our June 1999 initial public offering are
party, which gives the holders of a majority of the common stock issued to GTCR
and Smart Technology under the purchase agreement with GTCR and Smart Technology
a conditional right to demand registration of all or any portion of their common
stock. The other stockholders of AppNet who are party to the registration
agreement have the right to include all or any portion of their AppNet common
stock on registration statements filed by AppNet to register the common stock
issued to GTCR and Smart Technology under the purchase agreement with GTCR and
Smart Technology. Subject to various conditions, all of the stockholders of
AppNet who are party to the registration agreement have the right to include all
or any portion of their AppNet common stock on registration statements that we
file on our own behalf. These rights cover substantially all of the shares of
our common stock issued prior to our June 1999 initial public offering, and will
also cover any additional shares obtained by the parties to the registration
agreement.

In addition, our acquisition agreement with Arbor gave the former
stockholders of Arbor rights to have their shares of our common stock included
in any registration statement we file.

PREFERRED STOCK

AppNet's certificate of incorporation, a copy of which is filed as an
exhibit to the registration statement of which this prospectus is a part,
authorizes AppNet's Board of Directors to issue preferred stock in one or more
series and to establish the number of shares to be included in each such series
and to fix the designations, powers, preferences and rights of the shares of
each such series and any qualifications, limitations or restrictions of each
such series. Because the Board of Directors has the power to establish the
preferences and rights of the shares of any such series of preferred stock, it
may afford the holders of any such series of preferred stock preferences, powers
and rights, including voting rights, senior to the rights of the holders of
common stock. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of AppNet.

The Board of Directors has established a class of preferred stock designated
Class A Preferred Stock, currently consisting of 121 shares reserved for
issuance upon exercise of a warrant issued to a single holder in June 1998. The
Class A Preferred Stock has the dividend, redemption, liquidation and other
rights described below.

VOTING RIGHTS. The Class A Preferred Stock is not entitled to any voting
rights, other than those granted by the Delaware General Corporation Law,
provided that each holder of Class A Preferred Stock is entitled to notice of
all stockholders meetings at the same time and in the same manner to which all
stockholders entitled to vote at such meetings are entitled.

DIVIDEND RIGHTS. When and as declared by AppNet's Board of Directors and to
the extent permitted under the Delaware General Corporation Law, holders of
Class A Preferred Stock are entitled to preferential cash dividends. Dividends
on each share of Class A Preferred Stock accrue on a daily basis at the rate of
6% per annum on the liquidation value per share of $1,000, plus all accumulated
and unpaid dividends from and including the date of issuance of such share to
and including the first to occur of:

- the date on which the liquidation value of such share, plus all accrued
and unpaid dividends, is paid to the holder in connection with the
liquidation of AppNet or the redemption of such share by AppNet; and

- the date on which such share is otherwise acquired by AppNet.

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Dividends on the Class A Preferred Stock accrue whether or not they have
been declared and whether or not there are profits, surplus or other funds
legally available for the payment of dividends. To the extent dividends are not
paid on March 31, June 30, September 30, and December 31 of each year for
Class A Preferred Stock, the accrued dividends will accumulate on such dates.
All accrued and unpaid dividends will be fully paid or declared with funds
irrevocably set apart for payment before we are entitled to pay any dividends,
distributions, redemptions or other payments with respect to any stock of AppNet
other than Class A Preferred Stock.

DISTRIBUTION OF PARTIAL DIVIDEND PAYMENTS. Unless otherwise provided, if at
any time AppNet pays less than the total amount of accrued dividends with
respect to the Class A Preferred Stock, the payment will be distributed pro rata
among the holders of the class of preferred stock, based upon the aggregate
accrued but unpaid dividends on the shares held by each such holder.

LIQUIDATION. Upon any liquidation, dissolution or winding up of AppNet,
voluntary or involuntary, each holder of Class A Preferred Stock will be
entitled to an amount in cash equal to the aggregate liquidation value of all
shares held by the holder, plus all accrued and unpaid dividends thereon, before
any distribution or payment is made upon any securities that are junior to the
Class A Preferred Stock. The holders of Class A Preferred Stock will not be
entitled to receive any further payment. Prior to the time of any liquidation,
dissolution or winding up of AppNet, to the extent permitted by applicable law,
AppNet will declare for payment all accrued and unpaid dividends with respect to
the Class A Preferred Stock.

PRIORITY OF PREFERRED STOCK. So long as any Class A Preferred Stock remains
outstanding, without the prior written consent of the holders of a majority of
the outstanding shares of such preferred stock, AppNet will not be entitled, nor
will it permit any subsidiary, to redeem, purchase or otherwise acquire directly
or indirectly any securities that are junior to the Class A Preferred Stock, nor
is AppNet entitled directly or indirectly to pay or declare any dividend or make
any distribution upon any securities that are junior to the Class A Preferred
Stock. However, even if any such shares of Class A Preferred Stock are
outstanding, AppNet is entitled to purchase shares of its common stock under an
arrangement approved by the Board of Directors from present or former employees
of AppNet or its subsidiaries.

REDEMPTION RIGHTS.

OPTIONAL REDEMPTIONS BY APPNET. At any time and from time to time,
AppNet may redeem all or any portion of any outstanding shares of Class A
Preferred Stock. Upon any such redemption, AppNet will pay a price per share
equal to the liquidation value thereof, plus all accrued and unpaid
dividends thereon. No redemption may be made for less than 1,000 shares or
such lesser number of shares then outstanding.

REDEMPTIONS AFTER PUBLIC OFFERINGS. At the written request of the
holders of a majority of the shares of Class A Preferred Stock then
outstanding, AppNet will apply the net cash proceeds from any public
offering of AppNet common stock under an effective registration statement
under the Securities Act to redeem shares of Class A Preferred Stock at the
liquidation value of $1,000 per share, plus all accrued and unpaid dividends
thereon. Such redemption must take place not more than five days after
AppNet receives such public offering proceeds.

REDEMPTION PAYMENTS. On any date on which Class A Preferred Stock is to
be redeemed, if AppNet's funds that are legally available for redemption are
insufficient to redeem the total number of shares to be redeemed, those
funds which are legally available will be used to redeem the maximum
possible number of shares pro rata among the holders of the shares to be
redeemed. At any time thereafter when additional funds are legally available
for redemption of shares by

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AppNet, such funds will be immediately used to redeem the balance of the
shares which AppNet is obligated to redeem.

SPECIAL REDEMPTIONS. If either (a) a change in ownership, which is
defined as the transfer of more than 50% of the outstanding common stock to
a person or group of persons other than any stockholder of AppNet as of
June 29, 1998, has occurred or AppNet obtains knowledge that a change in
ownership is proposed or (b) a fundamental change, which is defined as the
transfer of more than 50% of AppNet's assets or mergers or consolidations
involving AppNet where Appnet is not the surviving party, is proposed to
occur, then the holder or holders of a majority of the shares of Class A
Preferred Stock then outstanding may require AppNet to redeem all or any
portion of the Class A Preferred Stock owned by such holders at a price per
share equal to the liquidation value thereof, plus all accrued and unpaid
dividends thereon, by giving written notice of such election. AppNet must
give all holders of Class A Preferred Stock prompt notice of any proposed
change in ownership or fundamental change and notice of any election to
redeem shares because of such changes.

ANTI-TAKEOVER EFFECTS OF APPNET'S CERTIFICATE OF INCORPORATION AND BYLAWS AND
PROVISIONS OF DELAWARE LAW

AppNet's certificate of incorporation and bylaws and Section 203 of the
Delaware General Corporation Law contain provisions that may make the
acquisition of control of AppNet by means of a tender offer, open market
purchase, proxy fight or otherwise, more difficult.

BUSINESS COMBINATIONS. Our certificate of incorporation provides that we
are subject to Section 203 of the Delaware General Corporation Law. In general,
subject to specific exceptions, Section 203 of the Delaware General Corporation
Law prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless:

- upon consummation of the transaction, the interested stockholder owned 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned by persons who are directors and
also officers and employee stock plans in which employee participants do
not have the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer;

- the business combination is, or the transaction in which such person
became an interested stockholder was, approved by the board of directors
of the corporation before the stockholder became an interested
stockholder; or

- the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of the
corporation's stockholders by the affirmative vote of at least 66 2/3% of
the outstanding voting stock which is not owned by the interested
stockholder.

For purposes of Section 203, a "business combination" includes mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder; an "interested stockholder" is a person who, together
with affiliates and associates, owns, or, in the case of affiliates and
associates of the issuer, did own within the last three years, 15% or more of
the corporation's voting stock. The restrictions set forth in Section 203 will
not apply to a business combination with an interested stockholder who became an
interested stockholder at a time when the restrictions of Section 203 did not
apply to AppNet.

STOCKHOLDER NOMINATIONS AND PROPOSALS. Our bylaws provide that stockholders
must follow an advance notification procedure for stockholder nominations of
candidates for the Board of Directors

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and for other stockholder business to be conducted at an annual meeting. For
business a stockholder wishes to bring before an annual meeting of stockholders,
the stockholder must deliver notice to AppNet not less than 60 days nor more
than 90 days prior to the date of the anniversary of the previous year's annual
meeting. For nominations of persons for election to our Board of Directors at an
annual meeting, a stockholder must deliver notice to AppNet not less than 90
days prior to the date of the anniversary of the previous year's annual meeting
unless the annual meeting is delayed, in which case the stockholder must deliver
the notice not less than 90 days prior to such meeting nor more than 10 days
after we mailed notice of such meeting or public disclosure of the annual
meeting was made. These advance notification provisions in our bylaws could
preclude the conduct of business at a meeting or a nomination for the election
of directors if the proper procedures are not followed. Such provisions could
operate to delay, defer or prevent a change in control of AppNet.

AUTHORIZED AND UNISSUED PREFERRED STOCK. There are 5,000,000 authorized and
unissued shares of preferred stock of which 121 shares are reserved for issuance
as Class A Preferred Stock. Our certificate of incorporation authorizes the
Board of Directors to issue one or more series of preferred stock and to
establish the designations, powers, preferences and rights of each series of
preferred stock. The existence of authorized and unissued preferred stock may
enable the Board of Directors to render more difficult or to discourage an
attempt to obtain control of AppNet by means of a merger, tender offer, proxy
contest or otherwise. For example, if in the due exercise of its fiduciary
obligations, the Board of Directors were to determine that a takeover proposal
is not in AppNet's best interests, the Board of Directors could cause shares of
preferred stock to be issued without stockholder approval in one or more private
offerings or other transactions that might dilute the voting or other rights of
the proposed acquiror or insurgent stockholder or stockholder group or create a
substantial voting block in institutional or other hands that might undertake to
support the position of the incumbent Board of Directors.

ABSENCE OF CUMULATIVE VOTING. Our certificate of incorporation does not
include a provision for cumulative voting in the election of directors. Under
cumulative voting, a minority stockholder holding a sufficient number of shares
may be able to ensure the election of one or more directors. The absence of
cumulative voting may have the effect of limiting the ability of minority
stockholders to effect changes in our Board of Directors and, as a result, may
operate to delay, defer or prevent a change in control of AppNet.

REMOVAL OF DIRECTORS; VACANCIES. Our certificate of incorporation states
that, subject to the rights of the holders of our preferred stock, directors may
be removed at any time by two-thirds stockholder vote. In addition, a majority
of the directors then in office will be able to fill board vacancies and newly
created directorships resulting from any increase in the size of our Board of
Directors. This is true even if those directors do not constitute a quorum or if
only one director is left in office. These provisions could prevent
stockholders, including parties who want to take over or acquire AppNet, from
removing incumbent directors and filling the resulting vacancies with their own
nominee.

SPECIAL MEETINGS OF STOCKHOLDERS. Our bylaws provide that special meetings
of AppNet's stockholders may be called only by the Board of Directors of AppNet.
This provision may render it more difficult for stockholders to take action
opposed by the Board of Directors.

INDEMNIFICATION AND LIMITATION OF LIABILITY

AppNet's bylaws provide that AppNet will indemnify each of its directors,
officers, employees and agents to the fullest extent permitted by law. The
certificate of incorporation limits the liability of AppNet's directors and
stockholders to AppNet for monetary damages. The certificate of incorporation
also provides that AppNet may purchase insurance on behalf of its directors,
officers, employees and agents against liabilities they may incur in such
capacity, whether or not AppNet would have the power to indemnify against such
liabilities.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock is BankBoston, N.A.

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SHARES ELIGIBLE FOR FUTURE SALE

Future sales of substantial amounts of shares of our common stock in the
public market could adversely affect prevailing market prices. Only a limited
number of shares will be available for sale shortly after this offering because
of contractual and legal restrictions on resale described below. Sales of
substantial amounts of common stock in the public market after the restrictions
lapse could adversely affect the prevailing market price.

Upon the completion of this offering, 32,497,027 shares of common stock will
be outstanding (based on shares outstanding as of September 30, 1999), including
our sale of 1,500,000 shares of common stock in this offering. A total of
approximately 10,700,000 shares, including the 4,000,000 shares sold in this
offering, will be freely tradable without restriction under the Securities Act.
Of the remaining shares outstanding upon completion of the offering,
approximately 21,800,000 shares of common stock held by existing stockholders
are restricted securities in that they may be sold in the public market only if
registered or if they qualify for an exemption from registration under the
Securities Act or Rules 144 or 701 under the Securities Act.

Our directors, our officers, most of the former owners of all the businesses
we acquired, GTCR, Smart Technology and certain of our other stockholders, who
collectively own approximately 24,500,000 shares of our common stock, entered
into lock-up agreements in connection with our initial public offering providing
that they will not offer, transfer or dispose of any of the shares of common
stock through December 15, 1999, without the prior written consent of Credit
Suisse First Boston Corporation.

In connection with this offering, our directors, our officers and the
selling stockholders, who collectively own approximately 14,250,000 shares of
our common stock, will be bound by lock-up arrangements providing that they will
not offer, transfer or dispose of any shares of common stock for 90 days after
the date of the underwriting agreement without the prior written consent of
Credit Suisse First Boston Corporation.

Credit Suisse First Boston Corporation may release all or any portion of the
securities subject to these lock-up arrangements. Credit Suisse First Boston
Corporation currently has no plans to release any portion of the securities
subject to lock-up arrangements. When determining whether or not to release
shares from the lock-up arrangements, Credit Suisse First Boston Corporation
will consider, among other factors, the stockholder's reasons for requesting the
release, the number of shares for which the release is being requested and
market conditions at the time. Following the expiration of these lock-up
periods, additional shares of common stock will be available for sale in the
public market subject to compliance with Rule 144 or Rule 701.

In general, under Rule 144 as currently in effect, if a minimum of one year
has elapsed since the later of the date of acquisition of the restricted
securities from the issuer or from an affiliate of the issuer, a person, or
persons whose shares of common stock are aggregated, including persons who may
be deemed affiliates of AppNet, would be entitled to sell within any three-month
period a number of shares of AppNet common stock that does not exceed the
greater of

(1) one percent of the then-outstanding shares of AppNet common stock, which
equals approximately 324,970 shares immediately after this offering, or

(2) the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission.

Sales under Rule 144 are also subject to restrictions as to the manner of
sale, notice requirements and the availability of current public information
about AppNet. In addition, under Rule 144(k), if a period of at least two years
has elapsed since the later of the date restricted securities were acquired from
AppNet or the date they were acquired from an affiliate of AppNet, a stockholder
who is not an

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affiliate of AppNet at the time of sale and who has not been an affiliate of
AppNet for at least three months prior to the sale would be entitled to sell
shares of our common stock in the public market immediately without compliance
with the requirements under Rule 144 set forth above. If shares are transferred
during this period, the holding period requirement may be satisfied by including
the time period during which such shares were previously held. The foregoing
summary of Rule 144 is not intended to be a complete description thereof.

In addition, any of our employees, directors, officers or consultants who
acquired shares under a written compensatory plan or contract may be entitled to
rely on the resale provisions of Rule 701 of the Securities Act without having
to comply with the public information, holding period, volume limitation or
notice provisions of Rule 144, and affiliates of AppNet may be entitled to sell
their Rule 701 shares without having to comply with the holding period
restrictions of Rule 144, in each case, commencing 90 days after the date of
this prospectus, although the contractual limitations will continue through the
180th day following the date of this prospectus.

In addition to the restrictions on transfer described above, our executives
with whom we have entered into senior management agreements are subject to
restrictions on the transfer of shares of our common stock owned by them as of
the date they entered into the senior management agreement.

We are a party to a registration agreement, dated as of June 29, 1998, which
gives the holders of a majority of the common stock issued to GTCR and Smart
Technology under the purchase agreement with GTCR and Smart Technology a
conditional right to demand registration of all or any portion of this common
stock. Substantially all of our stockholders who acquired their shares prior to
our June 1999 initial public offering have the right to include all or any
portion of their AppNet common stock on registration statements we file to
register the common stock issued to GTCR and Smart Technology under the purchase
agreement with GTCR and Smart Technology. Subject to specific conditions, the
stockholders who are party to the registration agreement have the right to
include all or any portion of their AppNet common stock on registration
statements we file on our own behalf. Registration of these shares of our common
stock would permit the sale of these shares without regard to the restrictions
of Rule 144. In addition, our acquisition agreement with Arbor gave the former
stockholders of Arbor rights to have their shares of our common stock included
in any registration statement, other than in connection with this offering.

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U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

The following is a general discussion of the principal United States federal
income and estate tax consequences of the ownership and disposition of common
stock by a non-U.S. holder. As used in this prospectus, a non-U.S. holder is
defined as a holder that for United States federal income tax purposes is an
individual or entity other than:

- a citizen or individual resident of the United States;

- a corporation or partnership created or organized in or under the laws of
the United States or of any political subdivision thereof, other than a
partnership treated as foreign under U.S. Treasury regulations;

- an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or

- a trust if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust.

An individual may, subject to a number of exceptions, be deemed to be a
resident alien, as opposed to a nonresident alien, by virtue of being present in
the United States for at least 31 days in the calendar year and for an aggregate
of at least 183 days during a three-year period ending in the current calendar
year, counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year and one-sixth of
the days present in the second preceding year. Resident aliens are subject to
U.S. federal income tax as if they were U.S. citizens.

This discussion does not address all aspects of United States federal income
and estate taxes that may be relevant to non-U.S. holders in light of their
personal circumstances, including the fact that in the case of a non-U.S. holder
that is a partnership, the U.S. tax consequences of holding and disposing of
shares of common stock may be affected by determinations made at the partner
level, or that may be relevant to non-U.S. holders which may be subject to
special treatment under United States federal income tax laws such as insurance
companies, tax-exempt organizations, financial institutions, dealers in
securities and holders of securities held as part of a "straddle," "hedge" or
"conversion transaction." This discussion also does not address U.S. state or
local or foreign tax consequences. Furthermore, this discussion is based on
provisions of the Internal Revenue Code of 1986, as amended, existing and
proposed regulations promulgated thereunder and administrative and judicial
interpretations thereof, all as of the date hereof, and all of which are subject
to change, possibly with retroactive effect. The following summary is included
herein for general information. ACCORDINGLY, INVESTORS ARE URGED TO CONSULT
THEIR TAX ADVISERS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND
NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING
OF SHARES OF COMMON STOCK.

DIVIDENDS

We do not anticipate paying cash dividends on our common stock in the
foreseeable future. In the event, however, that dividends are paid on shares of
our common stock, dividends paid to a non-U.S. holder of common stock generally
will be subject to withholding of United States federal income tax at a 30%
rate, or such lower rate as may be provided by an income tax treaty between the
United States and a foreign country if the non-U.S. holder is treated as a
resident of such foreign country within the meaning of the applicable treaty.
Non-U.S. holders should consult their tax advisors regarding their entitlement
to benefits under a relevant income tax treaty.

Dividends that are effectively connected with a non-U.S. holder's conduct of
a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment in the United States, are generally
subject to U.S. federal income tax on a net income basis at regular graduated
rates, but are not generally subject to the 30% withholding tax if the non-U.S.
holder files

72
<PAGE>
the appropriate U.S. Internal Revenue Service form with the payor, which form
under U.S. Treasury regulations generally requires the non-U.S. holder to
provide a U.S. taxpayer identification number. Any such U.S. trade or business
income received by a non-U.S. holder that is a corporation may also be subject
to an additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.

Under currently applicable U.S. Treasury regulations, dividends paid to an
address in a foreign country are presumed, absent actual knowledge to the
contrary, to be paid to a resident of such country for purposes of the
withholding discussed above and for purposes of determining the applicability of
a tax treaty rate. Under U.S. Treasury regulations generally effective for
payments made after December 31, 2000, however, a non-U.S. holder of our common
stock who wishes to claim the benefit of an applicable treaty rate generally
will be required to satisfy applicable certification and other requirements. In
addition, under these regulations, in the case of our common stock held by a
foreign partnership, the certification requirement will generally be applied to
the partners of the partnership and the partnership will be required to provide
specified information, including a United States taxpayer identification number.
The regulations generally effective for payments made after December 31, 2000,
also provide look-through rules for tiered partnerships. Further, the Internal
Revenue Service intends to issue regulations under which a foreign trustee or
foreign executor of a U.S. or foreign trust or estate, depending on the
circumstances, will be required to furnish the appropriate withholding
certificate on behalf of the beneficiaries, grantor trust or estate, as the case
may be.

A non-U.S. holder of our common stock that is eligible for a reduced rate of
U.S. withholding tax under an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for a refund with the
Internal Revenue Service.

The U.S. Treasury regulations generally effective for payments made after
December 31, 2000 also provide special rules for dividend payments made to
foreign intermediaries, U.S. or foreign wholly owned entities that are
disregarded for U.S. federal income tax purposes and entities that are treated
as fiscally transparent in the United States, the applicable income tax treaty
jurisdiction, or both. In addition, income tax treaty benefits may be denied to
foreigners receiving income derived through a partnership, or otherwise fiscally
transparent entity, in certain circumstances. Prospective investors should
consult with their own tax advisers concerning the effect, if any, of these
provisions on an investment in our common stock.

GAIN ON DISPOSITION OF COMMON STOCK

A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of our common stock unless:

- the gain is U.S. trade or business income, in which case, the branch
profits tax described above may also apply to a corporate non-U.S. holder;

- the non-U.S. holder is an individual who holds our common stock as a
capital asset within the meaning of Section 1221 of the Internal Revenue
Code, is present in the United States for 183 or more days in the taxable
year of the disposition and meets other requirements;

- the non-U.S. holder is subject to tax under the provisions of the U.S. tax
law applicable to certain United States expatriates; or

- AppNet is or has been a "U.S. real property holding corporation" for
federal income tax purposes at any time during the shorter of the
five-year period preceding such disposition or the period that the
non-U.S. holder held our common stock.

73
<PAGE>
Generally, a corporation is a "U.S. real property holding corporation" if the
fair market value of its "U.S. real property interests" equals or exceeds 50% of
the sum of the fair market value of its worldwide real property interests plus
its other assets used or held for use in a trade or business. We believe that we
have not been, are not currently, and do not anticipate becoming, a "U.S. real
property holding corporation" for U.S. federal income tax purposes. The tax with
respect to stock in a "U.S. real property holding corporation" does not apply to
a non-U.S. holder whose holdings, direct and indirect, at all times during the
applicable period, constituted 5% or less of our common stock, provided that our
common stock was regularly traded on an established securities market. If we
were, or were to become, a U.S. real property holding corporation, we believe
that our common stock would be treated as "regularly traded."

If a non-U.S. holder who is an individual is subject to tax on gain which is
U.S. trade or business income, such individual generally will be taxed on the
net gain derived from a sale of common stock under regular graduated United
States federal income tax rates. If an individual non-U.S. holder is subject to
tax because such individual holds our common stock as a capital asset, is
present in the United States for 183 or more days in the taxable year of the
disposition and meets other requirements, such individual generally will be
subject to a flat 30% tax on the gain derived from a sale, which may be offset
by United States capital losses, notwithstanding the fact that such individual
is not considered a resident alien of the United States. Thus, individual
non-U.S. holders who have spent (or expect to spend) more than a DE MINIMIS
period of time in the United States in the taxable year in which they
contemplate a sale of common stock are urged to consult their tax advisers prior
to the sale concerning the U.S. tax consequences of such sale.

If a non-U.S. holder that is a foreign corporation is subject to tax on gain
which is U.S. trade or business income, it generally will be taxed on its net
gain under regular graduated United States federal income tax rates and, in
addition, will be subject to the branch profits tax equal to 30% of its
"effectively connected earnings and profits," within the meaning of the Internal
Revenue Code for the taxable year, as adjusted for specific items, unless it
qualifies for a lower rate under an applicable tax treaty.

FEDERAL ESTATE TAX

Common stock owned or treated as owned by an individual who is neither a
United States citizen nor a United States resident, as defined for United States
federal estate tax purposes, at the time of death will be included in the
individual's gross estate for United States federal estate tax purposes, unless
an applicable estate tax or other treaty provides otherwise and, therefore, may
be subject to United States federal estate tax.

INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

Under U.S. Treasury regulations, we must report annually to the Internal
Revenue Service and to each non-U.S. holder the amount of dividends paid to such
holder and the tax withheld with respect to such dividends. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the non-U.S. holder is
a resident under the provisions of an applicable income tax treaty or agreement.

Currently, United States backup withholding, which generally is a
withholding tax imposed at the rate of 31% on payments to persons that fail to
furnish specified information under the United States information reporting
requirements, generally will not apply:

- to dividends paid to non-U.S. holders that are subject to the 30%
withholding discussed above, or that are not so subject because a tax
treaty applies that reduces or eliminates such 30% withholding; or

74
<PAGE>
- before January 1, 2001, to dividends paid to a non-U.S. holder at an
address outside of the United States unless the payor has actual knowledge
that the payee is a U.S. holder.

Backup withholding and information reporting generally will apply to dividends
paid to addresses inside the United States on shares of our common stock to
beneficial owners that are not "exempt recipients" and that fail to provide
identifying information in the manner required.

The payment of the proceeds of the disposition of our common stock by a
holder to or through the U.S. office of a broker or through a non-U.S. branch of
a U.S. broker generally will be subject to information reporting and backup
withholding at a rate of 31% unless the holder either certifies its status as a
non-U.S. holder under penalties of perjury or otherwise establishes an
exemption. The payment of the proceeds of the disposition by a non-U.S. holder
of common stock to or through a non-U.S. office of a non-U.S. broker will not be
subject to backup withholding or information reporting unless the non-U.S.
broker has particular types of U.S. relationships. In the case of the payment of
proceeds from the disposition of our common stock effected by a foreign office
of a broker that is a U.S. person or a U.S. related person, existing regulations
require information reporting on the payment unless the broker receives a
statement from the owner, signed under penalty of perjury, certifying its
non-U.S. status or the broker has documentary evidence in its files as to the
non-U.S. holder's foreign status and the broker has no actual knowledge to the
contrary. For this purpose, a U.S. related person is defined as:

- a "controlled foreign corporation" for U.S. federal income tax purposes;
or

- a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding
the payment, or for such part of the period that the broker has been in
existence, is derived from activities that are effectively connected with
the conduct of a U.S. trade or business.

The U.S. Treasury regulations generally effective for payments made after
December 31, 2000 alter the foregoing rules. Among other things, such
regulations provide presumptions under which a non-U.S. holder is subject to
backup withholding at the rate of 31% and information reporting unless we
receive certification from the holder of non-U.S. status. Depending on the
circumstances, this certification will need to be provided:

- directly by the non-U.S. holder;

- in the case of a non-U.S. holder that is treated as a partnership or other
fiscally transparent entity, by the partners, stockholders or other
beneficiaries of such entity; or

- by qualified financial institutions or other qualified entities on behalf
of the non-U.S. holder.

Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder will be refunded, or credited against the holder's U.S. federal
income tax liability, if any, provided that the required information is
furnished to the Internal Revenue Service.

75
<PAGE>
UNDERWRITING

Under an underwriting agreement dated , 1999, we and the selling
stockholders have agreed to sell to the underwriters named below, for whom
Credit Suisse First Boston Corporation, Hambrecht & Quist LLC, First Union
Securities, Inc. and The Robinson-Humphrey Company, LLC are acting as
representatives, the following respective numbers of shares of our common stock:

<TABLE>
<CAPTION>
NUMBER
OF SHARES
UNDERWRITERS ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Hambrecht & Quist LLC.......................................
First Union Securities, Inc.................................
The Robinson-Humphrey Company, LLC..........................

---------
Total................................................... 4,000,000
=========
</TABLE>

The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares of our common stock offered in this offering if any
are purchased, other than those shares covered by the over-allotment option we
describe below. The underwriting agreement also provides that if an underwriter
defaults, the purchase commitments of non-defaulting underwriters may be
increased or this offering of our common stock may be terminated.

The selling stockholders have granted to the underwriters a 30-day option to
purchase on a pro rata basis up to 600,000 additional shares from them at the
public offering price less the underwriting discounts and commissions. This
option may be exercised only to cover over-allotments of our common stock.

The underwriters propose to offer our common stock initially at the public
offering price on the cover page of this prospectus and to the selling group
members at that price less a selling concession of $ per share. The
underwriters and the selling group members may allow a discount of $ per share
on sales to other broker/dealers. After offering, the public offering price and
selling concession and discount to dealers may be changed by the
representatives. As used in this section,

- Underwriters are securities broker/dealers that are parties to the
underwriting agreement and will have a contractual commitment to purchase
shares of our common stock from us, and the representatives are the four
firms acting on behalf of the underwriters.

- Selling group members are securities broker/dealers to whom the
underwriters may sell shares of common stock at the public offering price
less the selling concession above, but who do not have a contractual
commitment to purchase shares from us.

- Broker/dealers are firms registered under applicable securities laws to
sell securities to the public.

- The syndicate consists of the underwriters and the selling group members.

The following table summarizes the compensation and estimated expenses that
we will pay. The compensation we will pay to the underwriters will consist
solely of the underwriting discount, which is equal to the public offering price
per share of common stock less the amount the underwriters pay to

76
<PAGE>
us per share of common stock. The underwriters have not received and will not
receive from us any other item of compensation or expense in connection with
this offering considered by the National Association of Securities Dealers, Inc.
to be underwriting compensation under its rules of fair practice.

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------------------------- ---------------------------
WITHOUT WITH OVER- WITHOUT WITH OVER-
OVER-ALLOTMENT ALLOTMENT OVER-ALLOTMENT ALLOTMENT
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Underwriting discounts and commissions paid by
us in cash.................................. $ $ $ $
Expenses payable by us........................ $ $ $ $
Underwriting discounts and commissions paid by
the selling stockholders.................... $ $ $ $
</TABLE>

Under the terms of our registration rights agreement with the selling
stockholders, we are required to pay all expenses in connection with this
offering. The principal components of the offering expenses payable by us will
include the fees and expenses of our accountants and attorneys, the fees of our
registrar and transfer agent, the cost of printing this prospectus, The Nasdaq
Stock Market listing fees and filing fees paid to the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc.

We, our officers, our directors, most of the former owners of all of the
businesses we acquired, GTCR and Smart Technology have agreed not to offer or
transfer, or file with the Securities and Exchange Commission a registration
statement under the Securities Act relating to, any additional shares of our
common stock or securities convertible into or exchangeable or exercisable for
any shares of our common stock without the prior written consent of Credit
Suisse First Boston Corporation for a period of 180 days after the date of this
prospectus, except in our case for grants of employee stock options under our
stock incentive plans in effect on the date hereof and issuances of securities
as a result of the exercise of any options outstanding on the date hereof and
issuances of securities as a result of the conversion of any convertible
instruments outstanding on the date hereof.

We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or to contribute to payments which the underwriters may be
required to make in that respect.

The shares of our common stock are traded on The Nasdaq Stock Market's
National Market under the symbol "APNT."

The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with
Regulation M under the Securities Exchange Act of 1934. Over-allotment involves
syndicate sales in excess of the size of this offering, which creates a
syndicate short position. Stabilizing transactions permit bids to purchase the
shares of our common stock so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of our
common stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
representatives to reclaim a selling concession from a syndicate member when our
common stock originally sold by the syndicate member is purchased in a
stabilization or a syndicate covering transaction to cover syndicate short
positions. The representatives track such purchases through the public offering
tracking system operated by the Depository Trust Company. The representatives
may, at their discretion, reclaim a selling concession from any syndicate member
that appears to have permitted its customers to purchase shares in the public
offering and then promptly resell all or a portion of such shares to such
syndicate member. However, the underwriters do not have any agreements with any
potential purchasers of shares of common stock in this offering that would
restrict their transfer of such shares following this offering.

Such stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of our common stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on The Nasdaq Stock Market's National Market or otherwise and, if
commenced, may be discontinued at any time.

77
<PAGE>
NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of our common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of our common stock are effected. Accordingly, any resale of our common
stock in Canada must be made in accordance with applicable securities laws which
will vary depending on the relevant jurisdiction and which may require resales
to be made in accordance with available statutory exemptions or under a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
our common stock.

REPRESENTATIONS OF PURCHASERS

Each purchaser of our common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that:

- such purchaser is entitled under applicable provincial securities laws to
purchase our common stock without the benefit of a prospectus qualified
under such securities laws;

- where required by law, that such purchaser is purchasing as principal and
not as agent; and

- such purchaser has reviewed the text above under "Resale restrictions."

RIGHTS OF ACTION (ONTARIO PURCHASERS)

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities law.

ENFORCEMENT OF LEGAL RIGHTS

All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of our common stock to whom the SECURITIES ACT (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
common stock acquired by such purchaser through this offering. Such report must
be in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one such report must
be filed in respect of shares of our common stock acquired on the same date and
under the same prospectus exemption.

TAXATION AND ELIGIBILITY FOR INVESTMENT

Canadian purchasers of our common stock should consult their own legal and
tax advisors with respect to the tax consequences of an investment in our common
stock in their circumstances and with respect to the eligibility of our common
stock for investment by the purchaser under relevant Canadian legislation.

78
<PAGE>
LEGAL MATTERS

The validity of the shares of our common stock offered by this prospectus
will be passed upon for AppNet by Foley & Lardner, Washington, DC. The
underwriters have been represented by Cravath, Swaine & Moore, New York, NY.

EXPERTS

The audited financial statements and schedules included in this prospectus
and elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

AppNet has filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act and the rules and regulations
promulgated under the Securities Act with respect to its common stock offered by
this prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement and its exhibits and schedules. For further information with respect
to AppNet and its common stock, we refer you to the registration statement,
including its exhibits and the schedules filed as a part of it. You may read and
copy the registration statement at the Securities and Exchange Commission's
following locations:

<TABLE>
<S> <C> <C>
Public Reference Room Office New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. Seven World Trade Center Citicorp Center
Washington, DC 20549 Suite 1300 500 West Madison Street
New York, NY 10048 Chicago, IL 60661-2511
</TABLE>

You may also obtain copies of the registration statement by mail from the
Public Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, DC 20549 or by telephone at
1-800-SEC-0330. The registration statement is available to the public from
commercial document retrieval services and at the Securities and Exchange
Commission's World Wide Website located at http://www.sec.gov. You can also read
AppNet's filings with the Securities and Exchange Commission at the office of
Nasdaq Operations, 1734 K Street, N.W. Washington, DC 20006. Statements in this
prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance we refer you to the full text of such
contract or document filed as an exhibit to the registration statement, each
such statement being qualified in all respects by such reference.

We intend to furnish our stockholders with annual reports containing
financial statements audited by an independent public accounting firm and make
available to our stockholders quarterly reports for the first three quarters of
each fiscal year containing interim unaudited financial information.

79
<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
APPNET, INC.

Report of independent public accountants.................. F--4

Consolidated balance sheets as of December 31, 1998 and
September 30, 1999 (unaudited).......................... F--5

Consolidated statements of operations for the year ended
December 31, 1998 and for the nine month periods ended
September 30, 1998 and September 30, 1999 (unaudited)... F--6

Consolidated statements of stockholders' equity for the
year ended December 31, 1998 and for the nine month
period ended September 30, 1999 (unaudited)............. F--7

Consolidated statements of cash flows for the year ended
December 31, 1998 and for the nine month periods ended
September 30, 1998 and September 30, 1999 (unaudited)... F--8

Notes to consolidated financial statements................ F--9

SOFTWARE SERVICES CORPORATION

Report of independent public accountants.................. F--28

Balance sheets as of December 31, 1996 and 1997, and
August 24, 1998......................................... F--29

Statements of operations for the years ended December 31,
1996 and 1997 and for the period from January 1, 1998 to
August 24, 1998......................................... F--30

Statements of stockholders' equity for the years ended
December 31, 1996 and 1997, and for the period from
January 1, 1998 to August 24, 1998...................... F--31

Statements of cash flows for the years ended December 31,
1996 and 1997 and for the period from January 1, 1998 to
August 24, 1998......................................... F--32

Notes to financial statements............................. F--33

ARBOR INTELLIGENT SYSTEMS, INC.

Report of independent public accountants.................. F--44

Balance sheets as of December 31, 1997 and March 11,
1998.................................................... F--45

Statements of operations for the year ended December 31,
1997 and for the period from
January 1, 1998 to March 11, 1998....................... F--46

Statements of stockholders' deficit for the year ended
December 31, 1997 and for the period from January 1,
1998 to March 11, 1998.................................. F--47

Statements of cash flows for the year ended December 31,
1997 and for the period from
January 1, 1998 to March 11, 1998....................... F--48

Notes to financial statements............................. F--49
</TABLE>

F-1
<PAGE>
<TABLE>
<S> <C>
NEW MEDIA PUBLISHING, INC.

Report of independent public accountants.................. F--55

Balance sheets as of December 31, 1996 and 1997, and
October 1, 1998......................................... F--56

Statements of operations for the years ended December 31,
1996 and 1997, and for the period from January 1, 1998
to October 1, 1998...................................... F--57

Statements of stockholders' equity for the year ended
December 31, 1996 and 1997, and for the period from
January 1, 1998 to October 1, 1998...................... F--58

Statements of cash flows for the years ended December 31,
1996 and 1997, and for the period from January 1, 1998
to October 1, 1998...................................... F--59

Notes to financial statements............................. F--60

CENTURY COMPUTING, INCORPORATED

Report of independent public accountants.................. F--68

Balance sheets as of December 31, 1996 and 1997 and
October 11, 1998........................................ F--69

Statements of operations for the years ended December 31,
1996 and 1997, and for the period from January 1, 1998
to October 11, 1998..................................... F--70

Statements of stockholders' equity for the years ended
December 31, 1996 and 1997, and for the period from
January 1, 1998 to October 11, 1998..................... F--71

Statements of cash flows for the years ended December 31,
1996 and 1997, and for the period from January 1, 1998
to October 11, 1998..................................... F--72

Notes to financial statements............................. F--73

RESEARCH & PLANNING, INC.

Report of independent public accountants.................. F--81

Balance sheets as of December 31, 1996 and 1997, and
October 19, 1998........................................ F--82

Statements of operations for the years ended December 31,
1996 and 1997, and for the period from January 1, 1998
to October 19, 1998..................................... F--83

Statements of stockholders' equity for the years ended
December 31, 1996 and 1997, and for the period from
January 1, 1998 to October 19, 1998..................... F--84

Statements of cash flows for the Years Ended December 31,
1996 and 1997, and for the period from January 1, 1998
to October 19, 1998..................................... F--85

Notes to financial statements............................. F--86
</TABLE>

F-2
<PAGE>
<TABLE>
<S> <C>
THE KODIAK GROUP, INC.

Report of independent public accountants.................. F--90

Balance sheets as of December 31, 1997 and December 13,
1998.................................................... F--91

Statements of operations for the year ended December 31,
1997 and for the period from
January 1, 1998 to December 13, 1998.................... F--92

Statements of stockholders' equity for the year ended
December 31, 1997 and for the period from January 1,
1998 to December 13, 1998............................... F--93

Statements of cash flows for the year ended December 31,
1997 and for the period from
January 1, 1998 to December 13, 1998.................... F--94

Notes to financial statements............................. F--95

I33 COMMUNICATIONS CORP.

Report of independent public accountants.................. F--100

Balance sheets as of December 31, 1996, 1997 and 1998..... F--101

Statements of operations for the years ended December 31,
1996, 1997 and 1998..................................... F--102

Statements of stockholders' equity (deficit) for the years
ended December 31, 1996, 1997 and 1998.................. F--103

Statements of cash flows for the years ended December 31,
1996, 1997 and 1998..................................... F--104

Notes to financial statements............................. F--105

SALZINGER & COMPANY, INC.

Report of independent public accountants.................. F--111

Balance sheet as of December 31, 1998..................... F--112

Statement of operations for the year ended December 31,
1998.................................................... F--113

Statement of stockholder's equity for year ended December
31, 1998................................................ F--114

Statement of cash flows for year ended December 31,
1998.................................................... F--115

Notes to financial statements............................. F--116

INTERNET OUTFITTERS, INC.

Report of independent public accountants.................. F--119

Balance sheet as of December 31, 1998..................... F--120

Statement of operations for the year ended December 31,
1998.................................................... F--121

Statement of stockholders' equity for the year ended
December 31, 1998....................................... F--122

Statement of cash flows for the year ended December 31,
1998.................................................... F--123

Notes to financial statements............................. F--124
</TABLE>

F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To AppNet, Inc.:

We have audited the accompanying consolidated balance sheet of AppNet, Inc.
(formerly AppNet Systems, Inc.) (a Delaware corporation) and subsidiaries as of
December 31, 1998 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
AppNet, Inc. and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Washington, D.C.
March 29, 1999
(except with respect to the matter discussed
in Note 18, as to which the date is
June 15, 1999.)

F-4
<PAGE>
APPNET, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,447,000 $ 3,236,000
Accounts receivable, net of allowance for doubtful
accounts of $1,124,000 and $1,597,000, respectively..... 11,238,000 27,010,000
Other current assets...................................... 1,118,000 1,428,000
------------ ------------
Total current assets.................................... 14,803,000 31,674,000
Property and equipment, net................................. 3,012,000 7,359,000
Intangible assets, net...................................... 99,380,000 102,028,000
Other assets................................................ 1,175,000 1,867,000
------------ ------------
Total assets............................................ $118,370,000 $142,928,000
============ ============
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,737,000 $ 5,665,000
Accrued liabilities....................................... 6,911,000 28,925,000
Current portion of convertible notes and long-term debt... 2,426,000 1,610,000
------------ ------------
Total current liabilities............................... 12,074,000 36,200,000
Credit facilities........................................... 37,461,000 3,660,000
Convertible notes, net of current portion................... 2,706,000 8,800,000
Other long-term debt, net of current portion................ 1,199,000 3,515,000
Other long-term liabilities................................. 3,398,000 1,066,000
------------ ------------
Total liabilities....................................... 56,838,000 53,241,000
------------ ------------
Commitments and contingencies (Note 16)
Class A Preferred Stock, $.01 par value, 96,621 shares
authorized, 38,093 and zero shares issued and outstanding
as of December 31, 1998 and September 30, 1999,
respectively, liquidation value $1,000.................... 37,646,000 --
Common stock subject to put rights, $.0005 par value; 48,771
and zero shares issued and outstanding as of December 31,
1998 and September 30, 1999, respectively................. 278,000 --
------------ ------------
Stockholders' equity:
Class B Preferred Stock, $.01 par value, 20,000 shares
authorized, 11,576 and zero shares issued and
outstanding as of December 31, 1998 and September 30,
1999, respectively, liquidation value $1,000............ 11,576,000 --
Common stock, $.0005 par value; 75,000,000 shares
authorized, 19,504,173 issued and outstanding as of
December 31, 1998, and 31,162,465 shares issued and
30,997,027 shares outstanding as of September 30, 1999,
respectively............................................ 10,000 16,000
Additional paid-in capital................................ 27,222,000 165,135,000
Treasury stock............................................ -- (50,000)
Notes receivable from management.......................... (821,000) (617,000)
Deferred compensation..................................... -- (414,000)
Accumulated deficit....................................... (14,379,000) (74,383,000)
------------ ------------
Total stockholders' equity.............................. 23,608,000 89,687,000
------------ ------------
Total liabilities, redeemable stock and stockholders'
equity................................................ $118,370,000 $142,928,000
============ ============
</TABLE>

The accompanying notes are an integral part of these statements.

F-5
<PAGE>
APPNET, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED ---------------------------
DECEMBER 31, 1998 1998 1999
------------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues......................................... $ 17,674,000 $ 3,508,000 $ 74,802,000
Cost of revenues................................. 11,699,000 3,252,000 42,205,000
------------ ------------ ------------
Gross profit................................. 5,975,000 256,000 32,597,000
Operating expenses:
Selling and marketing.......................... 964,000 218,000 5,832,000
General and administrative..................... 6,507,000 2,349,000 23,347,000
Stock-based and other acquisition-related
compensation................................. 1,157,000 -- 15,730,000
Depreciation and amortization.................. 10,151,000 1,669,000 42,857,000
------------ ------------ ------------
Total operating expenses..................... 18,779,000 4,236,000 87,766,000
------------ ------------ ------------
Loss from operations............................. (12,804,000) (3,980,000) (55,169,000)
Interest expense................................. 1,052,000 289,000 3,948,000
Other expense, net............................... 723,000 387,000 559,000
------------ ------------ ------------
Loss before income taxes......................... (14,579,000) (4,656,000) (59,676,000)
Income tax (benefit) provision................... (200,000) (70,000) 328,000
------------ ------------ ------------
Net loss......................................... (14,379,000) (4,586,000) (60,004,000)
Dividends on and accretion of preferred stock.... (873,000) (110,000) (2,139,000)
------------ ------------ ------------
Net loss attributable to common stockholders..... $(15,252,000) $(4,696,000) $(62,143,000)
============ ============ ============
Basic and diluted net loss per common share...... $ (1.41) $ (.59) $ (2.57)
============ ============ ============
Weighted average common shares outstanding....... 10,785,424 8,018,434 24,200,397
============ ============ ============
</TABLE>

The accompanying notes are an integral part of these statements.

F-6
<PAGE>
APPNET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
REDEEMABLE EQUITY SECURITIES
----------------------------------------------------------------------
COMMON STOCK
SUBJECT TO CLASS A SERIES A-1
PUT RIGHTS PREFERRED STOCK PREFERRED STOCK
------------------- ----------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Initial capitalization.................................. -- $ -- -- $ -- -- $ --
Issuance of Series A-1 preferred stock in connection
with acquisition.................................... -- -- -- -- 266,796 1,067,000
GTCR Investment....................................... 48,771 278,000 -- -- (266,796) (1,067,000)
Repurchase and cancellation of shares in exchange for
note payable........................................ -- -- -- -- -- --
Repurchase and cancellation of common stock shares.... -- -- -- -- -- --
Issuance of Class A Preferred Stock................... -- -- 37,676 37,045,000 -- --
Conversion of common stock into Class A Preferred
Stock............................................... -- -- 417 417,000 -- --
Dividends on and accretion of Class A Preferred
Stock............................................... -- -- -- 184,000 -- --
Issuance of stock in connection with the 1998 acquired
businesses.......................................... -- -- -- -- -- --
Repurchase and cancellation of shares sold to
management.......................................... -- -- -- -- -- --
Purchase of shares by management...................... -- -- -- -- -- --
Stock options exercised............................... -- -- -- -- -- --
Net loss.............................................. -- -- -- -- -- --
------- -------- ------- ------------ -------- -----------
Total, December 31, 1998................................ 48,771 $278,000 38,093 $ 37,646,000 -- $ --
------- -------- ------- ------------ -------- -----------
Issuance of Class A Preferred Stock (unaudited)....... -- -- 7,337 7,191,000 -- --
Dividends on and accretion of Class A Preferred Stock
(unaudited)......................................... -- -- -- 593,000 -- --
Issuance of stock in connection with the 1999 acquired
businesses (unaudited).............................. -- -- -- -- -- --
Exercise and expiration of put rights (unaudited)..... (48,771) (278,000) -- -- -- --
Conversion of notes payable (unaudited)............... -- -- -- -- -- --
Issuance of common stock in initial public offering,
net of expenses (unaudited)......................... -- -- -- -- -- --
Exchange of Class A and Class B Preferred Stock in the
initial public offering (unaudited)................. -- -- (45,430) (45,430,000) -- --
Charges associated with initial public offering
(unaudited)......................................... -- -- -- -- -- --
Repurchase and cancellation of shares sold to
management (unaudited).............................. -- -- -- -- -- --
Common stock sold for cash (unaudited)................ -- -- -- -- -- --
Repurchase of common stock (unaudited)................ -- -- -- -- -- --
Stock options and warrants exercised (unaudited)...... -- -- -- -- -- --
Deferred compensation pursuant to issuance of stock
options (unaudited)................................. -- -- -- -- -- --
Amortization of deferred compensation (unaudited)..... -- -- -- -- -- --
Other (unaudited)..................................... -- -- -- -- -- --
Net loss (unaudited).................................. -- -- -- -- -- --
------- -------- ------- ------------ -------- -----------
Total, September 30, 1999 (unaudited)................. -- $ -- -- $ -- -- $ --
======= ======== ======= ============ ======== ===========

<CAPTION>
STOCKHOLDERS' EQUITY
---------------------------------------------------------------

CLASS B COMMON
PREFERRED STOCK STOCK ADDITIONAL
------------------------ --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- ------------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
Initial capitalization.................................. -- $ -- 5,343,860 $ 3,000 $ 132,000
Issuance of Series A-1 preferred stock in connection
with acquisition.................................... -- -- -- -- --
GTCR Investment....................................... -- -- 13,342,145 7,000 4,108,000
Repurchase and cancellation of shares in exchange for
note payable........................................ -- -- (1,350,877) (1,000) (405,000)
Repurchase and cancellation of common stock shares.... -- -- (138,455) -- (789,000)
Issuance of Class A Preferred Stock................... -- -- -- -- --
Conversion of common stock into Class A Preferred
Stock............................................... -- -- (1,387,097) (1,000) (416,000)
Dividends on and accretion of Class A Preferred
Stock............................................... -- -- -- -- (873,000)
Issuance of stock in connection with the 1998 acquired
businesses.......................................... 11,576 11,576,000 3,397,329 2,000 24,811,000
Repurchase and cancellation of shares sold to
management.......................................... -- -- (681,053) (228,000)
Purchase of shares by management...................... -- -- 552,982 572,000
Stock options exercised............................... -- -- 425,339 310,000
Net loss.............................................. -- -- -- -- --
------- ------------- ---------- ------- ------------
Total, December 31, 1998................................ 11,576 $ 11,576,000 19,504,173 $10,000 $ 27,222,000
------- ------------- ---------- ------- ------------
Issuance of Class A Preferred Stock (unaudited)....... -- -- -- -- --
Dividends on and accretion of Class A Preferred Stock
(unaudited)......................................... -- -- -- -- (2,139,000)
Issuance of stock in connection with the 1999 acquired
businesses (unaudited).............................. -- -- 595,711 9,399,000
Exercise and expiration of put rights (unaudited)..... -- -- 44,882 -- 256,000
Conversion of notes payable (unaudited)............... -- -- 260,558 -- 2,307,000
Issuance of common stock in initial public offering,
net of expenses (unaudited)......................... -- -- 6,000,000 3,000 64,116,000
Exchange of Class A and Class B Preferred Stock in the
initial public offering (unaudited)................. (11,576) (11,576,000) 4,936,808 3,000 59,239,000
Charges associated with initial public offering
(unaudited)......................................... -- -- -- -- 3,506,000
Repurchase and cancellation of shares sold to
management (unaudited).............................. -- -- (467,074) (142,000)
Common stock sold for cash (unaudited)................ -- -- 29,240 -- 375,000
Repurchase of common stock (unaudited)................ -- -- -- -- --
Stock options and warrants exercised (unaudited)...... -- -- 258,167 228,000
Deferred compensation pursuant to issuance of stock
options (unaudited)................................. -- -- -- -- 481,000
Amortization of deferred compensation (unaudited)..... -- -- -- -- --
Other (unaudited)..................................... -- -- -- -- 287,000
Net loss (unaudited).................................. -- -- -- -- --
------- ------------- ---------- ------- ------------
Total, September 30, 1999 (unaudited)................. -- $ -- 31,162,465 $16,000 $165,135,000
======= ============= ========== ======= ============

<CAPTION>
STOCKHOLDERS' EQUITY
------------------------------------------------------------------------

NOTES TOTAL
TREASURY RECEIVABLE FROM DEFERRED ACCUMULATED STOCKHOLDERS'
STOCK MANAGEMENT COMPENSATION DEFICIT EQUITY
-------- --------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Initial capitalization.................................. -- $ -- $ -- $ -- $ 135,000
Issuance of Series A-1 preferred stock in connection
with acquisition.................................... -- -- -- -- --
GTCR Investment....................................... -- (447,000) -- -- 3,668,000
Repurchase and cancellation of shares in exchange for
note payable........................................ -- -- -- -- (406,000)
Repurchase and cancellation of common stock shares.... -- -- -- -- (789,000)
Issuance of Class A Preferred Stock................... -- -- -- -- --
Conversion of common stock into Class A Preferred
Stock............................................... -- -- -- -- (417,000)
Dividends on and accretion of Class A Preferred
Stock............................................... -- -- -- -- (873,000)
Issuance of stock in connection with the 1998 acquired
businesses.......................................... -- -- -- -- 36,389,000
Repurchase and cancellation of shares sold to
management.......................................... -- 197,000 -- -- (31,000)
Purchase of shares by management...................... -- (571,000) -- -- 1,000
Stock options exercised............................... -- -- -- -- 310,000
Net loss.............................................. -- -- -- (14,379,000) (14,379,000)
-------- --------- --------- ------------ ------------
Total, December 31, 1998................................ -- $(821,000) $ -- $(14,379,000) $ 23,608,000
-------- --------- --------- ------------ ------------
Issuance of Class A Preferred Stock (unaudited)....... -- -- -- -- --
Dividends on and accretion of Class A Preferred Stock
(unaudited)......................................... -- -- -- -- (2,139,000)
Issuance of stock in connection with the 1999 acquired
businesses (unaudited).............................. -- -- -- -- 9,399,000
Exercise and expiration of put rights (unaudited)..... -- -- -- -- 256,000
Conversion of notes payable (unaudited)............... -- -- -- -- 2,307,000
Issuance of common stock in initial public offering,
net of expenses (unaudited)......................... -- -- -- -- 64,119,000
Exchange of Class A and Class B Preferred Stock in the
initial public offering (unaudited)................. -- -- -- -- 47,666,000
Charges associated with initial public offering
(unaudited)......................................... -- -- -- -- 3,506,000
Repurchase and cancellation of shares sold to
management (unaudited).............................. -- 142,000 -- -- --
Common stock sold for cash (unaudited)................ -- -- -- -- 375,000
Repurchase of common stock (unaudited)................ (50,000) -- -- -- (50,000)
Stock options and warrants exercised (unaudited)...... -- -- -- -- 228,000
Deferred compensation pursuant to issuance of stock
options (unaudited)................................. -- -- (481,000) -- --
Amortization of deferred compensation (unaudited)..... -- -- 67,000 -- 67,000
Other (unaudited)..................................... -- 62,000 -- -- 349,000
Net loss (unaudited).................................. -- -- -- (60,004,000) (60,004,000)
-------- --------- --------- ------------ ------------
Total, September 30, 1999 (unaudited)................. $(50,000) $(617,000) $(414,000) $(74,383,000) $ 89,687,000
======== ========= ========= ============ ============
</TABLE>

The accompanying notes are an integral part of these statements.

F-7
<PAGE>
APPNET, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEAR MONTHS ENDED
ENDED ---------------------------------------
DECEMBER 31, 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------ ------------------ ------------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................. $(14,379,000) $ (4,586,000) $(60,004,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization............................ 9,867,000 1,611,000 40,893,000
Depreciation............................ 284,000 57,000 1,964,000
Stock-based and other
acquisition-related compensation...... 1,157,000 -- 15,730,000
Write-off of deferred financing costs... 291,000 -- 559,000
Deferred tax benefit.................... (50,000) -- --
Beneficial conversion charge............ -- -- 1,052,000
Change in assets and liabilities:
Accounts receivable, net.............. (1,762,000) (520,000) (13,143,000)
Other current assets.................. 399,000 182,000 86,000
Accounts payable...................... 1,012,000 (138,000) 1,579,000
Accrued liabilities................... 547,000 215,000 7,327,000
------------ ------------ ------------
Net cash used in operating
activities........................ (2,634,000) (3,179,000) (3,957,000)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment, net... (1,196,000) (378,000) (5,109,000)
Cash paid for acquired businesses, net of
cash acquired........................... (69,562,000) (12,877,000) (26,381,000)
Other assets.............................. (904,000) (454,000) (885,000)
------------ ------------ ------------
Net cash used in investing
activities........................ (71,662,000) (13,709,000) (32,375,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt.............. 1,104,000 351,000 --
Repayments of long-term debt.............. (268,000) (268,000) (203,000)
Borrowings under credit facilities........ 47,261,000 10,374,000 74,000,000
Repayments of credit facilities........... (9,800,000) (1,081,000) (107,801,000)
Debt issue costs.......................... (351,000) (194,000) (621,000)
Proceeds from issuance of common stock.... 3,015,000 3,015,000 375,000
Net proceeds from initial public
offering................................ -- -- 64,119,000
Repurchase of common stock................ (789,000) (789,000) (22,000)
Proceeds from issuance of preferred
stock................................... 36,292,000 6,122,000 7,046,000
Repurchase of shares sold to management... (31,000) -- --
Proceeds from exercise of stock options... 310,000 -- 228,000
------------ ------------ ------------
Net cash provided by financing
activities........................ 76,743,000 17,530,000 37,121,000
------------ ------------ ------------
Net increase in cash........................ 2,447,000 642,000 789,000
Cash and cash equivalents, beginning of
period.................................... -- -- 2,447,000
------------ ------------ ------------
Cash and cash equivalents, end of period.... $ 2,447,000 $ 642,000 $ 3,236,000
============ ============ ============
Supplementary information:
Cash paid for income taxes................ $ -- $ -- $ 181,000
============ ============ ============
Cash paid for interest.................... $ 775,000 $ 298,000 $ 2,212,000
============ ============ ============
</TABLE>

The accompanying notes are an integral part of these statements.

F-8
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

1. BUSINESS DESCRIPTION:

AppNet, Inc. ("AppNet" or the "Company") was incorporated under the name
Internet Applications, Inc. in November 1997 ("Inception"), under the laws of
the state of Delaware. The Company changed its name to AppNet, Inc. and AppNet
Systems, Inc., in October 1999 and March 1998, respectively. AppNet is based in
Bethesda, Maryland and is a provider of Internet and electronic commerce
professional services and solutions, including strategic consulting, interactive
media services, Internet-based application development, electronic commerce
systems integration and electronic commerce outsourcing.

The Company's financial statements for the period from Inception through
December 31, 1997 reflect immaterial transactions and, therefore, have been
included in the 1998 financial statements to facilitate presentation. From
Inception through March 11, 1998, the Company's operating activities related
primarily to recruiting personnel, raising capital, identifying operating assets
for acquisitions and developing technical and marketing materials. In
March 1998, the Company completed its first acquisition and recognized its first
revenues.

There are significant risks associated with the Company, including the
susceptibility of the Company's services to rapid technological change,
increased competition from existing service providers and new entrants, lack of
an operating history, existence of fixed price contracts, realizability of
intangible assets, government regulations, the year 2000 issue and dependence
upon key members of the management team.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
AppNet and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets, as
follows:

<TABLE>
<S> <C>
Computers and equipment................................. three to five years
Furniture and fixtures.................................. five to seven years
</TABLE>

F-9
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

Leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the remaining lease term.

IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews its recorded goodwill, other
intangibles and long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When deemed necessary, goodwill and other intangibles are assessed
for possible impairment based upon a number of factors, including turnover of
the acquired workforce and the undiscounted value of expected future operating
cash flows in relation to the Company's net investment in each subsidiary. Since
Inception, the Company has not recorded a provision for possible impairment of
long-lived assets or intangible assets associated with its acquired businesses.

INTERNAL USE COMPUTER SOFTWARE

In accordance with the American Institute of Certified Public Accountants
(the "AICPA") Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," the Company capitalizes costs
related to software and implementation in connection with its internal use
software systems. Such costs are amortized principally over three years.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, credit facilities, long-term
debt, convertible notes and capital lease obligations. In management's opinion,
the carrying amounts of these financial instruments approximate their fair
values at December 31, 1998. Due to the related party nature of the Company's
Class A Preferred Stock, it is impracticable to estimate its fair value at
December 31, 1998.

STOCK-BASED COMPENSATION

The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation cost is generally recognized based on the difference, if any, on
the date of grant between the fair value of the Company's stock and the amount
an employee must pay to acquire the stock.

REVENUE RECOGNITION

Revenues from time and materials contracts are recognized based on fixed
hourly rates for direct labor hours expended. Revenues from fixed-price
contracts are recognized on the percentage-of-completion method, with costs and
estimated profits recorded as work is performed. Revenues from
cost-plus-fixed-fee contracts are recognized on the basis of direct costs plus
indirect costs incurred plus a fixed profit percentage. Revenues exclude the
cost of media and advertising purchases reimbursed by clients.

F-10
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

revenues and are recognized in the period in which the revisions are determined.
Unbilled receivables on contracts are comprised of costs, plus earnings on
certain contracts in excess of contractual billings on such contracts. Cash
received in excess of costs incurred is classified as deferred revenue.

BUSINESS CONCENTRATION AND CREDIT RISK

The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:

<TABLE>
<CAPTION>
ACCOUNTS
RECEIVABLE
REVENUES FOR AS OF
THE YEAR ENDED DECEMBER 31,
DECEMBER 31, 1998 1998
----------------- ------------
<S> <C> <C>
Customer A...................................... 15% 12%
Customer B...................................... 12% 13%
</TABLE>

INCOME TAXES

Income taxes are accounted for using an asset and liability approach that
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.

EARNINGS PER SHARE

SFAS No. 128 "Earnings Per Share," requires the presentation of basic and
diluted earnings per share. Basic net income (loss) per share is computed by
dividing income (loss) attributable to common stockholders by the weighted
average number of common shares outstanding for the period. The diluted net
income (loss) per share data is computed using the weighted average number of
common shares outstanding plus the dilutive effect of common stock equivalents,
unless the common stock equivalents are antidilutive.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
for start-up activities and organization costs to be expensed as incurred. As
the Company has expensed these costs historically, the adoption of this standard
is not expected to have a significant impact on its results of operations,
financial position or cash flows.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS No. 133"), which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS
No. 133, as amended, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000 and management has not yet determined its effect
on the Company's financial statements or disclosures.

F-11
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

RECLASSIFICATIONS

Certain amounts have been reclassified to conform with the current
presentation.

INTERIM FINANCIAL INFORMATION

The financial information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited but includes all adjustments,
consisting only of normal recurring adjustments, that AppNet's management
considers necessary for a fair presentation of AppNet's operating results and
cash flows for such periods. Results for the nine month period ended
September 30, 1999 are not necessarily indicative of results to be expected for
the full fiscal year of 1999 or for any future period.

3. ACQUISITIONS:

1998 ACQUISITIONS

From March 1998 through December 1998, the Company acquired businesses in
the Internet and electronic commerce professional services industry.
Collectively, these entities are referred to as the "1998 Acquired Businesses."
The accounts of the Acquired Businesses are included in the accompanying
consolidated financial statements from the date of their respective
acquisitions. These acquisitions are described as follows:

On March 12, 1998, the Company acquired the assets of Arbor Intelligent
Systems, Inc. ("Arbor"), for an aggregate purchase price of approximately
$3,100,000, including transaction costs, of which $1,100,000 was paid in the
form of the Company's Series A-1 Convertible Preferred Stock (266,796 shares
valued at $4 per share), and $2,000,000 was paid in cash. Arbor is engaged in
the business of providing object-oriented development services.

On April 30, 1998, the Company acquired the assets of LOGEX International,
L.L.C. ("LOGEX"), in exchange for approximately $300,000 in cash and a five-year
convertible note in the principal amount of $300,000 (Note 9). The former
shareholders of LOGEX are entitled to a contingent consideration payment in the
event that certain performance criteria are achieved by LOGEX during the year
ending April 30, 1999. LOGEX provides electronic commerce systems integration
services and is located in Falls Church, Virginia.

On August 25, 1998, the Company acquired all the outstanding stock of
Software Services Corporation, Inc. ("SSC") for an aggregate purchase price of
approximately $23,000,000, including transaction costs, of which $12,000,000 was
paid in the form of company stock, and $11,000,000 was paid in cash. In
connection with the SSC acquisition, the Company issued 11,576 shares of its
Class B Preferred Stock at a price of $1,000 per share and 1,387,095 shares of
Company Common Stock at a price of $.3007 per share to the former SSC
shareholders. Since its inception in 1980, SSC has been in the business of
providing applications development, network design services and both full time
and temporary technical personnel, primarily in Michigan.

On October 2, 1998, the Company acquired all the outstanding stock of New
Media Publishing, Inc. ("NMP") for an aggregate purchase price of approximately
$19,470,000, including transaction costs, of which $8,820,000 was paid in cash,
$9,500,000 was paid in the form of Company Common Stock (1,111,111 shares valued
at $8.55 per share) and the remainder was paid in options to purchase 145,518
shares of Company Common Stock valued using the Black-Scholes pricing model, at
$1,150,000. These options were issued in exchange for previously outstanding
options of NMP, have

F-12
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

exercise prices ranging from $.06 to $8.69 and have vesting schedules ranging
from three months to 32 months. The value associated with these options has been
classified as additional paid-in capital on the accompanying consolidated
balance sheet. If NMP meets certain revenue and profitability targets and
certain NMP executives remain employed by the Company, an additional $14,000,000
is potentially payable to the former owners of NMP in cash and Company Common
Stock (Note 16). NMP is based in Falls Church, Virginia and offers interactive
community-building services to business and nonprofit organizations.

On October 12, 1998, the Company acquired all the outstanding stock of
Century Computing, Incorporated ("Century"). Century is located in Laurel,
Maryland, and is a provider of system integration and processing services in
electronic commerce to the Federal government, Federal government contractors
and commercial enterprises. The aggregate purchase price was approximately
$29,168,000, including transaction costs, of which $2,000,000 was provided in
the form of a convertible note (Note 9), $21,600,000 was paid in cash and the
remainder was paid in options to purchase 704,127 shares of Company Common Stock
valued, using the Black-Scholes pricing model, at $5,568,000. These options were
issued in exchange for previously outstanding options of Century, have exercise
prices ranging from $.71 to $1.00 and were fully vested at the time of issuance.
The value associated with these options has been classified as additional paid
in capital on the accompanying consolidated balance sheet.

On October 20, 1998, the Company acquired all the outstanding stock of
Research and Planning, Inc. ("R&P") for an aggregate purchase price of
approximately $22,100,000, including transaction costs, of which $15,100,000 was
paid in cash, $6,000,000 was paid in the form of Company Common Stock (701,754
shares valued at $8.55 per share), and $1,000,000 was provided in the form of
notes to the previous R&P shareholders (Note 9). R&P was founded in 1979 in
Cambridge, Massachusetts and provides ERP integration and data warehousing
services.

On December 14, 1998, the Company acquired all the outstanding stock of The
Kodiak Group, Inc. ("Kodiak") for an aggregate purchase price of approximately
$16,350,000, including transaction costs, of which $12,100,000 was paid in cash,
$2,250,000 was paid in the form of Company Common Stock (197,368 shares valued
at $11.40 per share) and $2,000,000 was provided in the form of notes to the
previous Kodiak shareholders. In addition, the former Kodiak shareholders are
entitled to a potential contingent payment payable in cash of up to $4.0 million
in the event that Kodiak sells or licenses certain technology during the
three-year period ending December 14, 2001. Kodiak has offices in Pittsfield,
Massachusetts, Charlottesville, Virginia and Denver, Colorado, and specializes
in electronic data interchange integration and processing services.

1999 ACQUISITIONS

From January 8, 1999 through March 29, 1999, the Company acquired an
additional five businesses in the Internet and electronic commerce professional
services industries. Collectively, these entities are referred to as the "1999
Acquired Businesses".

On January 8, 1999, the Company acquired all the outstanding stock of i33
communications corp. ("i33"), which is based in New York City. i33 provides
media buying and planning services, and, specializes in the design of creative
Internet solutions to its customers. The aggregate purchase price was
approximately $21,600,000, plus transaction costs, consisting of $10,300,000
paid in cash and $11,300,000 paid in the form of convertible notes to the
previous i33 shareholders.

F-13
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

On March 4, 1999, the Company acquired all of the issued and outstanding
stock of Sigma6, Inc. ("Sigma6") which is based in Michigan and specializes in
providing brand identity services to its customers. The aggregate purchase price
was approximately $2,500,000, plus transaction costs, consisting of $1,250,000
paid in cash and $1,250,000 paid in shares of Company Common Stock (97,465
shares valued at $12.83 per share). If certain performance criteria are met
during the 12-month period ending December 31, 1999, the former stockholders of
Sigma6 are entitled to a contingent payment of up to $2,800,000 consisting of
cash and Company Common Stock.

On March 15, 1999, the Company acquired certain assets of Salzinger &
Company, Inc. ("Salzinger"). The aggregate purchase price was approximately
$8,500,000, plus transaction costs, consisting of $5,000,000 in cash and
$3,500,000 in Company Common Stock (245,614 shares valued at $14.25 per share).
If certain performance criteria are met during the period ending September 30,
2000, Salzinger is entitled to a contingent payment of up to $5,000,000 in cash
or, at the seller's option, cash and Company Common Stock. Salzinger is based in
Vienna, Virginia and provides business-level strategic consulting services.

On March 26, 1999, the Company acquired all of the issued and outstanding
stock of Internet Outfitters, Inc. ("Internet Outfitters") which is based in
Santa Monica, California and provides localization and creative Web-development
services. The aggregate purchase price was approximately $9,500,000, plus
transaction costs, consisting of cash, $2,700,000 in Company Common Stock
(157,895 shares valued at $17.10 per share), and the issuance of 22,300 options
to purchase Company Common Stock. If certain performance criteria are met during
the year ending December 31, 1999, the former stockholders are entitled to a
contingent payment of up to $3,500,000 in cash and Company Common Stock.

On March 29, 1999, the Company acquired certain assets of Transform
IT, Incorporated ("Transform IT") which is based in Alexandria, Virginia and
provides process-level strategic consulting services. The aggregate purchase
price was approximately $5,120,000, plus transaction costs, consisting of
$3,500,000 in cash and $1,620,000 in Company Common Stock (94,737 shares valued
at $17.10 per share). If certain performance criteria are met during the
twelve-month period ending March 31, 2000, the seller is entitled to a
contingent payment of up to $3,500,000 in cash.

ALLOCATION OF PURCHASE CONSIDERATION

The acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the recognized purchase price has been allocated,
based on preliminary estimates of fair value, to the tangible assets acquired
and liabilities assumed and, with the advice of independent valuation experts,
to the identifiable intangible assets, on the acquisition dates. The Company has
recorded identifiable intangibles on the 1998 Acquired Businesses, as follows:

<TABLE>
<CAPTION>
APPRAISED
VALUE USEFUL LIFE
---------- ------------
<S> <C> <C>
Customer lists.................................... $4,160,000 7-24 months
Non-competition agreements........................ 2,800,000 36 months
Assembled workforce............................... 4,803,000 12-48 months
Proprietary technology............................ 4,325,000 12-24 months
</TABLE>

As of December 31, 1998, the purchase price in excess of identified tangible
and intangible assets and liabilities assumed in the amount of $93,159,000 was
allocated to goodwill.

F-14
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

In the three month period ended March 31, 1999, the Company recorded
identifiable intangibles related to the 1999 Acquisitions of $2,875,000. This
preliminary purchase price allocation also resulted in the allocation of
$43,225,000 to goodwill. Final estimates of fair value will be made upon the
completion of independent valuations for certain 1999 acquisitions and the final
determination of certain preexisting contingencies. As a result of the early
stage of development of the Internet and electronic commerce, the dynamics of
this rapidly evolving industry and the expectation of increasing competition,
the recorded goodwill is being amortized on a straight-line basis over three
years, the estimated period of its benefit.

The following unaudited pro forma consolidated amounts give effect to the
1998 acquisitions as if they had occurred on January 1, 1998, by consolidating
the results of operations of the 1998 Acquired Businesses with the results of
AppNet for the year ended December 31, 1998. The pro forma amounts do not
purport to be indicative of the results of operations that would have been
achieved had the transactions been in effect as of the beginning of 1998 and
should not be construed as being representative of future results of operations.

<TABLE>
<CAPTION>
DECEMBER 31, 1998
(UNAUDITED)
-----------------
<S> <C>
Revenues.................................................... $ 54,493,000
Net loss attributable to common stockholders................ (50,217,000)
Basic and diluted net loss per share........................ $ (2.81)
</TABLE>

The following unaudited pro forma consolidated amounts give effect to the
1999 acquisitions as if they had occurred on January 1, 1999:

<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30, 1999
-------------------
(UNAUDITED)
<S> <C>
Revenues................................................... $ 77,430,000
Net loss attributable to common stockholders............... $(53,182,000)
Basic and diluted net loss per share....................... $ (2.54)
</TABLE>

4. ACCOUNTS RECEIVABLE:

Accounts receivable consists of the following as of:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Accounts receivable................................ $ 9,571,000 $21,933,000
Unbilled accounts receivable....................... 2,791,000 6,674,000
Allowance for doubtful accounts.................... (1,124,000) (1,597,000)
----------- -----------
Accounts receivable, net....................... $11,238,000 $27,010,000
=========== ===========
</TABLE>

F-15
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

5. OTHER CURRENT ASSETS:

Other current assets consists of the following as of:

<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Income tax receivable....................................... $ 808,000
Other current assets........................................ 310,000
-----------
Other current assets.................................... $ 1,118,000
===========
</TABLE>

6. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following as of:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Computers and equipment............................ $ 2,797,000 $ 7,164,000
Furniture and fixtures............................. 288,000 1,123,000
Leasehold improvements............................. 211,000 795,000
----------- -----------
3,296,000 9,082,000
Accumulated depreciation........................... (284,000) (1,723,000)
----------- -----------
Property and equipment, net.................... $ 3,012,000 $ 7,359,000
=========== ===========
</TABLE>

7. INTANGIBLE ASSETS:

Intangible assets consists of the following as of:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Customer lists................................... $ 4,160,000 $ 4,060,000
Non-competition agreements....................... 2,800,000 2,900,000
Assembled workforce.............................. 4,803,000 7,677,000
Proprietary technology........................... 4,325,000 4,325,000
Goodwill......................................... 93,159,000 133,819,000
------------ ------------
109,247,000 152,781,000
Accumulated amortization......................... (9,867,000) (50,753,000)
------------ ------------
Intangible assets, net....................... $ 99,380,000 $102,028,000
============ ============
</TABLE>

F-16
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

8. ACCRUED LIABILITIES

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Accrued compensation and benefits.................. $2,590,000 $ 4,103,000
Accrued dividends on Class A Preferred Stock and
Class B Preferred Stock.......................... 689,000 --
Payments due to former shareholders of Acquired
Businesses....................................... 1,500,000 1,600,000
Accrued stock-based and other acquisition-related
compensation..................................... -- 14,072,000
Other accrued liabilities.......................... 2,132,000 9,150,000
---------- -----------
Accrued liabilities............................ $6,911,000 $28,925,000
========== ===========
</TABLE>

9. DEBT:

Debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Credit facilities:
Credit facility, bears interest at the lender's prime rate
plus .5% (8.25% at December 31, 1998), interest due
monthly................................................. $19,730,000 $ --
Credit facility, bears interest at the lender's prime rate
(7.75% at
December 31, 1998), interest due monthly................ 17,731,000 --
Credit facility, bear interest at the lender's prime rate
plus .25%--1.5% or various LIBOR rates plus 2.25%--3.5%,
interest due at varying monthly intervals, interest rate
of 9.75% at September 30, 1999 (unaudited).............. -- 3,660,000
----------- -----------
37,461,000 3,660,000
----------- -----------
</TABLE>

F-17
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Convertible notes:
Note payable, principal and interest due October 13, 1999,
bears interest at 7%, convertible at the option of the
holder for common stock at $8.55 per share.............. 2,000,000 485,000
Note payable, principal and interest due June 29, 2003,
bears interest at 5%, convertible at 80% of common stock
price upon a sale of Company or an initial public
offering................................................ 406,000 --
Notes payable, principal and interest due December 14,
2001, bear interest at 8%, convertible at the option of
the holder for common stock at $11.40 per share......... 2,000,000 2,000,000
Note payable, principal and interest due April 30, 2003,
bears interest at the prime rate (7.75% at December 31,
1998), interest payable quarterly at July 31, October
31, January 31 and April 30, convertible at the option
of the holder at 80% of common stock price on a sale of
Company or an initial public offering................... 300,000 --
Notes payable, principal and interest due January 8, 2002,
bear interest at rates ranging from 4.3% to 6%, two
notes totaling $3,500,000 convertible at the option of
the holder at 80% of the common stock price on a sale of
Company or an initial public offering, two notes
totalling $6,800,000 convertible at the option of the
holder for common stock at $11.40 per share............. -- 6,800,000
----------- -----------
4,706,000 9,285,000
----------- -----------
Other long-term debt:
Note payable, principal and interest due January 8, 2002,
bearing interest at 6%.................................. -- 3,500,000
Notes payable, principal and interest due January 1, 2000,
bear interest at 6%..................................... 1,000,000 1,000,000
Note payable to Smart Technology, L.L.C., due the earlier
of an initial public offering or June 29, 2000, bears
interest at 12%......................................... 150,000 --
Other notes payable....................................... 425,000 140,000
Note payable to a member of Company management, due at
earlier of an initial public offering or December 31,
1999.................................................... 50,000 --
----------- -----------
1,625,000 4,640,000
----------- -----------
Total debt............................................ 43,792,000 17,585,000
Less current portion...................................... (2,426,000) (1,610,000)
----------- -----------
Long-term debt, net of current portion................ $41,366,000 $15,975,000
=========== ===========
</TABLE>

The future minimum principal payments of debt outstanding at December 31,
1998, as refinanced by the 1999 Credit Facilities, are as follows:

<TABLE>
<S> <C>
1999........................................................ $ 2,426,000
2000........................................................ 1,199,000
2001........................................................ 39,461,000
2002........................................................ --
2003........................................................ 706,000
-----------
Total................................................... $43,792,000
===========
</TABLE>

F-18
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

1999 CREDIT FACILITIES

On January 8, 1999, the Company replaced its two existing credit agreements
("the 1998 Credit Facilities") with two credit agreements (together the "1999
Credit Facilities") entered into with a syndicate of lenders providing for
$55,000,000 in borrowings. The 1999 Credit Facilities consist of $40,000,000 in
credit loans (the "Guaranteed Loans") which have been guaranteed by a
significant stockholder and $15,000,000 of additional credit loans (the
"Unguaranteed Loans"). The 1999 Credit Facilities mature on August 24, 2001. On
March 10, 1999, the Company amended the Unguaranteed Loans increasing available
borrowings from $15,000,000 to $26,000,000. Under the terms of the Unguaranteed
Loans, the amount borrowed cannot, at any time, exceed the amount borrowed under
the Guaranteed Loans.

The Guaranteed Loans bear interest, at the Company's option, at various
LIBOR rates plus 2.5 percent or the lenders' base rate plus .5 percent. The
Guaranteed Loans require the Company to pay a quarterly commitment fee of
.5 percent on the unused amounts.

The Unguaranteed Loans bear interest, at the Company's option, at various
LIBOR rates or the lenders' base rate plus an applicable margin, as determined
by the Company's operating performance.

The 1999 Credit Facilities include certain restrictive covenants which
require the Company, among other things, to maintain minimum levels of earnings
before interest, taxes, depreciation, and amortization, ratios of cash flow to
debt service and place limits on capital expenditures.

1998 CREDIT FACILITIES

On August 25, 1998, the Company entered into a credit facility with a
commercial lender. The facility provided for borrowings of up to $15,000,000,
bore interest at the lender's base rate plus a defined percentage or at various
LIBOR rates, and was due on demand. For the period from August 25, 1998 to
October 13, 1998, the highest and weighted average balances outstanding under
the facility were $9,800,000 and $8,478,000, respectively.

On October 13, 1998, the Company modified its facility and entered into two
credit agreements (the "1998 Credit Facilities") with two commercial lenders.
Under the 1998 Credit Facilities, each lender provided a $20 million line of
credit which was payable upon demand, guaranteed by a significant stockholder
and bore interest at the option of the Company at the lenders' base rate plus a
defined percentage or at various LIBOR options plus 2.5 percent. For the period
from October 13, 1998, to December 31, 1998, the highest and weighted average
balances under the 1998 Credit Facilities were $37,461,000 and $36,040,000,
respectively. During this period, the average interest rate was 8.13 percent.
One of the facilities provided for a quarterly commitment fee equal to
.05 percent. As a result of the 1999 Credit Facilities, which replaced the 1998
Credit Facilities and qualify for non-current classification, the amounts
outstanding under the 1998 Credit Facilities as of December 31, 1998 have been
classified as long-term in the accompanying balance sheet. In connection with
debt refinancings during 1998, the Company charged to other expense
approximately $291,000 of previously deferred financing fees.

CONVERTIBLE NOTES

In conjunction with certain of the Acquired Businesses, the Company issued
convertible notes, certain of which, at the option of the holders, allow the
holders to convert the notes to the Company Common Stock upon certain defined
events at either a stated price or a discount to the then current

F-19
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

market price for the Company Common Stock. Upon an initial public offering of
the Company's Common Stock, the Company may be required to record an interest
charge of approximately $875,000 related to certain beneficial conversion
rights.

10. CAPITAL STOCK:

1998 COMMON STOCK SPLIT

In June 1998, upon adoption of the Company's Second Restated Certificate of
Incorporation, a two-for-one stock split of the Company Common Stock was
effected. All share and per-share amounts, including stock option information,
have been restated in these notes and the accompanying financial statements to
reflect this stock split and the 1999 Reverse Common Stock Split (see Note 18).

GTCR INVESTMENT

In June 1998, the Company completed an investment transaction with GTCR
Golder Rauner, L.L.C. and certain related investment funds ("GTCR") and Smart
Technology, L.L.C. ("Smart Technology"), a party related to the Company's
President and Chief Executive Officer (the "GTCR Investment"). Prior to the GTCR
Investment, the Company had 5,343,860 shares of issued and outstanding common
stock all of which were owned by Company's initial investors (the "Initial
Investors"). Pursuant to the GTCR Investment, the Company made a net redemption
of 1,350,887 shares of Company Common Stock from certain of the Initial
Investors for $.3007 per share or $406,000 and sold an aggregate 11,559,144
shares to GTCR and Smart Technology for $.3007 per share or $3,476,000 before
deduction for expenses and fees. The Company also sold 1,251,228 shares of
Company Common Stock to the Company's President and Chief Executive Officer (the
"Reserved Stock") and 531,773 shares to other certain parties affiliated with
the GTCR Investment. These shares were sold for $.3007 per share.

GTCR and Smart Technology committed to provide up to an additional
$96,500,000 in capital to the Company to fund acquisitions as well as other
general corporate purposes. Upon the request of the Board and the approval of
GTCR and Smart Technology, shares of Class A Preferred Stock will be issued to
GTCR and Smart Technology in the ratio of 98 percent to 2 percent, respectively,
in exchange for $1,000 per share. No shares of Class A Preferred Stock were
issued at the time of the GTCR Investment. In connection with the issuance of
Class B Preferred Stock as part of the SSC transaction, the capital commitment
from GTCR and Smart Technology was decreased to $84,900,000.

In connection with the GTCR Investment, the Company entered into a
management services agreement with GTCR for $200,000 per year.

F-20
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

COMMON STOCK SUBJECT TO PUT RIGHTS

In conjunction with its acquisition of Arbor, the Company issued 266,796
shares of Series A-1 Convertible Preferred Stock with a liquidation value of
$1,100,000. Pursuant to their terms, these shares were converted into 187,225
shares of Company Common Stock at the time of the GTCR Investment. As part of
the GTCR Investment, the Board of Directors authorized the repurchase of 138,455
shares of the common stock issued upon the conversion for $5.70 per share which
provided the holders a return equivalent to the liquidation value of the
Series A-1 Convertible Preferred Stock. In addition, the Board of Directors
agreed to grant the holders of the remaining 48,771 shares of Company Common
Stock the right to require the Company to repurchase their shares for cash at
$5.70 per share beginning on March 11, 1999, and extending for thirty days.

CLASS A PREFERRED STOCK

The holders of the Class A Preferred Stock ("Class A Preferred Stock") are
entitled to a 6 percent cumulative dividend which is paid when declared by the
Company's Board of Directors. The Company can redeem the shares at any time for
their liquidation value of $1,000 per share plus accrued but unpaid dividends.
The shares have no voting or conversion rights. Upon the earliest of the
liquidation of the Company, a change in the control of the Company, an initial
public offering ("IPO") or other fundamental change in the Company, as defined,
a majority of the holders of the Class A Preferred stock can require the Company
to redeem their shares for their liquidation value, plus accrued but unpaid
dividends. In the case of an IPO, the redemption is limited to the net funds
available from the IPO. GTCR holds approximately 97 percent of the outstanding
Class A Preferred Stock.

The Company incurred certain fees associated with the issuance of the
Class A Preferred Stock. Through December 31, 1998, the Company paid a one
percent fee of $369,000 to GTCR based on the issuance of the Company's Class A
Preferred Stock to GTCR. The Company also incurred a commission of $262,000 to
one of the Company's directors in connection with purchases of Class A Preferred
Stock. These costs were deducted from the proceeds of the Class A Preferred
Stock shown in the accompanying balance sheet. The Class A Preferred Stock is
being accreted to its liquidation value over the period to its estimated
redemption date, which is expected to occur in 1999. The accretion of the costs
associated with the Class A Preferred Stock was $184,000 for the year ended
December 31, 1998 and is classified as dividends on and accretion of preferred
stock in the accompanying statements of operations and stockholders' equity.

CLASS B PREFERRED STOCK

The holders of Class B Preferred Stock are entitled to a 6 percent
cumulative dividend which is paid when declared by the Company's Board of
Directors. The shares have no voting rights. The Company has the contractual
ability to redeem or convert all outstanding shares of Class B Preferred Stock
upon an initial public offering.

STOCK WARRANTS

The Company has issued warrants to purchase 84,795 shares of Company Common
Stock at $.3007 per share, of which 70,175 are held by Smart Technology. The
values attributable to these warrants at the time of issuance are not
significant and, therefore, have not been separately presented in the

F-21
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

consolidated financial statements. The Company has also issued warrants to
purchase 121 shares of Class A Preferred Stock at $1,000 per share.

RESERVED STOCK

The Reserved Stock is subject to a Senior Management Agreement dated
June 29, 1998 (the "Agreement") with the Company's President and Chief Executive
Officer. At the time of the GTCR Investment, 1,251,228 shares of Reserved Stock
were purchased at a price of $.3007 per share in exchange for cash equal to the
par value of the stock and a promissory note equal to the remaining balance.
Pursuant to the Agreement, the Company may, at its discretion, repurchase any or
all of the Reserved Stock for the $.3007 per share paid by the executive in
order to issue a corresponding number of shares and options to purchase shares
to certain employees. The Company's right to repurchase the Reserved Stock
expires on the first to occur of (a) a sale of the Company, (b) the failure by
GTCR to own 50 percent of the original number of Company Common Shares it
purchased in conjunction with the GTCR Investment and (c) an IPO ("Qualifying
Events"). As of December 31, 1998, the Company's President and Chief Executive
Officer had 659,649 shares of Reserved Stock remaining. Additional shares were
repurchased subsequent to year end reducing the total shares outstanding to
210,119 as of March 29, 1999.

Because the number of recorded shares to be held by the executive is not
fixed, the Company will record a charge to income equal to the difference
between the fair value of the Company's stock on the date of the Qualifying
Event and $.3007, multiplied by the number of remaining Reserved Shares retained
by the executive following the occurrence of the Qualifying Event.

SALES TO MANAGEMENT

Shortly after the GTCR Investment, the Company sold 503,860 shares of
Company Common Stock to management for $.3007 per share, the fair value at that
time. In November 1998, the Company sold 49,123 shares of Common Stock to a
member of management for $8.55 per share, the fair value at that time.

11. RETIREMENT PLAN:

During 1998, the Company maintained various 401(k) plans for its employees.
These plans had been established by the 1998 Acquired Businesses prior to
acquisition. Effective February 1, 1999, the employees of the 1998 Acquired
Businesses began making contributions to the AppNet plan. During 1998, the
Company's expense under these plans totaled $281,000.

Effective February 1, 1999, the Company established a 401(k) retirement plan
for the benefit of all eligible employees. Participants may contribute up to
15 percent of their annual compensation to the plan. Employee contributions are
fully vested. The Company will match 50 percent of each employees' contributions
up to six percent of each employees' salary. The Company may also elect to make
a discretionary contribution as determined by its Board of Directors on an
annual basis. Employees will fully vest in the Company's matching and any
discretionary contributions ratably over three years.

12. EMPLOYEE STOCK OPTION PLANS:

The Company had two stock option plans as of December 31, 1998, which were
the 1998 Stock Option and Incentive Plan and an incentive stock option plan
assumed in connection with the

F-22
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

acquisition of Century (the "Century Plan"). Options under these plans expire no
later than ten years from the date of the grant or when employment ceases,
whichever comes first. The maximum number of shares of common stock which may be
issued pursuant to the stock option plans is 913,042 at December 31, 1998.

Options granted under the stock option plan are accounted for under APB
Opinion No. 25, and since options have been granted at prices equal to the fair
value of the Company's Common Stock on the date of grant, no compensation
expense has been recognized for the option grants. Certain options converted
from the 1998 Acquired Businesses have exercise prices ranging from $.06 to
$8.69. The value of these options was included in the purchase price of the 1998
Acquired Businesses. Had compensation cost for the plan been determined based on
the estimated fair value of the options at the grant dates consistent with the
method of SFAS No. 123, pro forma net loss attributable to common stockholders
would have been approximately $15,408,000 or a net loss of $1.43 per share for
1998. The weighted average fair value of the options granted by the Company
during 1998 is estimated to be $3.85 per option assuming the following: no
dividend yield, risk-free interest rate of 5 percent, an expected term of the
options of four years and an expected volatility of 45 percent.

The following summarizes option activity during 1998:

<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
----------- --------------
<S> <C> <C>
Granted in 1998.................................... 500,351 $7.67
Options converted from 1998 Acquired Businesses.... 849,641 .91
Exercised in 1998.................................. (425,339) .74
Cancelled in 1998.................................. (11,614) 1.08
----------- -----
Options outstanding, December 31, 1998, exercise
prices range of $.06 to $11.40................... 913,039 $4.67
=========== =====
Options exercisable, December 31, 1998............. 296,736 $1.37
=========== =====
</TABLE>

From January 1, 1999 through March 29, 1999, the Company issued options to
purchase 882,883 shares of Company Common Stock.

In March 1999, the Company issued 337,776 stock options to a member of
management. These options have an exercise price of $12.83 and vest ratably over
4 years. As a result of this grant, the Company recorded deferred compensation
of $481,000. The amount of deferred compensation was based on the difference
between the estimated fair market value of the Company Common Stock at the date
of grant, as determined by the most recent third party stock transaction, and
the stated exercise price. The Company amortized $4,000 of the deferred
compensation for the three months ended March 31, 1999 in the unaudited
consolidated statement of operations.

13. EARNINGS PER SHARE:

Shares of common stock which are contingently payable pursuant to the
acquisition agreements (Note 16) are not included in the calculation of weighted
average shares outstanding for the period presented, as circumstances may arise
in which the shares would not be issued. In addition, the impact

F-23
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

of other potentially dilutive securities are excluded from diluted earnings per
share due to their antidilutive effect as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Stock options............................................... 539,312
Warrants.................................................... 84,010
Convertible notes........................................... 413,554
</TABLE>

In addition, as of December 31, 1998, $706,000 of notes payable are
convertible, upon completion of an initial public offering of Company Common
Stock, at 80% of the IPO price.

14. INCOME TAXES:

The Company follows the provisions of SFAS No. 109, "Accounting for Income
Taxes," for financial reporting purposes. Deferred tax assets or liabilities at
the end of each period are determined using the currently enacted tax rates to
apply to taxable income in the period in which the deferred tax asset or
liability is expected to be settled or realized.

The sources of and differences between the financial accounting and tax
basis of AppNet's assets and liabilities which give rise to the net deferred tax
liability as of December 31, 1998 and September 30, 1999, are as follows:

<TABLE>
DECEMBER SEPTEMBER
31, 30,
1998 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
Deferred tax liabilities:
Intangible assets........................................ $ 2,241,000 $ 3,735,000
Deferred tax assets:
Allowance for doubtful accounts.......................... 434,000 438,000
Net operating loss carryforward.......................... 1,624,000 1,638,000
Cumulative amortization differences on intangibles....... 994,000 6,729,000
Other.................................................... 506,000 564,000
Valuation allowance...................................... (1,317,000) (5,634,000)
----------- -----------
Net deferred tax liability............................. $ -- $ --
=========== ===========
</TABLE>

The components of the benefit from income taxes during the year ended
December 31, 1998 are as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, 1998 1999
------------------ --------------
<S> <C> <C>
(UNAUDITED)
Current--
Federal................................... $ (400,000) $ --
State..................................... 250,000 328,000
----------- -----------
Total................................... (150,000)
Deferred--
Federal................................... (50,000) --
State..................................... -- --
----------- -----------
Income tax benefit...................... $ (200,000) $ 328,000
=========== ===========
</TABLE>

F-24
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

For the year ended December 31, 1998 and the nine months ended
September 30, 1999, the income tax (benefit) provision differed from the amounts
computed at the statutory rate, as follows:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Income tax benefit computed at federal statutory
rates........................................... $(4,957,000) $(20,290,000)
Nondeductible intangible amortization............. 2,402,000 10,662,000
Nondeductible portion of stock-based and other
acquisition-related compensation, net........... 497,000 5,248,000
State income taxes, net of federal income tax
benefit......................................... 165,000 216,000
Changes in valuation allowance.................... 1,317,000 4,317,000
Other, net........................................ 376,000 175,000
----------- ------------
Total......................................... $ (200,000) $ 328,000
=========== ============
</TABLE>

As of December 31, 1998 and September 30, 1999, the Company had
approximately $4,200,000 and $8,500,000 (unaudited), respectively, of net
operating loss carryforwards which begin to expire in 2018. The Company has
recorded a valuation allowance for deferred tax assets as of December 31, 1998
and September 30, 1999, of $1,317,000 and $5,634,000 (unaudited), respectively.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment.

15. RELATED PARTIES:

At December 31, 1998, the Company was owed $821,000 from members of
management. These borrowings are due at varying dates through November, 2008.

At December 31, 1998, the Company had outstanding borrowings of $150,000
from Smart Technology, $50,000 from a member of management, and $406,000 from
one of the Company's Initial Investors. Also, the convertible notes of
$4,306,000 as of December 31, 1998 and the notes payable for $1,000,000 are due
to former shareholders of the Acquired Businesses, the majority of whom are
current AppNet employees. Subsequent to December 31, 1998, the Company issued
convertible notes of $10,300,000 due to former shareholders of one of the 1999
Acquired Businesses, both of whom are current AppNet employees. The Company also
issued, subsequent to December 31, 1998, a convertible note of $1,000,000 to a
trust established for employees of one of the 1999 Acquired Businesses. Since
the trust is available to the Company's creditors, the trust's assets are
included in these financial statements. As such, the trust's note receivable and
the Company's convertible note payable held by the trust have been eliminated in
consolidation.

In December 1997, the Company entered into an agreement which was
consummated in 1998 to purchase a 50 percent ownership interest in AppNet
Commerce Services, Inc. ("ACS"). ACS was established to conduct electronic
commerce transaction processing. The remaining 50 percent interest in ACS is
owned by another company. In 1998, due to the failure of the venture to maintain
its customer base and to generate sufficient revenues to cover operating
expenses, the Company determined that its investment was impaired and recorded a
charge of approximately $300,000 which is included in the accompanying statement
of operations as a component of other expense. As of December 31, 1998, the
investment in ACS has a value of zero.

F-25
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

During 1998, the Company was party to a professional services agreement with
one of its directors. The agreement provided for the payment of $17,000 per
month. The Company incurred approximately $200,000 related to this agreement in
1998. In addition, the Director received a fee of $350,000 in association with
the GTCR Investment. The professional services agreement also provides for a one
percent commission on certain issuances Class A Preferred Stock (Note 10). The
Company also paid approximately $336,000 related to certain fees and a
professional services agreement with one of its initial investors.

16. COMMITMENTS AND CONTINGENCIES:

LEASES

As of December 31, 1998, the Company has noncancellable operating leases,
primarily for real estate, that expire over the next six years. Rental expense
during 1998 was $512,000.

Future minimum lease payments under noncancellable operating leases are as
follows as of December 31, 1998:

<TABLE>
<S> <C>
1999........................................................ $1,424,000
2000........................................................ 1,294,000
2001........................................................ 1,187,000
2002........................................................ 1,082,000
2003........................................................ 872,000
Thereafter.................................................. 792,000
----------
Total minimum lease payments............................ $6,651,000
==========
</TABLE>

LITIGATION AND CLAIMS

In connection with the acquisition of Internet Outfitters, approximately
$1,450,000 of the purchase price in the form of shares of Company Common Stock,
based upon the fair value of $17.10 per share at the date of acquisition, was
pledged to the Company and escrowed to be available to satisfy any potential
liability in connection with a license dispute. The Company also held back
$750,000 of the cash purchase price to be used to satisfy this and any other
indemnification claims.

The Company is subject to lawsuits, investigations and claims arising out of
the ordinary course of business, including those related to commercial
transactions, contracts, government regulation and employment matters. Certain
claims, suits and complaints have been filed or are pending against the Company.
In the opinion of management, based on all known facts, all matters are without
merit, and except as related to the aforementioned Internet Outfitters claim,
are of such kind, or involve such amounts, as would not have a material effect
on the financial position or results of operations of the Company if disposed of
unfavorably.

CONTINGENT PAYMENTS

The Company's acquisition of NMP provided for additional contingent payments
of up to $14,000,000 as of December 31, 1998 in the form of cash and Company
Common Stock to be made to the former owners of NMP if NMP reaches certain
revenue and earnings before interest, taxes, depreciation, and amortization
targets for the period from October 1, 1998 to September 30, 1999. The amount of
this contingent payment varies based on a sliding scale of revenues and earnings
before

F-26
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

interest, taxes, depreciation, and amortization. If these goals are reached,
approximately 42 percent of the contingent consideration will be reflected as
additional purchase consideration if and when paid. The remaining 58 percent of
the contingent consideration will be paid only if the targets are reached and
certain NMP employees remain employed by the Company. Accordingly, pursuant to
the consensus reached in Emerging Issues Task Force Issue 95-08, "Accounting for
Contingent Consideration Paid to the Shareholders of an Acquired Company in a
Purchase Business Combination," ("EITF 95-08") an estimate of the amount
expected to be paid to these employees will be reflected as stock-based and
other acquisition-related compensation expense ratably over the period which
these employees must remain employed to receive the contingent consideration.
Revisions to this estimate will be reflected on a prospective basis each
reporting period until paid. The accompanying statement of operations reflects a
charge of $1,157,000 of stock-based and other acquisition related compensation
for this contingent payment.

The Company's acquisitions of Sigma6, Salzinger, Internet Outfitters and
Transform IT provided for contingent payments of up to $14,800,000 (unaudited)
in the form of cash and Company Common Stock to be made to the former owners of
these companies if these entities reach certain revenue and earnings targets for
periods ranging from 9 - 18 months from the date of their acquisition. The
amount of these contingent payments varies based on a sliding scale of revenues
and earnings, as defined in the acquisition agreements.

If these goals are reached for Salzinger and Sigma6, the amount will be paid
only if the targets are reached and certain Sigma6 and Salzinger employees
remain employed by the Company. Accordingly, pursuant to EITF 95-08, an estimate
of the amount to be paid to these employees will be reflected as stock-based and
other acquisition-related compensation expense ratably over the period which the
employees must remain employed to receive the contingent consideration.
Revisions to this estimate will be reflected on a prospective basis each
reporting period until paid.

If these goals are reached for Internet Outfitters and Transform IT,
approximately 23 and 33 percent, respectively, of the contingent payment will be
reflected as additional purchase price consideration if and when paid. The
remaining contingent amounts will be paid only if the targets are reached and
certain Internet Outfitters and Transform IT employees remain employed by the
Company. Accordingly, pursuant to EITF 95-08, an estimate of the amount to be
paid to these employees will be reflected as stock-based and other
acquisition-related compensation expense ratably over the period which the
employees must remain employed to receive the contingent consideration.
Revisions to this estimate will be reflected on a prospective basis each
reporting period until paid.

17. SEGMENT INFORMATION:

The Company currently operates in two operating segments: professional
services and electronic commerce processing. For the year ended December 31,
1998 and the nine months ended September 30, 1999 (unaudited), the electronic
commerce processing segment was not significant to the overall financial
statements.

18. 1999 COMMON STOCK SPLIT

The Company is currently contemplating an initial public offering. Prior to
the effectiveness of the initial public offering, the Company intends to enter
into an agreement to exchange the Class A Preferred Stock and the Class B
Preferred Stock and the related accrued dividends, into Company Common Stock
based on the per share price in the initial public offering. On June 15, 1999,
the Company declared a 2.85-for-one reverse stock split. All share and per-share
amounts, including stock

F-27
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

option information, have been restated in these notes and the accompanying
consolidated financial statements to reflect this reverse stock split.

19. SUBSEQUENT EVENTS (UNAUDITED)

On June 23, 1999, the Company completed its initial public offering of
securities and issued 6,000,000 shares of common stock at $12.00 per share,
which generated proceeds, net of issuance costs, of approximately $64,100,000.
The proceeds of the offering were used to repay outstanding borrowings under
various credit facilities and other outstanding debt, as well as fund general
corporate purposes, including working capital expenditures.

In connection with the initial public offering, the Company exchanged 45,430
shares of Class A Preferred Stock and 11,576 shares of Class B Preferred Stock,
including accrued dividends, for 4,936,808 shares of common stock at an exchange
rate based on the initial public offering price of $12.00 per share. Of the
4,936,808 shares of common stock, 3,813,864 shares of common stock were issued
to GTCR.

Certain promissory notes automatically converted at the time of the initial
public offering and certain promissory notes were converted at the option of the
promissory note holders. The notes that converted had a principal balance of
approximately $700,000 plus accrued interest and converted into 75,129 shares of
the Company's common stock at a conversion price at 80% of the $12.00 initial
public offering price. The Company recognized an interest charge of
approximately $1,100,000 related to the beneficial conversion features of
certain convertible notes which allowed the holders to convert at a discount
from the initial public offering price of the common stock.

During May 1999 and August 1999, the Company converted promissory notes of
approximately $1,500,000 plus accrued interest to former owners of an acquired
business into 185,429 shares of the Company's common stock at a conversion price
of $8.55 per share. During October 1999, an additional $500,000 of promissory
notes to former owners of an acquired business plus accrued interest were
converted based on a conversion price of $8.55 per share into 60,082 shares of
common stock. In conjunction with the modification of the credit facilities on
June 23, 1999, a charge of approximately $600,000 was recorded to write-off
financing costs related to the facilities.

The Company recognized a compensation charge of approximately $2,500,000,
recorded as stock-based and acquisition-related compensation expense, upon
completion of the initial public offering in connection with the termination of
the Company's right to repurchase the Reserved Shares. The amount of the
compensation charge was calculated as the difference between the initial public
offering price of $12.00 per share and $0.3007, multiplied by the number of
Reserved Shares retained by the executive

During June 1999, in connection with the initial public offering, the
Company terminated the Guaranteed Loans and amended the Unguaranteed Loans
decreasing available borrowings from $26,000,000 to $20,000,000 (the "Amended
1999 Credit Facility"). The Amended 1999 Credit Facility matures on August 24,
2001. In conjunction with the modification of the credit facilities, a charge of
$600,000 was recorded to write-off financing costs related to the facilities.

On September 30, 1999, the stockholders of the Company approved the adoption
of the 1998 Employee Stock Purchase Plan ("ESPP"). The purpose of the Plan is to
enhance stockholder value and promote the attainment of significant business
objectives of the Company by allowing employees to purchase the Company's Common
Stock at a discount of 15%, thereby giving employees an interest in common with
that of the stockholders. The number of shares available for purchase under the
ESPP is 250,000. The purchase price of shares under the plan is the lower of 85%
of the share price on the first

F-28
<PAGE>
APPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND SEPTEMBER 30, 1999

day of the plan quarter or the share price on the plan quarter close. All
employees are eligible to participate except (i) those employed for less than
20 hours per week; (ii) employees who, as a result of participation in the ESPP,
would own stock or hold options to purchase stock possessing five percent or
more of the total combined voting power or value of all classes of stock of the
Company; and (iii) if such right would permit the employee to purchase stock
under the Plan and any other stock purchase plans of the Company and its
subsidiaries in effect from time to time with a fair market value in excess of
$25,000 (determined as of the first day of each plan quarter) for each calendar
year. Participants can contribute from 1% to 10% of their annual salary. The
plan became effective on October 1, 1999.

In connection with the acquisition of NMP, contingent purchase payments
based upon the achievement of certain operating targets during the twelve months
ended October 1, 1999 are payable in January 2000. Based on the preliminary
results of NMP's operating performance during the period of measurement, 100% of
the contingent consideration, or $14,000,000, is payable to the former
shareholders, of which $8,400,000 is payable in cash and $5,600,000 or 654,971
shares of common stock is payable in stock based on $8.55 per share, the agreed
to price for our common stock. The fair value of the stock portion totalled
approximately $17,200,000 as of October 1, 1999.

F-29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Software Services Corporation:

We have audited the accompanying balance sheets of Software Services
Corporation (a Michigan corporation) as of December 31, 1996 and 1997, and
August 24, 1998, and the related statements of operations, stockholders' equity
and cash flows for the years ended December 31, 1996 and 1997, and for the
period from January 1, 1998 to August 24, 1998. 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 generally accepted auditing
standards. 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 financial position of Software Services
Corporation as of December 31, 1996 and 1997, and August 24, 1998, and the
results of its operations and its cash flows for the years ended December 31,
1996 and 1997, and for the period from January 1, 1998 to August 24, 1998, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Ann Arbor, Michigan
February 5, 1999

F-30
<PAGE>
SOFTWARE SERVICES CORPORATION

BALANCE SHEETS

AS OF DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 70,000 $ 252,000 $ 44,000
Accounts receivable, net of allowance for doubtful
accounts of $29,000, $25,000 and $255,000,
respectively......................................... 1,597,000 2,167,000 2,935,000
Other current assets................................... 225,000 150,000 1,020,000
---------- ---------- ----------
Total current assets................................. 1,892,000 2,569,000 3,999,000
Property and equipment, net.............................. 617,000 541,000 475,000
Intangible assets, net................................... 450,000 311,000 216,000
Other assets............................................. 196,000 246,000 283,000
---------- ---------- ----------
Total assets......................................... $3,155,000 $3,667,000 $4,973,000
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable....................................... $ 56,000 $ 57,000 $ 725,000
Accrued liabilities.................................... 649,000 1,058,000 761,000
Current portion of long-term debt...................... 672,000 334,000 --
---------- ---------- ----------
Total current liabilities............................ 1,377,000 1,449,000 1,486,000
Long-term debt, net of current portion................... 320,000 332,000 --
---------- ---------- ----------
Total liabilities.................................... 1,697,000 1,781,000 1,486,000
---------- ---------- ----------
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock, no par value, 10,000,000 shares
authorized, 5,700,000, 5,697,000 and 5,667,000 shares
issued and outstanding, respectively................. 1,000 61,000 31,000
Additional paid-in capital (Note 1).................... -- -- 3,344,000
Retained earnings...................................... 1,457,000 1,825,000 112,000
---------- ---------- ----------
Total stockholders' equity........................... 1,458,000 1,886,000 3,487,000
---------- ---------- ----------
Total liabilities and stockholders' equity........... $3,155,000 $3,667,000 $4,973,000
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-31
<PAGE>
SOFTWARE SERVICES CORPORATION

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE
DECEMBER 31, PERIOD FROM
---------------------------- JANUARY 1, 1998
1996 1997 TO AUGUST 24, 1998
----------- ----------- ------------------
<S> <C> <C> <C>
Revenues........................................... $11,789,000 $13,298,000 $10,788,000
Costs of revenues.................................. 7,680,000 8,416,000 7,392,000
----------- ----------- -----------
Gross profit................................... 4,109,000 4,882,000 3,396,000
Operating expenses:
Selling and marketing............................ 1,082,000 997,000 567,000
General and administrative....................... 2,615,000 3,050,000 1,856,000
Stock-based and acquisition-related
compensation................................... -- -- 2,654,000
Depreciation and amortization.................... 300,000 341,000 230,000
----------- ----------- -----------
Total operating expenses....................... 3,997,000 4,388,000 5,307,000
----------- ----------- -----------
Income (loss) from operations...................... 112,000 494,000 (1,911,000)
Gain on sale of investment in affiliate............ -- 358,000 --
Interest expense, net.............................. 52,000 35,000 28,000
Other expense, net................................. -- 9,000 372,000
----------- ----------- -----------
Income (loss) before income taxes.................. 60,000 808,000 (2,311,000)
Provision (benefit) for income taxes............... 113,000 377,000 (598,000)
----------- ----------- -----------
Net (loss) income.................................. $ (53,000) $ 431,000 $(1,713,000)
=========== =========== ===========
Basic and diluted net (loss) income per share...... $ (.01) $ .08 $ (.30)
=========== =========== ===========
Weighted average common shares outstanding......... 5,727,000 5,705,000 5,697,000
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-32
<PAGE>
SOFTWARE SERVICES CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO AUGUST 24, 1998

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995.......... 6,000,000 $ 1,000 $ -- $ 1,810,000 $1,811,000
Repurchase of common stock
shares.......................... (300,000) -- -- (300,000) (300,000)
Net loss.......................... -- -- -- (53,000) (53,000)
--------- -------- ---------- ----------- ----------
Balance, December 31, 1996.......... 5,700,000 1,000 -- 1,457,000 1,458,000
Repurchase of common stock
shares.......................... (63,000) -- -- (63,000) (63,000)
Issuance of common stock as
compensation.................... 60,000 60,000 -- -- 60,000
Net income........................ -- -- -- 431,000 431,000
--------- -------- ---------- ----------- ----------
Balance, December 31, 1997.......... 5,697,000 61,000 -- 1,825,000 1,886,000
Repurchase of common stock
shares.......................... (30,000) (30,000) -- -- (30,000)
Capital contribution.............. -- -- 3,344,000 -- 3,344,000
Net loss.......................... -- -- -- (1,713,000) (1,713,000)
--------- -------- ---------- ----------- ----------
Balance, August 24, 1998............ 5,667,000 $ 31,000 $3,344,000 $ 112,000 $3,487,000
========= ======== ========== =========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-33
<PAGE>
SOFTWARE SERVICES CORPORATION

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FOR THE YEARS ENDED JANUARY 1,
DECEMBER 31, 1998 TO
-------------------- AUGUST 24,
1996 1997 1998
--------- -------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income......................................... $ (53,000) $431,000 $(1,713,000)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 300,000 341,000 230,000
Deferred compensation agreements...................... -- 616,000 --
Gain on sale of investment in affiliate............... -- (358,000) --
Deferred income taxes................................. (34,000) (216,000) (935,000)
Change in assets and liabilities:
Accounts receivable................................. 97,000 (570,000) (768,000)
Other current assets................................ (74,000) 89,000 31,000
Other assets........................................ -- (2,000) (3,000)
Accounts payable.................................... (109,000) 1,000 668,000
Accrued liabilities................................. (11,000) 409,000 (297,000)
--------- -------- -----------
Net cash provided by (used in) operating
activities...................................... 116,000 741,000 (2,787,000)
--------- -------- -----------
Cash flows from investing activities:
Purchase of property and equipment, net................... (221,000) (121,000) (69,000)
Additional investment in affiliate........................ -- (75,000) --
Proceeds from disposal of investment in affiliate......... -- 490,000 --
--------- -------- -----------
Net cash (used in) provided by investing
activities...................................... (221,000) 294,000 (69,000)
--------- -------- -----------
Cash flows from financing activities:
Repayments of long-term debt.............................. (235,000) (236,000) (263,000)
Net borrowings (repayments) under notes payable........... 400,000 (400,000) --
Repurchase of common stock................................ (300,000) (63,000) (30,000)
Capital contribution...................................... -- -- 3,344,000
Payments under deferred compensation agreement............ -- (154,000) (403,000)
--------- -------- -----------
Net cash (used in) provided by financing
activities...................................... (135,000) (853,000) 2,648,000
--------- -------- -----------
Net (decrease) increase in cash and cash equivalents........ (240,000) 182,000 (208,000)
Cash and cash equivalents, beginning of period.............. 310,000 70,000 252,000
--------- -------- -----------
Cash and cash equivalents, end of period.................... $ 70,000 $252,000 $ 44,000
========= ======== ===========
Supplementary information:
Cash paid for interest.................................... $ 59,000 $ 56,000 $ 33,000
========= ======== ===========
Cash paid for income taxes................................ $ 182,000 $135,000 $ 653,000
========= ======== ===========
Assets financed under capital lease obligations........... $ 252,000 $ -- $ --
========= ======== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-34
<PAGE>
SOFTWARE SERVICES CORPORATION

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998

1. BUSINESS DESCRIPTION:

Software Services Corporation (the Company) engages in application
development, computer software and networking projects, and provides both
full-time and temporary personnel to companies in the computer industry. The
Company is headquartered in Ann Arbor, Michigan.

On August 25, 1998, all of the outstanding Common Stock of the Company was
acquired by SSC Acquisition Sub. No. 1, Inc. (a Michigan Corporation and a
wholly owned subsidiary of AppNet Systems, Inc.; "AppNet"). In contemplation of
the acquisition, AppNet advanced the Company $3,344,000 to fund the repayment of
certain debt, the repurchase of certain shares, pay the Company's obligation
under a deferred compensation agreement and to fund certain acquisition expenses
paid by the Company. This amount has been included as paid in capital in the
accompanying financial statements.

There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:

USE OF ESTIMATES

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

INVESTMENT IN AFFILIATE

Investment in affiliate represented the Company's 10 percent interest in
Workwell Health & Safety Systems, Inc. ("Workwell"). In addition to the
investment in Workwell, the Company held an option to purchase an additional
2,353 to 2,667 shares of Workwell for $75,000. In January 1997, the Company
exercised this option and signed an agreement to sell its total investment in
Workwell for $490,000. In connection with the sale, certain employment
agreements and options were canceled and the owners of Workwell released the
Company from further payments owed under the non-competition agreements. Except
for the release of payments, all the terms and conditions of the non-competition
agreements remain in full force and effect. During 1997, the Company recognized
a $358,000 gain on this transaction; $93,000 of which represents the release of
payments by the Company under the non-competition agreements.

CASH AND CASH EQUIVALENTS

The Company considers all investments purchased with a maturity of three
months or less to be cash equivalents.

F-35
<PAGE>
SOFTWARE SERVICES CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998

PROPERTY AND EQUIPMENT

<TABLE>
<S> <C>
Computers and equipment................................. three to five years
Furniture and fixtures.................................. five years
</TABLE>

Purchased software and third-party costs incurred to develop software for
internal use are capitalized and amortized principally over three years.

In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
reviews its recorded long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable.

GOODWILL

Goodwill represents the excess of the purchase price over the fair value of
net assets acquired and is amortized on a straight-line basis over 5 years.

NON-COMPETITION AGREEMENTS

Non-compete agreements were entered into with former owners of various
acquisitions of the Company and are being amortized on a straight-line basis
over the lives of the related agreements, generally four to five years.

INTELLECTUAL PROPERTY

Intellectual property represents acquired and internally developed patents.
The Company capitalizes the direct external costs of acquiring the related
patents. Intellectual property is amortized on a straight-line basis over the
lives of the related assets, generally five years.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, short-term borrowings,
long-term debt and capital lease obligations. In management's opinion, the
carrying amounts of these financial instruments approximated their fair values
at December 31, 1996 and 1997, and August 24, 1998.

SELF INSURANCE

The Company partially self insures its dental, vision and short-term
disability programs. There are stop-loss provisions on each of these programs.
Paid claims were $54,000 and $64,000 in 1996 and 1997, respectively, and $47,000
for the period from January 1, 1998 through August 24, 1998.

F-36
<PAGE>
SOFTWARE SERVICES CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998

STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation arrangements using the
intrinsic value method in accordance with provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
complies with the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Under APB Opinion No. 25, compensation cost is
recognized based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the amount an employee must pay to acquire
the stock.

REVENUE RECOGNITION

Revenues from time and material contracts are recognized based on fixed
hourly rates for direct labor hours expended.

Costs of revenues include all direct, material and labor costs related to
contract performance and does not include any related depreciation expense.

BUSINESS CONCENTRATION AND CREDIT RISK

The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:

<TABLE>
<CAPTION>
REVENUES ACCOUNTS RECEIVABLE
------------------------------------------ ------------------------------------------
FOR THE YEAR
ENDED
DECEMBER 31, FOR THE PERIOD ENDED AS OF DECEMBER 31,
------------------- AUGUST 24, ----------------------- AS OF AUGUST 24,
1996 1997 1998 1996 1997 1998
-------- -------- -------------------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Customer A............. 62% 46% 33% 49% 37% 23%
Customer B............. * * 11% * 11% 14%
</TABLE>

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

* Represents less than 10 percent of total.

INCOME TAXES

The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under the
provisions of SFAS No. 109, deferred income taxes reflect the impact of
temporary differences between the amount of assets and liabilities recognized
for financial reporting purposes and such amounts recognized for tax reporting
purposes. Deferred tax assets may also be recognized to reflect the expected
future benefit from the utilization of net operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured by applying
current enacted tax laws.

EARNINGS PER SHARE

SFAS No. 128, "Earnings Per Share," requires the presentation of basic and
diluted earnings per share. Basic net income (loss) per share is computed by
dividing income (loss) available to common stockholders by the weighted average
number of common shares outstanding for the period. The diluted net income
(loss) per share data is computed using the weighted average number of common
shares outstanding plus the dilutive effect of common stock equivalents, unless
the equivalents are antidilutive.

F-37
<PAGE>
SOFTWARE SERVICES CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998

RECENT ACCOUNTING PRONOUNCEMENTS

In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
financial statement years beginning after December 15, 1998. SOP 98-1 provides
guidance on accounting for computer software developed or obtained for internal
use, including the requirements to capitalize specified costs and the
amortization of such costs. The Company does not expect the adoption of this
standard to have a material effect on the Company's capitalization policy.

RECLASSIFICATIONS

Certain amounts from the prior year financial statements have been
reclassified to conform with the current presentation.

3. ACCOUNTS RECEIVABLE:

Accounts receivable consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ----------
<S> <C> <C> <C>
Accounts receivable...................... $1,562,000 $2,014,000 $2,630,000
Unbilled accounts receivables............ 64,000 178,000 560,000
Allowance for doubtful accounts.......... (29,000) (25,000) (255,000)
---------- ---------- ----------
Accounts receivable, net............. $1,597,000 $2,167,000 $2,935,000
========== ========== ==========
</TABLE>

4. OTHER CURRENT ASSETS:

Other current assets consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ----------
<S> <C> <C> <C>
Prepaid expenses......................... $ 174,000 $ 91,000 $ 60,000
Other.................................... 6,000 -- --
Deferred income tax asset................ 45,000 59,000 960,000
---------- ---------- ----------
Other current assets................. $ 225,000 $ 150,000 $1,020,000
========== ========== ==========
</TABLE>

F-38
<PAGE>
SOFTWARE SERVICES CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998

5. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ----------
<S> <C> <C> <C>
Computer equipment and software.......... $ 874,000 $ 994,000 $1,054,000
Furniture and fixtures................... 178,000 179,000 187,000
Leasehold improvements................... 53,000 53,000 53,000
---------- ---------- ----------
1,105,000 1,226,000 1,294,000
Accumulated depreciation and
amortization........................... (488,000) (685,000) (819,000)
---------- ---------- ----------
Net property and equipment........... $ 617,000 $ 541,000 $ 475,000
========== ========== ==========
</TABLE>

6. INTANGIBLE ASSETS:

Intangible assets consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ----------
<S> <C> <C> <C>
Goodwill................................. $ 120,000 $ 120,000 $ 120,000
Non-competition agreements............... 380,000 380,000 380,000
Intellectual property, net............... 150,000 155,000 155,000
Acquired contracts....................... 158,000 -- --
--------- ---------- ----------
808,000 655,000 655,000
Accumulated amortization................. (358,000) (344,000) (439,000)
--------- ---------- ----------
Intangible assets, net............... $ 450,000 $ 311,000 $ 216,000
========= ========== ==========
</TABLE>

7. OTHER NON-CURRENT ASSETS:

Other non-current assets consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ----------
<S> <C> <C> <C>
Other.................................... $ 12,000 $ 10,000 $ 13,000
Deferred income tax benefit.............. 34,000 236,000 270,000
Investment in affiliate.................. 150,000 -- --
-------- ---------- ----------
Other non-current assets............. $196,000 $ 246,000 $ 283,000
======== ========== ==========
</TABLE>

F-39
<PAGE>
SOFTWARE SERVICES CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998

8. ACCRUED LIABILITIES:

Accrued liabilities consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31, AUGUST 24,
1996 1997 1998
----------- ------------ ----------
<S> <C> <C> <C>
Accrued compensation and benefits........ $477,000 $ 422,000 $ 440,000
Accrued commissions...................... 89,000 111,000 79,000
Income taxes payable..................... 33,000 477,000 161,000
Accrued professional fees................ 17,000 27,000 22,000
Other accrued liabilities................ 33,000 21,000 59,000
-------- ---------- ----------
Accrued liabilities.................. $649,000 $1,058,000 $ 761,000
======== ========== ==========
</TABLE>

9. COMMITMENTS AND CONTINGENCIES:

The Company currently leases its facility under an operating lease. Rent
expense for the years ended December 31, 1996 and 1997, and for the period from
January 1, 1998 to August 24, 1998, totaled approximately $180,000, $243,000 and
$165,000, respectively. Future minimum lease payments at August 24, 1998, under
these agreements are as follows:

<TABLE>
<S> <C>
Period ended December 31, 1998.............................. $ 86,000
1999........................................................ 275,000
2000........................................................ 293,000
2001........................................................ 301,000
2002........................................................ 309,000
2003........................................................ 155,000
----------
Total................................................... $1,419,000
==========
</TABLE>

F-40
<PAGE>
SOFTWARE SERVICES CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998

10. DEBT:

Debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31, AUGUST 24,
1996 1997 1998
----------- ------------ ----------
<S> <C> <C> <C>
Deferred compensation (see Note 17), repaid during the
period ended August 24, 1998 (see below)................ $ -- $403,000 $ --
Capital lease obligation, repaid during the period ended
August 24, 1998 (see below)............................. 141,000 116,000 --
Promissory notes, repaid during the period ended August
24, 1998 (see below).................................... 285,000 98,000 --
Capital lease obligation, repaid during the period ended
August 24, 1998 (see below)............................. 73,000 49,000 --
Noncompete agreements, repaid during the year ended
December 31, 1997....................................... 93,000 -- --
Note payable, repaid during the year ended December 31,
1997.................................................... 400,000 -- --
-------- -------- --------
992,000 666,000 --
Less--Current portion..................................... 672,000 334,000 --
-------- -------- --------
$320,000 $332,000 $ --
======== ======== ========
</TABLE>

As a condition of the sale of the Company to AppNet, all of the Company's
outstanding debt was repaid prior to August 24, 1998. In contemplation of the
repayment, AppNet advanced funds to the Company to repay the debt. The funds
received by AppNet have been included in additional paid-in capital in the
accompanying financial statements.

11. STOCKHOLDERS' EQUITY:

STOCK SPLIT

During 1997, the Company declared a stock split of six-to-one for each
holder of common stock. All share information included in the accompanying
financial statements has been restated to retroactively reflect the stock split.

STOCK OPTION PLAN

During 1995, the Company established a stock option plan (the "Plan") to
encourage ownership by selected employees of the Company and provide an
additional incentive to these employees to promote the success of the Company.
Under the Plan, options to purchase the Company's common stock may be granted at
the discretion of the Board of Directors. The maximum number of shares that may
be granted is 1,500,000. The Plan may be terminated at any time at the
discretion of the Board of Directors. According to the Plan, the options will be
granted at a price equal to 100 percent of the fair market value of the common
stock as determined by the Board of Directors. All options will expire ten years
after date of grant. During the years ended December 31, 1996 and 1997 and the
for the period from January 1, 1998 to August 24, 1998, the Company granted
108,000, 170,000 and 20,000 options, respectively, at an option price of $1.00,
all of which vest over four years. During the years ended December 31, 1996,
1997 and for the period from January 1, 1998 to August 24, 1998, 372,000, 90,000
and 54,000 options were cancelled due to termination of employment,
respectively. As of December 31,

F-41
<PAGE>
SOFTWARE SERVICES CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998

1996 and 1997, and as of August 24, 1998, 180,000, 260,000 and zero options were
outstanding, respectively. In contemplation of the sale of the Company to
AppNet, certain option vesting was accelerated and all then vested options,
totaling 89,500, were redeemed and the remaining options of the Company were
converted to equivalent options of AppNet for $3.43 per share. The amount paid
to the stockholders, net of the option exercise price, has been recognized as
expense and included in stock-based and acquisition-related compensation in the
accompanying statement of operations. In contemplation of the redemption of the
shares, AppNet advanced approximately $217,000 to the Company to fund the
redemption. The funds advanced to the Company have been recorded as additional
paid in capital in the accompanying financial statements.

Utilizing the intrinsic value method of accounting for the value of stock
options issued during the years ended December 31, 1996 and 1997 and for the
period from January 1, 1998 to August 24, 1998, no compensation cost was
recorded in the accompanying statements of income. Had compensation cost been
determined based on the fair value at the date of grant for awards for the years
ended December 31, 1996 and 1997 and for the period from January 1, 1998 to
August 24, 1998, consistent with the provisions of SFAS No. 123, net income
(loss) would not have significantly differed from the reported amounts.

12. EARNINGS PER SHARE:

The impact of stock options are excluded from diluted earnings per share due
to their antidilutive effect and are 180,000, 260,000, and zero for the years
ended December 31, 1996 and 1997 and for the period from January 1, 1998 to
August 24, 1998.

13. INCOME TAXES:

The components of the provision (benefit) for income taxes as recorded under
SFAS No. 109 are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- AUGUST 24,
1996 1997 1998
-------- --------- ----------
<S> <C> <C> <C>
Federal income taxes:
Currently payable......................... $ 12,000 $ 446,000 $ 213,000
Deferred income taxes..................... (34,000) (216,000) (935,000)
State taxes................................. 135,000 147,000 124,000
-------- --------- ---------
Provisions (benefit) for income taxes... $113,000 $ 377,000 $(598,000)
======== ========= =========
</TABLE>

The tax provision (benefit) differed from the amounts computed at the
statutory rate as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- AUGUST 24,
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Federal income taxes at the U.S. statutory
rate....................................... $(26,000) $275,000 $(786,000)
State taxes, net of federal benefit.......... 135,000 97,000 82,000
Acquisition expenses not deductible for tax
purposes................................... -- -- 115,000
Other........................................ 4,000 5,000 (9,000)
-------- -------- ---------
Total.................................... $113,000 $377,000 $(598,000)
======== ======== =========
</TABLE>

F-42
<PAGE>
SOFTWARE SERVICES CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998

The components of the net deferred tax asset as of December 31, 1996 and
1997, and August 24, 1998, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 24,
1996 1997 1998
------------ ------------ ----------
<S> <C> <C> <C>
Current deferred income tax asset:
Deferred compensation.................. $ -- $ -- $ 829,000
Accrued expenses....................... 36,000 50,000 32,000
Accounts receivable.................... 9,000 9,000 99,000
-------- -------- ----------
45,000 59,000 960,000
-------- -------- ----------
Long-term deferred income tax asset:
Deferred compensation.................. -- 137,000 137,000
Property and equipment................. (25,000) 7,000 19,000
Other assets........................... 59,000 92,000 114,000
-------- -------- ----------
34,000 236,000 270,000
-------- -------- ----------
Net deferred tax asset............... $ 79,000 $295,000 $1,230,000
======== ======== ==========
</TABLE>

14. RELATED-PARTY TRANSACTIONS:

The Company purchased consulting services from an affiliate for
approximately $90,000 in 1996 and 1997 and $58,000 in the period from
January 1, 1998 through August 24, 1998.

15. RETIREMENT PLAN:

The Company maintains a profit sharing and retirement plan under the
provisions of section 401(k) of the Internal Revenue Code. The Plan provides for
contribution by employees and a discretionary contribution by the Company. The
Plan is for the benefit of all employees. Employees are eligible to participate
if they are at least 18 years of age and have met certain minimum service
requirements. Employee contributions are fully vested and subject to statutory
limits. The Company's contribution is discretionary and is determined by its
Board of Directors. Company contributions vest after three years of service.
There were no company contributions for the year ended December 31, 1996 and
1997, and for the period from January 1, 1998 to August 24, 1998.

16. TERMINATION AGREEMENT:

During 1997, the Company entered into an agreement to terminate an
employment agreement with a key employee of the Company (the "Termination
Agreement"). Under the terms of the Termination Agreement, the Company was to
pay the former employee a total of $662,000 as satisfaction of any claims the
former employee may have had under the employment agreement. The amount was
payable in the form of 10,000 shares of the Company's common stock valued at
$60,000 and $602,000 in the form of a note. The Note was payable in quarterly
installments of $50,000 through December 1999, with a final payment of $30,000
in March 2000. The Company recorded the net present value of this note,
discounted at 5.5 percent, in the accompanying financial statements as deferred
compensation, which is included in long-term debt. This note was fully repaid
during the period from January 1, 1998 through August 24, 1998.

F-43
<PAGE>
SOFTWARE SERVICES CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998

17. DEFERRED COMPENSATION AGREEMENT:

The Company has entered into a deferred compensation agreement (the
"Agreement") with the president of the Company. Under the terms of the
Agreement, the president is to receive certain compensation should the Company
be sold or merged, as defined in the Agreement. As a result of the sale of the
Company to AppNet, the Company recognized $2,437,000 in compensation expense
during the period from January 1, 1998 through August 24, 1998, which has been
included in general and administrative expense in the accompanying statement of
operations. In contemplation of this compensation being paid, AppNet advanced
funds to the Company to pay its obligation under the Agreement. The funds
advanced from AppNet have been included as paid in capital in the accompanying
financial statements.

18. SEGMENT DISCLOSURE:

The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.

The Company operated in two operating segments: technical consulting and
managed services. The technical consulting group primarily provides information
technology consulting to companies on a per diem basis. The managed services
group provides information technology solutions to its customers through the
design and implementation of information systems technology on a project or
solutions basis. Substantially all of the Company's revenues are generated and
assets are located in the Midwestern United States.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (Note 2) except that certain
deferred compensation, merger related costs, interest expense and income taxes
have not been allocated to the business segments. The Company evaluates the
performance of its operating segments based primarily upon revenues and
operating income. Assets are not allocated to the operating segments.

As summary of the Company's operating segments for the years ended
December 31, 1996 and 1997 for the period from January 1, 1998 to August 24,
1998, is set forth below.

F-44
<PAGE>
SOFTWARE SERVICES CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996 AND 1997, AND AUGUST 24, 1998

The following table presents revenues and other financial information by
operating segment:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE PERIOD
DECEMBER 31, ENDED
------------------------- ---------------
1996 1997 AUGUST 24, 1998
----------- ----------- ---------------
<S> <C> <C> <C>
Revenues to external customers:
Technical consulting............................. $ 8,520,000 $10,205,000 $ 8,489,000
Managed services................................. 3,269,000 3,093,000 2,299,000
----------- ----------- -----------
Total revenue to external customers............ 11,789,000 13,298,000 10,788,000
----------- ----------- -----------
Operating profit (loss):
Technical consulting............................. 531,000 1,055,000 827,000
Managed services................................. (395,000) 56,000 (84,000)
----------- ----------- -----------
Segment operating profit............................. 136,000 1,111,000 743,000
Reconciliation to Company operating profit due to
costs not allocated to segments:
Deferred compensation............................ (24,000) (617,000) --
Costs associated with acquisition................ -- -- (2,654,000)
----------- ----------- -----------
Total operating profit........................... $ 112,000 $ 494,000 $(1,911,000)
=========== =========== ===========
</TABLE>

F-45
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Arbor Intelligent Systems, Inc.:

We have audited the accompanying balance sheets of Arbor Intelligent
Systems, Inc. (a Michigan corporation), as of December 31, 1997, and March 11,
1998, and the related statements of operations, stockholders' deficit, and cash
flows for the year ended December 31, 1997, and for the period from January 1,
1998 to March 11, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial 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 financial position of Arbor Intelligent
Systems, Inc. as of December 31, 1997, and March 11, 1998, and the results of
its operations and its cash flows for the year ended December 31, 1997, and for
the period from January 1, 1998 to March 11, 1998, in conformity with generally
accepted accounting principles.

ARTHUR ANDERSEN LLP

Washington, D.C.
February 19, 1999

F-46
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.

BALANCE SHEETS

AS OF DECEMBER 31, 1997 AND MARCH 11, 1998

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 12,000 $ 145,000
Accounts receivable, net of allowance for doubtful
accounts of $15,000 and $20,000, respectively........... 464,000 449,000
Other current assets...................................... 14,000 27,000
---------- -----------
Total current assets.................................... 490,000 621,000
Property and equipment, net................................. 92,000 84,000
Other assets, net........................................... 198,000 146,000
---------- -----------
Total assets............................................ $ 780,000 $ 851,000
========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term borrowings..................................... $ 300,000 $ 300,000
Accounts payable.......................................... 210,000 292,000
Accrued liabilities....................................... 497,000 787,000
Current portion of long-term debt......................... 685,000 678,000
Current portion of capital lease obligations.............. 12,000 12,000
---------- -----------
Total current liabilities............................... 1,704,000 2,069,000
Capital lease obligations, net of current portion........... 11,000 9,000
---------- -----------
Total liabilities....................................... 1,715,000 2,078,000
---------- -----------
Commitments and contingencies (Note 7)
Stockholders' deficit:
Common stock, no par value; 50,000 shares authorized;
10,000 and 14,640 shares issued and outstanding,
respectively............................................ 1,000 1,000
Additional paid-in capital................................ 5,000 470,000
Accumulated deficit....................................... (941,000) (1,698,000)
---------- -----------
Total stockholders' deficit............................. (935,000) (1,227,000)
---------- -----------
Total liabilities and stockholders' deficit............. $ 780,000 $ 851,000
========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-47
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.

STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 11, 1998

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM JANUARY 1,
ENDED 1998 TO
DECEMBER 31, MARCH 11,
1997 1998
------------ ---------------
<S> <C> <C>
Revenues.................................................... $3,106,000 $ 688,000
Cost of revenues............................................ 2,149,000 471,000
---------- ---------
Gross profit............................................ 957,000 217,000
---------- ---------
Operating expenses:
Selling and marketing..................................... 105,000 14,000
General and administrative................................ 843,000 226,000
Stock-based compensation.................................. -- 465,000
Depreciation and amortization............................. 186,000 29,000
---------- ---------
Total operating expenses................................ 1,134,000 734,000
---------- ---------
Loss from operations........................................ (177,000) (517,000)
Interest expense, net....................................... 187,000 29,000
Other expense, net.......................................... 41,000 211,000
---------- ---------
Net loss.................................................... $ (405,000) $(757,000)
========== =========
</TABLE>

The accompanying notes are an integral part of these statements.

F-48
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 11, 1998

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
-------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996................ 10,000 $1,000 $ 5,000 $ (536,000) $ (530,000)
Net loss................................ -- -- -- (405,000) (405,000)
------ ------ -------- ----------- -----------
Balance, December 31, 1997................ 10,000 1,000 5,000 (941,000) (935,000)
Exercise of stock rights................ 4,640 -- 465,000 -- 465,000
Net loss................................ -- -- -- (757,000) (757,000)
------ ------ -------- ----------- -----------
Balance, March 11, 1998................... 14,640 $1,000 $470,000 $(1,698,000) $(1,227,000)
====== ====== ======== =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-49
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 11, 1998

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM JANUARY 1,
ENDED 1998 TO
DECEMBER 31, MARCH 11,
1997 1998
------------ ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(405,000) $(757,000)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization........................... 186,000 29,000
Loss on fixed asset disposal............................ -- 3,000
Write-off of commitment fees, net....................... -- 28,000
Stock-based compensation................................ -- 465,000
Change in assets and liabilities:
Accounts receivable................................... 92,000 15,000
Other current assets.................................. (10,000) (13,000)
Accounts payable...................................... 2,000 82,000
Accrued liabilities................................... 12,000 290,000
--------- ---------
Net cash (used in) provided by operating
activities........................................ (123,000) 142,000
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment, net................... (86,000) --
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt.............................. 172,000 --
Repayments of long-term debt.............................. (86,000) (7,000)
Short-term borrowings..................................... 150,000 --
Repayments of capital lease obligations................... -- (2,000)
--------- ---------
Net cash provided by (used in) financing
activities........................................ 236,000 (9,000)
--------- ---------
Net increase in cash and cash equivalents................... 27,000 133,000
Cash and cash equivalents, beginning of period.............. (15,000) 12,000
--------- ---------
Cash and cash equivalents, end of period.................... $ 12,000 $ 145,000
========= =========
Supplementary information:
Cash paid for interest.................................... $ 186,000 $ 36,000
========= =========
</TABLE>

The accompanying notes are an integral part of these statements.

F-50
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997 AND MARCH 11, 1998

1. BUSINESS DESCRIPTION:

Arbor Intelligent Systems, Inc. ("Arbor" or the "Company") was incorporated
on August 31, 1988, under the laws of the state of Michigan. The Company is an
Internet-based applications development group providing object-oriented
development services. The Company is headquartered in Ann Arbor, Michigan, and
operates primarily in the surrounding Ann Arbor area.

On March 12, 1998, certain assets and liabilities of the Company were
acquired by AppNet Systems, Inc. ("AppNet"). The Company incurred $198,000 of
expenses in conjunction with the sale to AppNet primarily for early debt
retirement. This has been classified in other expenses in the accompanying
statements of operations.

There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.

PROPERTY AND EQUIPMENT

<TABLE>
<S> <C>
Computers, equipment and software........................ three to five years
Furniture and fixtures................................... seven years
</TABLE>

Purchased software and third-party costs incurred to develop software for
internal use are capitalized and amortized principally over three years.

In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews its recorded long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.

F-51
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND MARCH 11, 1998

SOFTWARE DEVELOPMENT COSTS

The Company has capitalized costs related to the development of certain
software products. In accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," capitalization of
costs begins when technological feasibility has been established and ends when
the product is available for general release to customers. Amortization has been
computed and recognized based on the products' estimated economic lives of two
years. Capitalized costs and amortization periods are management's estimates and
are subject to change due to rapid technological changes in software
development.

FAIR VALUE OF FINANCIAL INSTRUMENTS

STOCK-BASED COMPENSATION

The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation cost is recognized based on the difference, if any, on the date of
grant between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock.

REVENUE RECOGNITION

Revenues from time and material contracts are generally recognized based on
fixed hourly rates for direct labor hours expended.

Costs of revenues include all direct material and labor costs related to
contract performance and does not include any related depreciation expense.

Revenues from software product sales are recognized when the related product
is delivered, provided no significant vendor obligations remain. Revenues from
all maintenance agreements are recognized ratably over the term of the
agreement, generally one year.

BUSINESS CONCENTRATION AND CREDIT RISK

The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:

<TABLE>
<CAPTION>
REVENUES
----------------------------------------- ACCOUNTS RECEIVABLE
FOR THE YEAR ENDED FOR THE PERIOD ENDED ------------------------------------
DECEMBER 31, MARCH 11, AS OF DECEMBER 31, AS OF MARCH 11,
1997 1998 1997 1998
------------------ -------------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Customer A................... 23% 48% 23% 19%
Customer B................... 18% 15% 17% 16%
</TABLE>

F-52
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND MARCH 11, 1998

INCOME TAXES

The Company, with the consent of its shareholders, has elected to be taxed
pursuant to Subchapter S of the Internal Revenue Code (an "S corporation"). In
lieu of corporation income taxes, the shareholders of an S corporation are taxed
on their proportionate share of the Company's taxable income. Therefore, no
provision for federal income taxes has been included in the accompanying
financial statements.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 1998, the AIPCA issued Statement of Position 98-4 ("SOP 98-4"),
"Deferral of the Effective Date of a Provision of SOP 97-2." SOP 98-4 defers for
one year the application of certain provisions of Statement of Position 97-2
("SOP 97-2"), "Software Revenue Recognition." The Company does not expect the
adoption of SOP 97-2 or 98-4 to have a material effect on the Company's results
of operations, financial position or cash flows.

3. ACCOUNTS RECEIVABLE:

Accounts receivable consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ ---------
<S> <C> <C>
Commercial clients.................................... $479,000 $469,000
Allowance for doubtful accounts....................... (15,000) (20,000)
-------- --------
Accounts receivable, net.......................... $464,000 $449,000
======== ========
</TABLE>

4. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ ---------
<S> <C> <C>
Computers, equipment and software.................... $ 207,000 $ 204,000
Furniture and fixtures............................... 30,000 30,000
--------- ---------
237,000 234,000
Accumulated depreciation and amortization............ (145,000) (150,000)
--------- ---------
Property and equipment, net...................... $ 92,000 $ 84,000
========= =========
</TABLE>

F-53
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND MARCH 11, 1998

5. OTHER NON-CURRENT ASSETS:

Other non-current assets consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ ---------
<S> <C> <C>
Software development costs........................... $ 423,000 $ 423,000
Commitment fees...................................... 43,000 --
--------- ---------
466,000 423,000
Accumulated amortization............................. (268,000) (277,000)
--------- ---------
Other non-current assets, net.................... $ 198,000 $ 146,000
========= =========
</TABLE>

6. ACCRUED LIABILITIES:

Accrued liabilities consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ ---------
<S> <C> <C>
Accrued compensation and benefits..................... $423,000 $487,000
Accrued financing fees................................ -- 198,000
Other................................................. 74,000 102,000
-------- --------
Accrued liabilities............................... $497,000 $787,000
======== ========
</TABLE>

7. COMMITMENTS AND CONTINGENCIES:

LEASES

The Company has noncancelable operating leases, primarily for real estate,
that expire over the next three years. Rental expense for operating leases
during the year ended December 31, 1997 and for the period from January 1, 1998
to March 11, 1998, was $14,000 and $3,000, respectively.

The Company leases certain equipment under capital leases.

F-54
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND MARCH 11, 1998

Future minimum lease payments under capital leases and noncancelable
operating leases are as follows as of March 11, 1998:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
Period ended December 31, 1998........................... $12,000 $ 8,000
1999..................................................... 12,000 6,000
2000..................................................... -- 3,000
2001..................................................... -- 1,000
------- -------
Total minimum lease payments......................... 24,000 $18,000
=======
Less: Amount representing interest....................... (3,000)
-------
Present value of capital lease obligations............... 21,000
Less: Current portion of capital lease obligations....... (12,000)
-------
Long-term portion of capital lease obligations........... $ 9,000
=======
</TABLE>

Equipment under capital leases is summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ ---------
<S> <C> <C>
Computer equipment.......................................... $34,000 $ 34,000
Accumulated depreciation.................................... (9,000) (10,000)
------- --------
Computer equipment, net................................. $25,000 $ 24,000
======= ========
</TABLE>

8. DEBT:

Debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 11,
1997 1998
------------ ---------
<S> <C> <C>
Note payable, due 2001, bears interest at prime plus 4%,
plus 1.5% of gross revenues, payable in monthly
installments, secured by the assets of Arbor Intelligent
Systems, Inc., guaranteed by former shareholder........... $434,000 $425,000
Note payable, due February 14, 1998, bears interest at
11.75%.................................................... 1,000 --
Note payable, in default, due October 5, 1997, bears
interest at 20%, payable in full, guaranteed by former
shareholder............................................... 100,000 100,000
Note payable to related party, non-interest-bearing......... 150,000 153,000
-------- --------
Total debt.............................................. $685,000 $678,000
======== ========
</TABLE>

The Company is not in compliance with debt covenants related to the note
payable, due 2001. As such, the note payable has been classified as current
since it is callable.

The Company has a line of credit which expired on December 31, 1997, and was
collateralized by substantially all of the assets of the Company and is
guaranteed by the majority shareholder. The line of credit had a maximum
borrowing of $300,000. Interest on the outstanding balance was calculated at
10.5 percent. As of December 31, 1997, and March 11, 1998, there were borrowings
under the line of credit totaling $300,000.

F-55
<PAGE>
ARBOR INTELLIGENT SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND MARCH 11, 1998

The line of credit and notes payable contain restrictions on certain debt
and stock transactions.

9. RETIREMENT PLAN:

The Company maintains a profit-sharing and retirement plan under the
provisions of section 401(k) of the Internal Revenue Code. The Plan provides for
contributions by employees and a discretionary contribution by the Company. The
Plan is for the benefit of all employees. Participants may contribute up to 18%
of their compensation, subject to statutory limits. Employee contributions are
fully vested. The Company's contribution is discretionary and is determined by
its Board of Directors. Company contributions vest after five years of service.
There were no Company contributions for the year ended December 31, 1997 and for
the period from January 1, 1998 to March 11, 1998.

Effective February 1, 1999, Arbor employees are covered by the AppNet 401(k)
Plan.

10. EMPLOYEE STOCK RIGHTS:

The Company maintained a stock rights program for key employees. Pursuant to
the program, granted rights to acquire stock expired at the earlier of ten years
from the grant date or the termination of employment. The grants had value to
the employee only upon an equity transaction such as a public sale of common
stock or acquisition. Prior to the acquisition of the Company by AppNet, no
compensation expense had been recognized for these granted rights as such an
equity event was not deemed probable. Immediately prior to the AppNet
acquisition, rights to acquire 4,640 shares of common stock were exercised. A
charge of $465,000 which reflects the fair value of the Arbor common stock
acquired through exercise of these rights (as determined by the AppNet
acquisition) has been reflected as stock-based compensation in the accompanying
statement of operations in the period from January 1, 1998 to March 11, 1998.

The following summarizes rights during 1997 and for the period from
January 1, 1998 to March 11, 1998:

<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Stock rights outstanding December 31, 1996, exercise price
of $0..................................................... 4,657
Granted in 1997........................................... --
Exercised in 1997......................................... --
Expired in 1997........................................... (517)
------
Stock rights outstanding December 31, 1997, exercise price
of $0..................................................... 4,140
Granted in 1998........................................... 500
Exercised in 1998......................................... (4,640)
Expired in 1998........................................... --
------
Stock rights outstanding, March 11, 1998.................... --
======
Stock rights exercisable, December 31, 1997................. 1,673
======
</TABLE>

11. RELATED-PARTY TRANSACTIONS:

The Company has a non-interest bearing loan with the majority shareholder in
the amount of $150,000 and $153,000 as of December 31, 1997 and March 11, 1998,
respectively.

The Company leases its real estate from the majority shareholder for $8,250
per month, on a month-to-month basis.

F-56
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To New Media Publishing, Inc.:

We have audited the accompanying balance sheets of New Media
Publishing, Inc. (a Virginia corporation), as of December 31, 1996 and 1997, and
October 1, 1998, and the related statements of operations, stockholders' equity,
and cash flows for the years ended December 31, 1996 and 1997, and for the
period from January 1, 1998 to October 1, 1998. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of New Media Publishing, Inc.
as of December 31, 1996 and 1997, and October 1, 1998, and the results of its
operations and its cash flows for the years ended December 31, 1996 and 1997,
and for the period from January 1, 1998 to October 1, 1998, in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Washington, D.C.
February 9, 1999

F-57
<PAGE>
NEW MEDIA PUBLISHING, INC.

BALANCE SHEETS

AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- OCTOBER 1,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 129,000 $ 317,000 $ 224,000
Accounts receivable, net of allowance for doubtful
accounts of $0, $0, and $208,000, respectively....... 265,000 628,000 1,184,000
Other current assets................................... 2,000 19,000 69,000
---------- ---------- ----------
Total current assets................................. 396,000 964,000 1,477,000
Property and equipment, net.............................. 102,000 275,000 403,000
Other assets............................................. -- 10,000 10,000
---------- ---------- ----------
Total assets......................................... $ 498,000 $1,249,000 $1,890,000
========== ========== ==========
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 62,000 $ 163,000 $ 149,000
Accrued liabilities.................................... 50,000 552,000 321,000
Current portion of long-term debt...................... 250,000 51,000 --
Current portion of capital lease obligations........... -- 32,000 --
---------- ---------- ----------
Total current liabilities............................ 362,000 798,000 470,000
Long-term debt, net of current portion................... -- 50,000 --
Other long-term debt..................................... 4,000 7,000 1,000
Capital lease obligations................................ -- 71,000 --
---------- ---------- ----------
Total liabilities.................................... 366,000 926,000 471,000
Commitments and contingencies (Note 11)
Mandatorily redeemable preferred stock, no par value; 0,
0, and 1,450,000 shares authorized; 0, 0, and 1,428,570
shares issued and outstanding at December 31, 1996 and
1997, and October 1, 1998, respectively; liquidation
value $.875 per share.................................. -- -- 1,230,000
Stockholders' equity:
Common stock, no par value; 8,550,000 authorized;
5,937,500, 5,000,000, and 5,000,000 shares issued and
outstanding, respectively............................ -- -- --
Less: Treasury stock, at cost, 1,250,000 shares........ -- (51,000) (51,000)
Additional paid-in capital............................. -- 1,000 1,000
Retained earnings...................................... 132,000 373,000 239,000
---------- ---------- ----------
Total stockholders' equity........................... 132,000 323,000 189,000
---------- ---------- ----------
Total liabilities, preferred stock and stockholders'
equity............................................. $ 498,000 $1,249,000 $1,890,000
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-58
<PAGE>
NEW MEDIA PUBLISHING, INC.

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 1, 1998

<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE PERIOD
DECEMBER 31, FROM JANUARY 1,
----------------------- 1998 TO
1996 1997 OCTOBER 1, 1998
---------- ---------- ---------------
<S> <C> <C> <C>
Revenues............................................ $1,291,000 $3,028,000 $3,711,000
Cost of revenues.................................... 385,000 1,211,000 1,542,000
---------- ---------- ----------
Gross profit.................................... 906,000 1,817,000 2,169,000
---------- ---------- ----------
Operating expenses:
Selling and marketing............................. 3,000 88,000 227,000
General and administrative........................ 498,000 1,246,000 1,868,000
Depreciation and amortization..................... 38,000 68,000 123,000
---------- ---------- ----------
Total operating expenses........................ 539,000 1,402,000 2,218,000
---------- ---------- ----------
Income (loss) from operations....................... 367,000 415,000 (49,000)
Interest expense, net............................... 24,000 17,000 --
---------- ---------- ----------
Income (loss) before income taxes................... 343,000 398,000 (49,000)
Provision for income taxes.......................... 69,000 157,000 13,000
---------- ---------- ----------
Net income (loss)................................... $ 274,000 $ 241,000 $ (62,000)
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-59
<PAGE>
NEW MEDIA PUBLISHING, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1996
AND 1997, AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 1, 1998

<TABLE>
<CAPTION>
REDEEMABLE EQUITY
SECURITIES STOCKHOLDERS' EQUITY
---------------------- -------------------------------------------------------------------------
MANDATORILY
REDEEMABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
---------------------- --------------------- TREASURY PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL EARNINGS EQUITY
--------- ---------- ---------- -------- -------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995... -- $ -- 5,937,500 $ -- $ -- $ -- $(142,000) $(142,000)
Net income................. -- -- -- -- -- -- 274,000 274,000
--------- ---------- ---------- ------- -------- ------ --------- ---------
Balance, December 31, 1996... -- -- 5,937,500 -- -- -- 132,000 132,000
Issuance of 312,500 shares
of common stock.......... -- -- 312,500 -- -- 1,000 -- 1,000
Repurchase of 1,250,000
shares of common stock... -- -- (1,250,000) -- (51,000) -- -- (51,000)
Net income................. -- -- -- -- -- -- 241,000 241,000
--------- ---------- ---------- ------- -------- ------ --------- ---------
Balance, December 31, 1997... -- -- 5,000,000 -- (51,000) 1,000 373,000 323,000
Issuance of 1,428,570
shares of Mandatorily
Redeemable Preferred
Stock.................... 1,428,570 1,230,000 -- -- -- -- -- --
Accretion of preferred
stock dividend........... -- -- -- -- -- -- (72,000) (72,000)
Net loss................... -- -- -- -- -- -- (62,000) (62,000)
--------- ---------- ---------- ------- -------- ------ --------- ---------
Balance, October 1, 1998..... 1,428,570 $1,230,000 5,000,000 $ -- $(51,000) $1,000 $ 239,000 $ 189,000
========= ========== ========== ======= ======== ====== ========= =========
</TABLE>

The accompanying notes are an integral part of these statements.

F-60
<PAGE>
NEW MEDIA PUBLISHING, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 1, 1998

<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE PERIOD
DECEMBER 31, FROM JANUARY 1,
------------------- 1998 TO
1996 1997 OCTOBER 1, 1998
-------- -------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $274,000 $241,000 $ (62,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization....................... 38,000 68,000 123,000
Deferred income taxes............................... 3,000 1,000 (4,000)
Change in assets and liabilities:
Accounts receivable, net.......................... (251,000) (363,000) (556,000)
Other assets...................................... 1,000 (25,000) (52,000)
Accounts payable.................................. (15,000) 101,000 (14,000)
Accrued liabilities............................... 9,000 502,000 (303,000)
-------- -------- ---------
Net cash provided by (used in) operating
activities.................................... 59,000 525,000 (868,000)
-------- -------- ---------
Cash flows from investing activities:
Purchase of property and equipment, net................. (78,000) (138,000) (251,000)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from long-term debt............................ 125,000 250,000 --
Repayments of long-term debt............................ -- (449,000) (101,000)
Repayments of capital lease obligations................. -- -- (103,000)
Proceeds from issuance of preferred stock............... -- -- 1,230,000
Proceeds from issuance of common stock.................. -- 1,000 --
Payments to repurchase common stock..................... -- (1,000) --
-------- -------- ---------
Net cash provided by (used in) financing
activities.................................... 125,000 (199,000) 1,026,000
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents...... 106,000 188,000 (93,000)
Cash and cash equivalents, beginning of period............ 23,000 129,000 317,000
-------- -------- ---------
Cash and cash equivalents, end of period.................. $129,000 $317,000 $ 224,000
======== ======== =========
Supplementary information:
Cash paid for income taxes.............................. $ 43,000 $ 32,000 $ 218,000
======== ======== =========
Cash paid for interest.................................. $ 24,000 $ 23,000 $ 13,000
======== ======== =========
Non-cash financing and investing activities:
Issuance of note payable for repurchase of common stock
(Note 6).............................................. $ -- $ 50,000 $ --
======== ======== =========
Capital lease additions (Note 11)....................... $ -- $103,000 $ --
======== ======== =========
Accretion of preferred stock dividend (Note 2).......... $ -- $ -- $ 72,000
======== ======== =========
</TABLE>

The accompanying notes are an integral part of these statements.

F-61
<PAGE>
NEW MEDIA PUBLISHING, INC.

NOTES TO FINANCIAL STATEMENTS

AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998

1. BUSINESS DESCRIPTION:

New Media Publishing, Inc. ("NMP" or the "Company") was incorporated in
1995, under the laws of the state of Virginia. NMP is a provider of
comprehensive interactive community-building services for commercial and
not-for-profit entities. The Company is headquartered in Falls Church, Virginia.

On October 2, 1998, all of the issued and outstanding stock of the Company
was acquired by AppNet Systems, Inc. ("AppNet").

There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.

PROPERTY AND EQUIPMENT

<TABLE>
<S> <C>
Computer equipment.......................................... three years
Furniture and fixtures...................................... seven years
</TABLE>

Purchased software is capitalized and amortized principally over three
years. Leasehold improvements are amortized over the lesser of the estimated
useful life of the asset or the remaining lease term.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, long-term debt, capital
lease obligations and Mandatorily Redeemable

F-62
<PAGE>
NEW MEDIA PUBLISHING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998

Preferred Stock. In management's opinion, the carrying amounts of these
financial instruments approximated their fair values at December 31, 1996 and
1997, and October 1, 1998.

CAPITAL STOCK

On December 8, 1997, the Board of Directors approved a common stock split of
625-to-1. In addition, on April 23, 1998, the Board of Directors approved a
common and preferred stock split of ten-to-one. All share amounts in the
accompanying financial statements have been retroactively adjusted to reflect
these splits.

In March 1998, the Company amended and restated its Articles of
Incorporation. The amended and restated Articles of Incorporation increased the
authorized number of shares of no par common stock to 7,500,000 shares and
authorized 1,428,570 shares of a new class of $0.0875 cumulative annual
dividend, nonparticipating, convertible, redeemable, voting, no par preferred
stock called the Series A Convertible Preferred Stock (the "Mandatorily
Redeemable Preferred Stock"). The Company issued 1,428,570 shares of the
Mandatorily Redeemable Preferred Stock for net proceeds of $1,230,000. Dividends
on the Mandatorily Redeemable Preferred Stock were to cease to accrue on the
sixth anniversary of the issue date. In the event of liquidation, holders of the
Mandatorily Redeemable Preferred Stock would have first received an amount per
share equal to the original issue price of the shares plus accrued but unpaid
dividends thereon and then participate pro rata with the holders of the
Company's common stock in the distribution of any remaining funds in excess of
$5,000,000. Each share of Mandatorily Redeemable Preferred Stock was convertible
at any time at the option of the holder into one share of common stock, subject
to adjustment as a result of the occurrence of certain events. Further,
beginning on March 5, 2004, the Company would have been required, at the request
of the holders, to redeem at the original issue price plus accrued but unpaid
dividends, at least 10 percent of the outstanding Mandatorily Redeemable
Preferred Stock on each successive calendar quarter until all shares had been
redeemed. The dividend on the Mandatorily Redeemable Preferred Stock was
originally due March 1999. The holders of the Mandatorily Redeemable Preferred
Stock forgave payment of this dividend in conjunction with NMP's purchase by
AppNet.

The Company's common stock, including common stock which may be authorized
and issued in the future, is subject to a Shareholders' Agreement, which
includes certain co-sale rights, transfer restrictions, and buy back rights. On
April 23, 1998, the Board of Directors approved an increase in the authorized
number of shares of common and preferred stock to 8,550,000 and 1,450,000,
respectively.

STOCK-BASED COMPENSATION

The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation cost is recognized based on the difference, if any, on the date of
grant between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock.

REVENUE RECOGNITION

Revenues from time and materials contracts are recognized based on fixed
hourly rates for direct labor hours expended. Revenues from fixed-price
contracts are recognized on the percentage-of-

F-63
<PAGE>
NEW MEDIA PUBLISHING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998

completion method, with costs and estimated profits recorded as work is
performed. Revenues exclude the costs of media and advertising purchases
reimbursed by clients.

Cost of revenues include all direct material and labor costs related to
contract performance, and does not include any related depreciation expense.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance and estimated
profitability, including final contract settlements, may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined. Unbilled receivables on contracts are comprised of costs, plus
earnings on certain contracts in excess of contractual billings on such
contracts. Cash received in excess of costs incurred is classified as deferred
revenue.

BUSINESS CONCENTRATION AND CREDIT RISK

The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:

<TABLE>
<CAPTION>
REVENUES ACCOUNTS RECEIVABLE
---------------------------------------------- --------------------------------
FOR THE YEAR ENDED AS OF
DECEMBER 31, FOR THE PERIOD ENDED DECEMBER 31, AS OF
--------------------- OCTOBER 1, ------------------- OCTOBER 1,
1996 1997 1998 1996 1997 1998
-------- -------- -------------------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Customer A.................... * 16.3% * * 21.7% *
</TABLE>

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

* Represents less than 10% of total.

INCOME TAXES

3. ACCOUNTS RECEIVABLE:

Accounts receivable consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- OCTOBER 1,
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Accounts receivable......................... $169,000 $486,000 $ 943,000
Unbilled accounts receivable................ 96,000 142,000 449,000
Allowance for doubtful accounts............. -- -- (208,000)
-------- -------- ----------
Accounts receivable, net................ $265,000 $628,000 $1,184,000
======== ======== ==========
</TABLE>

F-64
<PAGE>
NEW MEDIA PUBLISHING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998

4. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- OCTOBER 1,
1996 1997 1998
-------- --------- ----------
<S> <C> <C> <C>
Computer equipment.......................... $145,000 $ 386,000 $ 627,000
Furniture and fixtures...................... 7,000 7,000 7,000
Leasehold improvements...................... -- -- 10,000
-------- --------- ---------
152,000 393,000 644,000
Accumulated depreciation and amortization... (50,000) (118,000) (241,000)
-------- --------- ---------
Property and equipment, net............. $102,000 $ 275,000 $ 403,000
======== ========= =========
</TABLE>

5. ACCRUED LIABILITIES:

Accrued liabilities consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- OCTOBER 1,
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Accrued compensation and benefits.............. $29,000 $198,000 $102,000
Accrued bonuses................................ -- 200,000 --
Accrued Mandatorily Redeemable Preferred Stock
dividends.................................... -- -- 72,000
Deferred revenues.............................. 21,000 154,000 147,000
------- -------- --------
Accrued liabilities........................ $50,000 $552,000 $321,000
======= ======== ========
</TABLE>

6. DEBT:

Debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- OCTOBER 1,
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Note payable to former shareholder, due
December 31, 1999, bore interest at 8%,
interest payable quarterly.................. $ -- $ 50,000 $ --
Bank note payable, due May 15, 2000, payable
in monthly installments of $6,944 plus
interest at bank's prime rate plus 1%
secured by the Company's assets............. -- 51,000 --
Note payable, principal due April 27, 1997,
bears interest at 10%, payable
semi-annually............................... 250,000 -- --
-------- -------- --------
Total debt................................ 250,000 101,000 --
-------- -------- --------
Less: Current portion......................... 250,000 51,000 --
-------- -------- --------
Long term-debt, net of current portion.... $ -- $ 50,000 $ --
======== ======== ========
</TABLE>

F-65
<PAGE>
NEW MEDIA PUBLISHING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998

In 1997, the Company had a line of credit which was collateralized by
substantially all of the assets of the Company. Under the terms of the line of
credit, borrowings were limited to 80 percent of qualified accounts receivable,
up to a maximum borrowing of $250,000. Interest on the outstanding balance was
calculated as the bank's prime rate of interest plus one and one-half percent.
As of December 31, 1997, there was no amount outstanding under the line of
credit. The agreement expired in May 1998.

The note payable issued to the former shareholder related to the
reacquisition of 1,250,000 shares of common stock. The note was paid in full in
February 1998.

The bank note payable contained certain restrictions on capital
expenditures, the incurrence of additional indebtedness, payment of cash
dividends and treasury stock transactions. This bank borrowing was paid in full
during February 1998.

7. RETIREMENT PLAN:

The Company maintains a retirement plan under the provisions of
section 401(k) of the Internal Revenue Code. The plan was adopted January 1,
1997. The Plan provides for contributions by employees and by the Company.
Participants may contribute up to 15 percent of their compensation, subject to
statutory limits. The Company's contribution is discretionary and is determined
by its Board of Directors. Company contributions vest immediately. Company
contributions totaled $32,000, and $40,000 for the year ended December 31, 1997,
and for the period from January 1, 1998 to October 1, 1998, respectively.
Effective February 1,1999, NMP employees are covered by the AppNet 401(k) plan.

8. EMPLOYEE STOCK OPTION PLAN:

On December 31, 1997, the Company adopted a stock option plan for employees,
directors, and consultants of the Company. Options expire no later than ten
years from the date of the grant or when employment ceases, whichever comes
first. The maximum number of shares of common stock which may be issued pursuant
to the stock option plan was 714,290.

The stock option plan is accounted for under APB Opinion No. 25 and no
compensation has been recognized for the plan. Had compensation cost for the
plan been determined based on the estimated fair value of the options at the
grant dates consistent with the method of SFAS No. 123, the effect to pro forma
net income would have been approximately $7,000 and $91,000, for the year ended
December 31, 1997, and for the period from January 1, 1998 to October 1, 1998,
respectively. The weighted average fair value of the options granted during
1997, and during the period from January 1, 1998 to October 1, 1998, is
estimated to be $.03, and $.22, respectively, per option assuming the following:
dividend yield of 0 percent, risk-free interest rate ranging from 5.40 to
6.00 percent, volatility of 0 percent, and an expected term of the options of
5 years.

F-66
<PAGE>
NEW MEDIA PUBLISHING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998

The following summarizes option activity during 1997 and for the period from
January 1, 1998 to October 1, 1998:

<TABLE>
<CAPTION>
STOCK OPTIONS
OUTSTANDING
-------------------
1997 1998
-------- --------
<S> <C> <C>
Beginning of period....................................... -- 286,000
Granted................................................. 286,000 168,000
Exercised............................................... -- --
Cancelled............................................... -- (33,000)
------- -------
End of period............................................. 286,000 421,000
======= =======
Exercisable at end of period.............................. -- 14,000
======= =======
</TABLE>

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
-------------------
1997 1998
-------- --------
<S> <C> <C>
Beginning of period....................................... $ -- $ .03
Granted................................................. .03 1.16
Exercised............................................... -- --
Cancelled............................................... -- .05
End of period............................................. $ .03 $ .48
======= =======
Exercisable at end of period.............................. $ -- $ .04
======= =======
</TABLE>

When AppNet acquired NMP (Note 1), the options outstanding under the stock
option plan were assumed as part of the purchase combination and converted to
AppNet options.

9. INCOME TAXES:

F-67
<PAGE>
NEW MEDIA PUBLISHING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998

The sources of and differences between the financial accounting and tax
basis of NMP's assets and liabilities that give rise to the net deferred tax
liability (asset) are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- OCTOBER 1,
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Deferred tax liability
Depreciation.................................... $4,000 $8,000 $ 2,000
Deferred tax asset
Reserves........................................ 1,000 4,000 71,000
------ ------ --------
Net deferred tax liability (asset)................ $3,000 $4,000 (69,000)
====== ======
Less: Valuation allowance......................... 69,000
--------
Net deferred tax liability (asset)................ $ --
========
</TABLE>

The components of the provision for income taxes for the years ended
December 31, 1996 and 1997, and for the period from January 1, 1998 to
October 1, 1998, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- OCTOBER 1,
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Federal income taxes:
Current...................................... $55,000 $132,000 $13,000
Deferred provision (benefit)................. 3,000 1,000 (4,000)
State taxes.................................... 11,000 24,000 4,000
------- -------- -------
Provision for income taxes..................... $69,000 $157,000 $13,000
======= ======== =======
</TABLE>

For the years ended December 31, 1996 and 1997, and for the period from
January 1, 1998 to October 1, 1998, the provision for income taxes differed from
the amounts computed at the statutory rate, as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- OCTOBER 1,
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Income tax computed at statutory rates........ $116,000 $135,000 $(17,000)
State income taxes, net of federal income tax
benefit..................................... 7,000 15,000 3,000
Change in valuation allowance................. (53,000) -- 35,000
Other, net.................................... (1,000) 7,000 (8,000)
-------- -------- --------
$ 69,000 $157,000 $ 13,000
======== ======== ========
</TABLE>

The valuation allowance for deferred tax assets as of January 1, 1996 was
$53,000. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. For the year ended December 31,
1996, management determined that the deferred tax asset would be realized and
decreased the valuation allowance by $53,000. For the period

F-68
<PAGE>
NEW MEDIA PUBLISHING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 1, 1998

from January 1, 1998 to October 1, 1998, management determined that a valuation
allowance of $35,000 was required.

10. RELATED PARTIES:

Certain directors and other parties related to the Company through common
shareholder interests provided administrative and management consulting services
to the Company totaling $115,000, $191,000 and $34,000 for the years ended
December 31, 1996 and 1997, and for the period from January 1, 1998 to
October 1, 1998, respectively. Rent expense to companies related through common
shareholder interest totaled $34,000, $74,000, and $74,000 for the years ended
December 31, 1996 and 1997, and for the period from January 1, 1998 to
October 1, 1998, respectively. Accounts payable included $40,000, $76,000 and $0
related to these transactions at December 31, 1996 and 1997, and October 1,
1998, respectively.

11. COMMITMENTS AND CONTINGENCIES:

COMMITMENTS

In connection with the repurchase by the Company of 1,250,000 shares of the
Company's common stock, the Company entered into a consulting and
non-competition agreement with a former shareholder on April 1, 1997, which
provided for monthly payments by the Company totaling $57,600 for the period
from January 1, 1998 to December 31, 1999. The Company accelerated the payment
schedule and paid the remaining balance as of October 1, 1998.

LEASES

The Company has noncancelable operating leases, primarily for real estate,
that expire over the next two years. Rental expense for operating leases during
the years ended December 31, 1996 and 1997, and for the period from January 1,
1998 to October 1, 1998, was $34,000, $79,000 and $154,000, respectively.

During 1997, the Company entered into a capital lease for certain equipment.
This capital lease was paid-off on October 1, 1998.

Future minimum lease payments under the noncancelable operating leases are
as follows as of October 1, 1998:

<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
Period ended December 31, 1998.............................. $ 30,000
1999........................................................ 122,000
--------
Total minimum lease payments............................ $152,000
========
</TABLE>

F-69
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Century Computing, Inc.:

We have audited the accompanying balance sheets of Century Computing, Inc.
(a Delaware corporation), as of December 31, 1996 and 1997, and October 11,
1998, and the related statements of operations, stockholders' equity, and cash
flows for the years ended December 31, 1996 and 1997, and for the period from
January 1, 1998 to October 11, 1998. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Century Computing, Inc. as
of December 31, 1996 and 1997, and October 11, 1998, and the results of its
operations and its cash flows for the years ended December 31, 1996 and 1997,
and for the period from January 1, 1998 to October 11, 1998, in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Washington, D.C.
February 22, 1999

F-70
<PAGE>
CENTURY COMPUTING, INC.

BALANCE SHEETS

AS OF DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- OCTOBER 11,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 549,000 $ 1,225,000 $ 8,000
Accounts receivable, net of allowance for doubtful
accounts of $0, $0 and $129,000, respectively...... 1,260,000 2,023,000 2,178,000
Other current assets................................. 62,000 62,000 684,000
----------- ----------- -----------
Total current assets............................. 1,871,000 3,310,000 2,870,000
Property and equipment, net............................ 416,000 573,000 653,000
Deferred income taxes.................................. 30,000 -- --
Other assets........................................... 11,000 11,000 11,000
----------- ----------- -----------
Total assets..................................... $ 2,328,000 $ 3,894,000 $ 3,534,000
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 255,000 $ 280,000 $ 703,000
Accrued liabilities.................................. 338,000 1,194,000 1,294,000
----------- ----------- -----------
Total current liabilities........................ 593,000 1,474,000 1,997,000
Deferred income taxes................................ -- -- 67,000
----------- ----------- -----------
Total liabilities................................ 593,000 1,474,000 2,064,000
----------- ----------- -----------

Commitments and contingencies (Note 7)
Stockholders' equity
Class A common stock, voting, $.01 par value;
2,500,000 shares authorized; 603,055, 603,055, and
606,929 shares issued and outstanding,
respectively....................................... 6,000 6,000 6,000
Class B common stock, nonvoting, $.01 par value;
2,500,000 shares authorized; 11,630, 14,380, and
17,461 shares issued and outstanding,
respectively....................................... -- -- --
Less: Treasury stock, at cost--257,987, 258,056, and
258,306, respectively.............................. (1,175,000) (1,176,000) (1,178,000)
Additional paid-in capital........................... 255,000 271,000 315,000
Retained earnings.................................... 2,649,000 3,319,000 2,327,000
----------- ----------- -----------
Total stockholders' equity....................... 1,735,000 2,420,000 1,470,000
----------- ----------- -----------
Total liabilities and stockholders' equity....... $ 2,328,000 $ 3,894,000 $ 3,534,000
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-71
<PAGE>
CENTURY COMPUTING, INC.

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 11, 1998

<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1998
------------------------ TO OCTOBER 11,
1996 1997 1998
---------- ----------- ----------------
<S> <C> <C> <C>
Revenues.......................................... $7,198,000 $10,850,000 $10,040,000
Cost of revenues.................................. 3,356,000 5,309,000 6,192,000
---------- ----------- -----------
Gross profit.................................. 3,842,000 5,541,000 3,848,000
Operating expenses:
Selling, general and administrative............. 2,992,000 3,890,000 2,751,000
Acquisition-related compensation................ -- -- 953,000
Depreciation and amortization................... 153,000 179,000 156,000
---------- ----------- -----------
Total operating expenses...................... 3,145,000 4,069,000 3,860,000
Income (loss) from operations..................... 697,000 1,472,000 (12,000)
Interest income, net.............................. 8,000 29,000 41,000
Other income (expense)............................ 20,000 -- (423,000)
---------- ----------- -----------
Income (loss) before income taxes................. 725,000 1,501,000 (394,000)
Provision (benefit) for income taxes.............. 279,000 580,000 (135,000)
---------- ----------- -----------
Net income (loss)................................. $ 446,000 $ 921,000 $ (259,000)
========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-72
<PAGE>
CENTURY COMPUTING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 11, 1998

<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
CLASS A CLASS B ADDITIONAL TOTAL
------------------- ------------------- TREASURY PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL EARNINGS EQUITY
-------- -------- -------- -------- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995.... 613,485 $6,000 -- $ -- $(1,036,000) $258,000 $2,374,000 $1,602,000
Repurchase of 21,755 shares
of common stock........... -- -- -- -- (139,000) -- -- (139,000)
Stock conversion............ (10,430) -- 11,630 -- -- (3,000) -- (3,000)
Dividends to stockholders... -- -- -- -- -- -- (171,000) (171,000)
Net income.................. -- -- -- -- -- -- 446,000 446,000
------- ------ ------ ------ ----------- -------- ---------- ----------
Balance, December 31, 1996.... 603,055 6,000 11,630 -- (1,175,000) 255,000 2,649,000 1,735,000
Repurchase of 189 shares of
common stock.............. -- -- -- -- (1,000) -- -- (1,000)
Exercise of stock options... -- -- 2,750 -- -- 16,000 -- 16,000
Dividends to stockholders... -- -- -- -- -- -- (251,000) (251,000)
Net income.................. -- -- -- -- -- -- 921,000 921,000
------- ------ ------ ------ ----------- -------- ---------- ----------
Balance, December 31, 1997.... 603,055 6,000 14,380 -- (1,176,000) 271,000 3,319,000 2,420,000
Repurchase of 250 shares of
common stock.............. -- -- -- -- (2,000) -- -- (2,000)
Exercise of stock options... 3,874 -- 3,081 -- -- 44,000 -- 44,000
Dividends to stockholders... -- -- -- -- -- -- (733,000) (733,000)
Net loss.................... -- -- -- -- -- -- (259,000) (259,000)
------- ------ ------ ------ ----------- -------- ---------- ----------
Balance, October 11, 1998..... 606,929 $6,000 17,461 $ -- $(1,178,000) $315,000 $2,327,000 $1,470,000
======= ====== ====== ====== =========== ======== ========== ==========
</TABLE>

F-73
<PAGE>
CENTURY COMPUTING, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 11, 1998

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS FROM JANUARY 1,
ENDED DECEMBER 31, 1998 TO
---------------------- OCTOBER 11,
1996 1997 1998
--------- ---------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................... $ 446,000 $ 921,000 $ (259,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred income taxes............................. (25,000) 78,000 (156,000)
Depreciation and amortization..................... 153,000 179,000 156,000
Change in assets and liabilities:
Accounts receivable............................. 53,000 (763,000) (155,000)
Other current assets............................ (39,000) 28,000 (475,000)
Accounts payable................................ 83,000 25,000 423,000
Accrued liabilities............................. 6,000 780,000 176,000
--------- ---------- -----------
Net cash provided by (used in) operating
activities.................................. 677,000 1,248,000 (290,000)
--------- ---------- -----------
Cash flows from investing activities:
Purchase of property and equipment, net............... (243,000) (336,000) (236,000)
--------- ---------- -----------
Cash flows from financing activities:
Repayments of long-term debt.......................... (127,000) -- --
Payments to repurchase common stock................... (139,000) (1,000) (2,000)
Dividends to stockholders............................. (171,000) (251,000) (733,000)
Proceeds from exercise of stock options............... -- 16,000 44,000
Stock conversion...................................... (3,000) -- --
--------- ---------- -----------
Net cash used in financing activities......... (440,000) (236,000) (691,000)
--------- ---------- -----------
Net (decrease) increase in cash and cash equivalents.... (6,000) 676,000 (1,217,000)
Cash and cash equivalents, beginning of period.......... 555,000 549,000 1,225,000
--------- ---------- -----------
Cash and cash equivalents, end of period................ $ 549,000 $1,225,000 $ 8,000
========= ========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-74
<PAGE>
CENTURY COMPUTING, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998

1. BUSINESS DESCRIPTION:

Century Computing, Inc. ("Century" or the "Company") was incorporated in
1979, under the laws of the state of Delaware. Century is a government
contractor that provides systems integration and processing services to improve
clients' business processes, including networking and data communications,
computer and Internet security, image processing, graphical user interfacing and
object-oriented design and development. Century is headquartered in Laurel,
Maryland, and operates primarily in the United States.

On October 11, 1998, all of the issued and outstanding stock of the Company
was acquired by AppNet Systems, Inc. ("AppNet").

There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological changes,
government regulations and the Year 2000 issue.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed over the estimated
useful lives of the related assets, as follows:

<TABLE>
<S> <C>
Computers, equipment and software........................ three to five years
Furniture and fixtures................................... seven years
</TABLE>

Purchased software and third-party costs incurred to develop software for
internal use are capitalized and amortized principally over five years.
Leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the remaining lease term.

F-75
<PAGE>
CENTURY COMPUTING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998

SOFTWARE DEVELOPMENT COSTS

The Company has capitalized costs related to the development of certain
software products. In accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," capitalization of
costs begins when technological feasibility has been established and ends when
the product is available for general release to customers. Amortization has been
computed and recognized based on the products' estimated economic lives of two
years. Capitalized costs and amortization periods are management's estimates and
may have to be modified due to inherent technological changes in software
development.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist primarily of cash, marketable
securities, accounts receivable, short-term borrowings and accounts payable. In
management's opinion, the carrying amounts of these financial instruments
approximated their fair values at December 31, 1996 and 1997, and October 11,
1998.

STOCK-BASED COMPENSATION

The Company accounts for its stock-based employee compensation arrangements
using the intrinsic value method in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation cost is recognized based on the difference, if any, on the date of
grant between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock.

REVENUE RECOGNITION

Cost of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in contract performance and
estimated profitability, including final contract settlements, may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined. Unbilled receivables on contracts are comprised of
costs, plus earnings on certain contracts in excess of contractual billings on
such contracts.

Revenues from software sales are recognized when the related product is
sold, provided no significant vendor obligations remain.

BUSINESS CONCENTRATION AND CREDIT RISK

Revenues for the years ended December 31, 1996 and 1997 and for the period
from January 1, 1998 through October 11, 1998, were concentrated with 45, 74 and
62 percent of agencies of the United States Government, respectively.

F-76
<PAGE>
CENTURY COMPUTING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998

Billed accounts receivable and unbilled accounts receivable as of
December 31, 1996 and 1997, and October 11, 1998, were concentrated with 56, 78
and 55 percent and 51, 78 and 50 percent of agencies of the United States
Government, respectively.

INCOME TAXES

RECENT ACCOUNTING PRONOUNCEMENTS

RECLASSIFICATIONS

Certain amounts from the prior year financial statements have been
reclassified to conform with the current presentation.

3. ACCOUNTS RECEIVABLE:

Accounts receivable consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- OCTOBER 11,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Commercial clients....................... $258,000 $ 264,000 $ 663,000
Government agencies and contractors...... 330,000 938,000 823,000
-------- ---------- ----------
588,000 1,202,000 1,486,000
Allowance for doubtful accounts.......... -- -- (129,000)
-------- ---------- ----------
Accounts receivable, net............. $588,000 $1,202,000 $1,357,000
======== ========== ==========
</TABLE>

Unbilled accounts receivable consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- OCTOBER 11,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Commercial clients....................... $329,000 $ 179,000 $ 409,000
Government agencies and contractors...... 343,000 642,000 412,000
-------- ---------- ----------
Unbilled accounts receivable......... $672,000 $ 821,000 $ 821,000
======== ========== ==========
</TABLE>

F-77
<PAGE>
CENTURY COMPUTING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998

4. OTHER CURRENT ASSETS:

Other current assets consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- OCTOBER 11,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Deferred income taxes.................. $ 20,000 $ 48,000 $ 195,000
Income tax receivable.................. 26,000 -- 460,000
Other current assets................... 16,000 14,000 29,000
----------- ----------- -----------
Total.............................. $ 62,000 $ 62,000 $ 684,000
=========== =========== ===========
</TABLE>

5. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- OCTOBER 11,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Computers, equipment and software...... $ 1,709,000 $ 2,049,000 $ 2,218,000
Furniture and fixtures................. 40,000 50,000 51,000
Leasehold improvements................. 154,000 154,000 252,000
----------- ----------- -----------
1,903,000 2,253,000 2,521,000
Accumulated depreciation and
amortization......................... (1,487,000) (1,680,000) (1,868,000)
----------- ----------- -----------
Property and equipment, net........ $ 416,000 $ 573,000 $ 653,000
=========== =========== ===========
</TABLE>

6. ACCRUED LIABILITIES:

Accrued liabilities consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- OCTOBER 11,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Accrued compensation and benefits...... $ 293,000 $ 914,000 $ 1,204,000
Income tax payable..................... -- 204,000 --
Deferred income taxes.................. -- 76,000 --
Other accrued liabilities.............. 45,000 -- 90,000
----------- ----------- -----------
Total.............................. $ 338,000 $ 1,194,000 $ 1,294,000
=========== =========== ===========
</TABLE>

7. LEASES:

The Company has entered into a noncancelable operating lease for real estate
that expires in 2005. Rental expense for the operating lease during the years
ended December 31, 1996 and 1997, and for the period from January 1, 1998 to
October 11, 1998, was $123,000, $127,000, and $109,000, respectively.

F-78
<PAGE>
CENTURY COMPUTING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998

Future minimum lease payments under noncancelable operating leases are as
follows as of October 11, 1998:

<TABLE>
<S> <C>
Period ended December 31, 1998.............................. $ 40,000
1999........................................................ 195,000
2000........................................................ 195,000
2001........................................................ 195,000
2002........................................................ 195,000
2003........................................................ 195,000
Thereafter.................................................. 263,000
----------
Total minimum lease payments............................ $1,278,000
==========
</TABLE>

8. SHORT-TERM BORROWING:

The Company had a revolving line of credit that expired April 30, 1998,
which was secured by the accounts receivable of the Company. Under the terms of
the line of credit, borrowings were available up to a maximum borrowing of
$1,500,000. Interest on the outstanding balance was calculated at the bank's
prime rate plus one-half of one percent per annum, payable monthly. As of
December 31, 1996 and 1997, and October 11, 1998, there were no outstanding
amounts.

9. NOTE PAYABLE:

During 1995, the Company purchased a portion of a stockholder's shares for
$379,000, payable in three annual installments in January 1996, 1997 and 1998.
The Company placed $252,000 into an interest bearing escrow account during 1995
to satisfy the first two annual payments. The remaining balance was placed into
the escrow account during 1996. As of December 31, 1996 and 1997, and for the
period ended October 11, 1998, there was no outstanding balance on the note
payable.

10. RETIREMENT PLAN:

The Company maintains a profit-sharing and retirement plan under the
provisions of section 401(k) of the Internal Revenue Code. The Plan provides for
contributions by employees and a discretionary contribution by the Company. The
plan is for the benefit of all employees who have attained the age of 21.
Participants may contribute up to 15 percent of their compensation, subject to
statutory limits. Employee contributions are fully vested. The Company's
contribution is discretionary and is determined by its Board of Directors.
Company contributions vest twenty percent per year over the five years, after
the first year. Company contributions totaled $125,000, $182,000 and $170,000
for the years ended December 31, 1996 and 1997, and for the period from
January 1, 1998 to October 11, 1998, respectively.

Effective February 1, 1999, Century's employees are covered by AppNet's
401(k) plan.

11. STOCKHOLDER AGREEMENTS:

During the year ended December 31, 1996, the Company established Class B
common stock. This Class B common stock has no voting rights. The Company gave
the holders of the Class A common stock the option of retaining their Class A
voting stock, converting their Class A voting stock to

F-79
<PAGE>
CENTURY COMPUTING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998

Class B stock or selling their Class A voting stock back to the Company. The
activity related to this program is presented in the statement of stockholders'
equity as stock conversion.

12. EMPLOYEE STOCK OPTION PLAN:

The Company maintained a stock option plan for key employees. The issued
options expire no later than ten years from the date of the grant or when
employment ceases, whichever comes first.

Options granted under the plan are accounted for pursuant to APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and no compensation has been
recognized for the plan. Had compensation cost for the plan been determined
based on the estimated fair value of the options at the grant dates consistent
with the method of SFAS No. 123, pro forma net income (loss) would have been
approximately $354,000, $844,000 and $380,000 for the years ended December 31,
1996 and 1997, and for the period from January 1, 1998 to October 11, 1998. The
weighted-average fair value of the options granted during 1996, 1997, and during
the period from January 1, 1998 to October 11, 1998, is estimated to be $5.58,
$5.50 and $5.84, respectively, per option. All stock options were granted at
fair market value at the date of grant.

The following summarizes option activity during 1996, 1997 and for the
period from January 1, 1998 to October 11, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------------------
1996 1997 OCTOBER 11, 1998
------------------- ------------------- -------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Beginning of period......... -- 87,399 10,730 81,603 10,730 77,153
Granted................... 10,730 21,604 -- 540 5,000 10,490
Exercised................. -- -- -- (2,750) (3,874) (3,081)
Expired................... -- (27,400) -- (2,240) -- (260)
------ ------- ------ ------ ------ ------
End of period............... 10,730 81,603 10,730 77,153 11,856 84,302
====== ======= ====== ====== ====== ======
Exercisable at end of
period.................... -- 75,334 10,730 77,153 11,856 84,302
====== ======= ====== ====== ====== ======
</TABLE>

<TABLE>
<CAPTION>
WEIGHTED AVERAGE EXERCISE PRICE
---------------------------------------
OCTOBER 11,
1996 1997 1998
-------- -------- -----------
<S> <C> <C> <C>
Beginning of period.............................. $5.23 $5.52 $5.50
Granted........................................ 6.03 7.41 7.97
Exercised...................................... -- 6.03 6.26
Expired........................................ 5.19 6.03 7.41
----- ----- -----
End of period.................................... $5.52 $5.50 $5.84
===== ===== =====
Exercisable at end of period..................... $5.58 $5.50 $5.84
===== ===== =====
</TABLE>

13. INCOME TAXES:

The Company follows the provisions of SFAS No. 109, "Accounting for Income
Taxes," for financial reporting purposes. Deferred tax assets or liabilities at
the end of each period are determined

F-80
<PAGE>
CENTURY COMPUTING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998

using the currently enacted tax rates to apply to taxable income in the period
in which the deferred tax asset or liability is expected to be settled or
realized.

The components of the net deferred tax asset (liability) are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- OCTOBER 11,
1996 1997 1998
-------- -------- -----------
<S> <C> <C> <C>
Total deferred tax liabilities............... $ -- $(76,000) $ (67,000)
Total deferred tax assets.................... 50,000 48,000 195,000
-------- -------- ---------
Net deferred tax asset (liability)........... $ 50,000 $(28,000) $ 128,000
======== ======== =========
</TABLE>

The sources of and differences between the financial accounting and tax
basis of Century Computing, Inc.'s assets and liabilities that give rise to the
net deferred tax asset (liability) are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- OCTOBER 11,
1996 1997 1998
-------- -------- -----------
<S> <C> <C> <C>
Deferred tax liabilities
Software development costs................. $ -- $ -- $ (21,000)
Other...................................... -- (76,000) (46,000)
-------- -------- ---------
-- (76,000) (67,000)
======== ======== =========
Deferred tax assets
Depreciation and amortization.............. 30,000 21,000 12,000
Other...................................... 20,000 27,000 183,000
-------- -------- ---------
$ 50,000 $ 48,000 $ 195,000
======== ======== =========
</TABLE>

The components of the provision (benefit) for income taxes as of
December 31, 1996 and 1997, and October 11, 1998, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- OCTOBER 11,
1996 1997 1998
-------- -------- -----------
<S> <C> <C> <C>
Federal income taxes:
Current.................................... $250,000 $409,000 $ 7,000
Deferred................................... (23,000) 64,000 (119,000)
State taxes.................................. 52,000 107,000 (23,000)
-------- -------- ---------
Provision (benefit) for income taxes......... $279,000 $580,000 $(135,000)
======== ======== =========
</TABLE>

F-81
<PAGE>
CENTURY COMPUTING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996 AND 1997, AND OCTOBER 11, 1998

The tax provision (benefit) differed from the amounts computed at the
statutory rate, as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- OCTOBER 11,
1996 1997 1998
-------- -------- -----------
<S> <C> <C> <C>
Federal income taxes at the U.S. statutory
rate....................................... $246,000 $510,000 $(134,000)
State taxes, net of federal benefit.......... 34,000 70,000 (15,000)
Other........................................ (1,000) -- 14,000
-------- -------- ---------
Total.................................... $279,000 $580,000 $(135,000)
======== ======== =========
</TABLE>

14. ACQUISITION-RELATED COMPENSATION:

In conjunction with AppNet Systems, Inc.'s purchase of Century, Century paid
an unconditional cash bonus of approximately $953,000 to certain employees for
past services.

F-82
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Research & Planning, Inc.:

We have audited the accompanying balance sheets of Research &
Planning, Inc. (a Massachusetts corporation), as of December 31, 1996 and 1997,
and October 19, 1998, and the related statements of operations, stockholders'
equity, and cash flows for the years ended December 31, 1996 and 1997, and for
the period from January 1, 1998 to October 19, 1998. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of
December 31, 1996 and 1997, and October 19, 1998, and the results of its
operations and its cash flows for the years ended December 31, 1996 and 1997,
and for the period from January 1, 1998 to October 19, 1998 in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Washington, D.C.
February 19, 1999

F-83
<PAGE>
RESEARCH & PLANNING, INC.

BALANCE SHEETS

AS OF DECEMBER 31, 1996, AND 1997, AND OCTOBER 19, 1998

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- OCTOBER 19,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 74,000 $ 93,000 $ 310,000
Accounts receivable, net of allowance for doubtful
accounts of $1,000, $15,000 and $40,000,
respectively......................................... 865,000 1,374,000 1,407,000
Other current assets................................... 73,000 137,000 30,000
---------- ---------- ----------
Total current assets................................. 1,012,000 1,604,000 1,747,000
Property and equipment, net.............................. 97,000 262,000 457,000
---------- ---------- ----------
Total assets......................................... $1,109,000 $1,866,000 $2,204,000
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Short-term borrowing................................... $ -- $ 200,000 $ --
Accounts payable....................................... 10,000 25,000 198,000
Accrued liabilities.................................... 116,000 301,000 457,000
---------- ---------- ----------
Total liabilities.................................... 126,000 526,000 655,000
---------- ---------- ----------
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock, $0.10 par value; 100,000 authorized;
11,111 shares issued; and 10,000 outstanding......... 1,000 1,000 1,000
Less: Treasury stock, at cost--1,111 shares............ (11,000) (11,000) (11,000)
Additional paid-in capital............................. 12,000 12,000 12,000
Retained earnings...................................... 981,000 1,338,000 1,547,000
---------- ---------- ----------
Total stockholders' equity........................... 983,000 1,340,000 1,549,000
---------- ---------- ----------
Total liabilities and stockholders' equity........... $1,109,000 $1,866,000 $2,204,000
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-84
<PAGE>
RESEARCH & PLANNING, INC.

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1996, AND 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 19, 1998

<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE PERIOD
DECEMBER 31, FROM JANUARY 1,
----------------------- 1998 TO
1996 1997 OCTOBER 19, 1998
---------- ---------- ----------------
<S> <C> <C> <C>
Revenues.............................................. $3,329,000 $4,781,000 $5,303,000
Cost of revenues...................................... 1,753,000 2,434,000 2,667,000
---------- ---------- ----------
Gross profit...................................... 1,576,000 2,347,000 2,636,000
---------- ---------- ----------
Operating expenses:
Selling and marketing............................... 93,000 86,000 260,000
General and administrative.......................... 418,000 657,000 644,000
Depreciation and amortization....................... 30,000 53,000 80,000
---------- ---------- ----------
Total operating expenses.......................... 541,000 796,000 984,000
---------- ---------- ----------
Income from operations................................ 1,035,000 1,551,000 1,652,000
Interest income, net.................................. 7,000 13,000 11,000
Other expense......................................... -- -- 99,000
---------- ---------- ----------
Income before income taxes............................ 1,042,000 1,564,000 1,564,000
Provision for income taxes............................ 3,000 23,000 29,000
---------- ---------- ----------
Net income............................................ $1,039,000 $1,541,000 $1,535,000
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-85
<PAGE>
RESEARCH & PLANNING, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1996, AND, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 19, 1998

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- TREASURY PAID- IN RETAINED STOCKHOLDERS'
SHARES AMOUNT STOCK CAPITAL EARNINGS EQUITY
-------- -------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995............................ 10,000 $1,000 $(11,000) $12,000 $ 604,000 $ 606,000
Distributions to stockholders....................... -- -- -- -- (662,000) (662,000)
Net income.......................................... -- -- -- -- 1,039,000 1,039,000
------ ------ -------- ------- ----------- -----------
Balance, December 31, 1996............................ 10,000 1,000 (11,000) 12,000 981,000 983,000
Distributions to stockholders....................... -- -- -- -- (1,184,000) (1,184,000)
Net income.......................................... -- -- -- -- 1,541,000 1,541,000
------ ------ -------- ------- ----------- -----------
Balance, December 31, 1997............................ 10,000 1,000 (11,000) 12,000 1,338,000 1,340,000
Distributions to stockholders....................... -- -- -- -- (1,326,000) (1,326,000)
Net income.......................................... -- -- -- -- 1,535,000 1,535,000
------ ------ -------- ------- ----------- -----------
Balance, October 19, 1998............................. 10,000 $1,000 $(11,000) $12,000 $ 1,547,000 $ 1,549,000
====== ====== ======== ======= =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-86
<PAGE>
RESEARCH & PLANNING, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1996 AND, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 19, 1998

<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE PERIOD
DECEMBER 31, FROM JANUARY 1,
----------------------- 1998 TO
1996 1997 OCTOBER 19, 1998
---------- ---------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $1,039,000 $1,541,000 $1,535,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 30,000 53,000 80,000
Change in assets and liabilities:
Accounts receivable, net....................... (308,000) (509,000) (33,000)
Other current assets........................... (45,000) (64,000) 107,000
Accounts payable............................... (1,000) 15,000 173,000
Accrued liabilities............................ 70,000 185,000 156,000
---------- ---------- ----------
Net cash provided by operating activities.... 785,000 1,221,000 2,018,000
---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment, net.............. (64,000) (218,000) (275,000)
---------- ---------- ----------
Cash flows from financing activities:
Net proceeds (repayments) under short-term
borrowings......................................... -- 200,000 (200,000)
Distributions to stockholders........................ (662,000) (1,184,000) (1,326,000)
---------- ---------- ----------
Net cash used in financing activities........ (662,000) (984,000) (1,526,000)
---------- ---------- ----------
Net increase in cash and cash equivalents.............. 59,000 19,000 217,000
Cash and cash equivalents, beginning of period......... 15,000 74,000 93,000
---------- ---------- ----------
Cash and cash equivalents, end of period............... $ 74,000 $ 93,000 $ 310,000
========== ========== ==========
Supplementary information:
Cash paid for interest............................... $ -- $ -- $ 2,000
========== ========== ==========
Cash paid for income taxes........................... $ 3,000 $ 23,000 $ --
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-87
<PAGE>
RESEARCH & PLANNING, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996 AND 1997, AND OCTOBER 19, 1998

1. BUSINESS DESCRIPTION:

Research & Planning, Inc. ("R&P" or the "Company") was incorporated in 1968,
under the laws of the state of Massachusetts. R&P is an information technology
services company providing Enterprise Resource Planning integration and support,
data warehousing, decision support applications and business-to-business
electronic commerce solutions. R&P is headquartered in Cambridge, Massachusetts
and operates primarily in the United States.

On October 20, 1998, all of the issued and outstanding stock of the Company
was acquired by AppNet Systems, Inc. ("AppNet"). The Company incurred $99,000 of
expenses in conjunction with the sale to AppNet for accounting and consulting
fees. This has been classified in other expenses in the accompanying statements
of operations.

There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.

PROPERTY AND EQUIPMENT

<TABLE>
<S> <C>
Computers, equipment and software........................... five years
Furniture and fixtures...................................... five years
</TABLE>

Purchased software is capitalized and amortized principally over five years.
Leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the remaining lease term.

In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," the Company reviews its recorded long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.

F-88
<PAGE>
RESEARCH & PLANNING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996 AND 1997, AND OCTOBER 19, 1998

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and short-term borrowings. In
management's opinion, the carrying amounts of these financial instruments
approximated their fair values at December 31, 1996 and 1997, and October 19,
1998.

REVENUE RECOGNITION

Revenues pursuant to fixed-fee contracts are recognized on the
percentage-of-completion method with costs and estimated profits recorded as
work is performed. Revenues from time and material contracts are recognized
based on fixed hourly rates for direct labor expended.

Cost of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.

Provisions for estimated losses on uncompleted contracts are made on a
contract by contract basis and are recognized in the period in which such losses
are determined. Changes in contract performance and estimated profitability,
including final contract settlements, may result in revisions to costs and
income and are recognized in the period in which revisions are determined.
Unbilled receivables on contracts are comprised of costs, plus earnings on
certain contracts in excess of contractual billings on such contracts.

BUSINESS CONCENTRATION AND CREDIT RISK

The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:

<TABLE>
<CAPTION>
REVENUES ACCOUNTS RECEIVABLE
---------------------------------- ---------------------------------
FOR THE
YEAR ENDED FOR THE AS OF
DECEMBER 31, PERIOD ENDED DECEMBER 31, AS OF
------------------- OCTOBER 19, ------------------- OCTOBER 19,
1996 1997 1998 1996 1997 1998
-------- -------- ------------ -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Customer A................. 19% 28% 41% 18% 24% 44%
Customer B................. * 16% 10% * 17% *
Customer C................. 15% * * 11% * *
Customer D................. * 10% 13% * 22% *
Customer E................. 13% * * * * *
Customer F................. * 12% * * * *
</TABLE>

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

* Represents less than 10% of total.

INCOME TAXES

The Company, with the consent of its shareholders, has elected to be taxed
pursuant to Subchapter S of the Internal Revenue Code (an "S Corporation"). In
lieu of corporate income taxes, the shareholders of an S corporation are taxed
on their proportionate share of the Company's taxable income. Therefore, no
provision for federal income taxes has been included in the accompanying
financial statements.

F-89
<PAGE>
RESEARCH & PLANNING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996 AND 1997, AND OCTOBER 19, 1998

RECENT ACCOUNTING PRONOUNCEMENTS

In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use". SOP 98-1 is
effective for financial statements for years beginning after December 15, 1998.
SOP 98-1 provides guidance on accounting for computer software developed or
obtained for internal use, including the requirement to capitalize specified
costs and the amortization of such costs. The Company does not expect the
adoption of this standard to have a material effect on the Company's
capitalization policy.

3. ACCOUNTS RECEIVABLE:

Accounts receivable consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- OCTOBER 19,
1996 1997 1998
-------- ---------- -----------
<S> <C> <C> <C>
Accounts receivable........................ $586,000 $ 951,000 $1,084,000
Unbilled accounts receivable............... 280,000 438,000 363,000
Allowance for doubtful accounts............ (1,000) (15,000) (40,000)
-------- ---------- ----------
Accounts receivable, net............... $865,000 $1,374,000 $1,407,000
======== ========== ==========
</TABLE>

4. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- OCTOBER 19,
1996 1997 1998
-------- ---------- -----------
<S> <C> <C> <C>
Computers, equipment and software.......... $275,000 $ 385,000 $ 507,000
Furniture and fixtures..................... 114,000 222,000 375,000
-------- ---------- ----------
389,000 607,000 882,000
Accumulated depreciation and
amortization............................. (292,000) (345,000) (425,000)
-------- ---------- ----------
Property and equipment, net............ $ 97,000 $ 262,000 $ 457,000
======== ========== ==========
</TABLE>

5. ACCRUED LIABILITIES:

Accrued liabilities consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- OCTOBER 19,
1996 1997 1998
-------- -------- -----------
<S> <C> <C> <C>
Accrued compensation and benefits............ $ 54,000 $113,000 $289,000
Accrued dividends............................ 39,000 86,000 --
Deposits..................................... -- 54,000 73,000
Other........................................ 23,000 48,000 95,000
-------- -------- --------
Total.................................... $116,000 $301,000 $457,000
======== ======== ========
</TABLE>

F-90
<PAGE>
RESEARCH & PLANNING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996 AND 1997, AND OCTOBER 19, 1998

6. LEASES:

The Company has noncancelable operating leases, primarily for real estate,
that expire over the next five years. Rental expense for operating leases during
the years ended December 31, 1996 and 1997, and for the period from January 1,
1998 to October 19, 1998, was $77,000, $185,000 and $300,000, respectively.

Future minimum lease payments under noncancelable operating leases are as
follows as of October 19, 1998:

<TABLE>
<S> <C>
Period ended December 31, 1998.............................. $ 102,000
1999........................................................ 410,000
2000........................................................ 410,000
2001........................................................ 391,000
2002........................................................ 332,000
2003........................................................ 332,000
Thereafter.................................................. 332,000
----------
Total future minimum lease payments..................... $2,309,000
==========
</TABLE>

7. SUBLEASE INCOME:

The Company subleases certain portions of their leased buildings. These
subleases extend over varying dates through September 2000. For the years ended
December 31, 1996 and 1997, and for the period from January 1, 1998 to
October 19, 1998, the Company earned $17,000, $46,000 and $153,000,
respectively, in sublease income, which is included in general and
administrative expenses as an offset to lease expense in the accompanying
statements of operations.

8. SHORT-TERM BORROWING:

The Company has a line of credit which expired on October 19, 1998, and was
collateralized by substantially all of the assets of the Company and was
guaranteed by the stockholders of the Company. Under the terms of the line of
credit, borrowings are limited to $200,000. Interest on the outstanding balance
was calculated as the Bank's prime rate plus 1.50 percent. As of December 31,
1996 and 1997, and October 19, 1998, there were borrowings under the line of
credit totaling $0, $200,000, and $0, respectively.

9. RETIREMENT PLAN:

The Company maintained a profit-sharing and retirement plan under the
provisions of section 401(k) of the Internal Revenue Code. The Plan provided for
contributions by employees and a discretionary contribution by the Company as
determined by the Board of Directors. The plan was for the benefit of all
employees who had completed one year of service or 1,000 hours and had full-time
status. Participants could contribute up to 15 percent of their compensation,
subject to statutory limits. Employee contributions fully vest immediately upon
contribution. Company contributions vested fully after five years. Company
contributions totaled $66,000, $82,000, and $85,000 for the years ended
December 31, 1996 and 1997, and for the period from January 1, 1998 to
October 19, 1998, respectively. Effective February 1, 1999, Research and
Planning, Inc. employees are covered by the AppNet 401(k) plan.

F-91
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To The Kodiak Group, Inc.:

We have audited the accompanying balance sheets of The Kodiak Group, Inc. (a
Massachusetts corporation), as of December 31, 1997, and December 13, 1998, and
the related statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 1997, and for the period from January 1, 1998 to
December 13, 1998. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Kodiak Group, Inc. as of
December 31, 1997, and December 13, 1998, and the results of its operations and
its cash flows for the year ended December 31, 1997, and for the period from
January 1, 1998 to December 13, 1998 in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP

Washington, D.C.
February 19, 1999

F-92
<PAGE>
THE KODIAK GROUP, INC.

BALANCE SHEETS

AS OF DECEMBER 31, 1997 AND DECEMBER 13, 1998

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 300,000 $ --
Accounts receivable, net of allowance for doubtful
accounts of $39,000 and $97,000, respectively........... 768,000 1,247,000
Other current assets...................................... 18,000 48,000
---------- ----------
Total current assets.................................... 1,086,000 1,295,000
Property and equipment, net................................. 278,000 319,000
Other assets................................................ 12,000 72,000
---------- ----------
Total assets............................................ $1,376,000 $1,686,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 50,000 $ 61,000
Accrued liabilities....................................... 113,000 845,000
Current portion of long-term debt......................... 49,000 --
Current portion of capital lease obligation............... 18,000 23,000
---------- ----------
Total current liabilities............................... 230,000 929,000
Long-term debt, net of current portion...................... 32,000 --
Capital lease obligation, net of current portion............ 39,000 16,000
---------- ----------
Total liabilities....................................... 301,000 945,000
---------- ----------
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock, $.01 par value; 1,000 shares authorized; 400
shares issued and outstanding........................... -- --
Additional paid-in capital................................ 4,000 4,000
Retained earnings......................................... 1,071,000 737,000
---------- ----------
Total stockholders' equity.............................. 1,075,000 741,000
---------- ----------
Total liabilities and stockholders' equity.............. $1,376,000 $1,686,000
========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-93
<PAGE>
THE KODIAK GROUP, INC.

STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO DECEMBER 13, 1998

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM JANUARY 1,
ENDED 1998 TO
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ---------------
<S> <C> <C>
Revenues.................................................... $3,687,000 $6,289,000
Cost of revenues............................................ 2,065,000 3,221,000
---------- ----------
Gross profit............................................ 1,622,000 3,068,000
---------- ----------
Operating expenses:
Selling and marketing..................................... 48,000 66,000
General and administrative................................ 1,061,000 1,691,000
Acquisition related compensation.......................... -- 250,000
Depreciation and amortization............................. 136,000 136,000
---------- ----------
Total operating expenses................................ 1,245,000 2,143,000
---------- ----------
Income from operations...................................... 377,000 925,000
Interest expense, net....................................... 5,000 2,000
Other expense, net.......................................... -- 8,000
---------- ----------
Income before income taxes.................................. 372,000 915,000
Provision for income taxes.................................. 1,000 5,000
---------- ----------
Net income.................................................. $ 371,000 $ 910,000
========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-94
<PAGE>
THE KODIAK GROUP, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEAR ENDED DECEMBER 31, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO DECEMBER 13, 1998

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
-------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996................. 400 $ -- $4,000 $ 740,000 $ 744,000
Distributions to stockholders............ -- -- -- (40,000) (40,000)
Net income............................... -- -- -- 371,000 371,000
--- ---- ------ ----------- -----------
Balance, December 31, 1997................. 400 -- 4,000 1,071,000 1,075,000
Distributions to stockholders............ -- -- -- (1,244,000) (1,244,000)
Net income............................... -- -- -- 910,000 910,000
--- ---- ------ ----------- -----------
Balance, December 13, 1998................. 400 $ -- $4,000 $ 737,000 $ 741,000
=== ==== ====== =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-95
<PAGE>
THE KODIAK GROUP, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 1997,
AND FOR THE PERIOD FROM JANUARY 1, 1998 TO DECEMBER 13, 1998

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM JANUARY 1,
ENDED 1998 TO
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 371,000 $ 910,000
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation and amortization......................... 136,000 136,000
Loss on fixed asset disposals......................... -- 7,000
Change in assets and liabilities:
Accounts receivable, net............................ (50,000) (479,000)
Other assets........................................ (4,000) (90,000)
Accounts payable.................................... (12,000) 11,000
Accrued liabilities................................. 16,000 732,000
--------- -----------
Net cash provided by operating activities......... 457,000 1,227,000
--------- -----------
Cash flows from investing activities:
Purchase of property and equipment, net................... (177,000) (184,000)
--------- -----------
Cash flows from financing activities:
Proceeds from long-term debt.............................. 118,000 --
Repayments of long-term debt.............................. (96,000) (81,000)
Repayments on capital lease obligations................... (55,000) (18,000)
Distributions to stockholders............................. (40,000) (1,244,000)
--------- -----------
Net cash used in financing activities............. (73,000) (1,343,000)
--------- -----------
Net increase (decrease) in cash and cash equivalents........ 207,000 (300,000)
Cash and cash equivalents, beginning of period.............. 93,000 300,000
--------- -----------
Cash and cash equivalents, end of period.................... $ 300,000 $ --
========= ===========
Supplementary information:
Cash paid for interest.................................... $ 16,000 $ 11,000
========= ===========
Cash paid for income taxes................................ $ 1,000 $ --
========= ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-96
<PAGE>
THE KODIAK GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997 AND DECEMBER 13, 1998

1. BUSINESS DESCRIPTION:

The Kodiak Group, Inc. ("Kodiak" or the "Company") was incorporated in 1994,
under the laws of the state of Massachusetts. Kodiak is an electronic commerce
services company which provides electronic data interchange ("EDI") integration
and processing services to clients who are looking to create, maintain or expand
their EDI systems. Kodiak is headquartered in Pittsfield, Massachusetts and
operates primarily in the Northeast.

On December 13, 1998, all of the issued and outstanding stock of the Company
was acquired by AppNet Systems, Inc. ("AppNet").

There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change, government
regulations and the Year 2000 issue.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.

PROPERTY AND EQUIPMENT

<TABLE>
<S> <C>
Computers, equipment and software........................ three to five years
Furniture and fixtures................................... five years
</TABLE>

Purchased software and third-party costs incurred to develop software for
internal use are capitalized and amortized principally over three years.
Leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the remaining lease term.

F-97
<PAGE>
THE KODIAK GROUP, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND DECEMBER 13, 1998

SOFTWARE DEVELOPMENT COSTS

The Company has capitalized costs related to the development of certain
software products. In accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," capitalization of
costs begins when technological feasibility has been established and ends when
the product is available for general release to customers. Amortization will be
computed and recognized based on the products' estimated economic lives of three
years. Capitalized costs and amortization periods are management's estimates and
may have to be modified due to inherent technological changes in software
development.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, and capital lease
obligations. In management's opinion, the carrying amounts of these financial
instruments approximated their fair values at December 31, 1997, and
December 13, 1998.

REVENUE RECOGNITION

Revenues from software sales are recognized when the related product is
sold, provided no significant vendor obligations remain.

BUSINESS CONCENTRATION AND CREDIT RISK

The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:

<TABLE>
<CAPTION>
REVENUES ACCOUNTS RECEIVABLE
----------------------------------------- ---------------------------
FOR THE YEAR ENDED FOR THE PERIOD ENDED AS OF AS OF
DECEMBER 31, DECEMBER 13, DECEMBER 31, DECEMBER 13,
1997 1998 1997 1998
------------------ -------------------- ------------ ------------
<S> <C> <C> <C> <C>
Customer A......................... 52% 32% 62% 13%
Customer B......................... * 28% * 43%
Customer C......................... * 14% * 23%
</TABLE>

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

* Represents less than 10% of total

F-98
<PAGE>
THE KODIAK GROUP, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND DECEMBER 13, 1998

INCOME TAXES

The Company, with the consent of its shareholders, has elected to be taxed
pursuant to subchapter S of the Internal Revenue Code (an "S corporation"). In
lieu of corporation income taxes, the shareholders of an S corporation are taxed
on their proportionate share of the Company's taxable income. Therefore, no
provision for federal income taxes has been included in the accompanying
financial statements.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 1998, AIPCA issued Statement of Position 98-4 ("SOP 98-4"),
"Deferral of the Effective Date of a Provision of SOP 97-2." SOP 98-4 defers for
one year the application of certain provisions of Statement of Position 97-2
("SOP 97-2"), "Software Revenue Recognition." Different informal and
unauthoritative interpretations of certain provisions of SOP 97-2 have arisen
and, as a result, the AICPA is deliberating amendments to SOP 97-2, so it can
issue interpretations regarding the applicability and the method of application
of those provisions. The Company does not expect the adoption of this standard
to have a material effect on the Company's results of operations, financial
position, or cash flows.

3. ACCOUNTS RECEIVABLE:

Accounts receivable consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ------------
<S> <C> <C>
Accounts receivable................................. $613,000 $1,077,000
Unbilled accounts receivable........................ 194,000 267,000
Allowance for doubtful accounts..................... (39,000) (97,000)
-------- ----------
Accounts receivable, net........................ $768,000 $1,247,000
======== ==========
</TABLE>

4. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ------------
<S> <C> <C>
Computers, equipment and software................... $ 398,000 $ 508,000
Furniture and fixtures.............................. 138,000 199,000
Leasehold improvements.............................. 25,000 28,000
--------- ---------
561,000 735,000
Accumulated depreciation and amortization........... (283,000) (416,000)
--------- ---------
Property and equipment, net..................... $ 278,000 $ 319,000
========= =========
</TABLE>

F-99
<PAGE>
THE KODIAK GROUP, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND DECEMBER 13, 1998

5. ACCRUED LIABILITIES:

Accrued liabilities consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ------------
<S> <C> <C>
Accrued compensation and benefits................... $ 39,000 $406,000
Accrued professional fees........................... 29,000 131,000
Deferred revenue.................................... 42,000 107,000
Other accrued liabilities........................... 3,000 201,000
-------- --------
$113,000 $845,000
======== ========
</TABLE>

6. LEASES:

The Company has noncancelable operating leases, primarily for real estate,
that expire over the next three years. Rental expense for operating leases
during the year ended December 31, 1997, and for the period from January 1, 1998
to December 13, 1998, was $77,000, and $105,000, respectively.

The Company leases certain equipment under a capital lease.

Future minimum lease payments under the capital lease and noncancelable
operating leases are as follows as of December 13, 1998:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
Period ended December 31, 1998........................... $ 2,000 $ 7,000
1999..................................................... 26,000 160,000
2000..................................................... 14,000 153,000
2001..................................................... -- 59,000
------- --------
Total future minimum lease payments.................. 42,000 $379,000
------- ========
Less: Amount representing interest....................... (3,000)
-------
Present value of capital lease obligation................ 39,000
Less: Current portion of capital lease obligation........ (23,000)
-------
Long-term portion of capital lease obligation............ $16,000
=======
</TABLE>

Equipment under the capital lease is summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ------------
<S> <C> <C>
Computer equipment.................................. $ 84,000 $ 84,000
Less: Accumulated amortization...................... (47,000) (75,000)
-------- --------
Total........................................... $ 37,000 $ 9,000
======== ========
</TABLE>

F-100
<PAGE>
THE KODIAK GROUP, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND DECEMBER 13, 1998

7. SHORT-TERM BORROWINGS:

The Company had a line of credit, which expired in October 1998. The line of
credit was collateralized by substantially all of the assets of the Company.
Under the terms of the line of credit, borrowings were limited to $80,000.
Interest on the outstanding balance was calculated at the Bank's prime rate plus
1.75 percent. There were no borrowings under the line of credit during the year
ended December 31, 1997, or the period from January 1, 1998 through
October 1998.

8. DEBT:

Debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 13,
1997 1998
------------ ------------
<S> <C> <C>
Note payable, due October 30, 1999 bears interest at
9.25 percent, payable in 24 installments of
$4,083, secured by capital assets................. $ 81,000 $ --
Less: Current maturities............................ (49,000) --
-------- -------
Long-term debt, net of current portion.......... $ 32,000 $ --
======== =======
</TABLE>

This loan was paid in full in November 1998. Kodiak has not entered into any
additional loan agreements with outside parties.

9. RETIREMENT PLAN:

The Company maintains a profit-sharing and retirement plan under the
provisions of section 401(k) of the Internal Revenue Code. The Plan provides for
contributions by employees and a discretionary contribution by the Company. The
plan is for the benefit of all employees who have reached one year of service.
Participants may contribute up to 12 percent of their compensation, subject to
statutory limits. Employee contributions are fully vested. The Company's
contribution is discretionary and is determined by its Board of Directors. In
1997 and 1998, the discretionary rate was 3 percent of gross salary. Company
contributions vest at a rate of 25 percent a year, beginning in the employee's
first eligible year. Company contributions totaled $39,000, and $51,000 for the
year ended December 31, 1997, and for the period from January 1, 1998 to
December 13, 1998, respectively.

Effective February 1, 1999, Kodiak employees are covered by the AppNet
401(k) Plan.

F-101
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To i33 Communications Corporation:

We have audited the accompanying balance sheets of i33 Communications
Corporation (a Delaware corporation), as of December 31, 1996, 1997, and 1998,
and the related statements of operations, stockholders' equity (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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of i33 Communications
Corporation as of December 31, 1996, 1997, and 1998, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Washington, D.C.
February 23, 1999

F-102
<PAGE>
I33 COMMUNICATIONS CORPORATION

BALANCE SHEETS

AS OF DECEMBER 31, 1996, 1997, AND 1998

<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,000 $ 23,000 $ 1,000
Accounts receivable, net of allowance for doubtful
accounts of $0, $86,000 and $417,000, respectively...... 444,000 541,000 1,741,000
Other current assets...................................... 1,000 1,000 12,000
-------- -------- ----------
Total current assets.................................... 446,000 565,000 1,754,000
Property and equipment, net................................. 124,000 262,000 568,000
Other assets................................................ -- 7,000 12,000
-------- -------- ----------
Total assets............................................ $570,000 $834,000 $2,334,000
======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings..................................... $ -- $ -- $ 500,000
Accounts payable.......................................... 39,000 250,000 1,076,000
Accrued liabilities....................................... 292,000 356,000 1,082,000
Current portion of long-term debt......................... 104,000 -- --
Current portion of capital lease obligations.............. 3,000 24,000 41,000
-------- -------- ----------
Total current liabilities............................... 438,000 630,000 2,699,000
Capital lease obligations, net of current portion........... 7,000 21,000 15,000
-------- -------- ----------
Total liabilities....................................... 445,000 651,000 2,714,000
-------- -------- ----------
Commitments and contingencies (Note 6)
Stockholders' equity (deficit):
Common stock, no par value; 100 shares authorized; issued
and outstanding......................................... 1,000 1,000 1,000
Retained earnings (accumulated deficit)................... 124,000 182,000 (381,000)
-------- -------- ----------
Total stockholders' equity (deficit).................... 125,000 183,000 (380,000)
-------- -------- ----------
Total liabilities and stockholders' equity (deficit).... $570,000 $834,000 $2,334,000
======== ======== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-103
<PAGE>
I33 COMMUNICATIONS CORPORATION

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998

<TABLE>
<CAPTION>
1996 1997 1998
-------- ---------- ----------
<S> <C> <C> <C>
Revenues................................................... $980,000 $2,266,000 $4,360,000
Cost of revenues........................................... 524,000 982,000 2,251,000
-------- ---------- ----------
Gross profit........................................... 456,000 1,284,000 2,109,000
-------- ---------- ----------
Operating expenses:
Selling and marketing.................................... 41,000 471,000 985,000
General and administrative............................... 173,000 550,000 1,343,000
Depreciation............................................. 12,000 45,000 114,000
-------- ---------- ----------
Total operating expenses............................... 226,000 1,066,000 2,442,000
-------- ---------- ----------
Income (loss) from operations.............................. 230,000 218,000 (333,000)
Other expense.............................................. -- -- 35,000
Interest expense, net...................................... -- (1,000) 11,000
-------- ---------- ----------
Income (loss) before income taxes.......................... 230,000 217,000 (379,000)
Provision (benefit) for income taxes....................... 106,000 159,000 (34,000)
-------- ---------- ----------
Net income (loss).......................................... $124,000 $ 58,000 $ (345,000)
======== ========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-104
<PAGE>
I33 COMMUNICATIONS CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998

<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON STOCK EARNINGS STOCKHOLDERS'
------------------- (ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT) (DEFICIT)
-------- -------- -------------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1996......................... -- $ -- $ -- $ --
Issuance of 100 shares of common stock......... 100 1,000 -- 1,000
Net income..................................... -- -- 124,000 124,000
--- ------ --------- ---------
Balance, December 31, 1996....................... 100 1,000 124,000 125,000
Net income..................................... -- -- 58,000 58,000
--- ------ --------- ---------
Balance, December 31, 1997....................... 100 1,000 182,000 183,000
Distributions to stockholders.................. -- -- (218,000) (218,000)
Net loss....................................... -- -- (345,000) (345,000)
--- ------ --------- ---------
Balance, December 31, 1998....................... 100 $1,000 $(381,000) $(380,000)
=== ====== ========= =========
</TABLE>

The accompanying notes are an integral part of these statements.

F-105
<PAGE>
I33 COMMUNICATIONS CORPORATION

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998

<TABLE>
<CAPTION>
1996 1997 1998
-------- --------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $124,000 $ 58,000 $ (345,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities--
Depreciation......................................... 12,000 45,000 114,000
Deferred income taxes................................ 106,000 133,000 (45,000)
Change in assets and liabilities:
Accounts receivable, net........................... (444,000) (97,000) (1,200,000)
Other assets....................................... -- (7,000) (16,000)
Accounts payable................................... 39,000 211,000 826,000
Accrued liabilities................................ 186,000 (69,000) 771,000
-------- --------- -----------
Net cash provided by operating activities........ 23,000 274,000 105,000
-------- --------- -----------
Cash flows used in investing activities:
Purchase of property and equipment, net.................. (125,000) (140,000) (362,000)
-------- --------- -----------
Cash flows from financing activities:
Proceeds from short-term borrowings...................... -- -- 500,000
Proceeds from long-term debt............................. 104,000 -- --
Payments on capital lease obligations.................... (1,000) (112,000) (47,000)
Distributions to stockholders............................ -- -- (218,000)
-------- --------- -----------
Net cash provided by (used in) financing
activities..................................... 103,000 (112,000) 235,000
-------- --------- -----------
Net increase (decrease) in cash and cash equivalents....... 1,000 22,000 (22,000)
Cash and cash equivalents, beginning of year............... -- 1,000 23,000
-------- --------- -----------
Cash and cash equivalents, end of year..................... $ 1,000 $ 23,000 $ 1,000
======== ========= ===========
Supplementary information:
Cash paid for interest................................... $ -- $ 13,000 $ 11,000
======== ========= ===========
Cash paid for income taxes............................... $ -- $ 1,000 $ 5,000
======== ========= ===========
Non-cash financing and investing activities:
Property capital lease additions......................... $ 11,000 $ 42,000 $ 59,000
======== ========= ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-106
<PAGE>
I33 COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996, 1997, AND 1998

1. BUSINESS DESCRIPTION:

i33 Communications Corporation ("i33" or the "Company") was incorporated in
January 1996, under the laws of the state of Delaware. The Company is an
interactive agency specializing in strategy, design, technology and online
advertising management for mid-sized to large companies. Revenues are generated
from web site design and development, online media buying and planning, online
advertising management, site audits, web publishing and project management
tools, custom application and database development and hosting services. i33 is
headquartered and operates primarily in New York.

On January 8, 1999, all of the issued and outstanding stock of the Company
was acquired by AppNet Systems, Inc. The Company incurred $35,000 in consulting
fees in conjunction with the sale to AppNet. This has been classified as other
expense in the accompanying statements of operations.

There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.

PROPERTY AND EQUIPMENT

<TABLE>
<S> <C>
Computer equipment.......................................... five years
Furniture and fixtures...................................... seven years
</TABLE>

Purchased software for internal use is capitalized and amortized principally
over three years. Leasehold improvements are amortized over the lesser of the
estimated useful life of the asset or the remaining lease term.

In accordance with Statement of Financial Accounting Standards No. 121
("SFAS"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews its recorded long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.

F-107
<PAGE>
I33 COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1997, AND 1998

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, short-term borrowings, and
capital lease obligations. In management's opinion, the carrying amounts of
these financial instruments approximated their fair values at December 31, 1996,
1997, and 1998.

REVENUE RECOGNITION

Revenues from time and material contracts are recognized based on fixed
hourly rates for direct labor hours expended. Revenues from fixed-price
contracts are recognized on the percentage-of-
']completion method, with costs and estimated profits recorded as work is
performed. Revenues from fixed-price advertising contracts in which the Company
delivers advertising impressions for its customers on third-party websites are
recognized ratably over the period the advertising impressions are delivered. In
accordance with industry practice, the cost of third-party advertising placed by
the Company on behalf of its clients is offset against the related customer
reimbursement in the accompanying statements of operations.

BUSINESS CONCENTRATION AND CREDIT RISK

The following table summarizes the revenues and receivables from clients in
excess of 10% of total revenues and receivables:

<TABLE>
<CAPTION>
REVENUES
FOR THE ACCOUNTS
YEARS ENDED RECEIVABLE
DECEMBER 31, AS OF DECEMBER 31,
------------------------------ ------------------------------
1996 1997 1998 1996 1997 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Customer A............................ * * * * * 20%
Customer B............................ * * * * * 12%
Customer C............................ * * 10% * * 16%
Customer D............................ * 14% * * 16% *
Customer E............................ * 13% * * * *
Customer F............................ * 11% * * * *
Customer G............................ 25% * * 50% 14% *
Customer H............................ 11% * * 12% * *
</TABLE>

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

* Represents less than 10% of total.

F-108
<PAGE>
I33 COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1997, AND 1998

INCOME TAXES

In 1996, the Company was taxed as a C corporation. As such, income taxes are
accounted for using an asset and liability approach that requires the
recognition of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. The measurement
of current and deferred tax liabilities and assets are based on provisions of
the enacted tax law; the effects of future changes in tax laws or rates are not
anticipated. The measurement of deferred tax assets is reduced, if necessary, by
the amount of any tax benefits that, based on available evidence, are not
expected to be realized.

In 1997 and 1998, the Company, with the consent of its shareholders, has
elected to be taxed pursuant to subchapter S of the Internal Revenue Code ("an S
corporation"). In lieu of corporation income taxes, the shareholders of an S
corporation are taxed on their proportionate share of the Company's taxable
income. Therefore, no provision for federal income taxes has been included in
the accompanying financial statements. The Company is subject to state and city
income taxes based on the Company's taxable income and alternative minimum tax.
The recorded tax provision for 1997 and 1998 relates to these state and city
taxes. The significant components of differences between income reported for
financial statement purposes and income reported for tax purposes relates to tax
basis adjustments for accounts receivable, payroll and corporate tax
liabilities.

3. ACCOUNTS RECEIVABLE:

Accounts receivable consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Accounts receivable......................... $444,000 $599,000 $2,009,000
Unbilled accounts receivable................ -- 28,000 149,000
Allowance for doubtful accounts............. -- (86,000) (417,000)
-------- -------- ----------
Accounts receivable, net................ $444,000 $541,000 $1,741,000
======== ======== ==========
</TABLE>

4. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Computer equipment.......................... $ 79,000 $169,000 $ 474,000
Furniture and fixtures...................... 44,000 112,000 131,000
Leasehold improvements...................... 13,000 38,000 134,000
-------- -------- ----------
136,000 319,000 739,000
Accumulated depreciation and amortization... (12,000) (57,000) (171,000)
-------- -------- ----------
Property and equipment, net............. $124,000 $262,000 $ 568,000
======== ======== ==========
</TABLE>

F-109
<PAGE>
I33 COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1997, AND 1998

5. ACCRUED LIABILITIES:

Accrued liabilities consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Deferred revenue............................ $ 24,000 $ -- $ --
Deferred tax liability...................... 106,000 239,000 194,000
Accrued media expense....................... -- -- 798,000
Accrued compensation........................ 147,000 -- --
Other accrued liabilities................... 15,000 117,000 90,000
-------- -------- ----------
Total accrued liabilities............... $292,000 $356,000 $1,082,000
======== ======== ==========
</TABLE>

6. LEASES:

The Company has noncancelable operating leases, primarily for real estate,
that expire over the next 3 years. Rental expense for operating leases during
the years ended December 31, 1996, 1997, and 1998, was $21,000, $73,000 and
$102,000, respectively.

The Company leases certain equipment under capital leases.

Future minimum lease payments under capital leases and noncancelable
operating leases are as follows as of December 31, 1998:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
Year ended December 31, 1999............................ $39,000 $ 93,000
2000.................................................... 21,000 63,000
2001.................................................... 5,000 42,000
------- --------
Total minimum lease payments........................ 65,000 $198,000
========
Less: Amount representing interest...................... (9,000)
-------
Present value of capital lease obligations.............. 56,000
Less: Current portion of capital lease obligations...... 41,000
-------
Long-term portion of capital lease obligation........... $15,000
=======
</TABLE>

Equipment under capital leases is summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Computer equipment............................... $11,000 $54,000 $93,000
Accumulated depreciation......................... (1,000) (7,000) (14,000)
------- ------- -------
Total........................................ $10,000 $47,000 $79,000
======= ======= =======
</TABLE>

F-110
<PAGE>
I33 COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1997, AND 1998

7. INCOME TAXES:

The components of the net deferred tax liability as of December 31, 1996,
1997, and 1998 are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Total deferred tax liabilities................ $106,000 $242,000 $199,000
Total deferred tax assets..................... -- (3,000) (5,000)
-------- -------- --------
Net deferred tax liability.................... $106,000 $239,000 $194,000
======== ======== ========
</TABLE>

The sources of and differences between the financial accounting and tax
basis of i33's assets and liabilities that give rise to the net deferred tax
liability are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Deferred tax liabilities:
Differences from accrual to cash basis...... $106,000 $242,000 $199,000
Deferred tax assets:
Other....................................... -- (3,000) (5,000)
-------- -------- --------
$106,000 $239,000 $194,000
======== ======== ========
</TABLE>

The components of the provision (benefit) for income taxes as of
December 31, 1996, 1997, and 1998, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Federal income taxes:
Current..................................... $ -- $ -- $ --
Deferred.................................... 66,000 136,000 --
State taxes:
Current..................................... -- 26,000 11,000
Deferred.................................... 40,000 (3,000) (45,000)
-------- -------- --------
Provisions (benefit) for income taxes......... $106,000 $159,000 $(34,000)
======== ======== ========
</TABLE>

F-111
<PAGE>
I33 COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1997, AND 1998

For the years ended December 31, 1996, 1997, and 1998, the provision
(benefit) for income taxes differed from the amounts computed at the statutory
rate, as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Income tax computed at statutory rate......... $ 78,000 $ -- $ --
State income taxes, net of federal income tax
benefit..................................... 27,000 23,000 (34,000)
C Corporation Federal tax..................... -- 136,000 --
Other, net.................................... 1,000 -- --
-------- -------- --------
$106,000 $159,000 $(34,000)
======== ======== ========
</TABLE>

8. RELATED PARTIES:

The Company conducts certain transactions with a related party. These
transactions include the borrowing of funds for which the balances outstanding
at December 31, 1996, 1997, and 1998 were $104,000, $0 and $0, respectively. In
addition, the Company shares office space and has purchased equipment from a
related party during the years ended December 31, 1996, 1997, and 1998.

The Company has a note with a relative of one of the shareholders, which is
collateralized by substantially all of the assets of the Company and is
personally guaranteed by the Company's President and Chief Technical Officer.
Under the terms of the agreement, the loan was interest free and payment was due
upon the sale of the Company. As of December 31, 1998, the balance due on the
note was $500,000. The note was repaid on January 8, 1999.

During the years ended December 31, 1997 and 1998, the Company wrote off
amounts due from a related party of $5,000 and $18,000, respectively.

F-112
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Salzinger & Company:

We have audited the accompanying balance sheet of Salzinger & Company (a
Virginia corporation), as of December 31, 1998, and the related statements of
operations, stockholder's equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Salzinger & Company as of
December 31, 1998, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Washington, D.C.
March 15, 1999

F-113
<PAGE>
SALZINGER & COMPANY

BALANCE SHEET

AS OF DECEMBER 31, 1998

<TABLE>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 193,000
Accounts receivable....................................... 1,707,000
----------
Total current assets.................................... 1,900,000
Property and equipment, net................................. 43,000
Other assets................................................ 14,000
----------
Total assets............................................ $1,957,000
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Short-term borrowing...................................... $ 130,000
Accounts payable.......................................... 34,000
Accrued liabilities....................................... 177,000
----------
Total current liabilities............................... 341,000
----------

Commitments and contingencies (Note 6)
Stockholder's equity:
Common stock, $1.00 par value; 5,000 shares authorized;
1,000 shares issued and outstanding..................... 1,000
Retained earnings......................................... 1,615,000
----------
Total stockholder's equity.............................. 1,616,000
----------
Total liabilities and stockholder's equity.............. $1,957,000
==========
</TABLE>

The accompanying notes are an integral part of this statement.

F-114
<PAGE>
SALZINGER & COMPANY

STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<S> <C>
Revenues.................................................... $3,110,000
Cost of revenues............................................ 1,738,000
----------
Gross profit............................................ 1,372,000
----------
Operating expenses:
Selling and marketing..................................... 2,000
General and administrative................................ 425,000
Depreciation and amortization............................. 13,000
----------
Total operating expenses................................ 440,000
----------
Income from operations...................................... 932,000
Interest income............................................. 20,000
----------
Net income.................................................. $ 952,000
==========
</TABLE>

The accompanying notes are an integral part of this statement.

F-115
<PAGE>
SALZINGER & COMPANY

STATEMENT OF STOCKHOLDER'S EQUITY

FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
-------- -------- ---------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997........................... 1,000 $1,000 $ 663,000 $ 664,000
Net income......................................... -- -- 952,000 952,000
----- ------ ---------- ----------
Balance, December 31, 1998........................... 1,000 $1,000 $1,615,000 $1,616,000
===== ====== ========== ==========
</TABLE>

The accompanying notes are an integral part of this statement.

F-116
<PAGE>
SALZINGER & COMPANY

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 952,000
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization........................... 13,000
Change in assets and liabilities:
Accounts receivable................................... (1,152,000)
Other assets.......................................... (5,000)
Accounts payable...................................... 19,000
Accrued liabilities................................... 11,000
-----------
Net cash used in operating activities............... (162,000)
-----------
Cash flows from financing activities:
Short-term borrowing...................................... 130,000
-----------
Net decrease in cash........................................ (32,000)
Cash, beginning of year..................................... 225,000
-----------
Cash, end of year........................................... $ 193,000
===========
</TABLE>

The accompanying notes are an integral part of this statement.

F-117
<PAGE>
SALZINGER & COMPANY

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1998

1. BUSINESS DESCRIPTION:

Salzinger & Company ("Salzinger" or the "Company") was incorporated in 1995,
under the laws of the state of Virginia. Salzinger is a consulting company
providing business-level strategic consulting in website marketing strategy
development, planning and implementation. It is headquartered in Virginia and
operates primarily in the Northeast, with some international clients.

On March 15, 1999, certain assets of the Company were acquired by AppNet
Systems, Inc.

There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:

USE OF ESTIMATES

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

PROPERTY AND EQUIPMENT

<TABLE>
<S> <C>
Computer equipment and software............................. three years
Furniture and fixtures...................................... five years
Automobile.................................................. five years
</TABLE>

Purchased software is capitalized and amortized principally over three
years.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable and short-term borrowing. In management's opinion,
the carrying amounts of these financial instruments approximated their fair
values at December 31, 1998.

REVENUE RECOGNITION

Revenues from time and material contracts are recognized based on fixed
hourly rates for direct labor hours expended. The Company also enters into
arrangements in which a portion of its fee is based on the successful completion
of a transaction. Revenue under these contracts is recognized when

F-118
<PAGE>
SALZINGER & COMPANY

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

the transaction has closed and the Company is due its success fee. Included
within revenues in the accompanying statement of operations are success fees of
approximately $730,000.

Cost of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Unbilled receivables on contracts are comprised of costs, plus earnings on
certain contracts in excess of contractual billings on such contracts. Cash
received in excess of costs incurred is classified as deferred revenue.

BUSINESS CONCENTRATION AND CREDIT RISK

The following table summarizes the revenues and accounts receivable from
clients in excess of 10% of total revenues and accounts receivable:

<TABLE>
<CAPTION>
REVENUES ACCOUNTS RECEIVABLE
FOR THE YEAR ENDED AS OF
DECEMBER 31, 1998 DECEMBER 31, 1998
------------------ -------------------
<S> <C> <C>
Company A................................... 31% 50%
Company B................................... 21% 27%
Company C................................... 15% *
Company D................................... 15% 13%
</TABLE>

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

* Represents less than 10% of total.

INCOME TAXES

The Company, with the consent of its shareholders, has elected to be taxed
pursuant to Subchapter S of the Internal Revenue Code (an "S Corporation"). In
lieu of corporation income taxes, the shareholders of an S corporation are taxed
on their proportionate share of the Company's taxable income. Therefore, no
provision for federal or state income taxes has been included in the
accompanying financial statements.

3. ACCOUNTS RECEIVABLE:

Accounts receivable consists of the following:

<TABLE>
<S> <C>
Accounts receivable......................................... $1,522,000
Unbilled accounts receivable................................ 185,000
----------
Total................................................... $1,707,000
==========
</TABLE>

There was no allowance for doubtful accounts recorded as management believes
that all amounts will be collected.

F-119
<PAGE>
SALZINGER & COMPANY

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

4. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

<TABLE>
<S> <C>
Computer equipment and software............................. $ 21,000
Furniture and fixtures...................................... 9,000
Automobile.................................................. 35,000
--------
65,000
Accumulated depreciation and amortization................... (22,000)
--------
Property and equipment, net............................. $ 43,000
========
</TABLE>

5. ACCRUED LIABILITIES:

Accrued liabilities consists of the following:

<TABLE>
<S> <C>
Accrued compensation and benefits........................... $151,000
Deferred revenue............................................ 25,000
Other....................................................... 1,000
--------
Accrued liabilities..................................... $177,000
========
</TABLE>

6. LEASES:

The Company is party to a sublease agreement under which it rents its
corporate office. The sublease is renewable on a month-to-month basis. The
Company is also party to a second lease which is renewed annually. Rental
expense for operating leases during the year ended December 31, 1998 was
$130,000.

The Company leases certain equipment under noncancelable operating leases.

Future minimum lease payments under noncancelable operating leases for
office space and equipment are as follows as of December 31, 1998:

<TABLE>
<S> <C>
1999........................................................ $81,000
2000........................................................ 13,000
-------
Total minimum lease payments............................ $94,000
=======
</TABLE>

7. RELATED PARTIES:

The Company's sole stockholder loaned $130,000 to the Company in
December 1998. The Company repaid the loan in January 1999.

8. RETIREMENT PLAN:

The Company maintains a profit-sharing and retirement plan under the
provisions of section 408(p) of the Internal Revenue Code. The Plan provides for
contributions by employees and a discretionary contribution by the Company. The
plan is for the benefit of all employees. Participants may contribute up to
$6,000 annually. Employee contributions are fully vested. The Company
contributes 2 percent of employees total salary. The Company's contribution
vests immediately. Company contributions totaled $23,000 for the year ended
December 31, 1998.

F-120
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Internet Outfitters, Inc.:

We have audited the accompanying balance sheet of Internet Outfitters, Inc.
(a California corporation), as of December 31, 1998, and the related statements
of operations, stockholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of
December 31, 1998, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Washington, D.C.
March 26, 1999

F-121
<PAGE>
INTERNET OUTFITTERS, INC.

BALANCE SHEET

AS OF DECEMBER 31, 1998

<TABLE>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 70,000
Accounts receivable, net.................................. 555,000
Other current assets...................................... 71,000
--------
Total current assets.................................. 696,000
Property and equipment, net................................. 239,000
Other assets................................................ 6,000
--------
Total assets.......................................... $941,000
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $227,000
Accrued liabilities....................................... 184,000
Current portion of long-term debt......................... 316,000
Current portion of capital lease obligations.............. 17,000
--------
Total current liabilities............................. 744,000
Long-term debt, net of current portion...................... 53,000
Capital lease obligations, net of current portion........... 3,000
Deferred tax liability...................................... 29,000
--------
Total liabilities..................................... 829,000
--------
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock, no par value; 20,000,000 shares authorized;
7,695,641 shares issued and outstanding................. 8,000
Additional paid-in capital................................ 221,000
Deferred compensation..................................... (164,000)
Retained earnings......................................... 47,000
--------
Total stockholders' equity............................ 112,000
--------
Total liabilities and stockholders' equity............ $941,000
========
</TABLE>

The accompanying notes are an integral part of this statement.

F-122
<PAGE>
INTERNET OUTFITTERS, INC.

STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<S> <C>
Revenues.................................................... $2,343,000
Cost of revenues............................................ 1,287,000
----------
Gross profit.................................... 1,056,000
----------
Operating expenses:
Selling and marketing..................................... 47,000
General and administrative................................ 859,000
Stock-based compensation.................................. 57,000
Depreciation and amortization............................. 57,000
----------
Total operating expenses........................ 1,020,000
----------
Income from operations...................................... 36,000
Interest expense, net....................................... 47,000
----------
Loss before income taxes.................................... (11,000)
Provision for income taxes.................................. 52,000
----------
Net loss.................................................... $ (63,000)
==========
</TABLE>

The accompanying notes are an integral part of this statement.

F-123
<PAGE>
INTERNET OUTFITTERS, INC.

STATEMENT OF STOCKHOLDERS' EQUITY

FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN DEFERRED RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS EQUITY
---------- -------- ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1997...................... 7,695,641 $8,000 $ -- $ -- $ 110,000 $ 118,000
Stock-based
compensation............ -- -- 221,000 (164,000) -- 57,000
Net loss.................. -- -- -- -- (63,000) (63,000)
---------- ------ -------- --------- --------- ---------
Balance, December 31,
1998...................... 7,695,641 $8,000 $221,000 $(164,000) $ 47,000 $ 112,000
========== ====== ======== ========= ========= =========
</TABLE>

The accompanying notes are an integral part of this statement.

F-124
<PAGE>
INTERNET OUTFITTERS, INC.

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $ (63,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Deferred income taxes................................... (29,000)
Stock-based compensation................................ 57,000
Depreciation and amortization........................... 57,000
Change in assets and liabilities:
Accounts receivable, net.............................. (217,000)
Other assets.......................................... (8,000)
Accounts payable...................................... 5,000
Accrued liabilities................................... 138,000
---------
Net cash used in operating activities............... (60,000)
---------
Cash flows from investing activities:
Purchase of property and equipment, net................... (124,000)
---------
Cash flows from financing activities:
Proceeds from long-term debt.............................. 292,000
Repayments of long-term debt.............................. (28,000)
Repayments of capital lease obligations................... (13,000)
---------
Net cash provided by financing activities........... 251,000
---------
Net increase in cash........................................ 67,000
Cash, beginning of year..................................... 3,000
---------
Cash, ending of year........................................ $ 70,000
=========
Supplementary information:
Cash paid for interest.................................... $ 45,000
=========
Cash paid for income taxes................................ $ 63,000
=========
</TABLE>

The accompanying notes are an integral part of this statement.

F-125
<PAGE>
INTERNET OUTFITTERS, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1998

1. BUSINESS DESCRIPTION:

Internet Outfitters, Inc. ("IO" or the "Company") was incorporated in 1994
under the laws of the state of California. IO is an information technology
services company providing internet and web-based solutions designed to improve
clients' business processes, including strategy consulting, applications
development, electronic commerce, systems design, technology development,
integration, and operation. The Company is headquartered in Santa Monica,
California and operates primarily in the western region of the United States.

On March 22, 1999, the Company entered into a Stock Purchase Agreement with
AppNet Systems, Inc. ("AppNet"). The transaction was completed on March 26,
1999.

There are significant risks associated with the Company, including the
subjectivity of the Company's services to rapid technological change and the
Year 2000 issue.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:

USE OF ESTIMATES

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

PROPERTY AND EQUIPMENT

<TABLE>
<S> <C>
Computer equipment and software.......................... three to five years
Furniture and fixtures................................... seven years
</TABLE>

Purchased software and third-party costs incurred to develop software for
internal use are capitalized and amortized principally over three years.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable, long-term debt and capital lease obligations. In
management's opinion, the carrying amounts of these financial instruments
approximated their fair values at December 31, 1998.

F-126
<PAGE>
INTERNET OUTFITTERS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

STOCK-BASED COMPENSATION

The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation cost is recognized based on the difference, if any, on the date of
grant between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock.

REVENUE RECOGNITION

Revenues from time and material contracts are recognized based on fixed
hourly rates for direct labor hours expended. Revenues from fixed-price
contracts are recognized on the percentage-of-
']completion method, with costs and estimated profits recorded as work is
performed. Revenues from fixed-price advertising contracts in which the Company
delivers advertising impressions for its customers on third-party websites are
recognized ratably over the period the advertising impressions are delivered. In
accordance with industry practice, the cost of third party advertising placed by
the Company on behalf of its clients is offset against the related customer
reimbursement in the accompanying statement of operations. Revenues from
cost-plus-fixed-fee contracts are recognized on the basis of direct costs plus
indirect costs incurred plus a fixed profit percentage.

Costs of revenues includes all direct material and labor costs related to
contract performance and does not include any related depreciation expense.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in contract performance and
estimated profitability, including final contract settlements, may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined. Unbilled revenues on contracts are comprised of costs,
plus earnings on certain contracts in excess of contractual billings on such
contracts. Cash received in excess of costs incurred is classified as deferred
revenue.

BUSINESS CONCENTRATION AND CREDIT RISK

The following table summarizes the revenues and receivables from clients in
excess of 10% of total revenues and receivables:

<TABLE>
<CAPTION>
ACCOUNTS
REVENUES RECEIVABLE
FOR THE YEAR ENDED AS OF
DECEMBER 31, 1998 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Customer A.................................. 42.2% 27.0%
Customer B.................................. 18.1% 33.9%
Customer C.................................. 12.5% *
</TABLE>

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

* Represents less than 10 percent of total.

INCOME TAXES

F-127
<PAGE>
INTERNET OUTFITTERS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

returns. The measurement of current and deferred tax assets and liabilities are
based on provisions of the enacted tax law; the effects of future changes in tax
laws or rates are not anticipated. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.

3. ACCOUNTS RECEIVABLE:

Accounts receivable consists of the following as of December 31, 1998:

<TABLE>
<S> <C>
Commercial clients.......................................... $560,000
Unbilled accounts receivable................................ 41,000
Less: Allowance for doubtful accounts....................... (46,000)
--------
Accounts receivable, net................................ $555,000
--------
</TABLE>

In February 1998, the Company entered into a factoring agreement to sell,
with recourse, on an ongoing basis, certain accounts receivable to a third
party. Collections received on these accounts may be replaced by new receivables
in order to maintain the aggregate outstanding balance. Proceeds from the sale
of receivables are collateralized by substantially all of the assets of the
Company. At no time may the total accounts receivable factored exceed $350,000.
Fees associated with these transactions are included in interest expense in the
accompanying statement of operations. The factoring agreement has an initial
term of one year and is renewed from year to year thereafter unless terminated
by either party.

As of December 31, 1998, accounts receivable totaling $224,000 had been
pledged as collateral against this asset-based borrowing.

In accordance with SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," the Company's accounts
receivable program will be accounted for as a secured borrowing. The receivables
and the corresponding debt are included as an asset and liability, respectively,
on the accompanying balance sheet.

4. OTHER CURRENT ASSETS:

Other current assets consists of the following as of December 31, 1998:

<TABLE>
<S> <C>
Deferred tax asset.......................................... $ 58,000
Other assets................................................ 13,000
--------
Total................................................... $ 71,000
========
</TABLE>

F-128
<PAGE>
INTERNET OUTFITTERS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

5. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following as of December 31, 1998:

<TABLE>
<S> <C>
Computer equipment and software............................. $332,000
Furniture and fixtures...................................... 8,000
--------
340,000
Accumulated depreciation and amortization................... 101,000
--------
Property and equipment, net............................. $239,000
========
</TABLE>

6. ACCRUED LIABILITIES:

Accrued liabilities consists of the following as of December 31, 1998:

<TABLE>
<S> <C>
Accrued compensation and benefits........................... $ 96,000
Taxes payable............................................... 33,000
Deferred revenue............................................ 30,000
Other accrued liabilities................................... 25,000
--------
Total................................................... $184,000
--------
</TABLE>

7. DEBT:

In July 1996, the Company issued a $41,000 note payable to an officer of the
Company with a maturity of December 31, 1999. Interest on this note was payable
monthly at a rate of 8 percent. In April 1998, the Company issued a second note
in the amount of $51,000 payable to this officer, which contained a maturity of
June 30, 1999. Interest on this note was payable monthly at a rate of
12 percent.

In December 1998, the Company refinanced the outstanding balances of the
above notes and issued a single $92,000 note payable to this officer. This note
bears interest monthly at a rate of 10 percent and matures on December 31, 2000.

The Company issued a $50,000 note payable to a related party in March 1996,
which bears interest monthly at a rate of 8 percent. Principal payments were due
on a quarterly basis with a scheduled maturity of March 1, 1999. In
December 1998, the Company rescheduled the payments of the remaining outstanding
balance of $45,000. The amended note has a scheduled maturity of December 31,
1999. All other terms remained unchanged from the original note.

In 1998, the Company entered into a factoring agreement, the proceeds from
which are treated as a secured borrowing (see Note 3). The outstanding balance
at December 31, 1998 will be repaid through the subsequent sale of additional
accounts receivable from the Company. Finance charges of 2.25 percent are
payable monthly on the average outstanding balance for the respective period. In
addition, the Company is required to pay a monthly administrative fee of
0.75 percent of the face amount of each purchased receivable during the
respective period. The outstanding balance is secured by substantially all of
the assets of the Company. As of December 31, 1998, $224,000 was outstanding
related to this agreement.

F-129
<PAGE>
INTERNET OUTFITTERS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

In March 1998, IO issued a note payable to an employee of the Company in the
amount of $17,000. This note bears interest annually at a rate of 12 percent. At
December 31, 1998, $8,000 was outstanding related to this note. The remaining
principal is secured by a $26,000 billed receivable of the Company and will be
repaid upon receipt of payment from those receivables.

As of December 31, 1998, the maturities of long-term debt were as follows:

<TABLE>
<S> <C>
1999........................................................ $316,000
2000........................................................ 53,000
--------
Total................................................... $369,000
--------
</TABLE>

8. EMPLOYEE STOCK OPTION PLAN:

The Company has a stock option plan for key employees. Options expire no
later than ten years from the date of the grant or when employment ceases,
whichever comes first. One-third of the granted options vest on the grant date.
The remaining options vest ratably on the first and second anniversaries of the
date of grant. The maximum number of shares of common stock that may be issued
pursuant to the stock option plan is 5,000,000 shares at December 31, 1998.

The stock option plan is accounted for under APB Opinion No. 25, "Accounting
for Stock Issued to Employees." Had compensation cost for the plan been
determined based on the estimated fair value of the options at the grant dates
consistent with the method of SFAS No. 123, pro forma net loss would have been
approximately $289,000 for the year ended December 31, 1998. The weighted
average fair value of the options granted during 1998 is estimated to be $0.84
per option assuming the following: dividend yield of 0 percent, risk-free
interest rate of 5 percent and an expected term of the options of 3.4 years.

The following summarizes option activity during 1998:

<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Options outstanding December 31, 1997, exercise price
range of $0.10 to $0.16............................ 2,431,000 $0.13
Granted in 1998.................................. 345,000 0.20
---------
Options outstanding, December 31, 1998, exercise
price range of $0.10 to $0.20...................... 2,776,000 0.14
========= =====
Options exercisable, December 31, 1998............... 1,716,000 $0.13
========= =====
</TABLE>

9. INCOME TAXES:

F-130
<PAGE>
INTERNET OUTFITTERS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

The components of the net deferred tax asset are as follows as of
December 31, 1998:

<TABLE>
<S> <C>
Total deferred tax liabilities.............................. $(29,000)
Total deferred tax assets................................... 58,000
--------
Net deferred tax asset.................................. $ 29,000
========
</TABLE>

The sources of and differences between the financial accounting and tax
basis of Internet Outfitters, Inc.'s assets and liabilities that give rise to
the net deferred tax asset are as follows as of December 31, 1998:

<TABLE>
<S> <C>
Deferred tax liabilities
Depreciation.............................................. $(29,000)
Deferred tax assets
Reserves.................................................. 35,000
Stock-based compensation.................................. 23,000
--------
Net deferred tax asset.................................. $ 29,000
========
</TABLE>

The components of the provision for income taxes as of December 31, 1998,
are as follows:

<TABLE>
<S> <C>
Federal income taxes:
Current................................................... $ 68,000
Deferred.................................................. (29,000)
State taxes................................................. 13,000
--------
Provision for income taxes.................................. $ 52,000
========
</TABLE>

For the year ended December 31, 1998, the provision for income taxes
differed from the amounts computed at the statutory rate, as follows:

<TABLE>
<S> <C>
Income tax computed at statutory rates...................... $ (4,000)
State income taxes, net of federal income tax benefit....... 9,000
Permanent differences....................................... 48,000
Other, net.................................................. (1,000)
--------
$ 52,000
========
</TABLE>

10. RELATED PARTIES:

See Note 7 for a description of certain long-term debt obligations with
related parties.

In 1998, IO has entered into a service agreement with a relative of an
officer of the Company. Under this agreement, this individual will act as
financial advisor for any sale, merger or financing transaction entered into by
the Company and, in exchange, will receive a fee equal to three percent of the
transaction consideration. No fees were paid in 1998 in connection with this
agreement.

F-131
<PAGE>
INTERNET OUTFITTERS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

11. COMMITMENTS AND CONTINGENCIES:

LEASES

The Company has noncancelable operating leases, primarily for real estate,
that expire over the next 2 years. One of the operating leases maintains an
escalation provision that requires annual incremental increases of at least
3 percent. Rental expense for operating leases during the year ended
December 31, 1998 was $63,000.

The Company leases certain equipment under capital leases.

Future minimum lease payments under capital leases and noncancelable
operating leases are as follows as of December 31, 1998:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1999..................................................... $ 17,000 $68,000
2000..................................................... 5,000 11,000
-------- -------
Total minimum lease payments......................... 22,000 $79,000
=======
Less: Amount representing interest....................... (2,000)
--------
Present value of capital lease obligations............... 20,000
Less: Current portion of capital lease obligations....... (17,000)
--------
Long-term portion of capital lease obligations........... $ 3,000
========
</TABLE>

Equipment under capital leases is summarized as follows as of December 31,
1998:

<TABLE>
<S> <C>
Computer equipment.......................................... $ 49,000
Accumulated depreciation.................................... (15,000)
--------
Total................................................... $ 34,000
========
</TABLE>

LITIGATION AND CLAIMS

In 1998, one of the Company's suppliers informed IO that it believed the
Company had caused a third-party client of the Company to enter into an
incorrect license for a supplier's software. The supplier asserted that the
correct license required additional payments of approximately $2,200,000 in
license fees and technical support fees. The Company denies any liability for
additional licensing fees. While the Company intends to vigorously contest any
claim by the supplier that additional fees are owed in connection with the third
party, the ultimate resolution of this matter cannot be determined at this time.

F-132
<PAGE>
[APPNET LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth expenses and costs payable by AppNet (other
than underwriting discounts and commissions) expected to be incurred in
connection with the issuance and distribution of the securities described in
this registration statement. All amounts are estimated except for the Securities
and Exchange Commission's registration fee and the National Association of
Securities Dealers' filing fee.

<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Registration fee under Securities Act....................... $ 57,866
NASD filing fee............................................. 21,315
The Nasdaq National Market fees............................. 17,500
Legal fees and expenses..................................... 200,000
Accounting fees and expenses................................ 150,000
Printing and engraving expenses............................. 175,000
Registrar and transfer agent fees........................... 5,000
Miscellaneous expenses...................................... 73,319
--------
Total....................................................... $700,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

AppNet's bylaws provide that AppNet shall indemnify to the fullest extent
authorized by the Delaware General Corporation Law, each person who is involved
in any litigation or other proceeding because such person is or was a director
or officer of AppNet, against all expense, loss or liability reasonably incurred
or suffered in connection therewith. AppNet's bylaws provide that a director or
officer may be paid expenses incurred in defending any proceeding in advance of
its final disposition upon receipt by AppNet of an undertaking, by or on behalf
of the director or officer, to repay all amounts so advanced if it is ultimately
determined that such director or officer is not entitled to indemnification.

Section 145 of the Delaware General Corporation Law permits a corporation to
indemnify any director or officer of the corporation against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with any action, suit or proceeding brought by
reason of the fact that such person is or was a director or officer of the
corporation, if such person acted in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if he had
no reason to believe his conduct was unlawful. In a derivative action, (I.E.,
one brought by or on behalf of the corporation), indemnification may be made
only for expenses, actually and reasonably incurred by any director or officer
in connection with the defense or settlement of such an action or suit, if such
person acted in good faith and in a manner that he reasonably believed to be in
or not opposed to the best interests of the corporation, except that no
indemnification shall be made if such person shall have been adjudged to be
liable to the corporation, unless and only to the extent that the court in which
the action or suit was brought shall determine that the defendant is fairly and
reasonably entitled to indemnity for such expenses despite such adjudication of
liability.

Pursuant to Section 102(b)(7) of the Delaware General Corporation Law,
AppNet's certificate of incorporation eliminates the liability of a director to
the corporation or its stockholders for monetary damages for such breach of
fiduciary duty as a director, except for liabilities arising (a) from any breach
of the director's duty of loyalty to the corporation or its stockholders;
(b) from acts or omissions

II-1
<PAGE>
not in good faith or which involve intentional misconduct or a knowing violation
of law; (c) under Section 174 of the Delaware General Corporation Law; or
(d) from any transaction from which the director derived an improper personal
benefit.

AppNet intends to obtain primary and excess insurance policies insuring its
directors and officers and those of its subsidiaries against certain liabilities
they may incur in their capacity as directors and officers. Under such policies,
the insurer, on behalf of AppNet, may also pay amounts for which AppNet has
granted indemnification to the directors or officers.

Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the Underwriters of
AppNet, its directors and officers who sign the registration statement and
persons who control AppNet, under certain circumstances.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

AppNet has issued securities in the following transactions, each of which,
unless otherwise indicated, was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2).

On March 10, 1998, AppNet issued a warrant to purchase 31,250 shares of
Class B Preferred Stock for an aggregate purchase price of $125,000 to Silicon
Valley Bank as consideration, in part, for a loan from Silicon Valley Bank in
the principal amount of $2,262,500. Pursuant to the terms of an Exchange
Agreement, dated as of June 12, 1998, between AppNet and Silicon Valley Bank,
the warrant to purchase Class B Preferred Stock was exchanged for two new
warrants: (a) a warrant to purchase 14,620 shares of AppNet common stock for an
aggregate purchase price of $4,396 and (b) a warrant to purchase 121 shares of
Class A Preferred Stock for an aggregate purchase price of $121,000. This
exchange was exempt from the registration requirements of the Securities Act by
virtue of Section 3(a)(9) of the Securities Act.

On March 11, 1998, AppNet issued a total of 5,378,947 shares of its common
stock to its founders in the following amounts and for the following
consideration: (1) 3,157,895 shares to Ken Bajaj for an aggregate purchase price
of $9,000; (2) 2,052,632 shares to Fairfax Management Company for an aggregate
purchase price of $5,850; (3) 56,140 shares to Terrence McManus in exchange for
$80, as consideration for past services and in exchange for a binding obligation
to provide future services; (4) 56,140 shares to Robert Harvey in exchange for
$80, as consideration for past services and in exchange for a binding obligation
to provide future services; and (5) 56,140 shares to Robert McCalley in exchange
for $80, as consideration for past services and in exchange for a binding
obligation to provide future services. On June 29, 1998, AppNet repurchased a
portion of the shares issued to Fairfax Management Company in return for a
convertible promissory note in the principal amount of $406,175. The principal
amount of this note will automatically convert into shares of AppNet common
stock upon the consummation of this offering using a per share purchase price
equal to 80% of the offering price per common share.

On March 12, 1998, AppNet issued an aggregate of 266,796 shares of
Series A-1 Convertible Preferred Stock, par value $0.001, to Arbor and 20
employees of Arbor, as partial payment for the assets of Arbor. The Series A-1
Convertible Preferred Stock issued to Arbor and the Arbor employees was valued
at approximately $1,067,184. On June 29, 1998, all of the shares of the Series
A-1 Convertible Preferred Stock were converted into 187,225 shares of our common
stock. On June 29, 1998, AppNet redeemed 138,455 shares of its common stock that
were issued to Arbor for $789,192.

On April 30, 1998, as partial payment for the assets of LOGEX, AppNet issued
a convertible promissory note to LOGEX in the principal amount of $300,000. The
principal amount of this note, and, with AppNet's consent, accrued interest on
the note, is convertible into AppNet common stock at the holder's option upon
(a) the consummation of this offering, using a per share purchase price equal

II-2
<PAGE>
to 80% of the offering price per common share or (b) a change in control of
AppNet, using a per share purchase price equal to 80% of the fair market value
at the time of the change in control.

On May 31, 1998, AppNet issued a warrant to purchase 35,088 shares of its
common stock for an aggregate purchase price of $50,000 to Smart Technology as
consideration, in part, for a loan from Smart Technology in the maximum
principal amount of $1,000,000. On June 29, 1998, in accordance with the
Purchase Agreement, this warrant was canceled, and AppNet issued a new warrant
to Smart Technology to purchase 70,175 shares of AppNet common stock for an
aggregate purchase price of approximately $21,100.

On June 29, 1998, GTCR and Smart Technology purchased 11,326,228 and 232,916
shares of AppNet common stock, respectively, for aggregate purchase prices of
$3,405,514 and $70,032, respectively, from AppNet under a purchase agreement,
dated as of June 29, 1998). Each of these offerings was exempt from registration
under Section 4(2) of the Securities Act and satisfied the terms and conditions
of Rule 506 of the Securities Act. A Form D was filed on July 10, 1998. Under
the purchase agreement, GTCR and Smart Technology have also purchased aggregate
amounts of approximately 44,167 and 900 shares of Class A Preferred Stock,
respectively, since June 29, 1998, for aggregate purchase prices of
approximately $44,167,000 and $900,000, respectively.

On June 29, 1998, AppNet issued 1,251,228, 63,158, 110,175 and 63,158 shares
of its common stock to Ken Bajaj, Robert Harvey, Robert McCalley and Terrence
McManus, respectively, for an aggregate purchase price of $447,320.

On June 29, 1998, AppNet issued an aggregate of 35,088 shares of its common
stock to Anchor Financial Group, Inc., Pascal Luck and Robert Stewart in
satisfaction in full of all obligations of AppNet for finder's fees in
connection with investments by GTCR and Smart Technology in AppNet under the
purchase agreement with GTCR and Smart Technology. These shares had an aggregate
value of $10,550.

On June 29, 1998, AppNet issued 52,632 shares of its common stock to Thomas
Davidson for payment, in part, of a finder's fee in connection with the GTCR and
Smart Technology investments in AppNet. These shares had an aggregate value of
$15,825. AppNet also issued 86,651 shares of its common stock to Mr. Davidson
for an aggregate purchase price of $26,053. This offering was exempt from
registration under Section 4(2) of the Securities Act and satisfied the terms
and conditions of Rule 506 of the Securities Act. A Form D was filed on
July 10, 1998.

Since June 29, 1998, AppNet issued an aggregate of 552,983 shares of its
common stock to twelve of its employees for an aggregate purchase price of
$571,498.

On August 1, 1998, GTCR and Smart Technology exchanged an aggregate of
1,387,097 shares of our common stock for an aggregate of 417.066 shares of
Class A Preferred Stock. This exchange was exempt from the registration
requirements of the Securities Act by virtue of Section 3(a)(9) of the
Securities Act.

On August 25, 1998, AppNet issued an aggregate of 11,576 shares of Class B
Preferred Stock and 1,387,095 shares of its common stock to the ten stockholders
of SSC in connection with the acquisition of SSC. The Class B Preferred Stock
issued to the SSC stockholders was valued at $11,576,000 and the common stock
was valued at approximately $417,066.

On October 2, 1998, AppNet issued an aggregate of 1,111,111 shares of its
common stock to the five stockholders of NMP as payment, in part, for all of the
issued and outstanding capital stock of NMP. The common stock issued to the NMP
stockholders was valued at $9,500,000. Also in connection with the acquisition
of NMP, AppNet assumed options to purchase an aggregate of 145,518 shares of its
common stock to the NMP stockholders.

II-3
<PAGE>
On October 12, 1998, as payment, in part, for all of the issued and
outstanding capital stock of Century, AppNet issued a convertible promissory
note to Riggs & Co., as nominee on behalf of the twenty-nine stockholders of
Century, in the aggregate principal amount of $2,000,000. Each of the
twenty-nine Century stockholders obtained a percentage beneficial interest in
the note. All or any portion of the unpaid balance of the note is convertible at
the holder's option, at any time prior to payment in full, into shares of AppNet
common stock, using a per share purchase price of $8.55. Also in connection with
the acquisition of Century, AppNet assumed options to purchase an aggregate of
704,127 shares of its common stock to the Century stockholders. This offering
was exempt from registration under Section 4(2) of the Securities Act and
satisfied the terms and conditions of Rule 506 of the Securities Act. A Form D
was filed October 27, 1998.

On October 20, 1998, AppNet issued an aggregate of 701,754 shares of its
common stock to the two stockholders of R&P as payment, in part, for all of the
issued and outstanding capital stock of R&P. The common stock issued to the R&P
stockholders was valued at $6,000,000.

On December 14, 1998, AppNet issued an aggregate of 197,368 shares of its
common stock and four convertible promissory notes in an aggregate principal
amount of $2,000,000 to the four stockholders of Kodiak as payment, in part, for
all of the issued and outstanding capital stock of Kodiak. The common stock
issued to the Kodiak stockholders was valued at $2,250,000. All or any portion
of the unpaid balance of each of these notes is convertible at the holder's
option, at any time prior to payment in full, into shares of AppNet common
stock, using a per share purchase price of $11.40. This offering was exempt from
registration under Section 4(2) of the Securities Act and satisfied the terms
and conditions of Rule 506 of the Securities Act. A Form D was filed on
December 29, 1998.

On January 6, 1999, AppNet issued 29,240 shares of its common stock to
Antares Capital Corporation for an aggregate purchase price of $375,003. This
offering was exempt from registration under Section 4(2) of the Securities Act
and satisfied the terms and conditions of Rule 506 of the Securities Act. A Form
D was filed on January 22, 1999.

On January 8, 1999, AppNet issued two convertible promissory notes in an
aggregate principal amount of $3,500,000 to the two former stockholders of i33
as partial payment for their shares of the capital stock of i33. The principal
amount of, and accrued interest on, these notes is convertible into AppNet
common stock at the holder's option commencing upon (a) the consummation of this
offering, using a per share purchase price equal to 80% of the offering price
per common share, or (b) a change in control of AppNet, using a per share
purchase price equal to 80% of the fair market value at the time of the change
in control. In addition, AppNet issued two convertible subordinated promissory
notes in an aggregate principal amount of $6,800,000 to the two former i33
stockholders as partial payment for their shares of the capital stock of i33.
All or any portion of the principal of, and accrued interest on, each of these
notes is convertible, at the holder's option, commencing upon the consummation
of this offering or a change in control of AppNet, into shares of common stock,
using a per share purchase price of $11.40. Also in connection with the
acquisition of i33, AppNet issued a convertible promissory note in a principal
amount of $1,000,000 to a trust for the benefit of i33 employees. The principal
amount of, and accrued interest on, this note is convertible into AppNet common
stock at the holder's option commencing upon (a) the consummation of this
offering, using a per share purchase price equal to 80% of the offering price
per common share, or (b) a change in control of AppNet, using a per share
purchase price equal to 80% of the fair market value at the time of the change
in control. This offering was exempt from registration under Section 4(2) of the
Securities Act and satisfied the terms and conditions of Rule 506 of the
Securities Act. A Form D was filed on January 22, 1999.

On March 4, 1999, AppNet issued an aggregate of 97,465 shares of its common
stock to the four stockholders of Sigma6 as payment, in part, for all of the
issued and outstanding capital stock of

II-4
<PAGE>
Sigma6. The common stock issued to the Sigma6 stockholders was valued at
$1,250,000. This offering was exempt from registration under Section 4(2) of the
Securities Act and satisfied the terms and conditions of Rule 506 of the
Securities Act. A Form D was filed on March 19, 1999.

On March 15, 1999, AppNet issued an aggregate of 245,614 shares of its
common stock to Salzinger & Company, Inc. as payment, in part, for substantially
all of the assets of Salzinger & Company. The common stock issued to Salzinger &
Company was valued at $3,500,000. This offering was exempt from registration
under Section 4(2) of the Securities Act and satisfied the terms and conditions
of Rule 506 of the Securities Act. A Form D was filed on March 30, 1999.

On March 25, 1999, AppNet issued an aggregate of 157,895 shares of its
common stock to the 19 stockholders of Internet Outfitters as payment, in part,
for all of the issued and outstanding capital stock of Internet Outfitters. The
common stock issued to the Internet Outfitters stockholders was valued at
$2,700,000. Also in connection with the acquisition of Internet Outfitters,
AppNet assumed options to purchase an aggregate of 22,300 shares of its common
stock to the Internet Outfitters' stockholders. This offering was exempt from
registration under Section 4(2) of the Securities Act and satisfied the terms
and conditions of Rule 506 of the Securities Act. A Form D was filed on April
12, 1999.

On March 29, 1999, AppNet issued an aggregate of 94,737 shares of its common
stock to TransForm IT as payment, in part, for substantially all of the assets
of TransForm IT. The common stock issued to TransForm IT was valued at
$1,620,000.

From August 1998 through July 15, 1999, AppNet issued an aggregate of 4,790
shares of its common stock pursuant to option exercises under its 1998 Plan at a
weighted average exercise price of $0.07.

From August 1998 through July 15, 1999, AppNet issued an aggregate of
658,488 of its common stock pursuant to option exercises under the Century Plan
at a weighted average exercise price of $0.79.

On June 23, 1999, AppNet issued 4,936,808 shares of its common stock in
exchange for 45,430 shares of its Class A Preferred Stock and 11,576 shares of
its Class B Preferred Stock at an exchange rate of $12.00 per share. These
securities were issued without registration under the Securities Act of 1933, as
amended, in reliance upon an exemption from registration under Section 3(a)(9).

On June 23, 1999, AppNet issued 75,129 shares of its common stock upon the
conversion of promissory notes of approximately $0.7 million plus accrued
interest at a conversion price of $9.60 per share. These securities were issued
without registration under the Securities Act of 1933, as amended, in reliance
upon an exemption from registration under Section 3(a)(9).

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

The following documents are filed as exhibits to this registration
statement:

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement*

3.1 Restated Certificate of Incorporation of AppNet, Inc.

3.2 Form of Amended and Restated Bylaws of AppNet, Inc.
(Incorporated by reference to Exhibit 3.2 to Amendment
No. 2 to AppNet's Registration Statement on Form S-1, File
No. 333-75205, filed May 25, 1999)
</TABLE>

II-5
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
4.1 Form of certificate of common stock of AppNet Systems, Inc.
(Incorporated by reference to Amendment No. 2 to
Exhibit 4.1 to AppNet's Registration Statement on Form S-1,
File No. 333-75205, filed May 25, 1999)

4.2 Registration Agreement, dated as of June 29, 1998, by and
among AppNet Systems, Inc., GTCR Golder Rauner, L.L.C.,
Fairfax Management Company II, L.L.C., Smart Technology,
L.L.C. and certain stockholders of AppNet, Inc.
(Incorporated by reference to Exhibit 4.2 to AppNet's
Registration Statement on Form S-1, File No. 333-75205,
filed March 29, 1999)

5.1 Opinion of Foley & Lardner

10.1 Purchase Agreement, dated as of June 29, 1998, as amended,
by and among AppNet, Inc., Smart Technology, L.L.C. and GTCR
Golder Rauner, L.L.C. (Incorporated by reference to
Exhibit 10.1 to Amendment No. 5 to AppNet's Registration
Statement on Form S-1, File No. 333-75205, filed June 15,
1999)

10.2 Agreement of Purchase and Sale of Assets, dated March 12,
1998, by and between AppNet, Inc., Arbor Intelligent
Systems, Inc., AppNet of Michigan, Inc. and Ronald Suarez,
Robert Simms and Robert Royce for purchase and sale of
substantially all of the assets of Arbor Intelligent
Systems, Inc. (Incorporated by reference to Exhibit 10.2 to
Amendment No. 1 to AppNet's Registration Statement on
Form S-1, File No. 333-75205, filed May 13, 1999)

10.3 Merger Agreement, dated June 31, 1998, by and among AppNet,
Inc., SSC Acquisition Sub #1, Inc., Software Services
Corporation and its stockholders for the purchase of all of
the issued and outstanding capital stock of Software
Services Corporation (Incorporated by reference to
Exhibit 10.3 to Amendment No. 1 to AppNet's Registration
Statement on Form S-1, File No. 333-75205, filed May 13,
1999)

10.4 Merger Agreement, dated October 2, 1998, by and among
AppNet, Inc., NMP Acquisition Sub #1, Inc., New Media
Publishing, Inc. and its stockholders for the purchase of
all of the issued and outstanding capital stock of New Media
Publishing, Inc. (Incorporated by reference to Exhibit 10.4
to Amendment No. 1 to AppNet's Registration Statement on
Form S-1, File No. 333-75205, filed May 13, 1999)

10.5 Agreement and Plan of Merger, dated September 17, 1998, by
and among AppNet, Inc., AppNet/Century, Inc., Century
Computing, Incorporated and its stockholders for the
purchase of all of the issued and outstanding capital stock
of Century Computing, Incorporated (Incorporated by
reference to Exhibit 10.5 to Amendment No. 1 to AppNet's
Registration Statement on Form S-1, File No. 333-75205,
filed May 13, 1999)

10.6 Stock Purchase Agreement, dated October 20, 1998, by and
among AppNet, Inc., Research & Planning, Inc., Thomas H.
Rauh and William Rosenfeld for the purchase of all of the
issued and outstanding capital stock of Research & Planning,
Inc. (Incorporated by reference to Exhibit 10.6 to Amendment
No. 1 to AppNet's Registration Statement on Form S-1, File
No. 333-75205, filed May 13, 1999)

10.7 Stock Purchase Agreement, dated as of November 25, 1998, by
and among AppNet, Inc., The Kodiak Group, Inc. and its
stockholders for the purchase of all of the issued and
outstanding capital stock of The Kodiak Group, Inc.
(Incorporated by reference to Exhibit 10.7 to Amendment No.
1 to AppNet's Registration Statement on Form S-1, File
No. 333-75205, filed May 13, 1999)
</TABLE>

II-6
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
10.8 Stock Purchase Agreement, dated December 23, 1998, by and
among AppNet, Inc., i33 communications corp., Drew Rayman
and Enno Vandermeer for the purchase of all of the issued
and outstanding capital stock of i33 communications corp.
(Incorporated by reference to Exhibit 10.8 to Amendment No.
1 to AppNet's Registration Statement on Form S-1, File
No. 333-75205, filed May 13, 1999)

10.9 Merger Agreement, dated as of February 25, 1999, as amended,
by and among AppNet, Inc., AppNet Sigma6, Inc., Sigma6, Inc.
and the stockholders of Sigma6, Inc., for the purchase of
all of the issued and outstanding capital stock of Sigma6,
Inc. (Incorporated by reference to Exhibit 10.9 to Amendment
No. 3 to AppNet's Registration Statement on Form S-1, File
No. 333-75205, filed May 28, 1999)

10.10 Asset Purchase Agreement, dated as of March 1, 1999, by and
among AppNet, Inc., Salzinger Acquisition Corp., Salzinger &
Company, Inc. and Steven Salzinger for the purchase of
substantially all of the assets of Salzinger & Company, Inc.
(Incorporated by reference to Exhibit 10.10 to Amendment No.
1 to AppNet's Registration Statement on Form S-1, File
No. 333-75205, filed May 13, 1999)

10.11 Stock Purchase Agreement, dated as of March 22, 1999, by and
among AppNet, Inc., Internet Outfitters, Inc. and its
stockholders for the purchase of all of the issued and
outstanding capital stock of Internet Outfitters, Inc.
(Incorporated by reference to Exhibit 10.11 to Amendment No.
1 to AppNet's Registration Statement on Form S-1, File
No. 333-75205, filed May 13, 1999)

10.12 Asset Purchase Agreement, dated as of March 29, 1999, by and
among AppNet, Inc., Transform Acquisition Corp., TransForm
IT, Incorporated and John C. King, Thomas E. Hunt and Roy A.
Chandler for the purchase of substantially all of the assets
of TransForm IT, Incorporated (Incorporated by reference to
Exhibit 10.12 to Amendment No. 1 to AppNet's Registration
Statement on Form S-1, File No. 333-75205, filed May 13,
1999)

10.13 Recapitalization Agreement, dated as of June 16, 1999, by
and among AppNet, Inc. and owners of AppNet's preferred
stock (Incorporated by reference to Exhibit 10.1 to AppNet's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999)

10.14 Revolving Credit Agreement, dated as of January 8, 1999, by
and among AppNet, Inc., BankBoston, N.A. and Antares Capital
Corporation (Incorporated by reference to Exhibit 10.14 to
Amendment No. 1 to AppNet's Registration Statement on
Form S-1, File No. 333-75205, filed May 13, 1999)

10.15 Limited Consent Letter Agreement, dated August 16, 1999, by
BankBoston, N.A. and Antares Capital Corporation, and
AppNet, Inc. and certain of its subsidiaries, relating to
the Revolving Credit Agreement, dated as of January 8, 1999
(Incorporated by reference to Exhibit 10.3 to AppNet's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999)

10.16 Second Amendment to Revolving Credit Agreement, dated as of
May 24, 1999, by and among AppNet, Inc., BankBoston, N.A.
and Antares Capital Corporation (Incorporated by reference
to Exhibit 10.15 to Amendment No. 3 to AppNet's Registration
Statement on Form S-1, File No. 333-75205, filed May 28,
1999)

10.17 First Amendment to Revolving Credit Agreement, dated as of
March 10, 1999, by and among AppNet, Inc., BankBoston, N.A.
and Antares Capital Corporation (Incorporated by reference
to Exhibit 10.16 to Amendment No. 1 to AppNet's Registration
Statement on Form S-1, File No. 333-75205, filed May 13,
1999)
</TABLE>

II-7
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
10.18 Century Computing, Incorporated Incentive Stock Plan, as
amended (Incorporated by reference to Exhibit 10.18 to
Amendment No. 1 to AppNet's Registration Statement on Form
S-1, File No. 333-75205, filed May 13, 1999)

10.19 AppNet, Inc. 1998 Stock Option and Incentive Plan (as
amended and restated) (Incorporated by reference to Exhibit
10.19 to Amendment No. 2 to AppNet's Registration Statement
on Form S-1, File No. 333-75205, filed May 25, 1999)

10.20 AppNet, Inc. 1999 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.2 to AppNet's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999)

10.21 Internet Outfitters, Inc. 1996 Incentive Stock Option Plan,
as amended (Incorporated by reference to Exhibit 10.21 to
Amendment No. 1 to AppNet's Registration Statement on Form
S-1, File No. 333-75205, filed May 13, 1999)

10.22 Form of Senior Management Agreement, as amended
(Incorporated by reference to Exhibit 10.22 to Amendment No.
3 to AppNet's Registration Statement on Form S-1, File No.
333-75205, filed May 28, 1999)

10.23 Senior Management Agreement, dated as of June 29, 1998, by
and between AppNet, Inc. and Ken S. Bajaj (Incorporated by
reference to Exhibit 10.23 to Amendment No. 2 to AppNet's
Registration Statement on Form S-1, File No. 333-75205,
filed May 25, 1999)

10.24 Letter Agreement, dated as of May 28, 1999, by and among
AppNet, Inc., BankBoston, N.A. and Antares Capital
Corporation (Incorporated by reference to Exhibit 10.24 to
Amendment No. 3 to AppNet's Registration Statement on Form
S-1, File No. 333-75205, filed May 28, 1999)

21.1 Subsidiaries of AppNet, Inc. (Incorporated by reference to
Exhibit 21.1 to Amendment No. 4 to AppNet's Registration
Statement on Form S-1, File No. 333-75205, filed June 10,
1999)

23.1 Consent of Arthur Andersen LLP

23.2 Consent of Foley & Lardner (included in Exhibit 5.1 above)

23.3 Consent of Gartner Group/Dataquest*

23.4 Consent of International Data Corporation
</TABLE>

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

* To be filed by amendment.

II-8
<PAGE>
ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual reports pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

The undersigned registrant hereby undertakes that:

(1) To provide to the Underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the Underwriters to permit proper delivery to each
purchaser.

(2) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424b(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(3) For purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

II-9
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Bethesda, State of
Maryland, on this 28th of October, 1999.

<TABLE>
<S> <C> <C>
APPNET, INC.

By: /s/ KEN S. BAJAJ
-----------------------------------------
Ken S. Bajaj
President and Chief Executive Officer
</TABLE>

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
constitutes and appoints Ken S. Bajaj, Jack Pearlstein and William S. Dawson,
and each of them individually, his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and any additional registration statement to be filed pursuant to
Rule 462(b) under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or their or his substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
President, Chief Executive
/s/ KEN S. BAJAJ Officer and Director
------------------------------------------- (Principal Executive October 28, 1999
Ken S. Bajaj Officer)

/s/ JOHN CROSS
------------------------------------------- Executive Vice President and October 28, 1999
John Cross Director

/s/ THOMAS M. DAVIDSON
------------------------------------------- Director October 28, 1999
Thomas M. Davidson

/s/ BRUCE RAUNER
------------------------------------------- Director October 28, 1999
Bruce Rauner

/s/ PHILIP A. CANFIELD
------------------------------------------- Director October 28, 1999
Philip A. Canfield

/s/ RICHARD N. PERLE
------------------------------------------- Director October 28, 1999
Richard N. Perle

Senior Vice President and
/s/ JACK PEARLSTEIN Chief Financial Officer
------------------------------------------- (Principal Financial and October 28, 1999
Jack Pearlstein Accounting Officer)
</TABLE>

II-10
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To AppNet, Inc.:

We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of AppNet, Inc. (formerly AppNet Systems,
Inc.) and the financial statements of Software Services Corporation included in
this registration statement and have issued our reports thereon dated March 29,
1999 (except with respect to the matter discussed in Note 18, as to which the
date is June 15, 1999) and February 5, 1999, respectively. Our audits were made
for the purpose of forming an opinion on the basic financial statements taken as
a whole. The accompanying Schedule II -- Valuation and Qualifying Accounts for
AppNet, Inc. and Software Services Corporation are the responsibility of the
Company's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

ARTHUR ANDERSEN LLP

Washington, D.C.
March 29, 1999

S-1
<PAGE>
SCHEDULE II

APPNET, INC.
VALUATION AND QUALIFYING ACCOUNTS

SOFTWARE SERVICES CORPORATION (PREDECESSOR)
VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
ADDITIONS
-------------------
CHARGED
BEGINNING TO ENDING
BALANCE DEDUCTIONS EXPENSE OTHER(1) BALANCE
--------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
PERIOD ENDING DECEMBER 31, 1996
Allowance for Doubtful Accounts....... $ 49,000 $ 37,000 $ 17,000 -- $ 29,000
PERIOD ENDING DECEMBER 31, 1997
Allowance for Doubtful Accounts....... $ 29,000 $ 10,000 $ 6,000 -- $ 25,000
PERIOD FROM JANUARY 1 TO AUGUST 24, 1998
Allowance for Doubtful Accounts....... $ 25,000 $ (1,000) $229,000 -- $ 255,000
</TABLE>

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

(1) Amounts reflected in opening balance sheets of acquired companies in
accordance with the purchase method of accounting.

S-2
<PAGE>
INDEX TO EXHIBITS

The following documents are filed as exhibits to this registration
statement:

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement*

3.1 Restated Certificate of Incorporation of AppNet, Inc.

3.2 Form of Amended and Restated Bylaws of AppNet, Inc.
(Incorporated by reference to Exhibit 3.2 to AppNet's
Registration Statement on Form S-1, File No. 333-75205,
initially filed March 29, 1999)

4.1 Form of certificate of common stock of AppNet Systems, Inc.
(Incorporated by reference to Exhibit 4.1 to AppNet's
Registration Statement on Form S-1, File No. 333-75205,
initially filed March 29, 1999)

5.1 Opinion of Foley & Lardner

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
10.7 Stock Purchase Agreement, dated as of November 25, 1998, by
and among AppNet, Inc., The Kodiak Group, Inc. and its
stockholders for the purchase of all of the issued and
outstanding capital stock of The Kodiak Group, Inc.
(Incorporated by reference to Exhibit 10.7 to Amendment No.
1 to AppNet's Registration Statement on Form S-1, File
No. 333-75205, filed May 13, 1999)

10.8 Stock Purchase Agreement, dated December 23, 1998, by and
among AppNet, Inc., i33 communications corp., Drew Rayman
and Enno Vandermeer for the purchase of all of the issued
and outstanding capital stock of i33 communications corp.
(Incorporated by reference to Exhibit 10.8 to Amendment No.
1 to AppNet's Registration Statement on Form S-1, File
No. 333-75205, filed May 13, 1999)

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
10.17 First Amendment to Revolving Credit Agreement, dated as of
March 10, 1999, by and among AppNet, Inc., BankBoston, N.A.
and Antares Capital Corporation (Incorporated by reference
to Exhibit 10.16 to Amendment No. 1 to AppNet's Registration
Statement on Form S-1, File No. 333-75205, filed May 13,
1999)

10.18 Century Computing, Incorporated Incentive Stock Plan, as
amended (Incorporated by reference to Exhibit 10.18 to
Amendment No. 1 to AppNet's Registration Statement on Form
S-1, File No. 333-75205, filed May 13, 1999)

10.20 AppNet, Inc. 1999 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.2 to AppNet's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999)

21.1 Subsidiaries of AppNet, Inc. (Incorporated by reference to
Exhibit 21.1 to Amendment No. 4 to AppNet's Registration
Statement on Form S-1, File No. 333-75205, filed June 10,
1999)

23.1 Consent of Arthur Andersen LLP

23.2 Consent of Foley & Lardner (included in Exhibit 5.1 above)

23.3 Consent of Gartner Group/Dataquest*

23.4 Consent of International Data Corporation
</TABLE>

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

* To be filed by amendment.

<PAGE>

Exhibit 3.1

COMPOSITE RESTATED CERTIFICATE OF INCORPORATION

APPNET, INC.

AppNet, Inc. a corporation existing under the laws of the State of
Delaware (the "Corporation"), hereby certifies as follows:

1. The name of the Corporation is AppNet, Inc. AppNet, Inc. was
originally incorporated under the name Internet Applications, Inc. and the
original certificate of Incorporation was filed with the Secretary of State of
the State of Delaware on November 6, 1997.

2. This Restated Certificate of Incorporation restates and integrates
and further amends the provisions of the Certificate of Incorporation of the
Corporation and has been adopted pursuant to the provisions of Sections 242 and
245 of the General Corporation Law of the State of Delaware.

3. The text of the Restated Certificate of Incorporation as heretofore
amended or supplemented is hereby restated and further amended to read in its
entirety as follows:

FIRST: The name of the Corporation is AppNet, Inc.

SECOND: The address of the Corporation's registered office in the State
of Delaware is Corporation Service Company, 1013 Centre Road, in the City of
Wilmington, County of New Castle, Delaware 19805. The name of its registered
agent at such address is Corporation Service Company.

THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware (the "DGCL").

FOURTH: The aggregate number of shares of all classes of capital stock
which the Corporation shall have the authority to issue is 80,000,000 of which
(i) 75,000,000 shall be designated common stock, par value $.0005 per share
("Common Stock"), and (ii) 5,000,000 shall be designated preferred stock, par
value $.01 per share ("Preferred Stock").

A. Common Stock

Except as otherwise provided in this Part A or as otherwise
required by applicable law, all shares of Common Stock shall be identical in all
respects and shall entitle the holders thereof to the same rights and
privileges, subject to the same qualifications, limitations and restrictions.

<PAGE>

1. DIVIDENDS. Subject to the preferential rights, if any, of
the Preferred Stock, the holders of shares of Common Stock shall be entitled to
receive, when and if declared by the Board of Directors, out of the assets of
the Corporation which are by law available therefor, dividends payable either in
cash, in property, or in shares of capital stock.

2. VOTING RIGHTS. At every annual or special meeting of the
stockholders of the corporation, every holder of Common stock shall be entitled
to one vote, in person or by proxy, for each share of Common Stock standing in
his name on the books of the Corporation.

3. LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of any
voluntary or involuntary liquidation, dissolution, or winding up of the affairs
of the Corporation after payment or provision for payment of the debts and other
liabilities of the Corporation and of the preferential amounts, if any, to which
holders of Preferred Stock shall be entitled, the holders of all outstanding
shares of Common Stock shall be entitled to share ratably in the remaining net
assets of the Corporation.

B. Preferred Stock

Shares of Preferred Stock of the Corporation may be issued
from time to time in one or more classes or series, each of which class or
series shall have such distinctive designation or title as shall be fixed by the
Board of Directors of the Corporation prior to the issuance of any shares
thereof. Each such class or series of Preferred Stock shall have such voting
powers, full or limited or no voting powers and such preferences and relative,
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof, as shall be stated in such resolution or
resolutions providing for the issue of such class or series of Preferred Stock
as may be adopted from time to time by the Board of Directors prior to the
issuance of any shares thereof pursuant to the authority hereby expressly vested
in it, all in accordance with the laws of the State of Delaware.

C. Class A and Class B Preferred Stock

1. DESIGNATION, PAR VALUE AND AMOUNT.

a) CLASS A PREFERRED STOCK. The shares of such class shall
be designated as "Class A Preferred," the shares of such class shall be with par
value of $.01 per share, and the number of shares constituting such class shall
be 96,621.

b) CLASS B PREFERRED STOCK. The shares of such class shall
be designated as "Class B Preferred," the shares of such class shall be with par
value of $.01 per share, and the number of shares constituting such class shall
be 20,000.

2. DIVIDENDS.

-2-
<PAGE>

a) GENERAL OBLIGATION. When and as declared by the
Corporation's Board of Directors and to the extent permitted under DGCL, the
Corporation shall pay preferential dividends in cash to the holders of the Class
A and Class B Preferred as provided in this Section 2. Dividends on each share
of the Class A and Class B Preferred (a "Share") shall accrue on a daily basis
at the rate of 6% per annum of the sum of the Liquidation Value thereof plus all
accumulated and unpaid dividends thereon from and including the date of issuance
of such Share to and including the first to occur of (i) the date on which the
Liquidation Value of such Share (plus all accrued and unpaid dividends thereon)
is paid to the holder thereof in connection with the liquidation of the
Corporation or the redemption of such Share by the Corporation or (ii) the date
on which such Share is otherwise acquired by the Corporation. Such dividends
shall accrue whether or not they have been declared and whether or not there are
profits, surplus or other funds of the Corporation legally available for the
payment of dividends, and such dividends shall be cumulative such that all
accrued and unpaid dividends shall be fully paid or declared with funds
irrevocably set apart for payment before any dividends, distributions,
redemptions or other payments may be made with respect to any Junior Securities.
The date on which the Corporation initially issues any Share shall be deemed to
be its "Date of Issuance" regardless of the number of times transfer of such
Share is made on the stock records maintained by or for the Corporation and
regardless of the number of certificates which may be issued to evidence such
Share.

b) DIVIDEND REFERENCE DATES. To the extent not paid on
March 31, June 30, September 30 and December 31 of each year, beginning June 30,
1998 for the Class A Preferred and September 30, 1998 for the Class B Preferred
(the "Dividend Reference Dates"), all dividends which have accrued on each Share
outstanding during the three-month period (or other period in the case of the
initial Dividend Reference Date) ending upon each such Dividend Reference Date
shall be accumulated and shall remain accumulated dividends with respect to such
Share until paid to the holder thereof.

c) DISTRIBUTION OF PARTIAL DIVIDEND PAYMENTS. Except as
otherwise provided herein, if at any time the Corporation pays less than the
total amount of dividends then accrued with respect to the Class A or Class B
Preferred such payment shall be distributed pro rata among the holders thereof
based upon the aggregate accrued but unpaid dividends on the shares held by each
such holder.

3. LIQUIDATION. Upon any liquidation, dissolution or winding
up of the Corporation (whether voluntary or involuntary), each holder of Class A
or Class B Preferred shall be entitled to be paid, before any distribution or
payment is made upon any Junior Securities, an amount in cash equal to the
aggregate Liquidation Value of all Shares held by such holder (plus all accrued
and unpaid dividends thereof), and the holders of Class A or Class B Preferred
shall not be entitled to any further payment. If upon any such liquidation,
dissolution or winding up of the Corporation, the Corporation's assets to be
distributed among the holders of the Class A and Class B Preferred are
insufficient to permit payment to such holders of the aggregate amount which
they are entitled to be paid under this Section 3, the entire assets available
to be distributed to the Corporation's stockholders shall be distributed pro
rata among such holders based upon the aggregate Liquidation Value (plus all
accrued and

-3-
<PAGE>

unpaid dividends) of the Class A and Class B Preferred held by each
such holder. Not less than 60 days prior to the payment date stated therein, the
Corporation shall mail written notice of any such liquidation, dissolution or
winding up to each record holder of Class A or Class B Preferred, setting forth
in reasonable detail the amount of proceeds to be paid with respect to each
Share and each share of Common Stock in connection with such liquidation,
dissolution or winding up.

4. PRIORITY OF PREFERRED STOCK. So long as any Class A or
Class B Preferred remains outstanding, without the prior written consent of the
holders of a majority of the outstanding Shares of Class A or Class B Preferred,
the Corporation shall not, nor shall it permit any Subsidiary to, redeem,
purchase or otherwise acquire directly or indirectly any Junior Securities, nor
shall the Corporation directly or indirectly pay or declare any dividend or make
any distribution upon any Junior Securities; provided that the Corporation may
purchase shares of Common Stock pursuant to arrangements approved by the Board
from present or former employees of the Corporation or its Subsidiaries.

5. VOTING RIGHTS. Except as otherwise provided herein and as
otherwise required by applicable law, the Class A and Class B Preferred shall
have no voting rights, provided that each holder of Class A or Class B Preferred
shall be entitled to notice of all stockholders meetings at the same time and in
the same manner as notice is given to all stockholders entitled to vote at such
meetings.

D. Class A Preferred Stock

1. REDEMPTIONS.

a) OPTIONAL REDEMPTIONS. The Corporation may at any time
and from time to time redeem all or any portion of the Shares of Class A
Preferred then outstanding. Upon any such redemption, the Corporation shall pay
a price per Share equal to the Liquidation Value thereof (plus all accrued and
unpaid dividends thereon). No redemption pursuant to this Section may be made
for less than 1,000 Shares (or such lesser number of Shares then outstanding).

b) REDEMPTION AFTER PUBLIC OFFERING. The Corporation shall,
at the request (by written notice given to the Corporation) of the holders of a
majority of the Class A Preferred, apply the net cash proceeds from any Public
Offering remaining after deduction of all discounts, underwriters' commissions
and other reasonable expenses to redeem Shares of Class A Preferred at a price
per Share equal to the Liquidation Value thereof (plus all accrued and unpaid
dividends thereon). Such redemption shall take place on a date fixed by the
Corporation, which date shall be no more than five days after the Corporation's
receipt of such proceeds.

C) REDEMPTION PAYMENTS. For each Share which is to be
redeemed hereunder, the Corporation shall be obligated on the Redemption Date to
pay to the holder thereof (upon surrender by such holder at the Corporation's
principal office of the certificate

-4-
<PAGE>

representing such Share) an amount in immediately available funds equal to the
Liquidation Value of such Share (plus all accrued and unpaid dividends thereon).
If the funds of the Corporation legally available for redemption of Shares on
any Redemption Date are insufficient to redeem the total number of Shares to be
redeemed on such date, those funds which are legally available shall be used to
redeem the maximum possible number of Shares pro rata among the holders of the
Shares to be redeemed based upon the aggregate Liquidation Value of such Shares
held by each such holder (plus all accrued and unpaid dividends thereon). At any
time thereafter when additional funds of the Corporation are legally available
for the redemption of Shares, such funds shall immediately be used to redeem the
balance of the Shares which the Corporation has become obligated to redeem on
any Redemption Date but which it has not redeemed.

d) NOTICE OF REDEMPTION. Except as otherwise provided
herein, the Corporation shall mail written notice of each redemption of any
Class A Preferred to each record holder thereof not more than 60 nor less than
30 days prior to the date on which such redemption is to be made. In case fewer
than the total number of Shares represented by any certificate are redeemed, a
new certificate representing the number of unredeemed Shares shall be issued to
the holder thereof without cost to such holder within five business days after
surrender of the certificate representing the redeemed Shares.

e) DETERMINATION OF THE NUMBER OF EACH HOLDER'S SHARES TO
BE REDEEMED. The number of Shares of Class A Preferred to be redeemed from each
holder thereof in redemptions hereunder shall be the number of shares of Class A
Preferred determined by multiplying the total number of Shares of Class A
Preferred to be redeemed times a fraction, the numerator of which shall be the
total number of Shares of Class A Preferred then held by such holder and the
denominator of which shall be the total number of Shares of Class A Preferred
then outstanding.

f) DIVIDENDS AFTER REDEMPTION DATE. No Share shall be
entitled to any dividends accruing after the date on which the Liquidation Value
of such Share (plus all accrued and unpaid dividends thereon) is paid to the
holder of such Share. On such date, all rights of the holder of such Share shall
cease, and such Share shall no longer be deemed to be issued and outstanding.

g) REDEEMED OR OTHERWISE ACQUIRED SHARES. Any Shares which
are redeemed or otherwise acquired by the Corporation shall be canceled and
retired to authorized but unissued shares and shall not be reissued, sold or
transferred.

h) OTHER REDEMPTIONS OR ACQUISITIONS. The Corporation shall
not, nor shall it permit any Subsidiary to, redeem or otherwise acquire any
Shares of Class A Preferred, except as expressly authorized herein.

i) SPECIAL REDEMPTIONS.

i. If a Change in Ownership has occurred or the
Corporation obtains knowledge that a Change in Ownership is proposed to occur,
the Corporation shall

-5-
<PAGE>

give prompt written notice of such Change in Ownership describing in reasonable
detail the material terms and date of consummation thereof to each holder of
Class A Preferred, but in any event such notice shall not be given later than
five days after the occurrence of such Change in Ownership, and the Corporation
shall give each holder of Class A Preferred prompt written notice of any
material change in the terms or timing of such transaction. The holder or
holders of a majority of the Class A Preferred then outstanding may require the
Corporation to redeem all or any portion of the Class A Preferred owned by such
holders at a price per Share equal to the Liquidation Value thereof (plus all
accrued and unpaid dividends thereon) by giving written notice to the
Corporation of such election prior to the later of (a) twenty-one days after
receipt of the Corporation's notice and (b) five days prior to the consummation
of the Change in Ownership ( the "Expiration Date"). The Corporation shall give
prompt written notice of any such election to all other holders of Class A
Preferred within five days after the receipt thereof, and each such holder shall
have until the later of (a) the Expiration Date or (b) ten days after receipt of
such second notice to request redemption hereunder (by giving written notice to
the Corporation) of all or any portion of the Class A Preferred owned by such
holder.

Upon receipt of such election(s), the Corporation shall be obligated to
redeem the aggregate number of Shares specified therein on the later of (a) the
occurrence of the Change in Ownership or (b) five days after the Corporation's
receipt of such election(s). If any proposed Change in Ownership does not occur,
all requests for redemption in connection therewith shall be automatically
rescinded, or if there has been a material change in the terms or the timing of
the transaction, any holder of Class A Preferred may rescind such holder's
request for redemption by delivering written notice thereof to the Corporation
prior to the consummation of the transaction.

The term "Change of Ownership" means any sale, transfer or issuance or
series of sales, transfer and/or issuances of Common Stock by the Corporation or
any holders thereof which results in any Person or group of Persons (as the term
"group" is used under the Securities Exchange Act of 1934), other than the
holders of Common Stock or Class A Preferred as of the date of the Purchase
Agreement, owning more than 50% of the Common Stock outstanding at the time of
such sale, transfer or issuance or series of sales, transfers and/or issuances;
provided, however that a Change in Ownership shall not occur as a result of a
Public Offering of Common Stock.

ii. If a Fundamental Change is proposed to occur, the
Corporation shall give written notice of such Fundamental Change describing in
reasonable detail the material terms and date of consummation thereof to each
holder of Class A Preferred not more than forty-five days nor less than twenty
days prior to the consummation of such Fundamental Change, and the Corporation
shall give each holder of Class A Preferred prompt written notice of any
material change in the terms or timing of such transaction. The holder or
holders of a majority of the Shares then outstanding may require the Corporation
to redeem all or any portion of the Class A Preferred owned by such holders at a
price per Share equal to the Liquidation Value thereof (plus all accrued and
unpaid dividends thereon) by giving written notice to the Corporation of such
election prior to the later of (a) ten days prior to the consummation of the
Fundamental Change or (b) ten days after receipt of notice from the

-6-
<PAGE>

Corporation. The Corporation shall give prompt written notice of such election
to all other holders of Class A Preferred (but in any event within five days
prior to the consummation of the Fundamental Change), and each such holder shall
have until two days after the receipt of such notice to request redemption (by
written notice given to the Corporation) of all or any portion of the Class A
Preferred owned by such holder.

Upon receipt of such election(s), the Corporation shall be obligated to
redeem the aggregate number of Shares specified therein upon the consummation of
such Fundamental Change. If any proposed Fundamental Change does not occur, all
requests for redemption in connection therewith shall be automatically
rescinded, or if there has been a material change in the terms or the timing of
the transaction, any holder of Class A Preferred may rescind such holder's
request for redemption by delivering written notice thereof to the Corporation
prior to the consummation of the transaction.

The term "Fundamental Change" means (a) any sale or transfer of more
than 50% of the assets of the Corporation and its Subsidiaries on a consolidated
basis (measured either by book value in accordance with generally accepted
accounting principles consistently applied or by fair market value determined in
the reasonable good faith judgment of the Corporation's Board of Directors) in
any transaction or series of transactions (other than sales in the ordinary
course of business) and (b) any merger or consolidation to which the Corporation
is a party, except for a merger in which the Corporation is the surviving
corporation, the terms of the Class A Preferred are not changed and the Class A
Preferred is not exchanged for cash, securities or other property, and after
giving effect to such merger, the holders of the Corporation's outstanding
capital stock possessing a majority of the voting power (under ordinary
circumstances) to elect a majority of the Corporation's Board of Directors
immediately prior to the merger shall continue to own the Corporation's
outstanding capital stock possessing the voting power (under ordinary
circumstances) to elect a majority of the Corporation's Board of Directors.

E. Miscellaneous Provisions Applicable to Class A and Class B
Preferred Stock

1. DEFINITIONS FOR PURPOSES OF CLASS A AND CLASS B PREFERRED

"Change in Ownership" has the meaning set forth in Section
1.i)i of Part D of this Article Fourth.

"Fundamental Change" has the meaning set forth in Section
1.i)ii of Part D of this Article Fourth.

"Junior Securities" means any capital stock or other equity
securities of the Corporation, except for the Class A and Class B Preferred.

"Liquidation Value" of any share as of any particular date
shall be equal to $1,000.00.

-7-
<PAGE>

"Person" means an individual, a partnership, a corporation,
a limited liability company, a limited liability, an association, a joint stock
company, a trust, a joint venture, an unincorporated organization and a
governmental entity or any department, agency or political subdivision thereof.

"Public Offering" means any offering by the Corporation of
its capital stock, or equity securities to the public pursuant to an effective
registration statement under the Securities Act of 1933, as then in effect, or
any comparable statement under any similar federal statute then in force.

"Purchase Agreement" means the Purchase Agreement, dated as
of June 29, 1998, by and among the Corporation and certain investors, as such
agreement may from time to time be amended in accordance with its terms.

"Redemption Date" as to any Share means the date specified
in the notice of any redemption at the Corporation's option or at the holders'
option or the applicable date specified herein in the case of any other
redemption; provided that no such date shall be a Redemption Date unless the
Liquidation Value of such Share (plus all accrued and unpaid dividends thereon
and any required premium with respect thereto) is actually paid in full on such
date, and if not so paid in full, the Redemption Date shall be the date on which
such amount is fully paid.

"Subsidiary" means, with respect to any Person, any
corporation, limited liability company, partnership, association, joint venture
or other business entity of which (i) if a corporation, fifty percent (50%) or
more of the total voting power of shares of stock entitled (without regard to
the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled, directly or
indirectly, by that Person or one or more of the other Subsidiaries of that
Person or a combination thereof, or (ii) if a limited liability company,
partnership, association or other business entity, fifty percent (50%) or more
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by any Person or one or more
Subsidiaries of that person or a combination thereof. For purposes hereof, a
Person or Persons shall be deemed to have a fifty percent (50%) or greater
ownership interest in a limited liability company, partnership, association or
other business entity if such Person or Persons shall be allocated fifty percent
(50%) or more of limited liability company, partnership, association or other
business entity gains or losses or shall be or control the managing general
partner of such limited liability company, partnership, association or other
business entity.

2. AMENDMENT AND WAIVER. No amendment, modification or waiver
shall be binding or effective with respect to any provision of (i) Part C or E
without the prior written consent of the holders of a majority of the Class A
and Class B Preferred Stock outstanding at the time such action is taken or (ii)
Part D without the prior written consent of the holders of a majority of the
Class A Preferred outstanding at the time such action is taken;

-8-
<PAGE>

provided that no change in the terms hereof may be accomplished by merger or
consolidation of the Corporation with another corporation or entity unless the
Corporation has obtained the prior written consent of the holders of the
applicable percentage of the class or classes of the Preferred Stock then
outstanding.

3. NOTICES. Except as otherwise expressly provided hereunder,
all notices referred to herein to holders of Class A and Class B Preferred shall
be in writing and shall be delivered by registered or certified mail, return
receipt requested and postage prepaid, or by reputable overnight courier
service, charges prepaid, and shall be deemed to have been given when so mailed
or sent (i) to the Corporation, at its principal executive offices and (ii) to
any Class A or Class B stockholder, at such holders address as it appears in the
stock records of the Corporation (unless otherwise indicated by any such
holder).

F. Reverse Stock Split

1. MECHANICS. Effective upon the filing of this Restated
Certificate of Incorporation, each 2.85 shares of Common Stock issued and
outstanding shall be automatically changed into and combined as one fully paid
and nonassessable share of Common Stock pursuant to a reverse stock split,
subject to the treatment of fractional share interests as described below (the
"Reverse Stock Split"). Such change and combination shall not change the par
value per share of the shares changed and combined, which par value shall remain
$.0005 per share.

2. CERTIFICATES. Promptly after the filing of this Restated
Certificate of Incorporation, the Corporation shall deliver to each holder of
issued and outstanding shares of Common Stock, which surrender for cancellation,
a certificate or certificates representing outstanding shares of Common Stock
prior to the Reverse Stock Split, a certificate or certificates representing the
number of shares of Common Stock issuable by reason of the Reverse Stock Split
in the name of such holder. This issuance of certificates for shares of Common
Stock upon the Reverse Stock Split shall be made without charge for any issuance
tax in respect thereof or other cost incurred by the Corporation in connection
with such Reverse Stock Split and the related issuance of shares of Common
Stock. Until surrendered as provided herein, from and after the filing of this
Restated Certificate of Incorporation, certificates representing outstanding
shares of Common Stock prior to the Reverse Stock Split shall thereupon be
deemed for all corporate purposes to evidence ownership of the number of shares
of Common Stock into which the Common Stock shall have been changed and combined
by reason of the Reverse Stock Split, subject to the treatment of fractional
share interests as described below.

3. FRACTIONAL SHARES. No fractional shares of Common Stock
shall be created or outstanding upon the Reverse Stock Split. Any holder of
Common Stock who by reason of the Reverse Stock Split would have been entitled
to receive a fraction of a share of Common Stock by reason of the Reverse Stock
Split, shall receive cash from the Corporation for his fractional interest in an
amount equal to the percentage of a share represented by such

-9-
<PAGE>

fractional interest multiplied by the fair market value of one share of Common
Stock of the Corporation as established by the Corporation's Board of Directors
in good faith.

FIFTH: The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors. The Board of Directors may
exercise all such authority and powers of the Corporation and do all such lawful
acts and things as are not by statute or this Restated Certificate of
Incorporation directed or required to be exercised or done by the stockholders.

A. Directors

The number of directors of the Corporation shall be
established as set forth in the Amended and Restated By-laws of the Corporation,
but in no event shall the number of directors be fewer than three (3) nor more
than eleven (11). Any change to the number of directors set forth herein may
only be made by amendment to this Article FIFTH. No such change shall affect the
term of any director then in office. No director need be a stockholder. Each
director elected shall hold office until a successor is duly elected and
qualified or until his or her earlier death, resignation or removal as
hereinafter provided.

B. Newly Created Directorships and Vacancies

Subject to the rights of the holders of any class or series of
Preferred Stock then outstanding, newly created directorships resulting from any
increase in the number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or any other cause may be filled by the Board of Directors, provided that
a quorum is then in office and present, or by a majority of the directors then
in office, if less than a quorum is then in office, or by the sole remaining
director. Directors elected to fill a newly created directorship or other
vacancies shall hold office until such director's successor has been duly
elected and qualified or until his or her earlier death, resignation or removal
as hereinafter provided.

C. Removal of Directors

Subject to the rights of the holders of any class or series of
Preferred Stock then outstanding, the directors or any director may be removed
from office at any time, at a meeting called for that purpose, and only by the
affirmative vote of the holders of at least 66-2/3% of the voting power of all
shares of the Corporation entitled to vote generally in the election of
directors, voting together as a single class.

D. Rights of Holders of Preferred Stock

-10-
<PAGE>

Notwithstanding the foregoing provisions of this Article
FIFTH, whenever the holders of any one or more classes or series of Preferred
Stock issued by the Corporation shall have the right, voting separately by class
or series, to elect directors at an annual or special meeting of stockholders,
the election, term of office, filling of vacancies and other features of such
directorships shall be governed by the rights and preferences of such Preferred
Stock as set forth in this Restated Certificate of Incorporation or in the
resolution or resolutions of the Board of Directors relating to the issuance of
such Preferred Stock.

SIXTH: The Corporation is to have perpetual existence.

SEVENTH: The Board of Directors is expressly authorized to adopt, amend
or repeal the by-laws of the Corporation. Any by-laws made by the directors
under the powers conferred hereby may be amended or repealed by the directors or
by the stockholders. Notwithstanding the foregoing and anything contained in
this Restated Certificate of Incorporation to the contrary, the Amended and
Restated Bylaws of the Company shall not be amended or repealed by the
stockholders, and no provision inconsistent therewith shall be adopted by the
stockholders, without the affirmative vote of the holders of 66-2/3% of the
voting power of all shares of the Corporation entitled to vote generally in the
election of directors, voting together as a single class.

EIGHTH: A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director; PROVIDED, HOWEVER, that the foregoing shall not eliminate or
limit the liability of a director (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL, or (iv) for any transaction from which
the director derived an improper personal benefit. If the DGCL is hereafter
amended to permit further elimination or limitation of the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the DGCL as so amended.
Any repeal or modification of this Article EIGHTH by the stockholders of the
Corporation or otherwise shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification
with respect to acts or omissions occurring prior to such repeal or
modification.

NINTH: Each person who was or is made a party or is threatened to be
made a party to or is involved (including, without limitation, as a witness) in
any actual or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "Proceeding"), by reason of the
fact that he is or was a director or officer of the Corporation or is or was
serving at the request of the Corporation as a director or officer of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan (hereinafter an
"Indemnitee"), whether the basis of such Proceeding is alleged action in an
official capacity as a director or officer or in any other capacity while so
serving, shall be indemnified and held harmless by the Corporation to the
fullest extent authorized by the DGCL, as the same exits or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the

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Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment), or by other applicable law
as then in effect, against all expense, liability and loss (including attorneys'
fees and related disbursements, judgments, fines, excise taxes or penalties
under the Employee Retirement Income Security Act of 1974, as amended from time
to time ("ERISA"), penalties and amounts paid or to be paid in settlement)
actually and reasonably incurred or suffered by such Indemnitee in connection
therewith, and such indemnification shall continue as to a person who has ceased
to be a director, officer, partner, member or trustee and shall inure to the
benefit of his or her heirs, executors and administrators. Each person who is or
was serving as a director or officer of a subsidiary of the Corporation shall be
deemed to be serving, or have served, at the request of the Corporation.

A. Procedure

Any indemnification under this Article NINTH (unless ordered
by a court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the director or officer is
proper in the circumstances because he has met the applicable standard of
conduct set forth in the DGCL, as the same exits or hereafter may be amended
(but, in the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment). Such
determination shall be made with respect to a person who is a director or
officer at the time of such determination (a) by a majority vote of the
directors who were not parties to such Proceeding (the "Disinterested
Directors"), even though less than a quorum, (b) by a committee of Disinterested
Directors designated by a majority vote of such Disinterested Directors, even
though less than a quorum, (c) if there are not such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (d)
by the stockholders.

B. Advances for Expenses

Costs, charges and expenses (including attorneys' fees)
incurred by a director or officer of the Corporation in defending a Proceeding
shall be paid by the Corporation in advance of the final disposition of such
Proceeding upon receipt of an undertaking by or on behalf of the director or
officer to repay all amounts so advanced in the event that it shall ultimately
be determined that such director or officer is not entitled to be indemnified by
the Corporation as authorized in this Article NINTH. The majority of the
Disinterested Directors may, in the manner set forth above, and upon approval of
such director or officer of the Corporation, authorize the Corporation's counsel
to represent such person, in any Proceeding, whether or not the Corporation is a
party to such Proceeding.

C. Procedure for Indemnification

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<PAGE>

Any indemnification or advance of costs, charges and expenses
under this Article NINTH shall be made promptly, and in any event within 60 days
upon the written request of the director or officer, and shall be accompanied by
a written undertaking by or on behalf of Indemnitee to repay such amount if it
shall ultimately be determined that Indemnitee is not entitled to be indemnified
therefor pursuant to the terms of this Article NINTH. The right to
indemnification of advances as granted by this Article NINTH shall be
enforceable by the director or officer in any court of competent jurisdiction,
if the Corporation denies such request, in whole or in part, or if no
disposition thereof is made within 60 days. Such person's costs and expenses
incurred in connection with successfully establishing his right to
indemnification, in whole or in part, in any such action shall also be
indemnified by the Corporation. It shall be a defense to any such action (other
than an action brought to enforce a claim for the advance of costs, charges and
expenses under this Article NINTH where the required undertaking, if any, has
been received by the Corporation) that the claimant has not met the standard of
conduct set forth in the DGCL, as the same exists or hereafter may be amended
(but, in the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment), but the burden of
proving such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, its independent legal counsel and
its stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct set forth in the DGCL, as
the same exits or hereafter may be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than said law permitted the Corporation
to provide prior to such amendment), nor the fact that there has been an actual
determination by the Corporation (including its Board of Directors, its
independent legal counsel and its stockholders) that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that the claimant has not met the applicable standard of conduct.

D. Other Rights; Continuation of Right to Indemnification

The indemnification and advancement of expenses provided by
this Article NINTH shall not be deemed exclusive of any other rights to which a
person seeking indemnification or advancement of expenses may be entitled under
any law (common or statutory), by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding office or while employed by
or acting as agent for the Corporation, and shall continue as to a person who
has ceased to be a director or officer, and shall inure to the benefit of the
estate, heirs, executors and administrators of such person. All rights to
indemnification under this Article NINTH shall be deemed to be a contract
between the Corporation and each director or officer of the Corporation who
serves or served in such capacity at any time while this Article NINTH is in
effect. Any repeal or modification of this Article NINTH or any repeal or
modification of relevant provisions of the DGCL or any other applicable laws
shall not in any way diminish any rights to indemnification of such director or
officer or the obligations of the

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<PAGE>

Corporation arising hereunder with respect to any Proceeding arising out of, or
relating to, any actions, transactions or facts occurring prior to the final
adoption of such modification or repeal. For the purposes of this Article NINTH,
references to "the Corporation" include all constituent corporations absorbed in
a consolidation or merger as well as the resulting or surviving corporation, so
that any person who is or was a director or officer of such a constituent
corporation or is or was serving at the request of such constituent corporation
as a director or officer of any corporation, partnership, joint venture, trust
or other enterprise shall stand in the same position under the provisions of
this Article NINTH, with respect to the resulting or surviving corporation, as
he would if he had served the resulting or surviving corporation in the same
capacity.

E. Insurance

The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was or has agreed to become a
director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director or officer of the Corporation, or is or was
serving at the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him or on his behalf in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the
provisions of this Article NINTH, PROVIDED, HOWEVER, that such insurance is
available on acceptable terms, which determination shall be made by a vote of a
majority of the Board of Directors.

F. Savings Clause

If this Article NINTH or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify or advance expenses to each person
entitled to indemnification or advancement of expenses, as the case may be, as
to all expense, liability and loss (including attorneys' fees and related
disbursements, judgments, fines, ERISA excise taxes and penalties, penalties and
amounts paid or to be paid in settlement) actually and reasonably incurred or
suffered by such person and for which indemnification or advancement of
expenses, as the case may be, is available to such person pursuant to this
Article NINTH to the full extent permitted by any applicable portion of this
Article NINTH that shall not have been invalidated and to the full extent
permitted by applicable law.

TENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Restated Certificate of Incorporation, in
the manner now or hereafter prescribed herein and by the laws of the State of
Delaware, and all rights conferred upon stockholders herein are granted subject
to this reservation.

* * * * *

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<PAGE>

Exhibit 5.1

[FOLEY & LARDNER LETTERHEAD]

October 28, 1999

AppNet, Inc.
Suite 1000
6707 Democracy Boulevard
Bethesda, MD 20817

Ladies and Gentlemen:

We have acted as special counsel for AppNet, Inc., a Delaware
corporation (the "Company"), in conjunction with the preparation of a
Registration Statement on Form S-1 (the "Registration Statement"), including the
prospectus constituting a part thereof (the "Prospectus"), to be filed by the
Company with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Securities Act"), relating to 4,000,000 shares of the
Company's common stock, $.0005 par value (the "Common Stock"), together with up
to 600,000 additional shares of Common Stock being registered to cover the
over-allotment option granted by certain selling stockholders of the Company
(the "Selling Stockholders") to the underwriters.

In connection with our representation, we have examined: (i)
the Registration Statement, including the Prospectus; (ii) the Company's
Restated Certificate of Incorporation, as amended, and Amended and Restated
By-laws; (iii) resolutions of the Company's Board of Directors relating to the
authorization of the issuance of the securities covered by the Registration
Statement; and (iv) such other proceedings, documents and records as we have
deemed necessary to enable us to render this opinion.

Based upon the foregoing, we are of the opinion that:

1. The Company is a corporation validly existing under the
laws of the State of Delaware.

<PAGE>

October 28, 1999
Page 2

2. The shares of Common Stock covered by the Registration
Statement that are to be offered and sold by the Company, when the price thereof
has been determined in the manner provided by action of the Company's Board of
Directors and when issued and paid for in the manner contemplated in the
Registration Statement and Prospectus, will be validly issued, fully paid and
nonassessable.

3. The shares of Common Stock covered by the Registration
Statement that are to be offered and sold by the Selling Stockholders are, and
when sold in the manner contemplated in the Registration Statement and
Prospectus will continue to be, validly issued, fully paid and nonassessable.

We consent to the use of this opinion as an exhibit to the
Registration Statement and the references to our firm therein. In giving our
consent, we do not admit that we are "experts" within the meaning of Section 11
of the Securities Act or within the category of persons whose consent is
required by Section 7 of the Securities Act.

Very truly yours,

FOLEY & LARDNER

<PAGE>

Exhibit 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
reports (and all references to our Firm) included in or made a part of this
registration statement.

/s/ Arthur Andersen LLP

October 28, 1999

<PAGE>
EXHIBIT 23.4

CONSENT OF
INTERNATIONAL DATA CORPORATION

We consent to the incorporation by reference in this registration statement
of WORLDWIDE INTERNET SERVICES MARKET AND TRENDS FORECAST, 1998-2003 and HOW
REAL IS INTERNET COMMERCE?, two International Data Corporation reports, and to
all references to us and to such reports appearing in this registration
statement on Form S-1 of AppNet Systems, Inc. filed with the Securities and
Exchange Commission pursuant to the Securities Act of 1933.

INTERNATIONAL DATA CORPORATION

By: /S/ ALEXA MCLOUGHAN
-----------------------------------

Alexa McLoughan
Senior Vice President

October 28, 1999