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                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

|X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

                    For the fiscal year ended August 31, 2000

                         Commission File Number 0-13049

                           WORLDWIDE XCEED GROUP, INC.
                           ---------------------------
             (Exact name of registrant as specified in its charter)

         Delaware                                          13-3006788
(State of incorporation)                       (IRS Employer Identification No.)

                     233 Broadway, New York, New York 10279
          (Address of principal executive offices, including zip code)

       Registrant's telephone number, including area code: (212) 553-2000

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

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

                                  Common Stock
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for past 90 days. Yes |x| No |_|

Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|

The aggregate market value of the voting stock held by non-affiliates of the
registrant (for the purpose of this calculation only, the registrant's directors
and executive officers are deemed affiliates), based on the closing price of the
registrant's Common Stock on November 13, 2000 was $26,529,746.

The number of shares outstanding of the registrant's Common Stock as of November
13, 2000 was 26,762,518 shares.

Documents Incorporated by Reference: None.

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The terms "Xceed," "our," "us" and "we," as used in this annual statement,
refer to Worldwide Xceed Group, Inc., formerly known as Xceed Inc.

              CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K includes forward-looking statements that reflect
our current expectations about our future results, performance, prospects and
opportunities. These forward-looking statements are based on the current beliefs
of our management as well as assumptions made by, and information currently
available to, our management. We have tried to identify these forward-looking
statements by using words such as "believe," "expect," "anticipate," "intend,"
"estimate" and similar expressions. These forward-looking statements are subject
to a number of risks, uncertainties and other factors that could cause our
actual results, performance, prospects or opportunities in the remainder of 2000
and beyond to differ materially from those expressed in, or implied by, these
forward-looking statements. These risks, uncertainties and other factors
include, but are not limited to, our limited operating history, ability to
develop a profitable business model, risks related to the integration of prior
acquisitions and our ability to implement our restructuring plan, including our
ability to successfully divest ourselves of non-strategic assets. For further
information about these and other risks, uncertainties and factors, please
review the disclosure included under the caption "Risk Factors" in this annual
report. Except as required by federal securities laws, we undertake no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or changed circumstances or for any
other reason, after the date of this annual report.

                                     PART I

ITEM 1. BUSINESS

Overview

We are Interactive Architects who provide strategic consulting and digital
solutions that seek to transform the way companies conduct eBusiness. Using a
multi-disciplined methodology, we offer a full range of services that allow us
to deliver end-to-end solutions enabling companies to capitalize on the reach
and efficiency of the Internet. Our key competencies include:

      o     strategy, research and consulting--creating specialized business
            plans and models to enable our clients to operate and improve their
            eBusinesses;

      o     creative design--developing robust visual and interactive web site
            content;

      o     technology integration--combining third party products with our
            customized technology applications and components to create a
            specialized, technical infrastructure for our clients; and

      o     marketing and branding--promoting our clients' eBusinesses, services
            and brands to their existing and target customers and industry
            segments.

Our Internet professional services clients are a combination of multinational
corporations, mid-to-large sized companies and early stage businesses operating
in various industries, such as computers and technology, entertainment and
financial services. We provide our clients with solutions to:

      o     strengthen relationships with customers and business partners in
            both business-to-business and business-to-customer environments;


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      o     create new revenue and distribution opportunities; and

      o     reduce cost and improve operating efficiencies, productivity and
            internal communications.

Our strategic, technical and creative personnel collaborate to address the full
range of end-to-end solutions required to meet the increasingly large and
complex needs of an expanding, sophisticated client base. The industry in which
we operate is time-to-market sensitive, and we provide rapid project delivery
due to our ability to use previously developed technology applications for
multiple client engagements. Our methodology provides a framework to assess and
execute each stage of a client engagement. By delivering our services in a
seamless and integrated fashion, we guide our clients from concept to launch and
development of their eBusinesses.

Emergence and growth of the Internet

The emergence and acceptance of the Internet as a new global medium has
fundamentally changed the way that consumers and businesses communicate,
obtain information, purchase goods and services and transact business.
Initially, companies used the Internet as a means of advertising or promoting
their businesses. Typically they published web sites with read only,
brochure-like information intended to enhance internal and external
communications. Companies either used their own internal design and
information technology resources or hired online advertising agencies and web
design firms to develop and deploy their initial web sites. Businesses
quickly recognized the Internet's potential to enhance their ability to
attract and serve clients and viewed the Internet as a medium through which
to differentiate themselves and gain a competitive advantage.

The next stage in the adoption of the Internet as a business medium typically
involved the construction of systems that enabled limited types of transactions
to be conducted over the Internet or that focused on improvements in procurement
and distribution. At this stage, companies came to view the Internet primarily
as another channel for their core business. In order to build these sorts of
eBusiness systems, companies were required to shift their focus from simple web
design to the integration of client/server applications with those systems.
Because internal marketing and information technology, or IT departments often
lacked the resources or capabilities to build these systems, firms increasingly
began to hire traditional IT services firms focused on the integration of
client/server systems and traditional marketing services firms to complement the
services of web design firms.

Growth of eBusiness

Today, many companies recognize that the Internet offers even greater potential
for enhancing or maintaining their competitive positions. These companies
understand that the Internet is redefining the key determinants of business
success and the way business is conducted. In our view, this understanding has
led to the emergence of eBusiness, which is business that combines the reach and
efficiency of the Internet with both emerging and existing technologies.

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In many industries, physical or capital assets are becoming less important as
barriers to entry. The Internet is reducing the effect of geographic
barriers, providing access to the best prices worldwide and challenging the
way many businesses have historically competed. Competition can come from
new, unexpected sources in addition to traditional ones. The ability to
differentiate products or services and to price advantageously is greatly
enhanced as the consumer is given more information, choice and power. In
light of all of these factors, many new and established companies are
expanding or creating their businesses to integrate eBusiness capabilities.

Market for Internet professional services

The development and implementation of Internet-based solutions require the
successful integration of strategic consulting, creative design, application
development and systems engineering skills. Historically, expertise in these
areas either has not existed within an organization or has been located in
disparate functional areas. Accordingly, many businesses have chosen to
outsource a significant portion of the development, design, implementation
and maintenance of their intranets, extranets, web sites and e-commerce
applications to independent service providers who can capitalize on their
accumulated strategic, creative and technical expertise. Outsourcing needs
have generated worldwide demand for Internet professional services.

Companies are increasingly looking for firms that can supply end-to-end
strategic consulting, creative design, application development, systems
engineering skills and other value-added services. Many traditional service
providers lack the requisite expertise to implement comprehensive Internet-based
solutions. Many IT services firms lack the creative and marketing skills
required to build audiences and deliver unique and compelling content as well as
Internet expertise and implementation capabilities. Advertising and marketing
communications firms typically cannot provide the extensive technical skills and
systems integration expertise required to deliver the increasingly complex
solutions demanded by clients. Many strategic consulting firms do not offer
Internet expertise, marketing perspective and implementation capabilities to
deliver comprehensive solutions. A number of Internet professional services
firms have emerged to address these needs. We believe that we are one of the
firms that has the depth, management and infrastructure necessary to deliver the
end-to-end solutions required to meet the increasingly larger and more complex
projects and needs of an expanding, and sophisticated client base.

We believe that the rapidly increasing demand for Internet solutions has created
significant market opportunities for us, because we are able to address the full
range of end-to-end solutions.

The Xceed Solution

We help our clients use the Internet to develop and enhance their eBusinesses
and interact effectively, both internally with employees and externally with
vendors, suppliers and customers. To enhance our clients' core businesses,
operations and communications, we:

      o     Employ a methodology. Our multi-disciplined methodology is designed
            to carefully plan and implement successful and innovative Internet
            and eBusinesses efforts for our clients. Our methodology helps
            clarify client expectations and helps our clients achieve faster
            project delivery in an effort to reduce project delivery risks and
            become cost effective.

      o     Provide an integrated services offering. Our integrated and
            collaborative team delivers end-to-end strategic consulting,
            creative design, technology integration business transformation, and
            marketing and branding in a seamless package. We first help our
            clients integrate Internet


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            strategies with their core business objectives through use of our
            end-to-end strategic consulting, creative design, marketing, and
            technology capabilities. We then integrate web-based applications
            with the client's existing systems, using existing and emerging
            technologies. Finally, we apply e-commerce solutions and consulting,
            using our industry and marketing expertise, to enhance existing
            business processes and identify new business processes and
            opportunities created by the Internet. We believe that by providing
            our clients with a full range of professional services, we are able
            to meet their eBusiness needs on an ongoing basis.

      o     Develop strong client relationships. We believe that building
            strong, long-term relationships with our clients is an essential
            element of our business. We work closely with our clients to
            understand, predict and address their evolving business needs. Our
            strong, long-term relationships allow us to more accurately meet our
            clients' objectives and expectations. In certain instances, we have
            been engaged by a client to work on multiple projects. In addition,
            we often assist our clients in locating and contracting with vendors
            and suppliers, identifying partners for strategic alliances and
            joint ventures and identifying potential investors.

      o     Provide faster project delivery. Our client engagements are becoming
            larger and more complex and need to be completed in shorter
            timeframes. We have developed certain technology applications that
            reduce time to market for deliverables. Many of our technology
            applications can be used for more than one client or for more than
            one engagement. In addition, our employees have developed a broad
            base of knowledge and best practices through numerous service
            engagements and from prior experience.

      o     Deliver robust and scalable technology. Our engineers provide
            application development and systems integration services by
            employing proven and emerging Internet technologies. We have
            relationships with leading software and hardware vendors that
            provide us with access to their training, product support and
            technology. These relationships help us add value to our clients'
            businesses and operations. We are able to combine third-party
            products with custom technology applications and components that we
            have designed and developed, which allow us to create a specialized,
            technical infrastructure for a client's particular needs. This
            technical infrastructure is scalable and can be modified at a later
            date to adapt to a change in the way the client conducts its
            business.

Strategy

Our objective is to expand our position as an Interactive Architect for Fortune
1000 and other companies seeking to build Internet and eBusiness solutions. In
order to achieve this goal, we are pursuing the following strategies:

      o     Continue to attract new clients. We plan to grow our sales efforts
            and expand our skill set to acquire new clients seeking
            comprehensive Internet professional solutions. We believe that our
            full range of end-to-end service offerings and a proven,
            multi-disciplinary methodology will be important factors for our
            future success. We have been able to generate business based on
            word-of-mouth as well as our reputation.

      o     Develop additional business through our relationships with existing
            clients. We seek to gain a comprehensive understanding of our
            clients and their businesses and work closely with their senior
            management to understand, predict and address their strategic
            business needs. We often seek to leverage our client relationships
            to expand the scope and length of current projects and to enter into
            additional projects. We believe that our reputation for providing
            innovative and sophisticated services allows us to deepen
            relationships with existing clients.


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      o     Attract, train, retain and motivate experienced professionals. Our
            growth and our ability to provide strategic Internet professional
            services are based in large part on our ability to attract, train,
            retain and motivate experienced professionals. We actively expand
            our existing expertise by recruiting senior professionals from major
            consulting firms, creative design firms and information technology
            services firms as well as from other companies that provide Internet
            professional services. We maintain an informal, team-driven and
            results-oriented culture and provide incentives for our employees
            through a competitive compensation plan, equity ownership and our
            stock option plans. We provide training for our employees, which is
            designed to address the rapidly changing technological environment
            in which our employees are engaged.

Engagement Methodology

Our engagement methodology is designed to carefully plan and implement
successful and innovative Internet and eBusiness related solutions for our
clients and is enhanced by our experience and expertise in strategic consulting,
technology, creative design and marketing. Our engagement methodology consists
of the following steps:

      o     Discovery process. Typically, we begin an engagement by gathering
            information, performing research and analysis and gaining a
            comprehensive understanding of the project scope. This forms the
            foundation for a series of client meetings led by our strategic
            services team. Determining the client's needs and desired outcomes
            allows us to create a blueprint and program from which our
            multidisciplinary teams can establish a successful Internet-related
            initiative. Our clients are actively involved in this initial step.
            Upon completion of the discovery process, we provide the client with
            a strategic and tactical plan.

      o     Specifications. Using the information gathered during our discovery
            process and the blueprint and program created during the client
            workshops, we develop detailed functional and technical
            specifications that are designed to meet the client's business
            vision. By creating specifications, we seek to ensure that all of
            the details related to the creation of a web site are accounted for
            prior to beginning work on the project.

      o     Creative development and branding. Our creative team extends or
            establishes the client's brand online, while developing a user
            experience that meets the client's business requirements and
            expectations. Through an interactive and collaborative effort, we
            work with the client to refine a complete image.

      o     Functional prototype. Before full-scale development takes place, we
            produce a prototype that combines user specifications and an
            agreed-upon image. The prototype allows the client to test the
            systems that we have developed to ensure that all of its
            requirements and expectations have been met.

      o     Application development and system integration. We develop,
            integrate and test all of the necessary components, including
            third-party hardware, software and custom applications for the final
            launch of the online effort. During this stage, our developers and
            technologists seek to ensure that the client's business requirements
            and expectations are fully aligned with the technological
            infrastructure we have created.

We believe that our methodology clarifies client expectations, helps our clients
achieve rapid time to market, reduces the risks associated with the application
and integration of emerging technologies,


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provides consistent procedures for all engagement phases, provides a higher
degree of project organization, is cost effective and lowers implementation and
technology obsolescence risks.

Services

We provide a full range of strategic consulting and digital solutions to help
our clients capitalize on the reach and efficiency of the Internet. We believe
we offer our clients a single source for the services required to identify,
design, develop and deploy eBusiness solutions that complement or expand
conventional business processes, including:

      o     Strategic consulting. We work with our clients to develop and
            implement eBusiness strategy and effect growth.

            --    eBusiness strategy. We offer strategic consulting through
                  experts having industry-specific knowledge. We align client
                  strategic plans with the capabilities of the Internet and the
                  dynamics of the markets and industries in which they compete.
                  We help our clients turn strategy into action, viewing
                  strategy as the design of the entire business system along
                  with an integrated set of actions to continuously redefine
                  competitive advantage.

            --    Change management. We advise clients with respect to major
                  business and cultural changes by assessing current skills and
                  resource requirements, implementing organizational changes and
                  associated measurement systems and creating employee
                  communications plans. Our change management practice helps
                  align our clients' organizational structures and processes
                  with their Internet strategies.

      o     Creative design. We have extensive experience in developing visual
            and interactive content and creating online brand campaigns that
            enhance and extend our clients' relationships with their customers.
            Our creative design professionals assess and analyze our clients'
            existing brands, identify opportunities and provide user-focused
            solutions that help our clients build sustainable, long-term
            relationships with their customers. To keep up with the increasing
            complexity of the creative solutions required, we have developed
            expertise in graphic design, editorial creation, content management,
            information architecture, user-interface and rich-media
            technologies.

      o     Technology. Our technical professionals perform system integration
            and systems administration services for our clients using industry
            software products developed by vendors such as Broadvision, ATG,
            Open Market and Vignette, as well as our proprietary applications.
            Using our extensive in-depth knowledge of the Internet and emerging
            technologies, we translate strategic, creative and business
            requirements into sophisticated and functional technology platforms.
            Recognizing that technical infrastructure is the foundation for
            clients' Internet solutions, we develop infrastructures designed to
            be reliable, robust, secure and scalable. Our principal technology
            services include the design, architecture and development of
            e-commerce platforms, customer relationship management systems,
            sales automation systems, electronic markets and exchanges, Internet
            and intranet portals, as well as the implementation of enterprise
            middleware and the integration of Internet solutions with legacy
            systems.

      o     Intranet/extranet. Our intranet/extranet practice provides clients
            with both enterprise-wide and functional/workgroup services and
            component solutions. We help our clients improve their overall
            business practices by developing intranets and extranets that can be
            used to increase sales, improve communications and create or enhance
            business identities. Our solutions in this area have included the
            creation of new distribution channels, the repositioning of online
            brands and


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            the integration of a client's operations by opening and expanding
            lines of communication among the client's employees, customers,
            distributors and vendors.

Sales and Marketing

Our sales professionals operate through a coordinated and structured process to
evaluate and respond to large numbers of prospective clients and opportunities,
target qualified prospects and secure new engagements and joint ventures. We now
target our sales efforts to multinational corporations and mid-to-large-sized
Fortune 1000 companies.

Our sales efforts are supplemented by marketing and communications activities.
We seek to enhance our visibility by attending and speaking at industry
conferences and business events, sponsoring trade shows and holding seminars,
which are designed to promote our services and offerings.

Competition

Competition in the Internet professional services market is intense, and the
market is fragmented and evolving rapidly. We believe that competition will
become more focused as Internet professional services companies grow through
organic and acquired growth.

Our current competitors include the following:

      o     systems integrators that primarily engage in
            fixed-time/fixed-price contracts, such as Sapient and Viant;

      o     large systems integrators, such as Andersen Consulting and the
            former or current consulting arms of the Big Five accounting firms;

      o     web consulting firms and online agencies, such as Proxicom and
            Razorfish;

      o     advertising and new media companies, such as True North
            Communications and Omnicom;

      o     the professional services groups of computer equipment companies,
            such as IBM and Compaq;

      o     outsourcing firms, such as Computer Sciences Corporation and
            Electronic Data Systems;

      o     general management consulting firms, such as Bain & Company and Booz
            Allen & Hamilton; and

      o     internal IT departments of current and potential clients.

Because relatively low barriers to entry characterize our market, we also expect
other companies to enter our market. We believe that the principal competitive
factors in our industry are:

      o     the speed of development and implementation of eBusiness systems;

      o     the quality of services and deliverables;

      o     technical, strategic and industry expertise;

      o     project management capabilities;


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      o     reputation and experience of the company and the professionals
            delivering the service;

      o     the effectiveness of sales and marketing efforts;

      o     brand recognition;

      o     size of firm; and

      o     value of the services provided compared to the price of such
            services.

Intellectual Property Rights

We rely upon a combination of trade secrets, nondisclosure and other
contractual arrangements, and copyright and trademark laws, to protect our
proprietary rights. We generally enter into confidentiality agreements as
part of our standard employment agreement and generally require that our
consultants and clients enter into such agreements and limit access to and
distribution of our proprietary information.

Our business involves the development of technology solutions for specific
client engagements. Ownership of these solutions is the subject of negotiation
and is frequently assigned to the client, although we may retain a license for
certain uses. Some clients have prohibited us from marketing the solutions
developed for them for specified periods of time or to specified third parties
and there can be no assurance that clients will not demand similar or other
restrictions in the future. Issues relating to the ownership of and rights to
use solutions can be complicated and there can be no assurance that disputes
will not arise that affect our ability to resell or reuse such solutions.

Employees, Recruiting and Training

We currently have 470 full time employees. During the fiscal year ended
August 31, 2000 and since the year end there was a reduction in force of 93
full-time employees, and the termination of 68 employees in connection with
the sales of the Performance Enhancement Business and the operations
previously acquired by the acquisition of Enterprise Solutions Group, Inc.,
Catalyst Consulting Services, Inc. and a portion of the operations of
Sterling Carteret, Inc. We believe we have a good relationship with our
employees.

Strategic Acquisitions

In October 1999, we acquired 5th Floor Interactive, LLC, a New York-based
privately held company that provides interactive development services, in
consideration for 84,616 shares of our Common Stock having a market value of
$1,776,000 at the time of acquisition and $200,000 in cash.

In November 1999, we acquired Distributed Systems Solutions, Inc., a
Phoenix-based privately held company that provides systems integration
services, in consideration for 248,523 shares of our Common Stock having a
market value of $6,089,000 at the time of acquisition and $4,500,000 in cash.

In November 1999, we acquired Catalysts Consulting Services, Inc., a
Phoenix-based privately held company that provides change management and
business transformation services, in consideration for 90,360 shares of our
common stock having a market value of $2,191,000 at the time of the
acquisition. The total consideration includes 22,040 shares of Common Stock
issued in May 2000 with a market value of $304,000 which were issued upon the
achievement of post-closing performance criteria. We sold the operations of
Catalysts Consulting Services, Inc. in October 2000.

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In January 2000, we acquired the assets and assumed the liabilities of Big
Theory, LLC, a Dallas-based privately held company, which provides
interactive development and systems integration services, in consideration
for 678,302 shares of our Common Stock having a market value of $16,385,000
at the time of acquisition and $4,000,000 in cash, which was payable in three
installments. The total consideration includes, based upon the achievement of
post-closing performance criteria, 166,810 shares of Common Stock in April
2000 with a market value of $2,056,000 at the time of issuance and 175,879
shares of common stock in July 2000 with a market value of $1,429,000 at the
time of issuance.

In February 2000, we acquired Sterling Carteret, Inc., a Denver and Colorado
Springs, Colorado-based privately held company, which provides back end
enterprise solutions, in consideration for 187,920 shares of our Common Stock
having a market value of $7,115,000 at the time of the acquisition and
$2,950,000 in cash. We sold the Denver location operations in October 2000.

In February 2000, we acquired methodfive, inc., a New York-based privately
held company, which provides integrated marketing and communications
services, in consideration for 1,797,094 shares of our Common Stock (having a
market value of $73,501,000 at the time of the acquisition), 299,744 options
to purchase Xceed Common Stock and $4,500,000 in cash.

In February 2000, we acquired Pulse Interactive B.V., a privately held
company based in Amsterdam, which engages in interactive development, in
consideration for 120,805 shares of our Common Stock having a market value of
$3,965,000 at the time of the acquisition and $1,500,000 in cash. The selling
stockholders of Pulse Interactive have the right to receive up to two
subsequent earn-out payments of Xceed Common Stock in amounts based upon
revenue and earnings of Pulse Interactive during the first year following the
acquisition. The first earn-out payment became payable in September 2000 in
the amount of approximately 82,000 shares of Common Stock. The second
earn-out payment, if any, is due in March 2001. The acquisition agreement
with Pulse Interactive limits our ability to influence the management of
Pulse Interactive until expiration of the earn-out period.

Private Placements

Sale of Series A Cumulative Convertible Preferred Stock

In January 2000, we closed a private placement of our Series A Preferred
Stock pursuant to the terms of a subscription agreement with Peconic Fund,
Inc., Leonardo, L.P. and HFTP Investment L.L.C. Pursuant to the terms of the
subscription agreement, we issued 30,000 shares of Series A Preferred Stock
and warrants to purchase 183,273 shares of Common Stock in exchange for
$30,000,000. On April 4, 2000, we issued additional warrants to purchase
1,350,000 shares of Common Stock at an exercise price of $15.75 per share to
the preferred stockholders in connection with the amendment of certain of the
terms of the subscription agreement and the terms of the Series A Preferred
Stock and warrants.

In connection with the offering, we also entered into a registration rights
agreement with the preferred stockholders. Pursuant to the terms of the
offering documents, we filed a registration statement relating to the shares
of Common Stock issuable upon conversion of the Preferred Stock and exercise
of the warrants. The registration statement was declared effective by the
Securities and Exchange Commission on May 12, 2000.

Beginning on October 13, 2000, the conversion price applicable to the
Preferred Stock adjusted (pursuant to the terms of the offering documents) to
the lowest of the daily weighted average trading prices of the Common Stock
on the Nasdaq National Market for the ten trading days preceding and
including the conversion date. See "Risk Factors - The Conversion of our
Series A Preferred Stock and the Exercise of the Related Warrants Could
Results in Substantial Numbers of Additional Shares Being Issued if our
Market Price Declines."

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Sale of Common Stock

In April 2000, we sold 2,000,000 shares of Common Stock in a private
placement to Spherion Corporation in exchange for $24,750,000. Pursuant to
Spherion's subscription agreement, Spherion has the right to appoint a number
of directors to our Board of Directors equal to the greater of two and that
number of directors that would represent 22% of the Board of Directors.

Spherion Joint Venture

In April 2000, we entered into a two year Joint Marketing Agreement with
Spherion Corporation, which renews automatically for one-year periods unless
terminated by either party 60 days prior to the end of relevant term. In
addition, the agreement may be terminated by either party upon 120 days
written notice. Under the agreement, Xceed and Spherion agreed to cross-sell
one another's products and offerings, using their respective promotional
materials and customer service representatives, with a finder's fee being
paid to the generating party based on the first twelve months' revenue
generated. Each also agreed to assign a senior executive to monitor and
develop the relationship.

Spherion Credit Facility

In November 2000, we entered into a $5.0 million revolving credit facility
with Spherion secured by a security interest in our accounts receivable. The
proceeds of advances under the facility may be used to fund operating
expenses. Interest accrues on the revolving loans at the prime rate plus 2%
per annum. The facility expires in May 2002. Upon the occurrence of customary
defaults, Spherion has the right to exercise the rights and remedies of a
secured creditor and, in addition, upon the occurrence of certain
extraordinary corporate transactions, Spherion has the right to terminate its
nonsolicitation obligations under its Joint Marketing Agreement with Xceed
and the right to take assignment of the customer agreements entered into
jointly with Spherion under the Joint Marketing Agreement. In connection with
the facility, we issued to Spherion a warrant to purchase up to 3.5 million
shares of our Common Stock at a price per share equal to $1.6875. The
warrants entitle Spherion to purchase up to 500,000 shares until December 31,
2000 and, thereafter, all or any portion of the 3.5 million shares underlying
the warrant during the five years from the closing of the facility; however,
the warrant will be extinguished as to 3.0 million of the underlying shares
if Xceed enters into an extraordinary corporate transaction prior to December
31, 2000 and does not make any draws on the facility prior to the
consummation of the extraordinary corporate transaction.

Restructuring Plans

In direct response to fiscal 2000 performance, there have been various
executive level management changes during and subsequent to the fourth
quarter of fiscal 2000. Our new management team has developed and commenced
implementation of a restructuring plan which management believes will enable
us to focus on our position as an Interactive Architect. The restructuring
plan seeks to implement a profitable business model and contemplates the
divestiture of non-strategic assets. Pursuant to the plan, during the first
quarter of fiscal year 2001, we sold our Performance Enhancement Business and
completed a reduction in force. During the remainder of fiscal year 2001,
management expects to continue to implement the plan, leverage our current
strategic alliance with Spherion Corporation and continue the redirection of
our target client base to Fortune 1000 companies. In addition, management
hopes to sublease a portion of our New York corporate office, consolidate our
New York operating units, reduce our discretionary advertising expenditures,
increase the productivity of our employees, increase revenue per hour on
prospective projects, reduce and restructure certain unprofitable locations
acquired through past business combinations, obtain additional equity from
third-party sources, replace our $5.0 million line of credit with Chase
Manhattan and implement additional cost cutting measures.

                                       11
<PAGE>

Sales of Non-Strategic Assets

In January 2000, we sold our Water-Jel division to an unrelated buyer for a
purchase price of $4,000,000 in cash. The purchase price is subject to upward
adjustment in January 2001 by not more than $650,000 based upon the financial
performance of the buyer subsequent to the closing of the sale.

In July 2000, we sold our JourneyCorp division to Journey Corp. .Com, a
company formed and privately-owned by Nurit Kahane Haase, our former Senior
Vice President and Secretary, in a negotiated transaction in exchange for a
promissory note in the principal amount of $704,000, which bears interest at
a rate of 6% per annum and is payable in equal quarterly installments of
$58,666.67 over three years, commencing on October 31, 2000. The transaction
also included an exclusivity agreement whereby all of our U.S. offices are
reqired to use their best efforts to make their corporate travel arrangements
through Journey Corp. .Com until July 2003. We received a payment of
$58,666.67 under the note on October 31, 2000. Upon consummation of the sale
of JourneyCorp to Journey Corp. .Com, Mrs. Haase resigned from her positions
with us.

In October 2000, we sold the operations previously acquired by our
acquisition of Enterprise Solutions Group, Inc., Catalyst Consulting
Services, Inc. and a portion of the operations of Sterling Carteret, Inc. to
Xceed Retail Solutions Group, Inc. a company formed and privately-owned by
Gary S. Kahl, our former Executive Vice President of National Practices, and
other former employees of Xceed in a negotiated transaction in exchange for
the assumption by Xceed Retail Solutions Group of the liabilities related to
these operations. In connection with that sale, we granted a temporary
nonexclusive license to Xceed Retail Solutions Group to use the XCEED service
mark. The license expires in January 2001. Upon consummation of the sale of
these operations to Xceed Retail Solutions Group, Mr. Kahl, and the other
former employees joining Xceed Retail Solutions Group resigned their
positions with Xceed and agreed to relinquish their Xceed stock options and
all claims for severance compensation.

In November 2000, we sold our Performance Enhancement Business to 488
Performance Group, Inc., a company formed and privately-owned by Werner G.
Haase, our President and our former Chief Executive Officer, Co-Chairman and
director, in a negotiated transaction in exchange for a purchase price
comprised of a promissory note from 488 Performance Group in the principal
amount of $3,600,000, the assumption by 488 Performance Group of all
liabilities related to the Performance Enhancement Business and the retention
by us of $2,000,000 in cash collected from receivables associated with the
Performance Enhancement Business. The purchase price is subject to adjustment
based upon the net worth of the Performance Enhancement Business as of the
closing date of the sale. Upward adjustments of the purchase price will be
added to the principal amount of the purchase note and are unlimited.
Downward adjustments of the purchase price will be deducted from the
principal amount of the purchase note, subject to a maximum downward
adjustment of $3,600,000. At the present time, based upon preliminary
calculations, we expect a substantial downward adjustment to the purchase
price will be made. The sale included the sale of the assets of our
Performance Enhancement Business in Atlanta, Georgia and the sale of one
hundred percent of the capital stock of Journeycraft, Inc., which was a
wholly-owned subsidiary of Xceed immediately prior to the closing of the sale
and the owner of the Performance Enhancement Business based in New York, to
488 Performance Group. Upon consummation of the sale of the Performance
Enhancement Business to 488 Performance Group, Mr. Haase resigned from his
positions with Xceed other than his position as President. In addition, upon
closing of the sale, Mr. Haase relinquished all compensation and stock
options from Xceed, other than options to purchase an aggregate of 43,750
shares of Common Stock, and a third party purchased from Xceed for $100,000
cash a promissory note to Journeycraft, payable by Mr. Haase, maturing in
2016 and having a balance of $1,247,483.15 as of the date of sale.

RISK FACTORS

We caution you that the nature of our business is subject to risks and
uncertainties and there are significant risks associated with an investment in
Xceed. There are a variety of important factors


                                       12
<PAGE>

including those that follow that may cause our future results to differ
materially from those expressed in our forward-looking statements made in this
Annual Report on Form 10-K or otherwise. Stockholders and prospective investors
should carefully consider the following risk factors.

We Have Limited Operating History

Because we have changed our business model, there exists limited historical
data on which to base the evaluation of our results. Businesses in an early
stage of development frequently face extra risks as they evolve and grow.
Particular challenges we face are our ability to develop a profitable
business model, integration of prior acquisitions, our successful divestiture
of non-strategic assets and our maintenance of sufficient liquidity to fund
operations. To successfully manage these risks, we must continue to
strengthen our infrastructure and market presence as well as hire and retain
competent staff. Failing to achieve any of these tasks successfully, our
performance may be poor and the price of our stock may be negatively affected.

We Have Incurred, and May Continue to Incur, Operating Losses

We have incurred a loss from continuing operations of approximately $157
million for the fiscal year ended August 31, 2000, including impairment of
goodwill and other intangibles of $87 million, provision for bad debts of $9
million, other non-cash charges of $26 million and $3 million of costs
associated with abandoned capital raising activities. We continue to incur
operating losses and are likely to report net losses during the next year due
in large part to our continued strategic restructuring.

We May Need to Raise Additional Capital to Continue Operations

We may need to raise significant additional capital for future liquidity and
capital requirements. Our need for raising capital may depend on factors such as
timing and amount of funds required for or generated by operations and
unanticipated business opportunities.

We may seek to raise funds through public or private financing, credit
facilities, or joint ventures. Such funding may only be available in part,
not at all or at terms adverse to us. Further, we may have to sell stock at
prices lower than those paid for by current stockholders leading to dilution,
or we may have to sell stock or debt instruments with rights superior to
holders of Common Stock. Debt financing may result in restricted operating
flexibility on the part of management. If adequate funding on acceptable
terms cannot be obtained, we will be required to curtail or discontinue our
operations.

We Have Not Been Able and May Not be Able to Successfully Integrate Acquired
Companies Into our Operations, Which Could Slow our Growth

In fiscal year 2000, we completed seven acquisitions. We have already sold or
consolidated operations of some of the businesses acquired that have not met
our expectations, which has resulted in a write-off in fiscal year 2000 of
goodwill and other intangibles in the amount of $87.1 million.

We face a series of furhter risks related to the integration of the companies
we have acquired, including:

      o     failure to retain key personnel;

      o     management's distraction from focus on basic business needs;

      o     disputes with the sellers of one or more acquired companies;

      o     adverse effects on operating results from increase in goodwill
            amortization, stock compensation expense and increased compensation
            expenses; and


                                       13
<PAGE>

      o     we may not have discovered all matters of a material nature relating
            to the acquired companies and their businesses in our due diligence
            investigation of these companies.

Our Continued Growth May Further Strain our Resources, which Could Hinder our
Business and Results of Operations

Our rapid growth since entering the sector has imposed strains on our
operational, managerial, financial and other resources. The Company does not
believe that it will need to engage additional staff to support continued
growth. Instead, the Company must identify and address areas of inefficiency
located within itself to promote further growth from its existing staff base.

Our revenues could be negatively affected by the loss of our relationship with
Spherion.

If our Joint Marketing Agreement with Spherion Corporation is terminated or if
our relationship with Spherion is otherwise terminated, our revenues could be
significantly affected. Upon the occurrence of certain extraordinary company
transactions, pursuant to the Spherion Credit Facility, Spherion has the right
to terminate its non-solicitation obligations under the Joint Marketing
Agreement and to take assignment of the customer agreements entered into jointly
with Spherion.

Our Revenues Could be Negatively Affected by the Loss of Key Customers

As our client engagements have become more substantial, certain key customer
relationships have started to evolve. Such key customer relationships represent
a significant percentage of revenues. A loss or reduction of such key customer
revenues could result in a decline of revenue and earnings.

We Have Only Limited Protection of Proprietary Rights

We rely upon a combination of trade secret, nondisclosure and other
contractual arrangements to protect our proprietary rights. We generally
enter into confidentiality agreements with our employees and generally
require that our consultants and clients enter into such agreements and limit
access to and distribution of our proprietary information. There can be no
assurance that the steps taken by us in this regard will be adequate to deter
misappropriation of our proprietary information or that we will be able to
detect unauthorized use and take appropriate steps to enforce our
intellectual property rights.

We may be unable to protect our trademarks which could result in the loss of our
rights or increased costs. We do not have registrations for "Xceed" and the
Xceed logo as trademarks and may not be able to prevent others from using those
marks, although we have made applications for registration of those marks in the
U. S. We are also aware of a number of uses by third parties of the words
"exceed" and "xceed" in connection with technology services. The prior use of
those words as trademarks may further limit our ability to prevent others
from using our "Xceed" mark or similar derivative terms to identify goods or
services related to Internet professional services. Use of our brand name or its
derivatives by others could dilute our brand identity and divert users from our
products and services. In addition, other than pending applications for
registration of the "Xceed" brand in Canada, the United Kingdom, the European
Union and Benelux, we have not applied for registration of our trademarks in
foreign countries and we may not be able to use our proprietary brands in those
foreign countries. As a result, any competitive advantage we may establish
domestically through our goodwill and brand image would be eroded and could
diminish our ability to compete in foreign markets. Effective protection of our
trademarks may be unenforceable or limited in foreign countries.


                                       14
<PAGE>

Our Business Will be Negatively Affected if we do not Keep Up with the
Internet's Rapid Technological Changes

Internet service providers are challenged by rapid changes in technology. This
will require us to maintain our technical competence to effectively compete with
other integrated marketing service providers as well as traditional advertising
agencies. There can be no assurance that we will be successful in providing
competitive solutions to our clients. Failure to do so could result in the loss
of existing customers or the inability to attract and retain new customers, and,
as a result, could have a material adverse effect on our business, financial
condition and operating results.

Our Business may be Negatively Affected if we Fail to Accurately Estimate the
Time and Resources Necessary for the Performance of our Services; We Need to
Develop Recurring Revenue

A portion of our Internet professional services revenue is based on project
fees on a fixed fee-for-service basis or on a time-and-material basis with a
fee cap. We assume greater financial risk on fixed-price type contracts than
on either time-and-material or cost-reimbursable contracts. Failure to
anticipate technical problems, estimate costs accurately or control costs
during performance of fixed-price contracts may reduce our profits or cause a
loss. Short-term engagements create less exposure than a long-term
fixed-price contract. If we do not accurately anticipate the progress of a
number of significant revenue-generating projects, our operating results
could be materially and adversely affected. Additionally, engagements can
range in length from one month to over a year. Our future success will depend
in part on our ability to consistently convert more project-by-project
relationships to continuing engagements characterized by a recurring revenue.
Additionally, we have been actively pursuing a greater percentage of
time-and-material contracts as opposed to fixed-fee-for-service contracts to
reduce our overall financial exposure. There can be no assurance that these
efforts will be successful.

We Depend on Management for our Continued Operations and Growth

We are significantly dependent upon the continued availability of Howard A.
Tullman, our Chief Executive Officer and Douglas C. Laux, our Chief Financial
Officer. The loss or unavailability of Messrs. Tullman or Laux to us for an
extended period of time could have a material adverse effect on our business
operations and prospects. If either Messrs. Tullman or Laux's services become
unavailable, we may be unable to locate or employ qualified replacement
personnel on a timely basis or on acceptable terms. We do not have "key man"
life insurance covering any of our principal officers.

A Substantial Portion of our Common Stock is Held by a Small Group of our
Stockholders.

Werner Haase, our President, and his wife Nurit Kahane Haase, who was
formerly our Senior Vice President and Secretary, own together a total of
1,510,150 shares of our Common Stock, and Mr. Zabit, our former President,
owns 1,187,077 shares, which together represent approximately 16.1% of the
total shares outstanding. Under Delaware law, a simple majority of
stockholders may constitute a quorum for a meeting of stockholders and may
effect any action requiring a vote of stockholders. There are no requirements
for supermajority votes on any matter, nor is there any cumulative voting for
directors. Therefore, Mr. Haase, his wife and Mr. Zabit jointly will be in a
position to substantially influence the election of directors and the conduct
of our affairs. Mr. Haase, Mrs. Haase and Mr. Zabit may have interests that
differ from those of our current management. Our management may be unable to
influence the vote of Mr. Haase, Mrs. Haase or Mr. Zabit.

Peconic Fund, Ltd., Leonardo L.P. and HFTP Investment, L.L.C. each own
shares of our Series A Preferred Stock. If our market price continues to
decline, the conversion of the Series A Preferred Stock could result in the
issuance of up to 4.99% of our outstanding shares of Common Stock to each of
Peconic Fund, Leonardo and HFTP. As a result, 14.97% of our outstanding
Common Stock could be held by three stockholders who may have interests
different than those of our management and other stockholders.

To Succeed in our Labor Market Intensive Business, We Must Recruit and Retain
Qualified Professionals, who are Currently in High Demand


                                       15
<PAGE>

Our business is labor intensive, and our success depends on identifying, hiring,
training and retaining professionals. These professionals must have skills in
business strategy, marketing, branding, technology and creative design. The
labor-intensive Internet professional services industry currently faces a
shortage of qualified personnel, which is expected to continue. We compete
intensely with other companies to recruit and hire from this limited pool. If we
cannot retain qualified personnel or if a significant number of our current
employees leave, we may be unable to complete or retain existing projects or bid
for new projects of similar scope and revenue. Even if we retain our current
employees, our management must continually recruit talented professionals in
order for our business to grow. An inability to attract, motivate and retain
qualified professionals, could adversely affect our business and results of
operations.

If Clients do not Rehire us for New Projects, or if They Terminate or Reduce the
Scope of Existing Projects our Revenues may Decline

A portion of our revenues is derived from fixed-price, fixed-time contracts for
discrete client engagements. These engagements vary in size and scope. If
clients do not retain us for subsequent engagements, then our revenues could
decline. In addition, while our service model is designed as an integrated
approach, each sequential phase of that process represents a separate
contractual commitment. The client may elect not to proceed to the next phase of
a project. The decision of clients not to proceed to the next phase of a project
could impair our revenues. Most of our contracts are terminable upon thirty (30)
days prior notice. The cancellation, or reduction in scope, of a project could
have a negative impact on our revenues.

We Compete in a New and Highly Competitive Market that has Low Barriers to Entry

Our industry is intensely competitive and rapidly evolving. We may have to
significantly lower our prices or spend more money to compete effectively
against competitors, which could significantly decrease our revenues or
margins. We expect competition to intensify as the market evolves. We compete
with:

o     strategic consulting firms;
o     Internet service firms;
o     technology consulting firms and integrators; and
o     in-house information technology, marketing and design departments of our
      clients and potential clients.

Many of our competitors have longer operating histories, more clients, longer
relationships with their clients, greater brand or name recognition and
significantly greater financial, technical, marketing and public relations
resources than we do. As a result, our competitors may be in a stronger position
to respond quickly to new or emerging technologies and changes in client
requirements. They may also develop and promote their products and services more
effectively than we do. There are relatively low barriers to entry into the
Internet professional services market. In addition, we do not own any patented
technology that stops competitors from entering the Internet professional
services market or from providing services similar to ours. As a result, new and
unknown market entrants pose a threat to our business.

We Must Maintain our Reputation and Expand our Name Recognition to Remain
Competitive

We believe that establishing and maintaining a good reputation and name
recognition is critical for attracting and expanding our targeted client base.
We also believe that the importance of reputation and name recognition will
increase due to the growing number of information technology service providers.
If our reputation is damaged or if potential clients do not know what services
we provide, we may become


                                       16
<PAGE>

less competitive or lose our market share. Promotion and enhancement of our name
will depend largely on our success in providing high quality services and
end-to-end digital communications solutions, which we cannot ensure. If clients
do not perceive our services to be effective or of high quality, our brand name
and reputation could be materially and adversely affected.

Our Business Depends on Continued Growth in the use of the Internet

Our business is dependent upon continued growth in the use of the Internet by
our clients, prospective clients and their customers and suppliers. The
adoption of the Internet for commerce and communications, particularly by
those individuals and companies that have historically relied upon
alternative means of commerce and communication, generally requires the
understanding and acceptance of a new way of conducting business and
exchanging information. In particular, companies that have already invested
substantial resources in other means of conducting commerce and exchanging
information may be particularly reluctant or slow to adopt a new,
Internet-based strategy that may make their existing personnel and
infrastructure obsolete. If the number of users on the Internet does not
increase and commerce over the Internet does not become more accepted and
widespread, demand for our services may decrease and, as a result, our
revenues would decline. The Internet may lose its viability as a commercial
marketplace due to consumers' actual or perceived lack of security of
information, such as credit card numbers, governmental regulation and
uncertainty regarding intellectual property ownership. Use of the Internet
may also be affected if the infrastructure of the Internet is not developed
or maintained. Published reports have indicated that capacity constraints
caused by growth in the use of the Internet may impede further development of
the Internet to the extent that users experience delays, transmission errors
and other difficulties. The factors that may affect Internet usage or
electronic commerce adoption include:

o     actual or perceived lack of security of information;
o     lack of access and ease of use;
o     congestion of Internet traffic;
o     inconsistent quality of service;
o     increases in access costs to the Internet;
o     excessive governmental regulation;
o     uncertainty regarding intellectual property ownership;
o     reluctance to adopt new business methods; and
o     costs associated with the obsolescence of existing infrastructure.

If the necessary infrastructure, products, services or facilities are not
developed, or if the Internet does not become a viable and widespread commercial
medium, our business, results of operations and financial condition could be
materially and adversely affected.

Our Business is Subject to U.S. and Foreign Government Regulation of the
Internet

State, local and federal governments in the U.S. and local and national
governments in the European Union have recently passed legislation relating to
the Internet. Because these laws are still being implemented, we are not certain
how they will affect our business. This new legislation may indirectly affect us
through its impact on our clients and potential clients. In addition, U.S. and
foreign governmental bodies are considering, and may consider in the future,
other legislative proposals to regulate the Internet. We cannot predict if or
how any future legislation would impact our business, results of operations or
financial condition.


                                       17
<PAGE>

Difficulties Presented by International Factors Could Negatively Affect our
Business

In addition to our domestic operations, we have operations in two European
cities: London, England and Amsterdam, the Netherlands. Our management may
have difficulty managing and expanding our international operations because
of distance, as well as language and cultural differences. In addition, we
may have significant difficulty in retaining management of these foreign
operations, especially upon the expiration of the purchase price earn-out
terms, because of our current stock price. Our management cannot assure you
that they will be able to market and operate our services successfully in
foreign markets. We believe that we will face certain risks in doing business
abroad that we do not face domestically. Among the international risks we
believe are most likely to affect us are:

o     difficulties in staffing and managing international operations;
o     legal and regulatory requirements of different countries, such as
      differing tax or labor laws;
o     longer payment cycles;
o     problems in collecting accounts receivable;
o     international currency issues, including fluctuations in currency exchange
      rates and the conversion to the euro by all countries of the European
      Union by year end 2003;
o     potential political and economic instability; and
o     restrictions on the import and export of sensitive U.S. technologies, such
      as data security and encryption technologies that we may wish to use in
      solutions we develop for customers.

Any of these factors or other factors not enumerated here could damage our
business results.

The Conversion of our Series A Preferred Stock and the Exercise of the Related
Warrants Could Result in Substantial Numbers of Additional Shares Being Issued
if our Market Price Declines

On January 13, 2000, we issued 30,000 shares of our Series A Preferred Stock,
$1,000 stated value per share, and warrants to purchase an aggregate of
183,273 shares of our Common Stock at an exercise price of $50.10 per share,
subject to adjustment. On April 4, 2000, we issued additional warrants to
purchase an aggregate of 1,350,000 shares of our Common Stock at an exercise
price of $15.75 per share, subject to adjustment. The shares of Series A
Preferred Stock are currently convertible at a floating rate based on the
market price of our Common Stock, provided the conversion price may not
exceed $36.00 per share, subject to adjustment. As a result, the lower the
price of our Common Stock at the time of conversion, the greater the number
of shares the holder will receive.

To the extent the Series A Preferred Stock is converted or dividends on the
Series A Preferred Stock are paid in shares of Common Stock rather than cash, a
significant number of shares of Common Stock may be sold into the market, which
could decrease the price of our Common Stock and encourage short sales by
selling shareholders or others. Short sales could place further downward
pressure on the price of our Common Stock. In that case, we could be required to
issue an increasingly greater number of shares of our Common Stock upon future
conversions of the Series A Preferred Stock, sales of which could further
depress the price of our Common Stock.

The conversion of and payment of dividends in shares of Common Stock in lieu of
cash on the Series A Preferred Stock may result in substantial dilution to the
interests of other holders of our Common Stock. Although no selling shareholder
may convert its Series A Preferred Stock if upon such conversion the selling
shareholder together with its affiliates would have acquired a number of shares
of Common Stock which, when added to the number of shares of Common Stock held
would exceed 4.99% of our then outstanding Common Stock, including for purposes
of such determination shares of Common Stock issuable upon conversion of shares
of Series A Preferred Stock which have not been converted, this restriction does
not prevent a selling shareholder from selling a substantial number of shares in
the market. By periodically selling shares into the market, an individual
selling shareholder could eventually


                                       18
<PAGE>

sell more than 4.99% of our outstanding Common Stock while never holding more
than 4.99% at any specific time.

We may Issue Additional Shares and Dilute our Stockholders' Ownership
Percentage

Some events over which stockholders have no control could result in the
issuance of additional shares of our Common Stock, which would dilute our
stockholders' ownership percentage in us. We may issue additional shares of
Common Stock or preferred stock:

o     to raise additional capital or finance acquisitions;

o     upon the exercise or conversion of outstanding options, warrants and
      shares of convertible preferred stock; and/or

o     in lieu of cash payment of dividends.

As of November 8, 2000, other than the warrants issued to the holders of the
Series A Preferred Stock on January 13, 2000 and April 4, 2000, there were
outstanding warrants to acquire an aggregate of 1,226,562 shares of Common
Stock, and there were outstanding options to acquire an aggregate of 10,218,564
shares of Common Stock. If converted or exercised, these securities will dilute
your percentage ownership of Common Stock. These securities, unlike the Common
Stock, provide for anti-dilution protection upon the occurrence of stock splits,
redemptions, mergers, reclassifications, reorganizations and other similar
corporate transactions, and, in some cases, major corporate announcements. If
one or more of these events occurs, the number of shares of Common Stock that
may be acquired upon conversion or exercise would increase. In addition, as
disclosed in the preceding risk factor, the number of shares that may be issued
upon conversion of or payment of dividends in lieu of cash on the Series A
Preferred Stock could increase substantially if the market price of our Common
Stock decreases during the period the Series A Preferred Stock are outstanding.

For example, the number of shares of Common Stock that we would be required to
issue upon conversion of all 28,353 shares of Series A Preferred Stock,
excluding shares issued as accrued dividends, would increase from approximately
39.8 million shares, based on the applicable conversion price of $0.7124 per
share as of November 9, 2000, to approximately:

o     53.1 million shares if the applicable conversion price decreased 25%;

o     79.6 million shares if the applicable conversion price decreased 50%; or

o    159.2 million shares if the applicable conversion price decreased 75%.

Substantial Sales of our Common Stock Could Cause our Stock Price to Fall

If our stockholders sell substantial amounts of our Common Stock, including
shares issued upon the exercise of outstanding options and upon conversion of
the Series A Preferred Stock and exercise of the related warrants, the market
price of our Common Stock could fall. Such sales also might make it more
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate. As of November 9, 2000, we had
outstanding 26,762,518 shares of Common Stock and options to acquire an
aggregate of 10,218,564 shares of Common Stock, of which 3,781,645 options were
vested and exercisable. As of November 9, 2000, of the shares that are currently
outstanding, 18,539,021 are freely tradable in the public market and 7,643,735
are tradable in the public market subject to the


                                       19
<PAGE>

restrictions, if any, applicable under Rule 144 and Rule 145 of the Securities
Act of 1933, as amended.

In general, under Rule 144 as currently in effect, a person who has beneficially
owned restricted securities for at least one year would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of: (a) one percent of the number of shares of Common Stock then
outstanding (which for us was 261,828 shares as of November 9, 2000); or (b) the
average weekly trading volume of the Common Stock during the four calendar weeks
preceding the sale. Sales under Rule 144 are also subject to requirements with
respect to manner of sale, notice, and the availability of current public
information about us. Under Rule 144(k), a person who is not deemed to have been
our affiliate at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Sales by
stockholders of a substantial amount of our Common Stock could adversely affect
the market price of our Common Stock.

We may be Required to Pay Substantial Penalties to the Holders of the Series A
Preferred Stock if Specific Events Occur

In accordance with the terms of the documents relating to the issuance of the
Series A Preferred Stock, we are required to pay substantial penalties to a
holder of the Series A Preferred Stock under specified circumstances, including,
among others:

o     the delisting or suspension from trading of our Common Stock from Nasdaq
      for a period of five consecutive trading days;

o     notice by us or our transfer agent to any holder of Series A Preferred
      Stock of our intention not to comply with a request for conversion of any
      shares of Series A Preferred Stock;

o     our failure to deliver shares of our Common Stock upon conversion of the
      Series A Preferred Stock or upon exercise of the related warrants after a
      proper request; and

o     our breach of any provisions of the Certificate of Designation,
      Preferences and Rights of Series Cumulative Convertible Preferred Stock,
      the related warrants, and the subscription agreement and registration
      rights agreement both dated January 13, 2000.

If our Common Stock is Removed From Nasdaq, the Marketability of our Common
Stock will be Decreased Substantially

Our Common Stock is currently traded on the Nasdaq National Market System.
There can be no assurance that our Common Stock will maintain the minimum bid
price and continue to be listed on Nasdaq. The requirements for continued
listing on such Nasdaq include, among other things, a requirement that our
Common Stock maintain a minimum bid price of $1.00 per share. Our Common
Stock has traded at prices below $1.00 per share in the recent past. In
addition, in order to maintain our Nasdaq listing, we are required to comply
with the guidance of the National Association of Securities Dealers, Inc.
regarding "future priced securities." We believe that the Series A Preferred
Stock and the related warrants of the selling shareholders comply with the
guidance and criteria set forth by the NASD with regard to such future priced
securities. Any removal from Nasdaq would have a material adverse effect on
both the price and the liquidity of our Common Stock.

                                       20

<PAGE>

The Market Price of our Common Stock may be Volatile, Which Could Result in
Substantial Losses for Individual Stockholders

The market price for our Common Stock has been and is likely to continue to be
highly volatile and subject to wide fluctuations in response to factors
including the following, some of which are beyond our control:

o     actual or anticipated variations in our quarterly operating results;

o     announcements of technological innovations, increased cost of operations
      or new products or services by us or our competitors;

o     changes in financial estimates by securities analysts;

o     failure to meet securities analysts' financial estimates;

o     conditions or trends in the Internet and/or interactive architect
      industries;

o     changes in the economic performance and/or market valuations of other
      interactive architects or digital strategy companies;

o     volatility in the stock markets, particularly with respect to Internet
      stocks, and decreases in the availability of capital for Internet-related
      businesses;

o     announcements by us or our competitors of significant acquisitions,
      strategic partnerships, joint ventures or capital commitments;

o     additions or departures of key personnel;

o     transfer restrictions on our outstanding shares of Common Stock or sales
      of additional shares of Common Stock; and

o     pending or potential litigation.

From September 1, 1999 (the first day of our 2000 fiscal year), through August
31, 2000, the high and low sales prices for our Common Stock fluctuated between
$45.75 and $6.125. On November 13, 2000, the closing price of our Common Stock
was $1.125. In the past, following periods of volatility in the market price
of their securities, many companies have been the subject of securities class
action litigation. If we were sued in a securities class action, it could result
in substantial costs and a diversion of management's attention and resources and
would cause the price of our Common Stock to fall.

ITEM 2. DESCRIPTION OF PROPERTY

We lease our executive offices at 233 Broadway, New York consisting of
approximately 112,000 square feet of office space. The lease for this space
expires in 2015. We also lease office space for our seventeen locations in
Sausalito, Los Angeles, Dallas, Atlanta, Chicago, Colorado Springs, Chandler
(Arizona), London and Amsterdam. We believe that our existing facilities are
adequate to meet current requirements and that suitable additional or substitute
space will be available as needed.

ITEM 3. LEGAL PROCEEDINGS

                                       21

<PAGE>

We sued Drinks.com, Inc. on May 26, 2000 in the supreme court of the state of
New York, in the county of New York, commercial division. Our complaint
alleged breach of contract arising from the failure of Drinks to pay
approximately $1.5 million for services performed by us. Drinks
counterclaimed on July 21, 2000 for $14 million, alleging that our poor
performance caused Drinks to lose projected revenue (not profits). We have
moved to dismiss the counterclaim and intend to vigorously pursue our claim
and defend against the counterclaim. If this lawsuit is adversely determined,
it could materially affect our financial position and results of operations.

Brenda Isaac sued us, McLaughlin & Stern, L.L.P., Werner G. Haase, and
Richard J. Blumberg on October 3, 2000 in the United States District Court
for the Southern District of New York. Her complaint alleges violations of
Section 10(b) of the Securities and Exchange Act of 1934 and common law fraud
arising from the 1999 merger of Xceed Motivation Atlanta, Inc. and Xceed, as
well as breach of contract arising from certain provisions of the merger
agreement. Ms. Isaac demands $2,217,989.51 in compensatory damages and $100
million in punitive damages. Ms. Isaac is a former employee of ours and is
now an employee of the Performance Enhancement Business. In addition, she is
the owner of the property lease we assigned to the Performance Enhancement
Business in Atlanta. A response to this complaint is not yet due. In the
event that the litigation proceeds, we intend to vigorously contest and
defend against the allegations. If this lawsuit is adversely determined, it
could materially affect our financial position and results of operations.

We are involved in various other lawsuits and claims incidental to our
business. In the opinion of management, any liabilities resulting from these
other lawsuits and claims will not materially affect our financial position
or results of operations.

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

No matters were submitted to stockholder vote in the fiscal quarter ended August
31, 2000.

                                       22
<PAGE>

                                     PART II

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

Our Common Stock is traded on the National Market under the symbol
"XCED."

As of November 13, 2000, there were approximately 913 record holders of our
Common Stock.

The following table sets forth the high and low sales price for our Common Stock
for the periods indicated as reported by the Nasdaq National Market. The figures
shown represent inter-dealer prices, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.

Common Stock                                       High            Low
------------                                       ----            ---

Fiscal Year ending  August 31, 2001               $ 7.500       $  .703
     1st Quarter ending November 30, 2000
       (through November 13, 2000)

Fiscal Year ended August 31, 2000
     1st Quarter ended November 30, 1999          $32.188       $18.250
     2nd Quarter ended February 29, 2000          $45.750       $28.375
     3rd Quarter ended May 31, 2000               $33.625       $ 7.500
     4th Quarter ended August 31, 2000            $14.125       $ 6.125

Fiscal Year ended August 31, 1999
     1st Quarter ended November 30, 1998          $ 8.250       $ 4.500
     2nd Quarter ended February 28, 1999          $11.813       $ 7.250
     3rd Quarter ended May 31, 1999               $22.875       $ 9.000
     4th Quarter ended August 31, 1999            $24.500       $13.375

Class B Warrants                                  High Bid      Low Bid
----------------                                  --------      -------

Fiscal Year 1999
     1st Quarter ended November 30, 1998          $  3.50       $ 1.062
     Period ended February 28, 1999*              $  5.75       $ 2.875

* The Class B Warrants ceased trading on that date.

We have not paid any cash dividends upon our Common Stock since our inception
and, by reason of our present financial status and our contemplated financial
requirements, we do not anticipate paying any cash dividends in the foreseeable
future. It is anticipated that earnings, if any, which may be generated from
operations will be used to finance our operations.

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data set forth below for the years ended
August 31, 2000, 1999, 1998, 1997, and 1996 were derived from our audited
consolidated financial statements. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and related
Notes included elsewhere in this annual report. The historical results are not
necessarily indicative of the operating results to be expected in the future.


                                       23
<PAGE>

<TABLE>
<CAPTION>
                                                                       Year Ended August 31,
                                      ---------------------------------------------------------------------------------------
                                          2000               1999               1998               1997              1996
                                      ------------       ------------       ------------       ------------      ------------
                                                             (in thousands, except per share amounts)
<S>                                   <C>                <C>                <C>                <C>               <C>
Income Statement Data:(1)

Revenues                              $    108,441       $     63,450       $     42,266       $     46,007      $     39,824

Operating (loss) income               $   (155,653)      $    (14,416)      $     (1,768)      $        933      $        464

(Loss) income from continuing         $   (156,932)      $     (9,691)      $       (263)      $        498      $        256
operations

Net (loss) income                     $   (154,450)      $     (7,610)      $      1,550       $      1,877      $        632

Net (loss) applicable to              $   (173,754)      $     (7,610)      $      1,550       $      1,877      $        632
Common Stockholders

Net (loss) income from
continuing operations per
common share
    -Basic                            $      (8.42)      $      (0.64)      $      (0.03)      $       0.07      $       0.04
    -Diluted                          $      (8.42)      $      (0.64)      $      (0.03)      $       0.07      $       0.03

Net (loss) income per common
share
     -Basic                           $      (8.30)      $      (0.50)      $       0.20       $       0.27      $       0.09
     -Diluted                         $      (8.30)      $      (0.50)      $       0.20       $       0.26      $       0.09
Weighted average number
    Of shares outstanding
    -Basic                              20,946,729         15,219,140          7,755,795          7,023,770         7,001,295
    -Diluted                            20,946,729         15,219,140          7,755,795          7,339,625         7,394,012

Balance Sheet Data:

Cash and cash equivalents             $      9,888       $     19,754       $     13,789       $      7,230      $      7,333
</TABLE>


                                       24
<PAGE>

<TABLE>
<S>                                          <C>                <C>                <C>                <C>               <C>
Working capital                              $     13,874       $     23,480       $     17,333       $     10,042      $      7,964

Total assets                                 $    119,990       $     91,935       $     34,716       $     18,800      $     17,383

Long-term debt                               $        527       $      2,625       $          0       $         52      $         91

Redeemable preferred stock                   $     19,304       $          0       $          0       $          0      $          0
dividends

Stockholders' equity                         $     73,298       $     71,631       $     26,192       $     12,533      $     10,699
</TABLE>

(1) Net revenues and operating (loss) income have been restated to reflect the
operations of Water-Jel and JourneyCorp as discontinued operations.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements (including notes) that appear elsewhere in this annual report.

Overview

We are an Interactive Architect and solutions builder. We help companies
develop e-commerce and e-business solutions, improving people and business
performance through communication tools, techniques, and technologies. Due to
recent and continuing changes in our business model and our restructuring
plans, comparisons of year-to-year performance may not be indicative of
performance or changes in performance.

The following table sets forth the percentages of total revenues represented by
certain items reflected in our consolidated statements of operations.

<TABLE>
<CAPTION>
                                                                                   Fiscal years ended August 31,
                                                                                -----------------------------------
                                                                                2000           1999           1998
                                                                                -----          -----          -----
<S>                                                                             <C>            <C>            <C>
Revenues                                                                        100.0%         100.0%         100.0%

Operating expenses:
         Cost of revenues ..............................................         89.5           82.8           86.2
         Selling, general and administrative ...........................         40.7           28.5           15.6
         Provision for doubtful accounts ...............................          8.5            1.6             --
         Write-off of deferred offering costs ..........................          2.7             --             --
Impairment of goodwill and other intangibles ...........................         80.3             --             --
Stock-based compensation ...............................................          1.0            0.7            0.4
Gain on sale of business ...............................................         (1.8)%           --             --
Depreciation and amortization ..........................................         22.7            8.2             --
Research and development ...............................................           --            0.9            2.0
                                                                              -------          -----          -----
Total operating expense ................................................        243.5%         122.7%         104.2%
Operating (loss) .......................................................       (143.5)%        (22.7)%         (4.2)%
Loss from continuing operations ........................................       (144.7)%        (15.3)%         (0.6)%
</TABLE>


                                       25
<PAGE>

Overview

Fiscal Year 2000 compared to Fiscal Year 1999

Revenues for fiscal year 2000 increased 70.9% to $108.4 million from $63.5
million for fiscal year 1999. Interactive service business revenues increased
187.7% from $19.5 million in fiscal 1999 to $56.1 million in fiscal 2000.
Performance Enhancement Business revenues increased 18.9% from $44.0 million in
fiscal 1999 to $52.3 million in fiscal 2000. The significant increase in
interactive service business revenue during fiscal year 2000 resulted from an
increase in the size and number of client engagements and the acquisitions made
during fiscal year 2000. The increase in Performance Enhancement Business
revenues during fiscal year 2000 resulted from increased activity with its
existing client base.

Cost of revenues for fiscal 2000 increased 84.8% to $97.1 million from $52.5
million for fiscal year 1999. As a percentage of revenues, cost of revenues
increased to 89.5% for fiscal 2000 from 82.8% for fiscal year 1999. The
increase in cost of revenues during fiscal year 2000 resulted from additional
staffing requirements in the interactive service business in order to service
the increased revenues and underutilization of billable staff, as well as
personnel costs incurred from acquired entities.

Selling, general and administrative expense for fiscal 2000 increased 143.4% to
$44.1 million from $18.1 million from fiscal year 1999. As a percentage of
revenues, selling general and administrative expense increased to 40.7% in
fiscal 2000 from 28.6% in fiscal 1999. The increase in selling, general and
administrative expense during fiscal 2000 was a direct result of increased
selling, marketing and corporate expenses including twelve months of corporate
infrastructure cost for three new locations, increased staffing of corporate
non-billable personnel and additional general and administrative expenses
related to the acquisitions.

Provision for doubtful accounts for fiscal 2000 increased 826.7% to $9.3
million from $1.0 million in fiscal 1999. As a percentage of revenues,
provision for doubtful accounts increased to 8.5% in fiscal year 2000 from
1.6% in fiscal 1999. The increase in provision for doubtful accounts reflects
our increased revenues, as well as an increased provision associated with
interactive revenues derived from start-up entities which are experiencing
financial difficulties.

The write-off of deferred offering related costs for fiscal year 2000
derived from a proposed public offering of Common Stock. This offering was
cancelled due to adverse market conditions. During the fourth quarter of
fiscal year 2000, $2.9 million in offering-related costs were charged to
operations.

Impairment of goodwill for fiscal year 2000 of $87.1 million was recorded
and attributable to several factors. Based on revenue and ten-year cash flow
projections for each of the acquisitions we determined that there was
significant impairment of goodwill present. Additionally, we considered some
assets to be non-core business units. Due to the recent economic developments
in the marketplace, some of our acquired businesses have not been able to
meet their initial expectations.

Stock compensation expense for fiscal year 2000 increased 153.8% to $1.1 million
from $420 thousand in fiscal year 1999. As a percentage of revenues, stock
compensation expense increased to 1.0% in fiscal year 2000 from 0.7% in fiscal
1999. The increase is primarily derived from the unvested portion of stock
options issued in conjunction with the methodfive, inc. acquisition.

Depreciation and amortization expense for fiscal year 2000 increased 370.9% to
$24.6 million from $5.2 million in fiscal year 1999. As a percentage of
revenues, depreciation and amortization expense increased to 22.7% in fiscal
2000 from 8.2% in fiscal year 1999. The increase in depreciation and
amortization


                                       26
<PAGE>

expense is primarily the result of the amortization of intangibles assets from
acquisitions. In addition, we have incurred increased depreciation expense as a
result of increased fixed assets purchases and leasehold improvements.

Research and development expenses for fiscal year 2000 decreased 94.1% to $34
thousand from $579 thousand in fiscal year 1999. Research and development
expense for the prior fiscal year was incurred in connection with the
development of e-commerce ventures.

Operating loss for fiscal year 2000 increased to $155.7 million from $14.4
million in fiscal year 1999. The increase in operating loss during fiscal
year 2000 was attributable to several factors. During fiscal year 2000, in an
effort to transition to an Internet professional services company, we
completed seven acquisitions. As a result of these acquisitions, we incurred
increased expenses related to additional staffing requirements, corporate
expenses, corporate infrastructure cost, and amortization of intangibles
assets. In addition, due to the recent change in the economic marketplace,
our newly acquired businesses were unable to perform to their initial
expectations. As a result, we recorded a goodwill impairment charge of $87.1
million in the fourth quarter of fiscal year 2000.

In direct response to fiscal 2000 performance, there have been various
executive level management changes during and subsequent to the fourth
quarter of fiscal 2000. Our new management team has developed and commenced
implementation of a restructuring plan which management believes will enable
us to focus on our position as an Interactive Architect. The restructuring
plan, which received board approval in the first quarter of fiscal 2001,
seeks to implement a profitable business model and contemplates the
divestiture of non-strategic assets. Pursuant to the plan, during the first
quarter of fiscal year 2001, we sold the Performance Enhancement Business and
completed a reduction in force. During the remainder of fiscal year 2001,
management expects to continue to implement the plan, leverage our current
strategic alliance with Spherion Corporation and continue to redirect our
target client base to Fortune 1000 companies. In addition, management hopes
to sublease a portion of our New York corporate office, consolidate our New
York operating units, reduce our discretionary advertising expenditures,
increase the productivity of our employees, increase revenue per hour on
prospective projects, reduce and restructure certain unprofitable locations
acquired through past business combinations, obtain additional equity from
third-party sources, replace our $5.0 million line of credit with Chase
Manhattan and implement additional cost cutting measures. All costs
associated with the restructuring will be recorded during fiscal year 2001.
We have not yet completed an estimate of the total cost associated with the
restructuring plan; however, it is expected to be significant.

Fiscal Year 1999 compared to Fiscal Year 1998

Revenues for fiscal year 1999 increased 50% to $63.5 million from $42.3 million
for fiscal year 1998. Internet professional service revenues were $19.5 million
in fiscal year 1999 and Performance Enhancement Business revenues increased 4%
from $42.3 million for fiscal year 1998 to $44.0 million for fiscal year 1999.
The increase in Internet professional services revenues reflected the continued
growth of our Internet professional services, which increased in both the size
and the number of client projects. This increase was also attributable to a
series of acquisitions.

Cost of revenues for fiscal year 1999 increased 44% to $52.5 million from $36.4
million for fiscal year 1998. This increase in cost of revenues was primarily
due to the hiring of additional Internet professional services personnel, and
the personnel related expenses from acquisitions in the Internet professional
services area. As a percentage of revenues, cost of revenues decreased to 82.8%
for fiscal year 1999 from 86.2% for fiscal year 1998.

Selling, general and administrative expense for fiscal year 1999 increased 176%
to $18.1 million from $6.6 million for fiscal year 1998. As a percentage of
revenues, selling, general and administrative expense increased to 28.6% in
fiscal year 1999 from 15.6% in fiscal 1998. The increase in selling, general and


                                       27
<PAGE>

administrative expense was a direct result of increased selling, marketing and
corporate expenses, including corporate personnel and infrastructure related
costs associated with the expansion of our Internet professional services
business. In addition, we incurred additional general and administrative expense
related to acquisitions.

Provision for doubtful accounts for fiscal year 1999 increased to $1.0 million
from $4 thousand in fiscal year 1998. The increase in provision for doubtful
accounts reflects the inclusion of startup entities in the client base of our
Internet professional services business.

Stock-based compensation expense for fiscal year 1999 increased 147% to $420
thousand from $170 thousand for fiscal year 1998. As a percentage of revenues,
stock compensation expense increased to 0.7% for fiscal year 1999 from 0.4% for
fiscal year 1998. Stock- based compensation expense resulted primarily from
stock and stock option grants to consultants and employees in lieu of cash
payments for services rendered.

Depreciation and amortization expense for fiscal year 1999 increased to $5.2
million from $20 thousand for fiscal year 1998. As a percentage of revenues,
depreciation and amortization expense increased to 8.2% in fiscal year 1999 from
0.0% in fiscal year 1998. The increase in depreciation and amortization expense
is primarily the result of the amortization of intangible assets from
acquisitions. In addition, we incurred increased depreciation expense as a
result of increased fixed assets purchases of computers and other related
equipment.

Research and development expense for fiscal year 1999 decreased 33% to $579
thousand from $866 thousand for fiscal year 1998. As a percentage of revenues,
research and development expense decreased to 0.9% for fiscal year 1999 from
2.0% for fiscal year 1998. Research and development expense for fiscal year 1999
was primarily incurred in connection with the development of products for
e-commerce ventures. Research and development expense for fiscal year 1998 was
incurred in connection with the development of Maestro software for our
Performance Enhancement Business.

Other income, net for fiscal year 1999, decreased 68% to $396 thousand from $1.2
million for fiscal year 1998. The decrease during fiscal year 1999 was primarily
attributable to a $522 thousand gain on the sale of investments in fiscal year
1998, as well as interest expense incurred in fiscal year 1999 as a result of
our acquisition of Zabit & Associates, Inc. completed in September 1998.

An income tax benefit of $4.3 million was recorded for fiscal year 1999,
compared to $257 thousand for fiscal year 1998. Our effective tax rate for
fiscal year 1999 was 30.9% compared to 49.4% for fiscal year 1998. This
decreased rate reflected the impact of the amortization of non-tax deductible
goodwill in connection with certain Internet professional services
acquisitions.

For fiscal year 1999, we incurred a loss from continuing operations of $9.7
million compared to a loss from continuing operations of $263 thousand for
fiscal year 1998. Our fiscal year 1999 loss reflects the personnel requirements
and increased corporate infrastructure and related expenses required for our
rapidly growing Internet professional services business. We believe these costs
are required in order to accommodate the anticipated rapid growth of our
business.

Income, net of related taxes, from discontinued operations increased 15% for
fiscal year 1999 to $2.1 million from $1.8 million for fiscal year 1998.

We reported a net loss of $7.6 million for fiscal year 1999 compared to net
income of $1.6 million for fiscal year 1998. The decrease of $9.2 million was
due to the factors described above.


                                       28
<PAGE>

Recently Issued Accounting Pronouncements

In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which was
subsequently amended by SFAS 137, Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of SFAS 133, and SFAS
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities -an amendment of FASB Statement No. 133. SFAS 133 establishes
accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments imbedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at fair value. This statement also requires that changes in fair
value be recognized in earnings unless specific hedge accounting criteria are
met. SFAS 133, as amended by SFAS 137 and SFAS 138, applies to us beginning
September 1, 2000. Management does not believe that these pronouncements will
have a significant impact on our financial condition or results of operations.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, which provides
guidance related to revenue recognition based on interpretations and practices
followed by the SEC. SAB 101 requires companies to report any changes in revenue
recognition as a cumulative change in accounting principle at the time of
implementation in accordance with Accounting Principles Board Opinion No. 20,
Accounting Changes. We are required to implement SAB 101 no later than
the fourth quarter of fiscal 2001 in accordance with SAB No. 101B "Delaying
Implement of SAB 101," which was issued in June 2000. We do not expect the
implementation of SAB 101 to have a material effect on our financial position or
results of operations.

Liquidity and Capital Resources

At August 31, 2000 we had working capital of approximately $13.9 million as
compared to $23.5 million at August 31,1999.

For fiscal year 2000, we used $33.0 million in operating activities. This was
the result of a net loss of $154.5 million offset by impairment of goodwill
of $87.1 million, depreciation and amortization of $18.8 million, impairment
of leasehold improvements of $5.8 million coupled with an increase in
accounts receivables of $15.9 million, offset by an increase in accounts
payable and accrued expenses of $6.8 million and customer billings in
excess of costs of $2.6 million.

During 2000, we used $16.3 million to fund our growth strategy through
acquisitions in the Interactive business and approximately $18.3 million for the
purchase of property and equipment.

We raised approximately $53.8 million during 2000 through the proceeds of two
private placements of securities as well as proceeds from the exercise of
stock options and warrants of $7.1 million, which was partially offset by the
abandoned offering related costs of $2.9 million and the restricted cash from
leases of $1.9 million.

We expect our working capital needs to be funded through our current cash
resources, cash flow from operations, and third party credit facilities. In
that regard, we entered into a $5,000,000 revolving credit facility, secured
by our accounts receivable, with Spherion Corporation in November 2000 which
terminates in May 2002. We believe the combination of these sources will be
sufficient to fund our operations and to satisfy our cash requirements for
the next twelve months. There may be circumstances that would accelerate our
use of liquidity sources, including, but not limited to, our ability to
implement a profitable business model and complete our restructuring plan.
If this occurs, we may, from time to time, incur additional indebtedness or
issue, in public or private transactions, equity or debt securities. However,
there can be no assurance that suitable debt or equity financing will be
available to us. We currently have no outstanding balances under the Spherion
credit facility.

For fiscal year 2001, we currently anticipate that our capital expenditures
will be approximately $3.6 million.

                                       29
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements commence on Page F-1.

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

On January 21, 2000, Holtz Rubenstein & Co., LLP was dismissed as our
independent auditor. The decision to change independent auditors was approved
by our Board of Directors. No disagreements exist between us and Holtz
Rubenstein with respect to any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure. The report of
Holtz Rubenstein for the year ended August 31, 1999 did not contain an
adverse opinion or disclaimer of opinion. On January 21, 2000, the Board of
Directors appointed Deloitte & Touche LLP as our independent certified public
accountants to replace Holtz Rubenstein and to act as principal accountant to
audit our financial statements. Our stockholders ratified the appointment of
Deloitte & Touche at our annual meeting of stockholders on May 4, 2000.

                                       30
<PAGE>

                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers and directors as of August 31, 2000 were as follows:

    Name                   Age      Position
    ----                   ---      --------

Scott A. Mednick           44       Co-Chairman
Werner G. Haase            63       Co-Chairman, Chief Executive Officer and
                                    President
John P. Gandolfo           39       Senior Vice President and Chief Financial
                                    Officer
Gary S. Kahl               37       Executive Vice President, National Practices
Kevin D. Labick            30       Executive Vice President, National Business
                                    Operations
Adeo Ressi di Cervia       28       Executive Vice President, Corporate
                                    Strategies
Paul P. Schmidman          47       Chief Corporate Architect and Executive Vice
                                    President, Business Development
Terry A. Anderson          53       Director
Edward Bennett             54       Director
John A. Bermingham         56       Director
Norman Docteroff           66       Director
Raymond Marcy              49       Director

Our current executive officers and directors are as follows:

    Name                   Age      Position
    ----                   ---      --------

Scott A. Mednick           44       Chairman
Werner G. Haase            63       President
Howard A. Tullman          55       Chief Executive Officer and Director
Douglas C. Laux            47       Chief Financial Officer
Richard R. Dennerline      36       Chief Legal Officer and Secretary
Terry A. Anderson          53       Director
Edward Bennett             54       Director
John A. Bermingham         56       Director
Norman Docteroff           66       Director
Stuart Emanuel             57       Director

Other than discussed in the paragraph below, directors who are our employees
receive no additional compensation for their services as directors. Directors
who are not our 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
are reimbursed for travel expenses and other out of pocket costs incurred in
connection with their attendance at the meetings.

Terry Anderson received a fee of $10,000 during fiscal year 2000 for
rendering consulting services to us. Each of Messrs. Bennett, Bermingham and
Docteroff are entitled to receive an option to purchase 100,000, 50,000 and
50,000 shares of Common Stock, respectively, as of February 8, 2000. The
exercise price for such options would be $40.25.

Scott A. Mednick has served as Co-Chairman since 1998. From 1998 until 2000,
Mr. Mednick also served as our Chief Strategic Officer. From 1996 until 1998,
Mr. Mednick served as Chairman

                                       31
<PAGE>

and chief executive officer of THINK New Ideas, Inc., a provider of marketing
technology and interactive business solutions. In 1982, Mr. Mednick established
the Mednick Group, a graphic design company, which in 1996 became THINK New
Ideas. He served as its president until 1996.

Werner G. Haase served as a director from September 1987 until his resignation
on November 6, 2000 in connection with the sale of our Performance Enhancement
Business division to 488 Performance Group, Inc., a corporation formed and owned
by Mr. Haase (See "Sale of Non-Strategic Assets"). Mr. Haase became Chairman and
Chief Executive Officer in July 1996 following our acquisition of Journeycraft,
Inc. and TheraCom, Inc. He became President in March 2000 following William
Zabit's resignation. Mr. Haase served as Co-Chairman, Chief Executive Officer
and President until August 2000, when he resigned as Co-Chairman and Chief
Executive Officer.

Howard A. Tullman has served as a director and as our Chief Executive Officer
since September 2000 following Mr. Haase's resignation. We entered into a
three year employment agreement with Mr. Tullman in August 2000. Since March
2000, Mr. Tullman has been the General Manager of Chicago High Tech Investors
I, LLC, an Internet-oriented investment fund. From September 1996 until
February 2000, Mr. Tullman served as the chief executive officer of
Tunes.com, Inc. and its predecessors, an Internet music site he co-founded
and which was sold to EMusic.com, Inc. From October 1993 until October 1996,
Mr. Tullman was the president and chief executive officer of Imagination
Pilots, Inc., a multimedia software developer he founded in 1993. Mr. Tullman
serves as a director of Emusic.com Inc. and the Princeton Review and is the
chairman of the board of The Cobalt Group, Inc.

John P. Gandolfo served as our Senior Vice President and Chief Financial Officer
from November 1999 until September 2000 when he resigned from these positions.
From 1994 until November 1999, Mr. Gandolfo was an executive vice president,
chief financial officer and chief operating officer of Impath Inc., a publicly
held medical information services company. From 1987 through March 1994, Mr.
Gandolfo served as controller, senior vice president and chief financial officer
of Medical Resources Inc., a publicly held medical diagnostic imaging management
company.

Gary Kahl was the head of Xceed's National Practices Group until October 2000.
Before joining Xceed, Mr. Kahl ran the National Business Operations organization
at Impact Innovations Group (IIG). IIG was a large national IT consulting firm
specializing in integrated e-commerce, data warehousing, call center, and
document management solutions. Before assuming his role at Xceed, Mr. Kahl sat
on the technical advisory board of Computer Aids for Industrial Productivity
(CAIP).

Kevin Labick was the Executive Vice President of National Business Operations
of Xceed, responsible for our services, capabilities and methodologies until
September 2000. Prior to joining Xceed, Mr. Labick was cofounder and
president of Mercury Seven, an Internet consulting and development company
which specialized in building e-businesses. Mercury Seven was acquired by us
in 1998.

Adeo Ressi di Cervia joined Xceed in February 2000 when we acquired
methodfive. Mr. Ressi was our Executive Vice President for Corporate Strategy
until September 2000. Prior to joining Xceed, Mr. Ressi founded The Myriad
Agency, later renamed methodfive, and served as its chief executive officer.
Mr. Ressi began his career in new media by founding Hydrant, an interactive
multimedia company. After selling Hydrant, Mr. Ressi formed Total New York,
the first regional, advertising-supported website, which he later sold to
America Online, Inc.

Douglas C. Laux has been employed by us since October 2000 and was designated
as our Chief Financial Officer in November 2000. From February 2000 until
October 2000, Mr. Laux was the chief financial officer for Drinks.com, Inc.,
an on-line marketing

                                       32

<PAGE>

company and retailer of wine, beer and spirits. From September 1995 until
January 2000, Mr. Laux served as the chief financial officer at Platinum
Entertainment, Inc., a music entertainment company and was chief operating
officer from mid-1998 until January 2000. From October 1986 to September 1995
Mr. Laux was a partner at Ernst & Young, LLP in Chicago, Illinois.

Richard R. Dennerline has been employed by us since September 2000 and was
designated as our Chief Legal Officer in November 2000 and our Secretary
in October 2000. From June 1997 to September 2000, Mr. Dennerline was a
partner at the law firm of Freeborn & Peters in Chicago, Illinois, with which
he was also an associate from April 1995 to May 1997. Mr. Dennerline
currently acts as an independent consultant to Freeborn & Peters. From May
1989 through March 1995, Mr. Dennerline was an associate with the law firm of
Sidley & Austin in Chicago, Illinois.

Terry A. Anderson has served as a director since March 1999. He is a
journalist, teacher, writer and nationally known speaker. Mr. Anderson is
currently a visiting professor at Ohio University's Scripps School of
Journalism, where he has taught since 1993. From 1992 until 1993, Mr.
Anderson taught at Columbia University Graduate School of Journalism. Mr.
Anderson also currently writes a weekly opinion column on political, social
and international affairs for King Feature Syndicate.

Edward Bennett has served as a director since May 2000. Mr. Bennett has been a
partner in (212) Ventures, a venture capital firm, since March 2000. Since
November 1999, Mr. Bennett has served as the chairman of MOBILELOGIC, a wireless
solutions company he co-founded. From 1995 until 1999, Mr. Bennett was president
of Bennett Media Collaborative. Mr. Bennett is a director of SoftNet Systems,
Inc., Key3Media Group, Inc. and Engage, Inc.

John A. Bermingham has served as a director since November 1997 and served as
a consultant to us during 1997. Since August 2000, he has served as a
managing partner and the chief operating officer of Capital Key Advisors, an
investment banking firm. From 1998 until May 2000, Mr. Bermingham was the
president and chief executive officer of Smith Corona Corporation. From 1996
until November 1998, he served as a principal with The Promar Group, a
consulting company. From 1993 until 1996, Mr. Bermingham held the position of
president and chief executive officer of AT&T Smart Cards Systems and
Solutions, a division of AT&T.

Norman Docteroff has served as a director since May 1996. Mr. Docteroff has
been a director and the chief executive officer of Docuport, Inc., a research
and development and manufacturing company, since April 1999. From 1997 until
1999, he served as the president of Solutions Plus, a software customization
company. Since 1995, Mr. Docteroff has served as an independent management
consultant to Gemini Industries, a producer of consumer electronics
accessories, and other companies.

Stuart Emanuel has served as a director since November 2000. Mr. Emanuel has
been the president of worldwide operations for the Business Solutions Group
of Spherion Corporation, a human capital management company since 1997.
From 1989 until 1997 he acted as vice president of various divisions
within Spherion. Mr. Emanuel is Chairman of the Board of Interim Technology
(Asia), Pte. Ltd., a director of the Information Technology Association of
America (ITAA), a director of Amerihost Properties and a director of Zanathon
Inc., a Salt Lake City hi-tech company. Mr. Emanuel serves pursuant to
Spherion Corporation's right to designate one director.

Raymond Marcy served as a director from June 2000 until November 2000. Mr. Marcy
has served as president of Spherion, Inc. since 1989. He has served as its chief
executive officer since 1991 and as its chairman of the board since 1997.

Paul P. Schmidman has served as our Chief Corporate Architect and Executive
Vice President of Business Development since March 1999. Prior to joining
Xceed, Mr. Schmidman was senior vice president and general manager of
interactive media at THINK New Ideas, Inc., a provider of marketing
technology and interactive business solutions. Mr. Schmidman formerly served
as executive vice president and general manager of BoxTop Interactive.


                                       33
<PAGE>

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 as amended requires that
our directors and executive officers and beneficial owners of more than 10% of
our Common Stock file reports of holdings and transactions in our Common Stock
with the Securities and Exchange Commission and the Nasdaq National Market.
Based solely upon a review of the Forms 3 and 4 furnished to us, we are not
aware of any person that has failed to file a required report.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                        Annual Compensation
                                        -------------------      Securities
Name and                                                         Underlying          All Other
Principal Position         Year      Salary       Bonus          Options/SARs(#)     Compensation
------------------         ----      ------       -----          ---------------     ------------
<S>                        <C>       <C>          <C>            <C>                 <C>
(a)                        (b)       (c)          (d)            (f)                 (g)
Scott Mednick              2000      $350,000     $  200,000       600,000           $0
Co-Chairman                1999      $350,000     $1,080,000       300,000           $0
                           1998      $ 43,750     $   80,000     1,000,000           $0

Werner Haase (1)           2000      $500,000     $  102,550            -0-          $52,000(5)
Co-Chairman, Chief         1999      $500,000     $  150,000            -0-          $84,299
Executive Officer and      1998      $500,000     $  300,000       500,000           $80,859
President

William Zabit (2)          2000      $405,000     $0             -0-                 $0
President                  1999      $400,000     $0             -0-                 $7,066
                           1998      $      0     $0             -0-                 $0

John P. Gandolfo (3)       2000      $213,000     $75,000        250,000             $0
Senior Vice President and  1999      $      0     $0             -0-                 $0
Chief Financial Officer    1998      $      0     $0             -0-                 $0

Kevin Labick (4) Executive 2000      $275,000     $168,000       125,000             $121,875(6)
Vice President             1999      $      0     $0             150,000             $0
                           1998      $      0     $0             -0-                 $0
</TABLE>

------------
(1)   Mr. Haase resigned as Chief Executive Officer in August 2000.
(2)   Mr. Zabit resigned as President in March 2000.
(3)   On September 29, 2000, Mr. Gandolfo resigned from his position.
      In connection with his resignation, 83,337 options granted to
      Mr. Gandolfo on November 1, 1999 were cancelled, 125,000 options
      granted on April 17, 2000 were cancelled and the grant of 83,332
      options dated April 17, 2000 was cancelled.
(4)   On September 12, 2000, Mr. Labick's employment was terminated. In
      connection with his termination, all of the options granted to Mr. Labick
      in fiscal year 2000 were cancelled.
(5)   Includes premiums for life insurance policies paid by us on behalf of
      Mrs. Haase.
(6)   Includes payment made in connection with termination of employment.

                                       34

<PAGE>

OPTION/SAR GRANTS IN LAST FISCAL YEAR

The table below sets forth information regarding stock options granted during
fiscal year 2000 to each of the Named Executive Officers who were granted
options in fiscal year 2000.

<TABLE>
<CAPTION>
                                                                                         Potential Realizable
                                                                                         Value at Assumed
                                                                                         Annual Rates of
                                                                                         Stock Price
                                                                                         Appreciation for
                                                                                         Option Term(1)
                                                                                         -------------------
                           Number of          % of Total
                           Securities         Options/ SARs
                           Underlying         Granted to
                           Options/ SARs      Employees in      Exercise    Expiration
Name                       Granted (#)        Fiscal Year       Price       Date         5% ($)         10% ($)
----                       -----------        -----------       --------    --------     ------         -------
(a)                        (b)                (c)               (d)         (e)          (f)            (g)
<S>                        <C>                <C>               <C>         <C>          <C>            <C>
Scott Mednick (2)          250,000            2.9%              $13.63      4/05/03      $349,269       $715,575
Co-Chairman                250,000            2.9%              $ 7.50      4/17/03      $192,188       $393,750
                           100,000            1.2%              $ 7.50      4/17/03      $ 76,875       $157,500

Werner Haase                    -0-
Co-Chairman, Chief
Executive Officer and
President

William Zabit                   -0-
President

John P. Gandolfo (3)       125,000            1.4%              $22.00       11/01/03    $433,469       $910,250
Senior Vice President      125,000            1.4%              $ 7.50        4/17/04    $147,773       $310,313
and Chief Financial         83,332            1.0%              $ 7.50        4/17/04    $ 64,061       $131,248
Officer

Kevin Labick (4)           125,000            1.4%              $7.50        04/17/04    $147,773       $310.313
Executive Vice President    75,000            1.0%              $7.50        04/17/04    $ 57,656       $118,125
</TABLE>

---------------
(1)   Potential realizable value is reported net of the option exercise price
      but before taxes associated with exercise. These amounts assume annual
      compounding results in total appreciation of approximately 63% (5% per
      year) and approximately 159% (10% per year). Actual gains, if any, on
      stock option exercises and Common Stock are dependent on the future
      performance of the


                                       35
<PAGE>

      Common Stock, overall market conditions and the continued employment of
      the officer. There can be no assurance that the amounts reflected in this
      table will be achieved.
(2)   250,000 options vested on day of grant, while the additional grants shall
      vest on December 31, 2000.
(3)   In connection with his resignation on September 29, 2000, 83,337 options
      granted to Mr. Gandolfo on November 1, 1999 were cancelled, 125,000
      options granted on April 17, 2000 were cancelled and the grant of 83,332
      options dated April 17, 2000 was cancelled.
(4)   In connection with his termination on September 12, 2000, all of the
      options granted to Mr. Labick in fiscal year 2000 were cancelled.

The following table sets forth information concerning the value of unexercised
in-the-money options held by the Named Executive Officers as of August 31, 2000.
The last reported sale price of the Common Stock on August 31, 2000 was $7.625
per share. Accordingly, the values set forth below have been calculated based on
that price less the applicable exercise per share, multiplied by the number of
shares underlying the options.

AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR;
FISCAL YEAR END OPTION/SAR VALUES

<TABLE>
<CAPTION>
                                                                                                Value of
                                                                           Number of            Unexercised
                                                                           Unexercised          In-the-Money
                                                                           Options/SARs at      Options/SARs at
                                                        Value Realized(1)  FY-End (#)           FY-End ($)
                                      Shares Acquired   -----------------  Exercisable/         Exercisable/
Name                                  on Exercise (#)          ($)         Unexercisable        Unexercisable(2)
----                                  ---------------          ---         -------------        ----------------

<S>                                   <C>               <C>                <C>                  <C>
Scott Mednick                         -0-               -0-                1,349,990            $1,630,000
Co-Chairman                                                                (Exercisable)        (Exercisable)
                                                                           550,010              $45,500
                                                                           (Unexercisable)      (Unexercisable)

Werner Haase                          -0-               -0-                743,750              $4,068,375
Co-Chairman, Chief Executive                                               (Exercisable)        (Exercisable)
Officer and President

William Zabit
President

John P. Gandolfo                      -0-               -0-                41,663               $0
Senior Vice President and Chief                                            (Exercisable)        (Exercisable)
Financial Officer                                                          208,337              $16,250
                                                                           (Unexercisable)      (Unexercisable)

Kevin Labick                          25,000            175,000            50,000               $0
Executive Vice President                                                   (Exercisable)        (Exercisable)
                                                                           200,000              $16,250
                                                                           (Unexercisable)      (Unexercisable)
</TABLE>


                                       36
<PAGE>

(1)   Represents the difference between the average of the high and low prices
      of the Common Stock on the Nasdaq National Market on the date of exercise
      and the option exercise price multiplied by the number of shares acquired
      on exercise.
(2)   Represents the difference between $7.359 (the average of the high and
      low prices of the Common Stock on the Nasdaq National Market on August 31,
      2000) and the option exercise price multiplied by the number of shares of
      Common Stock covered by the options held.

Employment Agreements

During fiscal 2000, we had employment agreements with Scott A. Mednick,
Werner G. Haase, Howard A. Tullman, William N. Zabit, Nurit Kahane Haase,
John P. Gandolfo and Kevin D. Labick. As stated below, our employment
agreements with Werner G. Haase, William N. Zabit, Nurit Kahane Haase, John
P. Gandolfo and Kevin D. Labick have been terminated.

Scott A. Mednick. In July 1998, we entered into an employment agreement with
Scott Mednick, our Co-Chairman, which provides for an initial term of two
years, and a renewal term of two years if not terminated at the end of the
initial two year term. Mr. Mednick's employment agreement was amended in
September 1999 and March 2000. Either party may terminate the agreement under
certain circumstances. Mr. Mednick receives an annual base salary of $350,000.

In the event of a change in control, Mr. Mednick is entitled to receive a
one-time payment equal to three times his then-current annual compensation
(including bonuses). If Mr. Mednick is terminated without cause, he is
entitled to receive his annual salary for the balance of his employment term.
Mr. Mednick's employment agreement contains a non-compete covenant that is in
effect during the term of his employment, for so long as he receives base
compensation for termination without cause, and for 12 months after the final
base compensation payment is made. In addition, the non-compete covenant
remains in effect if Mr. Mednick elects not to extend the employment
agreement after the initial three-year term, or he voluntarily resigns prior
to the expiration of the initial three-year term.

Werner G. Haase. In December 1996, we entered into a five year employment
agreement with Werner Haase, our President and former Co-Chairman and Chief
Executive Officer. In connection with our sale of the Performance Enhancement
Business (See "Sale of Non-Strategic Assets"), Mr. Haase resigned from his
positions with Xceed, other than President, and released us from all
obligations under his employment agreement. In addition, upon closing of the
sale, Mr. Haase relinquished all rights to vested and unvested stock options,
other than certain options to purchase an aggregate of 43,750 shares of
Common Stock. While employed with us, Mr. Haase was paid a base salary of
$500,000 per year and we paid premiums, interest and other payments on a
number of policies insuring his life with an aggregate face value of at least
$2,300,000. Mr. Haase's employment agreement also entitled him to receive
bonuses, stock options and other incentives at the discretion of our Board of
Directors. In the event of a change in control, Mr. Haase was entitled to
receive a one-time payment equal to three times his then-current annual
compensation (including bonuses). Finally, upon termination without cause,
Mr. Haase was entitled to cancellation of all debts owed by him to us or to
Journeycraft (our former wholly-owned subsidiary which was sold to 488
Performance Group; See "Sale of Non-Strategic Assets") and we were obligated
to pay him an amount in cash equal to 100% of the amount of indebtedness
cancelled. As of August 31, 2000, the amount of Mr. Haase's indebtedness to us
was $1,222,000. See "Certain Transactions." Mr. Haase's indebtedness,
represented by a promissory note, was sold to a third party for $100,000 in
connection with the closing of our sale of the Performance Enhancement
Business. See "Sale of Non-Strategic Assets."

                                       37
<PAGE>

Howard A. Tullman. In August 2000, we entered into a three year employment
agreement with Howard Tullman, our Chief Executive Officer. Mr. Tullman was
selected by the Board of Directors to succeed Mr. Haase upon his resignation
of the position of Chief Executive Officer in August 2000. Pursuant to his
employment agreement, Mr. Tullman receives an annual base salary of $400,000
and has received options to purchase up to 1 million shares of Common Stock.
Mr. Tullman is also eligible to receive bonuses at the discretion of the
Board of Directors. If Mr. Tullman is terminated by us without cause during
the first year of his employment, he is entitled to receive the balance of
his annual salary up to and through the 18th month of his employment term;
during the second or third year of his employment, he is entitled to receive
the balance of his annual salary up to and through the 36th month of his
employment term; or after his initial three year term, he is entitled to six
months severance. In the event of a change in control of Xceed during the
initial three-year term of Mr. Tullman's employment agreement, where the
controlling entity does not assume the employment agreement or breaches its
provisions, Mr. Tullman is entitled to the severance arrangements and
acceleration of his options as set forth above. Mr. Tullman's employment
agreement contains a non-compete covenant that is in effect during the term
of his employment and for 12 months after his termination. Although this
employment agreement was effective August 4, 2000, Mr. Tullman did not assume
executive responsibilities until the beginning of fiscal year 2001.

William N. Zabit. In September 1998, we entered into a four year employment
agreement with William Zabit, our former President. Mr. Zabit resigned his
position as President in March 2000 and his employment agreement was
subsequently terminated effective as of September 15, 2000. While employed by
Xceed, Mr. Zabit was paid an annual base salary of $400,000 and we paid
premiums, interest and other payments on a policy insuring his life with a face
value of at least $2,000,000. Mr. Zabit's employment agreement also entitled him
to receive bonuses, stock options and other incentives at the discretion of our
Board of Directors. In the event of a change in control, Mr. Zabit was entitled
to receive a one-time payment equal to three times his then-current annual
compensation (including bonuses). Upon termination without cause, all debts owed
to us by Mr. Zabit were to be cancelled in full. As of the effective date of his
termination, Mr. Zabit was not indebted to us. Pursuant to certain promissory
notes executed in connection with our acquisition of Zabit & Associates, we were
indebted to Mr. Zabit and another former shareholder of Zabit & Associates;
however, as of August 9, 2000, we had paid off the promissory notes in full and
were not indebted to those individuals. See "Certain Transactions."

Nurit Kahane Haase. In July 1996, we entered into a five year employment
agreement with Nurit Kahane Haase, our former Senior Vice President and
Secretary. On July 31, 2000, Mrs. Haase resigned her positions with us,
releasing us from any further obligations under her employment agreement. While
employed with us, Mrs. Haase received an annual base salary of $250,000. Mrs.
Haase was entitled to receive a one-time payment equal to three times her
then-current annual compensation (including bonuses) in the event of a change in
control. Mrs. Haase's employment agreement contained a non-compete covenant that
was in effect during the term of her employment and for 12 months following her
termination.

Douglas C. Laux. In October 2000, we entered into a three year employment
agreement with Douglas C. Laux, our Chief Financial Officer. Pursuant to his
employment agreement, Mr. Laux receives an annual base salary of $250,000. He
also has been granted options to purchase 150,000 shares of common stock. If Mr.
Laux is continuously employed through June 30, 2001, then he is entitled to a
bonus of $25,000. Mr. Laux is eligible to additional performance-based bonus
payments of up to one-half of his base salary annually. If Mr. Laux is
terminated by us without cause or if we breach any material provision of his
employment agreement, he is entitled to receive three months of his base annual
salary as severance and, if such termination or breach is during the first year
of employment, options to purchase 50,000 shares of common stock will vest
immediately. If there is a change in control of Xceed during the initial
year of Mr. Laux's employment agreement and the controlling entity
does not assume the employment


                                       38
<PAGE>

agreement or breaches its provisions, Mr. Laux is entitled to a payment equal
to six months' base salary and immediate vesting of options to purchase
75,000 shares of Common Stock. If the change of control and failure to assume
the employment agreement occurs after the first year of employment but during
the first three years of employment, Mr. Laux is entitled to a payment equal
to six months' base salary and immediate vesting of options to purchase
150,000 shares of Common Stock.

Richard R. Dennerline. In September 2000, we entered into a three year
employment agreement with Richard R. Dennerline, our Chief Legal Officer.
Pursuant to his employment agreement, Mr. Dennerline receives an annual base
salary of $250,000. He also has been granted options to purchase 175,000
shares of common stock. Mr. Dennerline is eligible to additional
performance-based bonus payments annually. If Mr. Dennerline is terminated by
us without cause or if we breach any material provision of his employment
agreement during the first year of his employment, he is entitled to receive
the unpaid balance of his annual base salary through the first anniversary of
his employment agreement and immediate vesting of options to purchase 58,000
shares of common stock. If he is terminated by us without cause or if we
breach any material provision of his employment agreement during the second
or third year of his employment, Mr. Dennerline is entitled to receive
payment of twelve months base salary. If there is a change in control of
Xceed during the initial three-year term of Mr. Dennerline's employment
agreement and the controlling entity does not assume the employment agreement
or breaches its provisions, Mr. Dennerline is entitled to payment of the
unpaid balance of his annual base salary through the first anniversary of his
employment agreement and immediate vesting of options to purchase 87,500
shares of Common Stock. If it occurs after the first twelve months of the
employment term but during the first three years of employment, Mr.
Dennerline is entitled to a payment equal to twelve months base salary and
immediate vesting of options to purchase 175,000 shares of Common Stock.

Stock Option Plans

We have adopted six stock option plans, which provide for the granting of
options to employees, officers, directors, and others who render services to us.

The Non-Qualified Stock Option Plan (the "NQSO Plan") which expired on April 6,
1994 covered 187,500 shares of our Common Stock, pursuant to which our officers
and employees were eligible to receive non-qualified stock options. All options
granted under the NQSO Plan have been at exercise prices at least equal to the
fair market value of our Common Stock on the date of grant. Options to acquire a
total of 28,125 shares at an exercise price of $1.52 remain outstanding as of
August 31, 2000.

Under the 1990 Stock Option Plan (the "1990 Plan") we may grant to our officers,
key employees and others who render services to us, options to purchase up to
187,500 shares of our Common Stock at a price which may not be less than the
fair market value per share in the case of incentive stock options or 85% of
fair market value in the case of non-qualified options for such stock. The 1990
Stock Option Plan expired on January 31, 2000. Options to acquire a total of
25,000 shares at an exercise price of $1.52 remain outstanding as of August 31,
2000.

The 1995 Stock Option Plan (the "1995 Plan") operates on substantially the same
terms as the 1990 Plan except that it includes options to purchase up to 500,000
shares of our Common Stock. Any options granted under the plan expire ten years
from the date of grant. The plan expires March 3, 2005. As of


                                       39
<PAGE>

August 31, 2000, all available options had been granted under the 1995 Plan and
options to acquire a total of 334,000 shares remain outstanding at an exercise
price of $2.19 per share.

The 1998 Stock Option Plan (the "1998 Plan") provides for the issuance of
options to purchase up to 2,000,000 shares of our Common Stock. The 1998 Plan
authorizes the issuance of incentive stock options which qualify under Section
422A of the Internal Revenue Code as well as the issuance of non-statutory
options. The 1998 Plan authorizes the issuance of options to employees, officers
and employee-directors. Non-statutory options may also be issued to others who
render services to us. Any options granted under the 1998 Plan, unless
specifically designated otherwise, expire on March 1, 2008. As of August 31,
2000, all available options had been granted under the 1998 Plan and 1,169,371
options at exercise prices ranging from $3.44 to $37.50 remained outstanding.

The 1999 Stock Option Plan (the "1999 Plan") provides for the issuance of
options to purchase up to 3,000,000 shares of our Common Stock. The 1999 Plan
authorizes the issuance of incentive stock options which qualify under Section
422A of the Internal Revenue Code as well as the issuance of non-statutory
options. The 1999 Plan permits the grant of incentive stock options,
nonqualified stock options, stock appreciation rights, restricted stock,
restricted stock units and performance shares. Any options granted under the
1999 Plan, unless specifically designated otherwise, expire on March 1, 2009. As
of August 31, 2000, 2,542,156 options had been issued under the Plan and
2,831,046 options were outstanding.

The Amended and Restated Millennium Stock Option Plan (the "Plan") provides for
the issuance of up to 9,000,000 shares of our Common Stock. The Plan authorizes
the issuance of incentive stock options, nonqualified stock options, stock
appreciation rights, restricted stock, restricted stock units and performance
shares. As of August 31, 2000, 5,615,210 options had been issued under the
Plan and 5,381,810 options were outstanding.

All of the Plans are administered by Norman Docteroff and John Bermingham, who
are the members of the Option Committee and the Compensation Committee.


                                       40
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of our Common Stock as of November 13, 2000 by: (i) each person who is
known by us to own beneficially more than 5% of our outstanding Common Stock;
(ii) each of our named executive officers and directors; and (iii) all executive
officers and directors as a group:

Name and Address                  Amount and Nature of          Percentage
of Beneficial Owner               Beneficial Ownership          of Class (1)
-------------------               --------------------          --------
Werner G. Haase (2)(3)              589,450                        2.2%

Nurit Kahane Haase (3)              876,950                        3.3%

Scott Mednick (4)                 1,550,000                        5.8%

Howard A. Tullman                     2,200                          *

William Zabit                     1,179,828                        4.4%

Douglas C. Laux                          --                          *

Richard R. Dennerline                    --                          *

Terry A. Anderson (5)                 5,000                          *
19197 River Road
Athens, OH  45701

Edward A. Bennett                   262,411                          *
725 Washington Street
New York, NY 10014

John Bermingham (6)                 100,000                          *
9 Rain Tree Court
Kinnelon, NJ  07405

Theodore Deikel (7)               1,318,359                        4.9%
2424 West Lake of the Isles
Minneapolis, MN 55405

Norman Docteroff (8)                 50,000                          *
Edward A. Bennett
725 Washington Street
New York, NY 10014

Stuart Emanuel                           --                          *
832 Commerce Drive
Oak Brook, IL 60523


                                       41
<PAGE>

Raymond Marcy                            --                          *
2050 Spectrum Boulevard
Ft. Lauderdale, FL 33309

Spherion  Corporation             2,000,000                        8.3%
(formerly known as Interim
Services, Inc.)
2050 Specturm Boulevard
Ft. Lauderdale, FL 33309

All officers and directors
as a group (10 persons)           2,509,061                        9.4%

(1)   Percentage of class as set forth below is calculated based on the
      number of shares outstanding on November 13, 2000.
(2)   Includes 43,750 currently exercisable options to acquire Common Stock.
(3)   Werner Haase disclaims any beneficial interest in the shares held by his
      wife Nurit Kahane Haase. Mrs. Haase disclaims any beneficial interest in
      the shares held by her husband, Werner Haase.
(4)   Represents 1,550,000 currently exercisable options to acquire Common
      Stock.
(5)   Represents 5,000 currently exercisable options to acquire Common Stock.
(6)   Includes 100,000 currently exercisable options to acquire Common Stock.
(7)   Includes warrants to purchase 878,906 shares of Common Stock.
(8)   Includes 50,000 currently exercisable options to acquire Common Stock.

* Represents less than one percent (1%) ownership.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Prior to July 1996, Werner Haase had borrowed funds from Journeycraft which at
the time of the acquisition of Journeycraft by us amounted to $1,000,000. As a
result of the acquisition, the loan was transferred to us. The loan bears
interest at 7% and is payable in annual installments of $100,000 which amount is
first applied to interest and the balance to reduce principal. The remaining
balance and any accrued interest is due in full in December, 2016. As of August
31, 2000, $1,222,000 was due from Mr. Haase. In connection with the sale of the
Performance Enhancement Business to Mr. Haase in November 2000, this loan was
sold in exchange for $100,000. See "Sales of Non-Strategic Assets."

In connection with our acquisition of Zabit & Associates, we agreed to pay
off certain promissory notes which were due to two former shareholders of
Zabit & Associates in March 1999. We paid William Zabit, the former President
of the Company, $3,974,000, consisting of $3,840,000 of principal and
$134,000 of interest and paid the other shareholder, who is now our employee,
$993,600, consisting of $960,000 of principal and $33,600 of interest. In
addition, in connection with this acquisition, in May 2000 we paid off
promissory notes to Mr. Zabit and to another former stockholder of Zabit &
Associates in the aggregate amount of $2,161,000.

On July 31, 2000, we sold all the assets and liabilities associated
with the JourneyCorp travel division to Journey Corp. .Com, a company formed and
privately-owned by Mrs. Haase. In connection with the transaction, we
received a promissory note in the amount of $704,000, which bears interest at a
rate of 6% per annum and is payable to Xceed in equal quarterly
installments of $58,667 over three years. In addition, we entered into an
exclusivity agreement whereby our U.S. offices will use their best
efforts to make their corporate travel arrangements through Journey Corp. .Com
until July 31, 2003. Upon consummation of the sale of JourneyCorp, Mrs. Haase
resigned from her positions as our Senior Vice President and Secretary.


                                       42
<PAGE>

In April 2000, we entered into a two-year Joint Marketing Agreement with
Spherion Corporation, a 5% stockholder, which renews automatically for
one-year periods unless terminated by either party 60 days prior to the end
of the relevant term. In addition, the agreement may be terminated by either
party upon 120 days written notice. Under the agreement, Xceed and Spherion
agreed to cross-sell one another's products and offerings, using their
respective promotional materials and customer service representatives, with a
finder's fee being paid to the generating party based on the first twelve
months' revenue generated. Each also agreed to assign a senior executive to
monitor and grow the relationship.

In October 2000, we sold the operations previously acquired by the
acquisition of Enterprise Solutions Group, Inc., Catalyst Consulting Services,
Inc. and a portion of the operations of Sterling Carteret, Inc. to Xceed
Retail Solutions Group, Inc. a company formed and privately-owned by Gary S.
Kahl, our former Executive Vice President of National Practices, and other
former employees of Xceed in a negotiated transaction in exchange for the
assumption by Xceed Retail Solutions Group of the liabilities related to
these operations. In connection with that sale, we granted a temporary
nonexclusive license to Xceed Retail Solutions Group to use the XCEED service
mark. The license expires in January 2001. Upon consummation of the sale of
these operations to Xceed Retail Solutions Group, Mr. Kahl resigned his
positions with Xceed and Mr. Kahl and the other former employees joining
Xceed Retail Solutions Group agreed to relinquish their Xceed stock options
and all claims for severance compensation.

In November 2000, we sold the Performance Enhancement Group to 488 Performance
Group, Inc., a company formed and privately-owned by Werner G. Haase, our
President and our former Chief Executive Officer, Co-chairman and director.
See "Sales of Non-Strategic Assets."

                                       43
<PAGE>

                                     PART IV

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

         (a)      1.       Financial Statements and Schedules

                           The financial statements and schedules appearing
                           after the Index to Exhibits are filed as part of this
                           Annual Report on Form 10-K.

                  2.       Exhibits

                           The exhibits listed on the Index to Exhibits
                           following the Signature Page herein are filed as part
                           of this annual report.

         (b)      1.       Reports on Form 8-K

                           Form 8-K filed with the Securities and Exchange
                           Commission on August 10, 2000 relating to the sale of
                           JourneyCorp.

                                      44

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                    WORLDWIDE XCEED GROUP, INC.


                                    By: /s/ Werner G. Haase
                                        ----------------------------------------
                                        Werner G. Haase
                                        President

Dated: November 15, 2000

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on November 15, 2000 by the following persons on
behalf of the Registrant and in the capacities indicated.

                                    /s/ Scott A. Mednick
                                    --------------------------------------------
                                    Scott A. Mednick, Chairman


                                    /s/ Howard A. Tullman
                                    --------------------------------------------
                                    Howard A. Tullman, Chief Executive Officer
                                    (principal executive officer)


                                    /s/ Douglas C. Laux
                                    --------------------------------------------
                                    Douglas C. Laux, Chief Financial Officer
                                    (principal financial and accounting officer)


                                    /s/ Norman Docteroff
                                    --------------------------------------------
                                    Norman Docteroff, Director



                                    --------------------------------------------
                                    John A. Bermingham, Director


                                    /s/ Terry A. Anderson
                                    --------------------------------------------
                                    Terry A. Anderson, Director


                                    /s/ Edward Bennett
                                    --------------------------------------------
                                    Edward Bennett, Director


                                    /s/ Stuart Emanuel
                                    --------------------------------------------
                                    Stuart Emanuel, Director


                                       45
<PAGE>

                         EXHIBIT INDEX

Exhibits
--------
  2.1           Agreement and Plan of Merger and Reorganization between
                Xceed, Inc. and Reset, Inc., incorporated by reference from
                Exhibit 1 to our Report on Form 8-K dated August 13, 1998
                and filed with the Securities and Exchange Commission (the
                "Commission") on August 14, 1998.

  2.2           Agreement and Plan of Merger by and among Xceed Inc., Xceed
                Merger, Inc., Mercury Seven, Inc. and the Shareholders of
                Mercury Seven, Inc., incorporated by reference from
                Exhibit 2(e) to our Report on Form 8-K dated September 17, 1998
                and filed with the Commission on September 17, 1998 (the
                "September 1998 8-K").

  2.3           Certificate of Merger of Mercury Seven, Inc. into Xceed
                Merger, Inc., incorporated by reference from Exhibit 2(f) to
                our September 1998 8-K.

  2.4           Agreement and Plan of Merger among Xceed Inc., Zabit &
                Associates, Inc. and the Shareholders Named Therein,
                incorporated by reference from Exhibit 2(g) to our September
                1998 8-K.

  2.5           Certificate of Merger of Zabit & Associates, Inc. into Xceed
                Inc., incorporated by reference from Exhibit 2(h) to our
                September 1998 8-K.

  2.6           Agreement and Plan of Merger dated February 8, 2000, by and
                among Xceed Inc., methodfive, inc. and the stockholders of
                methodfive, inc., incorporated by reference from Exhibit 2.1
                to our Report on Form 8-K dated February 9, 2000 and filed with
                the Commission on February 16, 2000.

  2.7           Asset Purchase Agreement dated July 31, 2000, by and among
                Journey Corp..Com, Nurit Kahane Haase, Journeycraft, Inc., and
                Xceed Inc., incorporated by reference from Exhibit 2 to our
                Report on Form 8-K dated July 31, 2000 and filed with the
                Commission on August 10, 2000.

  2.8           Agreement and Plan of Merger dated as of May 17, 1996, by and
                among the Company, JCI, THI, JCI Acquisition Corp., THI
                Acquisition Corp. and Werner Haase, incorporated by reference
                from Exhibit 1 to our Report on Form 8-K dated July 2, 1996
                and filed with the Commission on July 12, 1996.

  2.9           Stock Purchase Agreement among Xceed Inc., William N. Zabit and
                Joyce M. Weslowski, incorporated by reference from Exhibit
                10(j) to our September 1998 8-K.

  2.10          Purchase Agreement by and among Xceed Inc., William N. Zabit and
                Joyce M. Weslowski, incorporated by reference from Exhibit
                10(k) to our September 1998 8-K.

  2.11          Stock Purchase Agreement dated as of November 3, 2000 by and
                among Journeycraft, Inc., Xceed Inc., Performance Group,
                Inc., and Werner G. Haase, as amended by the First Amendment
                to Stock Purchase Agreement dated as of November 6, 2000. (1)

  3.1           Certificate of Incorporation of Xceed Inc. incorporated by
                reference from Exhibit 3(c) to our Report on Form 8-K, dated
                February 20, 1998 and filed with the Commission on February
                27, 1998.

  3.2           Certificate of Amendment to Certificate of Incorporation. (1)

  3.3           By-laws of the Registrant, as amended, through November 6,
                2000. (1)

  4.1           Securities Purchase Agreement dated April 30, 1999, by and
                among Xceed Inc., Theodore Deikel and certain other strategic
                investors, incorporated by reference from Exhibit 4 to our
                Report on Form 8-K dated May 11, 1999 and filed with the
                Commission on June 24, 1999.

  4.2           Certificate of Designation, Preferences and Rights of Series A


                                      46

<PAGE>


Exhibits
--------
                Cumulative Convertible Preferred Stock, as filed with the
                Secretary of State of Delaware on January 13, 2000;
                incorporated by reference from Exhibit 3(i) to our Report
                on Form 8-K dated January 13, 2000 and filed with
                the Commission on January 20, 2000 (the "January 2000 8-K").

  4.3           Subscription Agreement, dated January 13, 2000, by and among
                Xceed Inc., Peconic Fund, Inc., Leonardo, L.P. and HTFP
                Investment, L.L.C., incorporated by reference from Exhibit
                4.1(a) to our January 2000 8-K.

  4.4           Registration Rights Agreement, dated January 13, 2000, by and
                among Xceed Inc., Peconic Fund, Inc., Leonardo, L.P. and HTFP
                Investment, L.L.C.; incorporated by reference from Exhibit
                4.1(b) to our January 2000 8-K.

  4.5           Form of Common Stock Purchase Warrant issued by Xceed Inc. to
                each of Peconic Fund, Inc., Leonardo, L.P. and HTFP Investment,
                L.L.C. on January 13, 2000, incorporated by reference from
                Exhibit 4.1(c) to our January 2000 8-K.

  4.6           Form of Common Stock Purchase Warrant issued by Xceed Inc. to
                each of Peconic Fund, Inc., Leonardo, L.P. and HTFP Investment,
                L.L.C. on April 4, 2000; incorporated by reference from
                Exhibit 4.1(b) to our Report on Form 8-K dated April 4, 2000
                and filed with the Commission on April 5, 2000.

 10.1           1995 Stock Option Plan, incorporated by reference from
                Exhibit (4) to our Registration Statement on Form S-8, File
                No. 333-01685, initially filed with the Commission on March
                13, 1996. (2)

 10.5           Form of Employment Agreement (1)(2)

 10.6           Water-Jel Technologies, Inc. 1998 Stock Option Plan,
                incorporated by reference from Exhibit A to our Definitive
                Proxy Statement filed with the Commission on January 8, 1998.
                (2)

 10.7           1999 Long Term Incentive Plan, incorporated by reference from
                Exhibit (10)(o) to our Annual Report on Form 10-K for the fiscal
                year ended August 31, 1999. (2)

 10.8           Xceed Inc. Amended and Restated Millenium Stock Option Plan
                incorporated by reference from Exhibit A to our Definitive
                Proxy Statement filed with the Commission on September 8,
                2000. (2)

 10.9           Revolving Credit Agreement by and between Worldwide Xceed
                Group, Inc. and Spherion Corporation dated as of November 15,
                2000. (1)

 10.10          Warrant Agreement by and between Worldwide Xceed Group, Inc.,
                and Spherion Corporation dated as of November 15, 2000. (1)

 23.1           Consent of Holtz Rubenstein & Co., LLP dated November 15,
                2000 (1)

 23.2           Consent of Deloitte & Touche LLP dated November 15, 2000 (1)

 27             Financial Data Schedule (1)

--------------------------
(1)  Filed herewith

(2)  Management contract or compensatory plan or arrangement


                                       47

<PAGE>

Worldwide Xceed Group, Inc.
(formerly Xceed Inc. and Subsidiaries)

Independent Auditors' Report

Consolidated Financial Statements
Years Ended August 31, 2000, 1999 and 1998


<PAGE>

WORLDWIDE XCEED GROUP, INC.
(Formerly Xceed Inc. and Subsidiaries)

TABLE OF CONTENTS
--------------------------------------------------------------------------------

                                                                            Page

CONSOLIDATED FINANCIAL STATEMENTS:

Report of Deloitte & Touche LLP, Independent Auditors                       F-2

Report of Holtz Rubenstein & Co., LLP, Independent Auditors                 F-3

  Balance Sheets as of August 31, 2000 and 1999                             F-4

  Statements of Operations for the Years Ended
   August 31, 2000, 1999 and 1998                                           F-5

  Statements of Stockholders' Equity for the Years Ended
   August 31, 2000, 1999 and 1998                                           F-6

  Statements of Cash Flows for the Years Ended
   August 31, 2000, 1999 and 1998                                           F-7

  Notes to Consolidated Financial Statements                                F-8

                                     F-1

<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
Worldwide Xceed Group Inc.

We have audited the accompanying consolidated balance sheets of Worldwide Xceed
Group, Inc. (formerly Xceed Inc. and Subsidiaries) (the "Company") as of August
31, 2000 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for the two years in the period ended August
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of August 31, 2000 and 1999, and the results of their operations and
their cash flows for the two years ended August 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.




/s/ Deloitte & Touche LLP





November 15, 2000
New York, New York

                                     F-2



<PAGE>

                               INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Worldwide Xceed Group, Inc.
New York, New York

We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Worldwide Xceed Group, Inc. (formerly
Xceed, Inc. and Subsidiaries) (the "Company") for the year ended August 31,
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 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 results of operations and cash
flows of the Company for the year ended August 31, 1998, in conformity with
generally accepted accounting principles.






                                        /s/ Holtz Rubenstein & Co., LLP
                                        HOLTZ RUBENSTEIN & CO., LLP


Melville, New York
November 19, 1999 (except for Note 5
 which the date is January 13, 2000)


                                     F-3


<PAGE>

WORLDWIDE XCEED GROUP, INC. (formerly Xceed Inc. and Subsidiaries)

CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2000 AND 1999
(In Thousands, Except Share and Per Share Data)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                         2000        1999
<S>                                                                   <C>          <C>
ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                           $   9,888    $  19,754
  Restricted cash                                                         1,930           --
  Investment in marketable securities, at fair market value                 382          367
  Accounts receivable - net of allowance for uncollectible
    accounts of $9,359 and $1,190, respectively                          11,607        9,868
  Program costs and earnings in excess of customer billings                  --        3,735
  Income tax refund receivable                                              270        2,437
  Prepaid expenses and other current assets                                 799          470
  Deferred income taxes                                                     358          358
  Net assets held for sale                                                2,936           --
  Net assets related to discontinued operations                              --        2,999
                                                                      ---------    ---------

           Total current assets                                          28,170       39,988

  Property and equipment - net                                           14,285        3,268
  Due from former officer                                                   615        1,223
  Goodwill and intangible assets - net of accumulated amortization
    of $20,908 and $4,308, respectively                                  75,473       42,999
  Deferred income taxes                                                   1,046        1,046
  Other assets                                                              401        3,411
                                                                      ---------    ---------

           Total assets                                               $ 119,900    $  91,935
                                                                      =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable and accrued expenses                               $  13,003    $   9,131
  Accrued compensation                                                      278        2,588
  Notes payable, banks                                                       60          862
  Current portion of long-term debt                                         955          389
  Customer billings in excess of program costs and earnings                  --        3,538
                                                                      ---------    ---------

           Total current liabilities                                     14,296       16,508

  Long-term debt                                                            527        2,625
  Accrued lease obligations                                                 789          875
  Deferred revenue                                                           --          296
                                                                      ---------    ---------

           Total liabilities                                             15,612       20,304
                                                                      ---------    ---------

CUMULATIVE REDEEMABALE CONVERTIBLE PREFERRED STOCK
   Series A 4%, $.05 par value; authorized 30,000 shares;
   30,000 issued and outstanding                                         30,450           --
                                                                      ---------    ---------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
  Common stock, $.01 par value; authorized, 30,000,000 shares;
    24,127,241 and 17,747, 554 issued and 24,112,241 and 17,732,554
    outstanding, respectively                                               241          177
  Preferred stock, $.05 par value; authorized, 1,000,000 shares;
    none issued or outstanding                                               --           --
  Common stock warrants                                                  12,087           --
  Accumulated other comprehensive gain (loss)                                67          (20)
  Additional paid-in capital                                            240,258       75,738
  Deferred stock compensation                                              (932)        (225)
  Treasury stock, at cost; 15,000 shares                                    (71)         (71)
  Accumulated deficit                                                  (177,722)      (3,968)
                                                                      ---------    ---------

           Total stockholders' equity                                    73,298       71,631
                                                                      ---------    ---------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                            $ 119,990    $  91,935
                                                                      =========    =========
</TABLE>

See notes to consolidated financial statements.


                                     F-4
<PAGE>

WORLDWIDE XCEED GROUP, INC. (formerly Xceed Inc. and Subsidiaries)

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
(In Thousands, Except Share and Per Share Data)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                      2000            1999            1998
<S>                                                               <C>             <C>             <C>
REVENUES                                                          $    108,441    $     63,450    $     42,266
                                                                  ------------    ------------    ------------

OPERATING EXPENSES:
  Cost of revenues (excluding stock-based compensation
    of $565 in fiscal 2000)                                             97,072          52,516          36,413
  Selling, general and administrative expenses (excluding
    stock-based compensation of $501, $420, and $120,
    respectively)                                                       44,129          18,132           6,561
  Provision for doubtful accounts                                        9,267           1,000               4
  Write-off of offering related costs                                    2,894              --              --
  Impairment of goodwill and other intangibles                          87,055              --              --
  Gain on sale of business                                              (2,000)             --              --
  Stock-based compensation                                               1,066             420             170
  Depreciation and amortization                                         24,577           5,219              20
  Research and development                                                  34             579             866
                                                                  ------------    ------------    ------------

                                                                       264,094          77,866          44,034
                                                                  ------------    ------------    ------------

OPERATING LOSS                                                        (155,653)        (14,416)         (1,768)
                                                                  ------------    ------------    ------------

OTHER (EXPENSE) INCOME:
  Interest income                                                          682             735             691
  Interest expense                                                        (262)           (485)             (4)
  Impairment of investment                                              (1,000)             --              --
  (Loss) gain on sale of investments                                      (409)             24             522
  Other - net                                                              (80)            122              39
                                                                  ------------    ------------    ------------

                                                                        (1,069)            396           1,248
                                                                  ------------    ------------    ------------

  Loss from continuing operations before
    provision (benefit) for income taxes                              (156,722)        (14,020)           (520)
  Income tax provision (benefit)                                           210          (4,329)           (257)
                                                                  ------------    ------------    ------------

  Loss from continuing operations                                     (156,932)         (9,691)           (263)

  Discontinued operations:
    Gain on sale of discontinued operations, net of
      taxes of $0 in 2000                                                1,220              --              --
    Income from operations, net of taxes of $0, $1,579,
      and $1,545, respectively                                           1,262           2,081           1,813
                                                                  ------------    ------------    ------------
   Income from discontinued operations                                   2,482           2,081           1,813
                                                                  ------------    ------------    ------------

  Net (loss) income                                                   (154,450)         (7,610)          1,550

  Preferred stock dividends                                             19,304              --              --
                                                                  ------------    ------------    ------------

  Net loss applicable to common shareholders                      $   (173,754)   $     (7,610)   $      1,550
                                                                  ============    ============    ============


  Net (loss) income per share applicable to common shareholders:

      Loss from continuing operations                             $      (8.42)   $       (.64)   $       (.03)
      Gain on sale of discontinued operations                             0.06              --              --
      Income from discontinued operations                                 0.06            0.14            0.23
                                                                  ------------    ------------    ------------

  Net (loss) income per share                                     $      (8.30)   $       (.50)   $        .20
                                                                  ============    ============    ============

  Weighted average number of shares outstanding                     20,946,729      15,219,140       7,755,795
                                                                  ============    ============    ============
</TABLE>

See notes to consolidated financial statements.


                                     F-5
<PAGE>

WORLDWIDE XCEED GROUP, INC. (formerly Xceed Inc. and Subsidiaries)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
(In Thousands, Except Share and Per Share Data)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                           Common Stock            Preferred Stock         Common     Additional
                                                         30,000,000 Shares,       1,000,000 Shares,        Stock       Paid-in
                                                           $.01 Par Value          $.05 Par Value         Warrants     Capital

                                                                      Par                      Par
                                                        Shares       Value       Shares       Value
<S>                                                    <C>         <C>                      <C>          <C>          <C>
BALANCE, SEPTEMBER 1, 1997                             7,043,180   $       70          --   $       --   $       --   $   10,211

Comprehensive income:
    Net income                                                --           --          --           --           --           --
    Net change in the valuation adjustment on
      marketable equity securities                            --           --          --           --           --           --
    Other comprehensive income                                --           --          --           --           --           --

Exercise of stock options and warrants                 1,983,873           20          --           --           --        5,927

Purchase of treasury shares                                   --           --          --           --           --           --

Issuance of stock options for services                        --           --          --           --           --          282

Amortization of deferred stock compensation                   --           --          --           --           --           --

Common stock issued for acquired businesses            1,250,000           13          --           --           --        6,237
                                                      ----------   ----------   ---------   ----------   ----------   ----------
BALANCE, AUGUST 31, 1998                              10,277,053          103          --           --           --       22,657

Comprehensive loss:
    Net loss                                                  --           --          --           --           --           --
    Net change in the valuation adjustment on
      marketable equity securities                            --           --          --           --           --           --
    Other comprehensive loss                                  --           --          --           --           --           --

Exercise of stock options and warrants                 2,809,910           28          --           --           --       14,011

Common stock issued for acquired businesses            3,174,143           31          --           --           --       27,996

Securities issued in private placement                   976,562           10          --           --           --        9,990

Issuance of securities for services                      509,886            5          --           --           --          528

Amortization of deferred stock compensation                   --           --          --           --           --           --

Tax benefit from exercise of stock options                    --           --          --           --           --          556
                                                      ----------   ----------   ---------   ----------   ----------   ----------
BALANCE, AUGUST 31, 1999                              17,747,554          177          --           --           --       75,738

Comprehensive loss:
  Net loss                                                    --           --          --           --           --           --
  Net change in the valuation adjustment on
    marketable equity securities                              --           --          --           --           --           --
   Translation adjustment                                     --           --          --           --           --           --
  Other comprehensive income                                  --           --          --           --           --           --

Exercise of stock options and warrants                   952,568            9          --           --           --        7,117

Common stock issued for acquired businesses            3,417,620           34          --           --           --      114,873

Stock options issued for acquired businesses                  --           --          --           --           --       11,883

Securities issued in private placement                 2,000,000           20          --           --           --       24,730

Issuance of securities for services                        9,499            1          --           --           --          450

Amortization of deferred stock compensation                   --           --          --           --           --           --

Preferred stock dividends, net of offering expenses           --           --          --           --           --        5,467

Issuance of common stock warrants                             --           --          --           --       12,087           --
                                                      ----------   ----------   ---------   ----------   ----------   ----------
BALANCE, AUGUST 31, 2000                              24,127,241   $      241          --   $       --   $   12,087   $  240,258
                                                      ==========   ==========   =========   ==========   ==========   ==========

<CAPTION>
                                                       Accumulated
                                                         Other                      Retained
                                                      Comprehensive   Deferred      Earning
                                                         Income        Stock      (Accumulated    Treasury
                                                         (Loss)     Compensation     Deficit)       Stock         Total



<S>                                                    <C>           <C>           <C>           <C>           <C>
BALANCE, SEPTEMBER 1, 1997                             $      216    $       --    $    2,092    $      (56)   $   12,533

Comprehensive income:
    Net income                                                 --            --         1,550            --            --
    Net change in the valuation adjustment on
      marketable equity securities                           (243)           --            --            --            --
    Other comprehensive income                                 --            --            --            --         1,307

Exercise of stock options and warrants                         --            --            --            --         5,947

Purchase of treasury shares                                    --            --            --           (15)          (15)

Issuance of stock options for services                         --          (262)           --            --            20

Amortization of deferred stock compensation                    --           150            --            --           150

Common stock issued for acquired businesses                    --            --            --            --         6,250
                                                       ----------    ----------    ----------    ----------    ----------
BALANCE, AUGUST 31, 1998                                      (27)         (112)        3,642           (71)       26,192

Comprehensive loss:
    Net loss                                                   --            --        (7,610)           --        (7,610)
    Net change in the valuation adjustment on
      marketable equity securities                              7            --            --            --            --
    Other comprehensive loss                                   --            --            --            --        (7,603)

Exercise of stock options and warrants                         --            --            --            --        14,039

Common stock issued for acquired businesses                    --            --            --            --        28,027

Securities issued in private placement                         --            --            --            --        10,000

Issuance of securities for services                            --          (533)           --            --            --

Amortization of deferred stock compensation                    --           420            --            --           420

Tax benefit from exercise of stock options                     --            --            --            --           556
                                                       ----------    ----------    ----------    ----------    ----------
BALANCE, AUGUST 31, 1999                                      (20)         (225)       (3,968)          (71)       71,631

Comprehensive loss:
  Net loss                                                     --            --      (173,754)           --            --
  Net change in the valuation adjustment on
    marketable equity securities                               20            --            --            --            --
   Translation adjustment                                      67            --            --            --            --
  Other comprehensive income                                   --            --            --            --      (173,667)

Exercise of stock options and warrants                         --            --            --            --         7,126

Common stock issued for acquired businesses                    --            --            --            --       114,907

Stock options issued for acquired businesses                   --        (1,773)           --            --        10,110

Securities issued in private placement                         --            --            --            --        24,750

Issuance of securities for services                            --            --            --            --           451

Amortization of deferred stock compensation                    --         1,066            --            --         1,066

Preferred stock dividends, net of offering expenses                          --            --            --         5,467

Issuance of common stock warrants                              --            --            --            --        12,087
                                                       ----------    ----------    ----------    ----------    ----------
BALANCE, AUGUST 31, 2000                               $       67    $     (932)   $ (177,722)   $      (71)   $   73,298
                                                       ==========    ==========    ==========    ==========    ==========
</TABLE>

See notes to consolidated financial statements.

                                     F-6

<PAGE>

WORLDWIDE XCEED GROUP  INC. (formerly Xceed Inc. and Subsidiaries)

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
(In Thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                    2000         1999         1998
<S>                                                              <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net (loss) income                                              $(154,450)   $  (7,610)   $   1,550
  Adjustments to reconcile net (loss) income to net cash
    provided by (used in) operating activities:
    Gain (loss) on sale of marketable securities                       409          (24)        (522)
    Gain (loss) on sale of equipment                                    --            6           (9)
    Gain on sale of businesses                                      (3,220)          --           --
    Impairment of leasehold improvements                             5,758           --           --
    Impairment of goodwill                                          87,055           --           --
    Impairment of investment                                         1,000           --           --
    Write-off of deferred offering related costs                     2,894           --           --
    Provision for losses on accounts receivable                      9,267        1,000            4
    Stock-based compensation                                         1,276          420          170
    Depreciation and amortization                                   18,819        5,514          351
    Deferred income taxes                                               --       (1,676)        (135)
  Changes in operating assets and liabilities:
  Decrease (increase) in assets:
    Accounts receivable                                            (15,908)      (4,819)      (2,220)
    Program costs and earnings in excess of billings                 2,180         (448)        (184)
    Prepaid expenses and other current assets                        2,049          321         (185)
    Other assets                                                       747          476         (105)
  Increase (decrease) in liabilities:
    Accounts payable and accrued expenses                            6,845        1,441        1,425
    Income taxes payable                                                --       (2,086)        (358)
    Customer billings in excess of program costs                     2,553        2,205           95
    Accrued lease liability                                            (86)          --           11
    Deferred revenues                                                 (209)        (170)         587
    Other current liabilities                                           --           --           --
                                                                 ---------    ---------    ---------

          Cash (used in) provided by operating activities          (33,021)      (5,450)         475
                                                                 ---------    ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Investment in business                                            (1,000)          --           --
  Investments in marketable securities                              (1,967)        (822)        (741)
  Proceeds from sale of marketable securities                        1,563          588        1,527
  Proceeds from sale of property and equipment                          --           --           10
  Proceeds from sale of business                                     5,461           --           --
  Acquisition of businesses, net of cash acquired                  (16,257)      (5,592)          44
  Acquisition of property and equipment                            (18,286)      (2,335)        (207)
                                                                 ---------    ---------    ---------

           Net cash (used in) provided by investing activities     (30,486)      (8,161)         633
                                                                 ---------    ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayments on long-term debt, net                                 (1,563)      (4,538)         (49)
  Payment of notes payable                                            (848)        (787)          --
  Proceeds from notes payable                                           --          862           --
  Proceeds from preferred stock offering                            29,000
  Deferred offering related costs                                   (2,894)
  Restricted cash from leases                                       (1,930)          --           --
  Advances to affiliate                                                 --           --         (432)
  Purchase of treasury stock                                            --           --          (15)
  Proceeds from the exercise of warrants and options                 7,126       14,039        5,947
  Proceeds from private placement offering                          24,750       10,000           --
                                                                 ---------    ---------    ---------

           Net cash provided by financing activities                53,641      19,576        5,451
                                                                 ---------    ---------    ---------

NET (DECREASE) INCREASE IN CASH AND
   CASH EQUIVALENTS                                                 (9,866)       5,965        6,559

CASH AND CASH EQUIVALENTS,
  BEGINNING OF YEAR                                                 19,754       13,789        7,230
                                                                 ---------    ---------    ---------

CASH AND CASH EQUIVALENTS,
  END OF YEAR                                                    $   9,888    $  19,754    $  13,789
                                                                 =========    =========    =========
</TABLE>

See notes to consolidated financial statements.


                                     F-7
<PAGE>

WORLDWIDE XCEED GROUP, INC.
(Formerly Xceed Inc. and Subsidiaries)

NOTES TO FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 2000, 1999 and 1998
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------

1.    ORGANIZATION, BUSINESS PLAN AND NATURE OF OPERATIONS

      Worldwide Xceed Group, Inc. (formerly Xceed Inc. and Subsidiaries - see
      Note 2v.) (the "Company") provides Internet professional services, such
      as strategy, consulting, and technology ("Internet Professional
      Services"), and performance enhancement business services ("Performance
      Enhancement Business"). These services include strategic consulting,
      creative design, technology integration, business transformation,
      research and analysis, and marketing and branding.

      The fiscal year ended August 31, 2000 ("Fiscal 2000") represented the
      continuation of a transitional period, which started during the year ended
      August 31, 1999 ("Fiscal 1999"), for the Company. The Company completed
      several strategic acquisitions to enable it to become a provider of a full
      range of Internet professional services that allow it to deliver
      end-to-end solutions enabling companies to capitalize on the reach and
      efficiency of the Internet. However, due to change in the economic
      marketplace, which caused a decrease in the number of new start-ups and
      negatively impacted the dot-com business conditions, these acquisitions
      have not met the Company's initial expectations. The Company has
      implemented a plan to enhance its industry position, including an
      organizational restructuring. Management approved a plan to divest the
      Company's non-core business units, enabling the Company to focus
      exclusively on Internet professional services.

      A significant portion of the Company's historic revenues in the
      accompanying financial statements were generated from its Performance
      Enhancement Business, including the fulfillment of awards pursuant to
      incentive performance programs and fees designing and implementing
      training and communications programs in the health field. In addition, the
      Company had generated revenues from its Water-Jel division, which sold
      first aid health products, and from its Journeycorp division, which
      generated revenues from travel management services rendered to major U.S.
      corporations. During fiscal 2000, the Company completed the sale of its
      Water-Jel and Journeycorp divisions (see Note 5). As a result, the
      Water-Jel and Journeycorp divisions have been reflected as discontinued
      operations in the accompanying consolidated financial statements.

      Various executive level management changes have occurred during the fourth
      quarter of fiscal 2000. To address the continuing loss from operations and
      negative cash flow, the new management team has developed the following
      plan for the Company for the year ending August 31, 2001 ("Fiscal 2001"):

      o     Completed the sale of the Performance Enhancement Business
            (see Note 17);

                                     F-8
<PAGE>

      o     Workforce reductions announced and completed during the first
            quarter of Fiscal 2001;

      o     Consolidation of its various New York operating units completed
            during the first quarter of Fiscal 2001;

      o     Attempt to sublease of a portion of its New York corporate office;

      o     Reduction in discretionary advertising expenditures;

      o     Leveraging its current strategic alliance with Spherion Corporation
            ("Spherion")(see Note 17) to provide preferable services to clients
            of Spherion;

      o     Redirect its target client base to Fortune 1000 companies;

      o     Increase productivity level of its professional service staff to
            dramatically increase utilization rates;

      o     Increase in revenue per hour on prospective projects;

      o     Reduce and restructure certain unprofitable locations
            acquired through past business combinations;

      o     Attempt to obtain additional equity investment from third-party
            sources;

      o     Replace its $5,000 line of credit, due to expire in February
            2001; and

      o     Additional cost cutting measures.

      In addition, on November 15, 2000, the Company entered into an agreement
      with Spherion Corporation ("Spherion"), an investor in the Company,
      whereby a $5,000 line of credit would be made available to the Company
      through May 2002 (see Note 17).

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      a.    Basis of Presentation - The consolidated financial statements are
            prepared on the accrual basis utilizing accounting principles
            generally accepted in the United States of America.

      b.    Principles of Consolidation - The accompanying consolidated
            financial statements include the accounts of the Company and its
            wholly-owned subsidiaries. All intercompany accounts and
            transactions have been eliminated.

      c.    Revenue Recognition - The Company has historically earned revenues
            from three segments of its business; (1) Health products (Water-Jel
            division); (2) Travel management (Journeycorp division); and (3)
            Integrated corporate communications (including its Internet
            Professional Services and Performance Enhancement Business).

            Revenues from the sale of health products are earned when goods are
            shipped to the customer. A provision is made for estimated returns
            on such shipments, which is reflected as a reduction of revenue.

            Revenues from the travel management business are recognized upon the
            ticketing of flights.


                                     F-9
<PAGE>


            The Company periodically evaluates cost and revenue assumptions in
            fixed price contracts. 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 become probable
            and estimable. Most contracts are cancelable by either the Company
            or the client upon 30 days notice, with payments due for services
            completed through the date of termination. No significant losses
            have been incurred on cancelled contracts.

            Unbilled services on contracts are comprised of costs plus earnings
            in excess of contractual billings on such contracts. Billings in
            excess of cost plus earnings and billings in excess of revenue
            recognized under the percentage of completion method on fixed price
            contracts represent deferred revenue and is included in accounts
            payable and accrued expenses in the balance sheets. Each of the
            above, as it relates to Performance Enhancement Business, has
            been reclassified as assets held for sale in the accompanying
            balance sheets. Performance program costs include the costs of goods
            and services incurred for award fulfillment.

            Revenues for the Company's Internet Professional Services and
            Performance Enhancement Business are recognized based on the
            nature of the contract. Revenues from fixed price contracts are
            recognized using the percentage of completion method. Revenues
            from time-and-materials contracts are accounted for as time is
            incurred, with the exception of certain projects in the
            Performance Enhancement Business, for which revenue is recognized
            on a completed contract basis.

      d.    Cash and Cash Equivalents - The Company considers all highly liquid
            debt instruments purchased with a maturity of three months or less
            to be cash equivalents.

            In connection with the leases for certain facilities, the
            Company is required to maintain letters of credit aggregating
            $1,930. Such letters of credit are collaterized by cash and are
            considered to be restricted and may not be utilized for any other
            use.

      e.    Investments in Marketable Securities - In Fiscal 2000, debt and
            equity securities are classified as "trading" and unrealized holding
            gains and losses are included in the determination of earnings. In
            Fiscal 1999 and 1998, debt and equity securities were classified as
            "available-for-sale securities" and reported at market value, with
            the unrealized gains and losses excluded from operating results and
            reported as a separate component of stockholders' equity. A decline
            in the market value of any available-for-sale security below cost
            that is deemed other than temporary is charged to earnings resulting
            in the establishment of a new cost basis for the security.

            For the securities transferred into the trading category in Fiscal
            2000, the unrealized holding loss at the date of the transfer were
            recognized in earnings immediately.

            Gains and losses on the sale of securities available-for-sale are
            computed on the basis of specific identification of the adjusted
            cost of each security.

      f.    Property and Equipment - Property and equipment is stated at cost,
            net of accumulated depreciation and amortization. Property and
            equipment is depreciated on a straight-line basis over the estimated
            useful lives of the related assets. Amortization of leasehold
            improvements is computed using the straight-line method over the
            estimated useful lives of the related assets or the remaining term
            of the lease, whichever is shorter.

      g.    Goodwill and Intangible Assets - Through August 31, 2000 goodwill,
            which represents the excess of the purchase price over the fair
            value of the net assets acquired, is being amortized over a period
            of seven to twelve years, on a straight-line basis. Other
            identifiable intangible assets associated with customer base,
            workforce and industry contacts are being amortized over a
            seven-year period on a straight-line basis. Amortization of
            goodwill and intangible assets was $16,600 and $4,308 for the
            years ended


                                     F-10
<PAGE>

            August 31, 2000 and 1999, respectively. There was no amortization
            expense related to goodwill and intangible assets for the year ended
            August 31, 1998 ("Fiscal 1998"). Subsequent to August 31, 2000,
            all remaining goodwill will be amortized over a seven year
            period. The Company reviews goodwill and certain identifiable
            intangibles for impairment as described in Note 2h (see note 4).

            The remaining value of $75.5 million on the accompanying balance
            sheet at August 31, 2000 relates entirely to goodwill.

      h.    Accounting for Long-Lived Assets - The Company reviews long-lived
            assets and certain identifiable intangibles to be held and used
            for impairment whenever events or changes in circumstances
            indicate that the carrying amount of an asset exceeds the fair
            value of the asset. If other events or changes in circumstances
            indicate that the carrying amount of an asset that the Company
            expects to hold and use may not be recoverable, the Company will
            estimate the undiscounted future cash flows expected to result
            from the use of the asset or its eventual disposition, and
            recognize an impairment loss. The impairment loss, if determined
            to be necessary, would be measured as the amount by which the
            carrying amount of the assets exceeds the fair value of the
            assets. A similar evaluation is made in relation to goodwill,
            with any impairment loss measured as the amount by which the
            carrying value of such goodwill exceeds the expected undiscounted
            future cash flows.

      i.    Concentration of Risk - The Company invests its excess cash in
            deposits and money market accounts with major financial institutions
            and in commercial paper of companies with strong credit ratings.
            Generally, the investments mature within 90 days and therefore, are
            subject to little risk. The Company has not experienced losses
            related to these investments.

            The concentration of credit risk in the Company's accounts
            receivable is mitigated by the Company's credit evaluation process,
            reasonably short collection terms and the geographical dispersion of
            revenue. However, the integrated corporate communications group
            includes startup companies in its client base. Although the Company
            generally does not require collateral, reserves for potential credit
            losses are maintained.

            During fiscal 2000, 1999 and 1998, significant portion of revenues
            earned by the Company's retail corporate travel business segment is
            derived from commissions earned on airline bookings with major U.S.
            and foreign airline carriers.

            One customer accounted for 20%, 26% and 23% of the Company's 2000,
            1999 and 1998 revenues, respectively.

      j.    Income Taxes - The Company accounts for income taxes under the
            provisions of SFAS No. 109, Accounting for Income Taxes. SFAS No.
            109 establishes financial accounting and reporting standards for the
            effect of income taxes that result from the differences between
            financial reporting and tax bases of assets and liabilities, and are
            measured using the enacted tax rates and laws that will be in effect
            when the differences are expected to reverse.

      k.    Stock-Based Compensation - The Company accounts for stock-based
            compensation arrangements in accordance with the provisions of
            Accounting Principles Board ("APB") Opinion No. 25, Accounting for
            Stock Issued to Employees, and accounts for stock issued for
            services provided by others than employees in accordance with and
            complies with the disclosure provisions of SFAS No. 123, Accounting
            for Stock-Based Compensation. Under APB No. 25, compensation expense
            is based on the difference, if any, on the date of the grant,
            between the fair value of the Company's stock and the exercise
            price. A new measurement date for purposes of determining
            compensation is established when there is a substantive change to
            the terms of an underlying option.


                                     F-11
<PAGE>

            In March 2000, the Financial Accounting Standards Board ("FASB")
            issued FASB Interpretation No. 44, Accounting for Certain
            Transactions Involving Stock Compensation - an interpretation of APB
            Opinion No. 25, ("FIN 44"). FIN 44 clarifies the application of APB
            Opinion No. 25 and among other issues clarifies the following: the
            definition of an employee for purposes of applying APB Opinion No.
            25; the criteria for determining whether a plan qualifies as a
            non-compensatory plan; the accounting consequence of various
            modifications to the terms of previously issued fixed stock options
            or awards; and the accounting for an exchange of stock compensation
            awards in a business combination. FIN 44 is effective July 1, 2000.
            The Company has adopted the provisions of FIN 44 in Fiscal 2000.

      l.    Basic and Diluted Net Income Per Common Share - Basic net income per
            common share is based on the weighted average number of shares of
            common stock outstanding during each year. Diluted net income per
            common share is based on the weighted average number of shares of
            common stock outstanding during each year, adjusted for the dilutive
            effect of potentially issuable common shares arising from the
            assumed exercise of stock options and warrants and conversion of
            preferred shares. Basic loss per common share was computed by
            dividing net loss by the weighted average number of shares of common
            stock outstanding. Diluted loss per common share does not give
            effect to the impact of options, warrants and conversion of
            preferred shares because their effect would have been anti-dilutive.

      m.    Research and Product Development Costs - Research and product
            development costs, consisting of salaries and materials related to
            software development, are expensed as incurred. SFAS No. 86,
            Accounting for the Costs of Computer Software to be Sold, Leased or
            Otherwise Marketed, requires capitalization of certain software
            development costs subsequent to the establishment of technological
            feasibility and prior to general release of the software. Based on
            the Company's development process, technological feasibility is
            established upon completion of a working model. The period between
            technological feasibility and general release is relatively short
            and the costs incurred during this period have been insignificant
            and do not warrant capitalization.

      n.    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. Such estimates primarily relate to accounts
            receivable, recoverability and lives of goodwill and revenues and
            costs on percentage of completion contracts. Actual results could
            differ from those estimates.

      o.    Advertising Costs - Advertising costs are charged to operations when
            the advertising first takes place. The Company incurred advertising
            costs of $1,053, $1,223 and $169 for the years ended August 31,
            2000, 1999 and 1998, respectively.

      p.    Comprehensive Income (Loss) - Other comprehensive income refers to
            revenues, expenses, gains and losses that under accounting
            principles generally accepted within the United States of America
            are included in comprehensive income but are excluded from net
            income as these amounts are recorded directly as an adjustment to
            stockholders' equity. The Company's other comprehensive income is
            comprised of net unrealized gain (loss) on marketable securities and
            translation adjustments. The tax benefit or expense, as well as any
            reclassifications related to the components of other comprehensive
            income were not significant.


                                     F-12
<PAGE>

      q.    Segment Information - On September 1, 1998, the Company adopted SFAS
            No. 131, Disclosures About Segments of an Enterprise and Related
            Information, which establishes annual and interim reporting
            standards for an enterprise's business segments and related
            disclosures about its products, services, geographic areas, and
            major customers. This Statement did not impact the Company's
            consolidated financial position, results of operations, or cash
            flows. Because the Company currently operates a single line of
            business and manages its operations under a unified management and
            reporting structure, no additional segment disclosures are provided.

      r.    Foreign Currency Translation - Assets and liabilities of foreign
            subsidiaries are translated at year-end exchange rates. Results of
            operations are translated using the average exchange rates
            prevailing throughout the year. Gains and losses from foreign
            currency transactions are included in the consolidated statement of
            operations. Exchange rate changes arising from translation are
            included in the other comprehensive income component of
            stockholders' equity. The Company does not engage in foreign
            currency hedging or other derivative financial instruments.

      s.    Recently Issued Accounting Pronouncements - In 1998, the Financial
            Accounting Standards Board issued SFAS No. 133, Accounting for
            Derivative Instruments and Hedging Activities, which was
            subsequently amended by SFAS 137, Accounting for Derivative
            Instruments and Hedging Activities - Deferral of the Effective Date
            of SFAS 133, and SFAS 138, Accounting for Certain Derivative
            Instruments and Certain Hedging Activities - an amendment of FASB
            amendment No. 133. SFAS 133 establishes accounting and reporting
            standards requiring that every derivative instrument, including
            certain derivative instruments imbedded in other contracts, be
            recorded in the balance sheet as either an asset or liability
            measured at fair value. This statement also requires that changes in
            fair value be recognized in earnings unless specific hedge
            accounting criteria are met. SFAS 133, as amended by SFAS 137 and
            SFAS 138, is effective for the Company beginning September 1, 2000.
            Management does not believe that these pronouncements will have a
            significant impact on the Company's financial condition or results
            of operations.

            In December 1999, the Securities and Exchange Commission ("SEC")
            issued Staff Accounting Bulletin ("SAB") No. 101, Revenue
            Recognition in Financial Statements, ("SAB 101") which provides
            guidance related to revenue recognition based on interpretations and
            practices followed by the SEC. SAB 101 requires companies to report
            any changes in revenue recognition as a cumulative change in
            accounting principle at the time of implementation in accordance
            with Accounting Principles Board Opinion No. 20, Accounting Changes.
            The Company is required to implement SAB 101 no later than the
            fourth quarter of fiscal 2001 in accordance with SAB No. 101B
            "Delaying Implementation of SAB 101," which was issued in June 2000.
            The Company does not expect the implementation of SAB 101 to have a
            material effect on its financial position or results of operations.

      t.    Allowance for uncollectible accounts - The Company evaluates the
            need for an allowance for uncollectible accounts receivable based
            on the customer's ability to pay and history of past payments.
            Recoveries of previously written off accounts are recorded as an
            increase in the allowance. During the years ended August 31,
            2000, 1999 and 1998, the Company recorded a provision for
            estimated uncollectibles of $9,267, $1,000, and $4, respectively,
            which was offset by write-offs of uncollectible accounts of
            $1,098, $0, and $133, respectively. During the year ended August
            31, 1999, $165 of recoveries on previously written off accounts
            were recorded.

      u.    Reclassifications - Certain reclassifications have been made to the
            Company's 1999 financial statements to conform with the current year
            presentation.

      v.    Change in Name - On October 5, 2000, the shareholders approved a
            change in the name of the Company to Worldwide Xceed Group, Inc.

3.    BUSINESS COMBINATIONS

      2000 Acquisitions - During fiscal 2000, the Company acquired seven
      companies engaged in operations such as Internet consulting, interactive
      marketing and e-commerce development strategies, custom software design,
      systems administration and strategic consulting for mergers and
      acquisitions, process management and large systems implementation for an
      aggregate purchase price of $140,555, consisting of $17,650 of cash,
      3,207,620 shares of the Company's common stock valued at $111,022 and
      299,744.


                                     F-13
<PAGE>

      options of the Company's stock valued at $11,883. Collectively these
      companies are herein referred to as the "2000 Acquisitions."

      The Company has accounted for these acquisitions under the purchase method
      of accounting. These acquisitions are summarized below.

      On February 25, 2000, the Company completed the acquisition of Pulse
      Interactive, B.V., a privately held company based in Amsterdam. Pulse
      Interactive engages in interactive development. Consideration consisted of
      120,805 shares of the Company's common stock having a market value of
      $3,965 and cash of $1,500.

      On February 8, 2000, the Company completed the acquisition of methodfive,
      inc., a New York-based privately held company engaged in interactive
      development. The consideration consisted of 1,797,094 shares of the
      Company's common stock equal to $73,501, 299,744 of options of the
      Company's stock valued at $11,883, and cash of $4,500.

      On February 3, 2000, the Company completed the acquisition of Sterling
      Carteret, Inc., a Denver and Colorado Springs, Colorado based privately
      held company which provided back end enterprise solutions.
      The consideration for the acquisition consisted of 187,920 shares of the
      Company's common stock having a market value of $7,115 and cash of $2,950.
      Subsequent to year end, the Company sold the operations of the Denver
      office (see Note 17).

      On January 21, 2000, the Company completed the acquisition, by asset
      purchase, of Big Theory, LLC. a privately held company that provided
      interactive development and systems integration services. The
      consideration for the acquisition consisted of 678,302 shares of the
      Company's common stock having an approximate market value of $16,385 and
      three cash installments aggregating $4,000. Total stock consideration
      includes the issuance of additional shares of the Company's common stock
      resulting from certain performance criteria being achieved subsequent to
      the consummation date. The additional consideration consisted of 166,810
      shares of common stock issued in April 2000 with a market value of $2,056
      and 175,879 shares of common stock issued in July 2000 with a market value
      of $1,429.

      On November 8, 1999, the Company completed the acquisition of Catalyst
      Consulting Services, Inc. ("Catalyst") a Phoenix-based privately held
      company which provided change management and business transformation
      services. The consideration for the acquisition consisted of 90,360 shares
      of the Company's common stock having a market value of $2,191. Total stock
      consideration includes the issuance of additional shares of the Company's
      common stock resulting from certain performance criteria being achieved
      subsequent to the consummation date. This additional consideration
      consisted of 22,040 shares of common stock issued in May 2000 with a
      market value of $304. The purchase price is subject to additional
      adjustments, in which, in the opinion of the Company's management, should
      not have a material impact on the Company's financial statements.
      Subsequent to year-end, the Company sold the operations acquired in
      connection with this acquisition (see Note 17).

      On November 2, 1999, the Company completed the acquisition of Distributed
      Systems Solutions, Inc., a Phoenix-based privately held company that
      provided systems integration services. The consideration for the
      acquisition consisted of 248,523 shares of the Company's common stock
      having a market value of $6,089 and cash of $4,500.

      On October 21, 1999, the Company completed the acquisition of 5th Floor
      Interactive, LLC, a New York-based privately held company which engaged in
      interactive development. The consideration for the acquisition consisted
      of 84,616 shares of the Company's common stock having a market value of
      $1,776 and cash of $200.


                                     F-14
<PAGE>

      The acquisition prices of the 2000 Acquisitions were allocated, on an
      entity-by-entity basis, to the assets acquired, including tangible and
      intangible assets and liabilities assumed based upon the fair values of
      such assets and liabilities on the dates of the acquisitions. The
      historical carrying amounts of the tangible assets and liabilities
      approximated their fair values on the dates of acquisitions. Approximately
      $132,631 of the aggregate purchase price was allocated to goodwill with
      the remaining balance, after consideration of the impairment charge
      (See Note 4), being amortized over its estimated useful life of seven
      years.

      Certain of these agreements provided for payment of additional
      consideration in the event certain specific performance criteria are met.
      Furthermore, in certain of the foregoing transactions, the Company entered
      into employment agreements with certain key personnel of the acquired
      companies.

      Xceed Atlanta - In April 1999, the Company acquired the remaining 50%
      interest in Xceed Atlanta, Inc. ("Xceed Atlanta") that was owned by an
      individual shareholder. To acquire this interest, the Company issued
      210,000 shares of common stock, valued at $3,885. Xceed Atlanta provided
      marketing services that complemented the Company's Performance Enhancement
      Business. The transaction has been accounted for under the purchase method
      of accounting. The shares had not been issued as of August 31, 1999 and
      accordingly, the consideration due was included in Accounts payable and
      accrued expenses. During Fiscal 2000, the shares were issued and the
      consideration was reclassified to common stock and additional paid in
      capital.

      Acquired Entities - During the period from August 5, 1998 through August
      31, 1999, the Company completed the acquisitions of four Internet
      professional services firms in various transactions accounted for as
      purchase business combinations. Collectively, the companies are referred
      to herein as the "Acquired Entities." The aggregate purchase price of the
      Acquired Entities was approximately $20,265, including 2,640,364 shares of
      common stock, with a value of $18,472 and $1,793 of cash and related
      expenses.

      The acquisition prices of the Acquired Entities were allocated, on an
      entity-by-entity basis, to the assets acquired, including tangible and
      intangible assets and liabilities assumed based upon the fair values of
      such assets and liabilities on the dates of the acquisitions. The
      historical carrying amounts of the tangible assets and liabilities
      approximated their fair values on the dates of acquisitions. Approximately
      $20,885 of the aggregate purchase price was allocated to goodwill,
      primarily workforce in place, and is being amortized over its estimated
      useful life of seven years.

      Zabit & Associates - In September 1998, the Company acquired Zabit &
      Associates, Inc. and one of its affiliates ("Zabit"), a company engaged in
      integrated corporate communications. In exchange for all of the
      outstanding shares of Zabit, the Company issued 2,258,724 shares of
      restricted common stock having a market value of $20,442 and notes
      totaling $6,730, together with cash consideration of $5,200. The Company
      accounted for this acquisition under the purchase method of accounting.
      At the date of acquisition, approximately $30,372 and $3,000 of the
      purchase price was allocated to goodwill and trademark (which is included
      in intangible assets), respectively, and prior to the impairment charge
      in fiscal 2000 (See Note 4) was being amortized over its estimated useful
      lives of 12 years.

      The following pro forma summary presents the consolidated results of
      operations of the Company as if each of the business combinations
      described above had occurred on September 1, 1998:


                                      F-15
<PAGE>

                                                      Fiscal Years Ended
                                                           August 31,
                                                      2000           1999

        Revenues                                    $ 117,451     $  81,810
        Loss from continuing operations              (161,927)      (20,967)
        Net loss                                     (159,445)      (18,886)
        Basic and diluted net loss per share            (7.13)        (1.00)

      The above amounts are based upon certain assumptions and estimates which
      the Company believes are reasonable. The pro forma results do not
      necessarily represent results which would have occurred if the business
      combination had taken place at the date and on the basis assumed above.

4.    IMPAIRMENT OF GOODWILL

      As discussed in note 2h, the Company reviews long-lived assets and
      certain identifiable intangibles to be held and used, including
      goodwill, for impairment whenever events or changes in circumstances
      indicate that the carrying amount of an asset exceeds the fair value
      of the asset. During the fourth quarter of fiscal 2000, the Company
      evaluated the carrying value of the goodwill and other intangibles
      related to their acquisitions. As a result, unamortized goodwill of
      $87,055 related to certain of these acquisitions was written off. This
      write-off was the result of various factors including significant
      decrease in the number of employees that remained with Xceed following
      certain acquisitions, a significant decrease in the profit that could be
      generated from the remaining employees acquired, a loss of recurring
      projects from the clients assumed through certain acquisitions, and a
      decrease in fair value of similar type businesses in the current
      marketplace.

5.    DISCONTINUED OPERATIONS AND SALE OF BUSINESSES

      Discontinued Operations - In January 2000, the Company completed the sale
      of its Water-Jel division for cash of $4,000 to an unrelated Company. The
      selling price is subject to certain adjustments, which in the opinion of
      the Company's management should not have a significant impact on the
      Company's financial condition or results of operations. As a result, a
      gain of approximately $1,322 has been recorded by the Company during
      Fiscal 2000.

      On July 31, 2000, the Company sold all of the assets and liabilities
      associated with Journeycorp, to Journey Corp.com, a company formed and
      privately-owned by the Company's former Senior Vice President and
      Secretary, in an arms-length negotiated transaction in exchange for: (i) a
      promissory note in the amount of $704 which bears interest at a rate of 6%
      per annum and is payable to the Company in equal quarterly installments of
      $59 over three years; and (ii) an exclusivity agreement whereby all of the
      Company's U.S. offices will use their best efforts to make their corporate
      travel arrangements through Journey Corp.com until July 31, 2003. As a
      result, a loss of approximately $102 was recorded by the Company during
      Fiscal 2000.

      The Company has restated its prior financial statements to present the
      operating results of its Water-Jel and Journeycorp divisions as
      discontinued operations. Net assets to be disposed of, at their book
      values, have been separately classified in the accompanying balance sheet
      at August 31, 1999. Summarized financial information for Water-Jel and
      Journeycorp as discontinued operations for fiscal 2000, 1999 and 1998 is
      as follows:

                                                 Fiscal Year Ended August 31,
                                                 ----------------------------
                                                   2000      1999      1998

        Revenues                                 $12,171   $16,485   $16,932
        Income from discontinued operations,
          before tax provision                     1,262     3,660     3,358
        Income from discontinued operations,
          net of tax provision                     1,262     2,081     1,813

      Net assets relating to these discontinued operations primarily relate to
      accounts receivable, accounts payable, inventory, and property and
      equipment.


                                     F-16
<PAGE>

      Sale of Businesses - In March 2000, the Company recognized a gain of
      $2,000 on the sale of its Channel Seven Internet Magazine.

      During the first quarter of Fiscal 2001, the Company sold its Performance
      Enhancement Business, Catalyst, one location of Sterling Carteret, and
      Enterprise Solutions Group, Inc. (acquired in Fiscal 1998) (see Note 17).

6.    INVESTMENT IN MARKETABLE SECURITIES

      Marketable equity securities, which are classified as trading securities
      at August 31, 2000, are carried at the fair value of the related
      securities, with the unrealized loss on such securities reflected in the
      statement of operations within other income (expense). At August 31, 2000,
      the cost and fair value of the trading securities were $542 and $382,
      respectively. Realized gains and losses for Fiscal 2000 were $203 and
      ($452), respectively. Unrealized gains and losses for Fiscal 2000 were $6
      and ($166), respectively.

      Marketable equity securities, which are classified as available for sale
      securities at August 31, 1999, are carried at the fair value of the
      securities and the unrealized gain (loss) on the securities, net of income
      taxes, is reflected in stockholders' equity. At August 31, 1999, the cost
      and fair value of the available for sale securities were $400 and $367,
      respectively. Unrealized gains and losses for Fiscal 1999 were $46 and
      ($39), respectively.

      During fiscal 1999 and 1998, the net change in the valuation adjustment on
      marketable securities classified as available-for-sale amounted to $7 and
      $(243), respectively.

7.    RELATED PARTY TRANSACTIONS

      The Company has a note receivable due from the Company's former President,
      Chief Executive Officer and Co-Chairman ("Former Officer"). At August 31,
      2000, the balance due on such note receivable (including accrued interest)
      was $1,222. The loan bears interest at 7% and is payable in annual
      installments of $100, which is first applied to accrued interest with the
      balance, applied to principal. The remaining unpaid principal and any
      accrued interest is payable in full in December 2016.

      As discussed in Note 17, on November 6, 2000, the Company sold its
      Performance Enhancement Business to the Former Officer. In connection
      with this transaction, this note receivable has been sold and converted
      into a new loan agreement with the Company. As such, the note receivable
      has been classified in Prepaid expenses and other current assets in the
      accompanying financial statements. In the 1999 financial statements, such
      amount was classified as Due from former officer.

      In addition, as discussed in Note 5, on July 31, 2000, the Company sold
      all of the assets and liabilities of Journeycorp, to a company formed and
      privately-owned by the Company's former Senior Vice President and
      Secretary. In connection with that transaction, the Company received a
      promissory note in the amount of $704. Such amount is classified as Due
      from former officer in the accompanying financial statements.

      During Fiscal 2000, the Company entered into several time and material
      contracts in the normal course of business with Spherion, an investee in
      the Company (see note 12b). Total sales in Fiscal 2000 to Spherion were
      $270 of which $78 remains unpaid as of August 31, 2000.


                                     F-17
<PAGE>

8.    PROPERTY AND EQUIPMENT - NET

      Property and equipment, at cost, consists of the following at August 31,
      2000 and 1999:

                                                             2000      1999

        Machinery and equipment                            $ 7,795   $ 4,211
        Furniture and fixtures                               1,116       461
        Software                                             1,009       342
        Leasehold improvements                              10,625       563
                                                           -------   -------

                                                            20,545     5,577

        Less accumulated depreciation and amortization       6,260     2,309
                                                           -------   -------

                                                           $14,285   $ 3,268
                                                           =======   =======

      Depreciation and amortization expense related to property and equipment
      approximated $2,219, $667 and $20, for the years ended August 31, 2000,
      1999 and 1998, respectively.

      During Fiscal 2000, the Company incurred an impairment charge relating to
      leasehold improvements of $5,758 due to underutilized capacity in the New
      York corporate office, which is included in depreciation and amortization
      in the accompanying statement of operations. This write-off is the
      result of the Company's evaluation of its useable space and the
      determination that 50% of its New York facility will be closed (see
      Note 17). The Company is actively pursuing a sublet tenant for the
      space. The write-off is based on the difference between carrying
      value of the leasehold improvements and the estimated net cash inflows
      that are to be expected over the remaining life of the lease.

9.    NOTES PAYABLE, BANK

      In 1999, the Company entered into a credit agreement with a bank which
      allowed for borrowings of up to $5,000. As of August 31, 2000, there were
      no amounts outstanding under this line of credit. The line will expire on
      February 28, 2001, and any borrowings would be collateralized by
      corresponding restricted cash balances.

      Zabit is party to a credit agreement which provides for maximum borrowings
      equal to the lesser of (i) $950 or (ii) 85% of eligible accounts
      receivable. Borrowings are due on demand and bear interest at 10.5%. As of
      August 31, 2000 and 1999, $60 and $862, respectively, was outstanding
      under this agreement.


                                     F-18
<PAGE>

10.   LONG-TERM DEBT

      Long-term debt consists of the following at August 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                               2000     1999
        <S>                                                                   <C>      <C>
        Notes payable, bearing interest at 7%, payable in September 2002      $   --   $1,930
        Note payable, bearing interest at 10%, payable in monthly
           installments of $13 through October 2002; collateralized
           by equipment                                                          333      486

        Note payable, bearing interest at 9.5% payable in monthly
          installments of $1 through April 2004; collateralized
          by equipment                                                            57       73

        Capital leases, payable in monthly installments of $17, including
          interest, expiring from April 2001 through January 2002,
          collateralized by equipment                                            236      413

        Capital leases, payable in monthly installments, including
          interest of $67 through August 2001 and $40 through
          February 2002                                                          753       --

        Other                                                                    103      112
                                                                              ------   ------

                                                                               1,482    3,014
        Less current portion                                                     955      389
                                                                              ------   ------

        Long-term debt, excluding current portion                             $  527   $2,625
                                                                              ======   ======
</TABLE>

      Maturities of long-term debt are as follows:

                                              Bank and   Capitalized
        Fiscal Year Ending August 31,        Other Debt     Leases      Total

        2001                                    $  247      $  767      $1,014
        2002                                       183         300         483
        2003                                        43          --          43
        2004                                        10          --          10
                                                ------      ------      ------

        Total minimum payments                     483       1,067       1,550

        Less amounts representing interest          47          21          68
                                                ------      ------      ------

        Present value of minimum payments       $  436      $1,046      $1,482
                                                ======      ======      ======

      Certain notes are guaranteed by corporate officers. Capital lease
      obligations are collateralized by property and equipment with a net book
      value of $1,123 at August 31, 2000.


                                     F-19
<PAGE>

11.   INCOME TAXES

      The Company files a consolidated U.S. federal income tax return that
      includes all wholly-owned subsidiaries. State tax returns are filed on a
      consolidated or separate basis, depending on applicable laws.

      The provision (benefit) for income taxes from continuing operations is
      comprised of the following:

                                         Fiscal Years Ended August 31,
                                       2000          1999          1998
        Current:
          Federal                       (263)      $(2,424)      $  (125)
          State                          473           216           (85)
                                     -------       -------       -------
                                         210        (2,208)         (210)
                                     -------       -------       -------

        Deferred:
          Federal                         --          (952)          (18)
          State                           --        (1,169)          (29)
                                     -------       -------       -------

                                          --        (2,121)          (47)
                                     -------       -------       -------

                                     $   210       $(4,329)      $  (257)
                                     =======       =======       =======

      The net deferred tax amounts included in the financial statements as of
      August 31, 2000 and 1999 consist of the following:


                                     F-20
<PAGE>

                                                         August 31,
                                                     2000         1999
        Deferred tax assets:
          Property and equipment                   $  2,678     $    109
          Accrued liabilities                           878          725
          Accounts receivable                         4,305          508
          Goodwill and other assets                      71          430
          Stock compensation                            121          162
          Net operating loss carryforwards           19,609          522
          Other                                         126          190
                                                   --------     --------

                                                     27,788        2,646

        Valuation allowance                         (25,844)          --
                                                   --------     --------

        Total deferred tax assets                     1,944        2,646
                                                   --------     --------

        Deferred tax liabilities:
          Cash basis adjustment                         540          739
          Deferred salaries and commissions              --          388
          Other                                          --          115
                                                   --------     --------

        Total deferred tax liabilities                  540        1,242
                                                   --------     --------

        Net deferred income tax assets             $  1,404     $  1,404
                                                   ========     ========

      The Company has federal net operating loss carryforwards amounting
      to approximately $38,291, which expire in August 2020.

      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 asset will be realized. The ultimate realization of the
      deferred tax assets is dependent upon the generation of future taxable
      income during the periods in which the temporary differences become
      deductible. Management considers scheduled reversals of deferred tax
      liabilities, projected future taxable income, and tax planning strategies
      which can be implemented by the Company in making this assessment. The
      valuation allowance increased during the year ended August 31, 2000
      since realization of such net deferred tax assets can not be reasonably
      assured.

      The Company's effective tax rates on loss from continuing operations
      differs from the Federal statutory rate as follows:

                                                 2000       1999       1998

        Federal statutory rate                  (34.0)%    (34.0)%    (34.0)%
        State taxes, net of federal benefit     (12.0)     (10.0)     (13.5)
        Federal income tax credits                 --         --        5.3
        Permanent differences                    30.8        8.8       (4.5)
        Increase in valuation allowance          15.0         --         --
        Other                                      .3        4.3       (2.7)
                                                -----       ----       ----

                                                   .1%      30.9 %     (49.4)%
                                                 ====       ====       ====


                                      F-21
<PAGE>

      The tax effect of excess deductions for stock-based awards, whose
      compensation cost recorded for tax purposes exceeds the compensation cost
      recorded for financial reporting purposes, is recognized as additional
      paid-in capital.

12.   STOCKHOLDERS' EQUITY

      a.    Capitalization - The Company is authorized to issue 30,000,000
            shares of $0.01 par value common stock and 1,000,000 shares of $0.05
            par value preferred stock. The Company's Board of Directors has the
            authority to issue the undesignated preferred stock in one or more
            series and to fix the rights, preferences, privileges and
            restrictions thereof.

      b.    Private Placements of Securities - In April 2000, the Company
            completed the sale of 2,000,000 shares of common stock to Spherion,
            at a price equal to the closing transaction price as quoted by
            NASDAQ. The net proceeds to the Company were $24,750.

            In June 1999, the Company completed a private sale of securities to
            a group of accredited investors. Under the terms of the offering,
            the Company issued an aggregate of 976,562 shares of common stock
            and options to acquire an additional 976,562 shares of common stock
            for proceeds of $10,000. The options have an exercise price of
            $19.01 and are exercisable for a five-year period beginning in
            November 1999.

      c.    Write-off of Deferred Offering-Related Costs - From January through
            April 2000, the Company was preparing to file a registration
            statement with the Securities and Exchange Commission relating to a
            proposed public offering of common stock. This offering was
            subsequently cancelled due to adverse market conditions. During the
            fourth quarter of 2000, $2,894 in offering-related costs were
            charged to operations and are included in the accompanying
            consolidated statements of operations.

      d.    Cumulative Redeemable Convertible Preferred Stock - In January 2000,
            the Company sold 30,000 shares of Series A cumulative redeemable
            convertible preferred stock (the "Series A Preferred Stock") to a
            group of investors. The net proceeds to the Company were
            approximately $29,000.

            As described in the Company's Certificate of Designation,
            Preferences and Rights of Series A Preferred Stock (the "Certificate
            of Designation"), each share of Series A Preferred Stock is
            convertible, at the option of the holder at any time, into 28 shares
            of common stock, subject to certain limitations, at a conversion
            price per share of not less than $25 or greater than $36. In
            accordance with Emerging Issues Task Force Consensus No. 98-5,
            Accounting for Convertible Securities with Beneficial Conversion
            Features, the Company recorded $6,466 of the net proceeds of its
            sale of Series A Preferred Stock as a dividend in order to recognize
            the immediate beneficial conversion feature resulting from the
            difference between the fair value of its common stock as of the date
            of agreement and the maximum conversion price of $36. Cost
            associated with the issuance of the Series A Preferred Stock were
            approximately $1,000 during Fiscal 2000.

            As a result of certain conditions that occurred during the term of
            the Certificate of Designation thus far, and based on certain
            defined provisions within the Certificate of Designation, subsequent
            to October 13, 2000 the Series A Preferred Stock will be convertible
            at the option of the holder at any time into an equivalent number of
            common shares based upon conversion calculated by utilizing the
            lowest weighted average 10-day trading period of the Company's
            common stock, as defined in the Certificate of Designation, rather
            than the $25 per share described above. If the holders of the Series
            A Preferred Stock had requested conversion at an assumed conversion
            price of $1.25, approximately 26,277,000 shares of the Company's
            common stock would have been issued.


                                      F-22
<PAGE>

            In connection with the issuance, the Company also issued warrants to
            purchase 183,273 shares of common stock at an exercise price of
            $50.10 per share. The warrants expire on January 13, 2005. Utilizing
            the Black-Scholes option pricing model and relative value method, a
            value of $4,286 of the net proceeds was allocated to common stock
            warrants and treated as a preferred stock dividend in order to
            recognize the fair value of the warrants at the time of issuance.

            Since the Series A Preferred Stock is convertible at the option of
            the holder at any time, the amount that has been ascribed to the
            warrants has been reflected as a deemed dividend so that the Series
            A Preferred Stock can be carried at its redemption value of $30,000.

            The Series A Preferred Stock has a cumulative annual dividend of
            4.0% per annum and is payable quarterly at the option of the Company
            in cash or by increasing the aggregate value of the Series A
            Preferred Stock. The Series A Preferred Stock has senior preference
            and priority as to the dividend as well as distributions and
            payments upon the liquidation, dissolution, or winding up of affairs
            before any payment to other shareholders of the Company. As of May
            31, 2000, $450 had been accrued for such dividends. In June 2000,
            the Company elected to satisfy the dividends due by increasing the
            aggregate value of the Series A Preferred Stock. Accordingly, the
            accrued dividends at May 31, 2000 have been included in the
            Cumulative Redeemable Convertible Preferred Stock balance in the
            accompanying balance sheet. At August 31, 2000, $302 has been
            accrued for dividends for the period June 1, 2000 through August 31,
            2000.

            A holder may request that the Company redeem such holder's Series A
            Preferred Stock upon the consummation of certain transactions set
            forth in the Certificate of Designation. In the event of such a
            redemption, the Company is to pay 120% of the aggregate value of the
            Series A Preferred Stock on the date of consummation of the
            transaction. If certain events in the Certificate of Designation are
            triggered, the Company is to redeem the Series A Preferred Stock at
            a price equal to 125% of the aggregate value of the Series A
            Preferred Stock on the date of the triggering event. In addition,
            the Company has the option, at any time, to redeem the Series A
            Preferred Stock at a price equal to 110% of the aggregate value of
            such stock plus 1% of the aggregate value of the Series A Preferred
            Stock since the date of the issuance of such stock, up to a maximum
            of 140% of the aggregate value of the Series A Preferred Stock and
            any accumulated, but unpaid dividends on the Series A Preferred
            Stock being redeemed.

            The Series A Preferred Stock matures in January 2005 at which time
            all shares of Series A Preferred Stock will be automatically
            converted into the Company's common stock.

            In April 2000, the Company issued warrants to purchase an additional
            1,350,000 shares of the Company's common stock to the holders of the
            Series A Preferred Stock in exchange for a waiver of their rights
            under certain provisions of the Certificate of Designation. As a
            result of the issuance of these additional warrants in April 2000,
            an additional dividend of approximately $7,800, calculated under the
            Black-Scholes pricing model, was recorded in the third quarter of
            fiscal 2000.

      e.    Stock Options - The Company has adopted six stock option plans which
            provide for the granting of options to employees, officers,
            directors, and others who render services to the Company. Under all
            of these plans in the aggregate, options to purchase not more than
            5,875,000 shares of common stock may be granted, at a price which
            may not be less than the fair market value per share in the case of
            incentive stock options or 85% of fair market value for
            non-qualified options.

            The Non-Qualified Stock Option Plan, which expired on April 6, 1994,
            covered 187,500 shares of Common Stock, pursuant to which officers
            and employees of the Company were eligible to receive non-qualified
            stock options. All options granted under the Non-Qualified Stock
            Option Plan have


                                      F-23
<PAGE>

            been at exercise prices equal to at least the fair market value of
            the Common Stock on the date of grant.

            Under the 1990 Stock Option Plan the Company may grant options to
            purchase up to 187,500 shares of Common Stock to its officers, key
            employees and others who render services to the Company. The
            exercise price of such options may not be less than the fair market
            value per share in the case of incentive stock options or 85% of the
            fair market value in the case of non-qualified options. The 1990
            Stock Option Plan expired on January 31, 2000.

            The 1995 Stock Option Plan operates on substantially the same terms
            as the 1990 Stock Option Plan except that it includes options to
            purchase up to 500,000 shares of Common Stock. Any options granted
            under the plan expire ten years from the date of the grant. The plan
            expires March 3, 2005.

            The 1998 Stock Option Plan provides for the issuance of options for
            the purchase of up to 2,000,000 shares of Common Stock. The 1998
            Stock Option Plan authorizes the issuance of incentive stock
            options, which qualify under Section 422A of the Internal Revenue
            Code as well as the issuance of non-statutory options. The 1998
            Stock Option Plan authorizes the issuance of options to employees,
            officers and employee-directors. Non-statutory options may also be
            issued to others who render services to the Company. Any options
            granted under the 1998 Stock Option Plan, unless specifically
            designated otherwise, expire on March 3, 2008.

            The 1999 Long-Term Incentive Plan provides for the issuance of
            options to purchase up to 3,000,000 shares of Common Stock. The 1999
            Long-Term Incentive Plan authorizes the issuance of incentive stock,
            stock appreciation rights, restricted stock, restricted stock units,
            performance units, performance shares and other awards.

            At the annual meeting of stockholders held on May 4, 2000,
            stockholders approved the adoption of the Millennium Stock Option
            Plan, which provides for the issuance of options to purchase up to
            3,000,000 shares of Common Stock. The Millennium Stock Option Plan
            authorizes the issuance of incentive stock options and non-qualified
            stock options.

            On April 17, 2000, management announced a Company-wide stock option
            grant to all employees who had stock options vested or vesting by
            December 31, 2000. Any employee who held such options, which also
            had a strike price equal to or above $7.00 were granted additional
            options in an amount equal to the options already held and which
            were expected to fully vest by December 31, 2000. The terms of the
            new options provide for an exercise price of $7.50 and allow the
            employee to exercise the options on or after January 1, 2001. The
            Company granted approximately 1,700,000 options in connection with
            this grant.

            A summary of the status of the Company's various fixed stock option
            plans at August 31, 2000, 1999 and 1998 and changes during the years
            then ended is presented below:


                                      F-24
<PAGE>

<TABLE>
<CAPTION>
                                                                   Fiscal Years Ended August 31,
                                                          2000                    1999                   1998
                                                 ----------------------  ----------------------  ----------------------
                                                               Weighted                Weighted                Weighted
                                                               Average                 Average                 Average
                                                               Exercise                Exercise                Exercise
                    Fixed Stock Option              Shares      Price       Shares      Price       Shares       Price
              <S>                                 <C>           <C>        <C>          <C>        <C>          <C>
              Outstanding, beginning of year       6,189,170    $11.27     3,076,625    $ 4.03     1,185,125    $ 1.80
              Granted                              8,659,926     15.95     3,901,375     15.37     2,006,000      5.20
              Exercised                             (827,568)     7.52      (765,330)     3.11      (114,500)     1.53
              Canceled                            (1,862,723)    20.78       (23,500)     7.89            --        --
                                                 -----------             -----------             -----------

              Outstanding, end of year            12,158,805    $13.37     6,189,170    $11.27     3,076,625    $ 4.03
                                                 ===========    ======   ===========    ======   ===========    ======

              Options exercisable, end of year     4,951,361    $10.03     2,719,452    $ 5.12     2,036,125    $ 4.63
                                                 ===========    ======   ===========    ======   ===========    ======
</TABLE>

            The weighted-average fair value of options granted was $17.49, $5.21
            and $2.84 during the years ended August 31, 2000, 1999 and 1998.

            The following table summarizes information regarding the Company's
            stock options outstanding at August 31, 2000:

<TABLE>
<CAPTION>
                                                  Options Outstanding                 Options Exercisable
                                       -----------------------------------------   -------------------------
                                                           Weighted
                                                            Average     Weighted                    Weighted
                                                           Remaining    Average                     Average
                    Range of             Number           Contractual   Exercise      Number        Exercise
                 Exercise Price        Outstanding            Life       Price     Outstanding       Price
                <S>                     <C>                   <C>       <C>          <C>            <C>
                 $0.31 - $4.40           1,328,500            1.52      $  3.09      1,243,009      $  3.07
                     $6.00               1,000,000            7.88      $  6.00      1,000,000      $  6.00
                 $6.44 - $7.50           2,657,325            3.75      $  7.48        541,009      $  7.45
                 $7.69 - $9.94           1,243,200            9.08      $  8.01          2,000      $  9.03
                $10.19 - $13.63          1,302,384            3.48      $ 12.38        665,804      $ 12.61
                $13.75 - $18.25          2,215,258            6.53      $ 17.35      1,350,989      $ 17.82
                $18.31 - $27.75          1,476,398            4.62      $ 23.11        131,580      $ 21.35
                $28.00 - $43.75            919,240            5.06      $ 36.03         16,970      $ 30.64
                $45.50 - $45.56             16,500            5.16      $ 45.51              0      $  0.00
                                        ----------                                   ---------
                 $0.31 - $45.56         12,158,805            5.06      $ 13.36      4,951,361      $  9.94
                                        ==========                                   =========
</TABLE>

            The Company has granted options to acquire shares of common stock
            under certain of its employment agreements (see Note 14).

            In fiscal 2000, 1999 and 1998, the Company issued 75,000, 100,000
            and 200,000 options to consultants which resulted in stock-based
            compensation expense approximating $210, $287 and $282,
            respectively.


                                      F-25

<PAGE>

            The Company has elected the disclosure-only provisions of SFAS No.
            123, Accounting for Stock-Based Compensation, in accounting for its
            stock options. Accordingly, no compensation expense has been
            recognized. If the Company had recorded compensation expense for the
            stock options based on the fair value at the grant date of awards,
            consistent with the provisions of SFAS No. 123, the Company's net
            (loss) income and net (loss) income per share would have been
            modified to the following pro forma amounts:
<TABLE>
<CAPTION>
                                            Fiscal Years Ended August 31,
                                            2000         1999        1998
              <S>                        <C>          <C>         <C>
              Net (loss) income:
                Actual                   $(173,754)   $  (7,610)  $   1,550
                Pro forma                 (216,582)     (10,868)      1,188

              (Loss) income per share:
              Basic:
                Actual                   $   (8.30)   $    (.50)  $     .20
                Pro forma                   (10.34)        (.71)        .15

              Diluted:
                Actual                   $   (8.30)   $    (.50)  $     .20
                Pro forma                   (10.34)        (.71)        .14
</TABLE>

            For the purposes of the pro forma presentation, the fair value of
            each option grant is estimated on the date of grant using the
            Black-Scholes option pricing model. The following range of weighted
            average assumptions were used for grants during the fiscal years
            ended August 31, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                  Fiscal Years Ended August 31,
                                           --------------------------------------------
                                                2000              1999            1998
              <S>                          <C>               <C>                 <C>
              Dividend yield                    0.00%             0.00%           0.00%
              Volatility                   95.00% - 98.00%   74.00% - 90.00%     78.00%
              Risk-free interest rate           5.58%         4.94% - 5.85%       5.90%
              Expected life                    Various           Various         1 year
</TABLE>

      f.    Warrants - In connection with a follow-on public offering of its
            securities in 1988, the Company issued Class A warrants. Each Class
            A warrant entitled the holder to receive one share of common stock
            and one Class B warrant at an exercise price of $3.00 per share.
            Each Class B warrant entitled the holder to purchase one share of
            common stock for an exercise price of $6.00 per share.

            During fiscal 1998, holders of Class A warrants exercised
            approximately 1,690,000 warrants prior to the extended expiration
            date of April 30, 1998. In February 1999, the Company redeemed all
            outstanding Class B warrants. Holders of Class B warrants exercised
            approximately 1,893,000 warrants.


                                      F-26



<PAGE>

      g.    Common Stock Reserved - Common stock reserved at August 31, 2000 is
            as follows:
            <TABLE>
              <S>                                                   <C>
              Incentive stock option plans                          10,910,680
              Non-qualified stock option plan                           28,125
              Key employees' options                                 1,220,000
                                                                    ----------

                                                                    12,158,805
                                                                    ==========
            </TABLE>
      h.    Net Loss Per Common Share and Per Common Equivalent Share - The
            reconciliation of loss from continuing operations for the fiscal
            years ended August 31, 2000, 1999 and 1998 is as follows:

<TABLE>
<CAPTION>
                                                                   Fiscal Year Ended August 31, 2000
                                                                                                  Per
                                                                    Loss           Shares        Share
              <S>                                               <C>               <C>           <C>
              Basic loss per share                              $   (173,754)     20,946,729    $ (8.30)
              Effect of diluted securities-common stock
                options and warrants                                      --              --         --
                                                                ------------    ------------    -------

                Diluted loss per share                          $   (173,754)     20,946,729    $ (8.30)
                                                                ============    ============    =======
</TABLE>

<TABLE>
<CAPTION>
                                                                   Fiscal Year Ended August 31, 1999
                                                                                                  Per
                                                                    Loss           Shares        Share
              <S>                                               <C>               <C>           <C>
              Basic loss per share                              $     (9,691)     15,219,140    $  (.64)
              Effect of diluted securities-common stock
                options and warrants                                      --              --         --
                                                                ------------    ------------    -------

                                Diluted loss per share          $     (9,691)     15,219,140    $  (.64)
                                                                ============    ============    =======
</TABLE>

<TABLE>
<CAPTION>
                                                                   Fiscal Year Ended August 31, 1998
                                                                                                  Per
                                                                    Loss           Shares        Share
              <S>                                               <C>                <C>          <C>
              Basic earnings per share                          $       (263)      7,755,795    $  (.03)
              Effect of diluted securities-common stock
                options and warrants                                      --              --         --
                                                                ------------    ------------    -------

                Diluted earnings per share                      $       (263)      7,775,795    $  (.03)
                                                                ============    ============    =======
</TABLE>

            For the three years ended August 31, 2000, 1999 and 1998,
            approximately 6.5 million, 7.1 million and 5.4 million shares of
            stock issuable from the potential exercise of dilutive options and
            warrants have been excluded from the calculation of diluted loss
            per share since their impact would be anti-dilutive.


                                      F-27
<PAGE>

13.   FAIR VALUE OF FINANCIAL INSTRUMENTS

      The methods and assumptions used to estimate the fair value of the
      following classes of financial instruments were:

      a.    Current Assets and Current Liabilities - The carrying amount of
            cash, current receivables and payables and certain other short-term
            financial instruments approximate their fair value.

      b.    Long-Term Debt - The fair value of the Company's long term-debt,
            including the current portion, was estimated using a discounted cash
            flow analysis, based on the Company's assumed incremental borrowing
            rates for similar types of borrowing arrangements. The carrying
            amount of variable and fixed rate debt at August 31, 2000 and 1999
            approximates fair value.

14.   COMMITMENTS

      a.    Lease Commitment - The Company conducts its operations from leased
            space in various locations throughout the United States. These
            leases (classified as operating leases) expire at various dates
            through 2014. The Company's management expects these leases will be
            renewed or replaced by other leases in the normal course of
            business.

            At August 31, 2000, future net minimum rental payments under
            operating leases having initial or remaining non-cancelable terms in
            excess of one year are as follows:
              <TABLE>
              <S>                                                   <C>
              Fiscal Year Ending August 31,
              2001                                                     7,580
              2002                                                     7,408
              2003                                                     7,048
              2004                                                     6,989
              2005                                                     7,004
           thereafter                                                 27,011
                                                                      --------

                                                                    $ 63,040
                                                                      ========
            </TABLE>
            Rental expenses approximated $5,080, $1,900 and $860 for the fiscal
            years ended August 31, 2000, 1999 and 1998, respectively.

            The Company recognizes rent expenses on its leases on a
            straight-line basis. The excess of rent expenses on a straight-line
            basis over the rental payments made is recorded as an accrued
            liability.

            In October 1999, the Company entered into a 15-year lease agreement
            for an operating facility in New York. The agreement provides for
            monthly rental payments ranging from $111 to $135. The Company was
            required to provide a security deposit of a $1,300 in the form of a
            letter of credit, collateralized by cash.

      b.    Employment Agreements - The Company has entered into employment and
            consulting agreements with officers/consultants which provide for
            minimum annual salaries. Certain agreements provide for incentive
            bonuses based upon divisional profitability and also include a
            one-time compensation payment of three times the current annual
            compensation in the event of a change in corporate control, as
            defined. Certain agreements include non-compete agreements.


                                      F-28
<PAGE>

            As part of a March 2000 amendment to one of the employment
            agreements, in exchange for an agreement to extend the initial term
            of his employment from two to three years, the Company granted the
            officer options to acquire 250,000 shares of common stock at an
            exercise price of $13.63 per share. As part of a 1999 amendment to
            this employment agreement, the officer was granted options, all of
            which were currently exercisable, to acquire an additional 300,000
            shares of common stock at an exercise price of $17.38 per share. The
            original employment agreement gave the officer options to acquire
            1,000,000 shares of common stock at $6.00 per share.

            One of the employment agreements provides for options to purchase
            1,000,000 shares of common stock at an exercise price of $7.75 per
            share. These options vest and become exercisable at the end of each
            year of service in increments of 216,666 shares over the next three
            years, provided that the officer is employed with the Company on the
            vesting date; the remaining options to purchase 350,000 shares will
            vest in August 2004, provided the Company and the officer agree to
            extend his employment agreement for a fourth year.

            On August 30, 1999, options to acquire approximately 2,034,000
            shares of common stock at an exercise price of $18.25 were granted
            under 10 of the agreements. Certain of the options become
            exercisable only if specified financial goals are attained.

            The aggregate minimum commitment under employment agreements are as
            follows:
              <TABLE>
              <S>                                    <C>
              Fiscal Year Ending August 31,
              2001                                   3,286
              2002                                     999
              2003                                     387
              </TABLE>
      c.    Retirement Plans - The Company maintains retirement plans which are
            salary deferral plans under Section 401(k) of the Internal Revenue
            Code. Participation in the plans is voluntary, and any participant
            may elect to contribute up to 15% of his or her earnings. The
            Company generally matches 10% of the first 6% of the employee's
            contribution. The Company's contribution approximated $78, $25 and
            $17 for the fiscal years ended August 31, 2000, 1999 and 1998,
            respectively.

      d.    Litigation - The Company sued Drinks.com, Inc. on May 26, 2000 in
            the supreme court of the state of New York. The complaint alleged
            breach of contract arising from the failure of Drinks to pay
            approximately $1.5 million for services performed by the Company.
            Drinks counterclaimed on July 21, 2000 for $14 million, alleging
            that our poor performance caused Drinks to lose projected revenue
            (not profits). The Company has moved to dismiss the counterclaim
            and intends to vigorously pursue its claim and defend against the
            counterclaim. If this lawsuit is adversely determined, it could
            materially affect the Company's financial position and results of
            operations.

            Brenda Isaac sued the Company, McLaughlin & Stern, L.L.P., Werner
            G. Haase, and Richard J. Blumberg on October 3, 2000 in the
            United States District Court for the Southern District of New
            York. Her complaint alleges violations of Section 10(b) of the
            Securities and Exchange Act of 1934 and common law fraud arising
            from the 1999 merger of Xceed Motivation Atlanta, Inc. and Xceed,
            as well as breach of contract arising from certain provisions of
            the merger agreement. Ms. Isaac demands $2,218 in compensatory
            damages and $100 million in punitive damages. Ms. Isaac is a
            former employee of Xceed and is now an employee of the
            Performance Enhancement Business. In addition, she is the owner
            of the property lease we assigned to the Performance Enhancement
            Business in Atlanta. A response to this complaint is not yet due.
            In the event that the litigation proceeds, the Company intends to
            vigorously contest and defend against the allegations. If this
            lawsuit is adversely determined, it could materially affect the
            Company's financial position and results of operations.

            The Company is involved in various other lawsuits and claims
            incidental to its business. In the opinion of management, any
            liabilities resulting from these other lawsuits and claims will
            not materially affect the Company's financial position or results
            of operations.

                                      F-29
<PAGE>

15.   SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                      Fiscal Years Ended August 31,
                                                                         2000      1999      1998
        <S>                                                            <C>        <C>       <C>
        Supplemental disclosures:
          Cash paid for interest                                       $    257   $   483   $   13
                                                                       ========   =======   ======

          Cash paid for income taxes                                   $     --   $   207   $1,719
                                                                       ========   =======   ======
        Non-cash financing and investing activities:
          Common stock issued in connection with acquisitions          $111,022   $27,707   $6,250
                                                                       ========   =======   ======

           Common stock option issued in connection with acquistions   $ 11,883   $    --   $   --
                                                                       ========   =======   ======

          Stock-based compensation                                     $  1,066   $   420   $  150
                                                                       ========   =======   ======

          Capital leases                                               $    879   $    --   $  547
                                                                       ========   =======   ======
</TABLE>

16.   FOURTH QUARTER ADJUSTMENTS

      Certain fourth quarter adjustments were made in Fiscal 2000 that are
      significant to the quarter and to comparisons between quarters. During the
      fourth quarter of Fiscal 2000, the Company: i) recorded an impairment
      charge relating to goodwill of $87,055 (see Note 4); ii) increased the
      provision for the allowance of uncollectible accounts receivable in the
      amount of $9,267 as a result of certain customers experiencing cash flow
      difficulties as a result of a decline in the economic marketplace for
      start up and dot-com companies that began to occur during the fourth
      quarter; iii) recorded a charge to eliminate the equity interest in a
      dot-com company, for which the Company believes that a permanent
      diminution exists as a result of the investee's recurring losses from
      operations, negative working capital, reduced cash levels, and the
      inability to obtain additional financing; iv) incurred a leasehold
      improvement impairment charge of $5,758 due to underutilized capacity in
      the New York corporate office; and v) write-off of offering related costs
      of $2,894 (see Note 12c).

17.   SUBSEQUENT EVENTS

      a.    Sale of Businesses - On November 6, 2000, the Board of Directors
            approved the sale of the Performance Enhancement Business to the
            former CEO, co-chairman and President (the "Former Officer") of
            the Company for $5.7 million. In connection with the sale, the
            Former Officer forfeited most of his stock options in the
            Company, his employment contract including severance agreements
            was terminated and his outstanding loan to the Company has been
            sold and converted into a new loan agreement. Net assets to be
            sold, at their book values, have been separately classified as
            Net Assets Held for Sale in the accompanying balance sheet at
            August 31, 2000.

            In October 2000, the Company sold all the operations previously
            acquired in the Enterprise Solutions Group and Catalyst
            acquisitions and the Denver location of the Sterling Cateret
            acquisition (see Note 3) to a group of former Xceed employees,
            for the assumption of all related liabilities and obligations
            relating to ongoing projects. The former employees also
            relinquished their Xceed stock options and all claims for
            severance.

      b.    Restructuring and integration charges- In the fourth quarter of
            Fiscal 2000, the Company announced their intention to restructure
            their operations, consolidate or sell various operating units and
            eliminate 75 full-time employees. However, as the Company did not
            have a plan approved by the Board of Directors for this
            restructuring as required by EITF 94-3, "Liability Recognition
            for Certain Employee Terminations Benefits and Other Costs to Exit
            an Activity (including Certain Costs Incurred in a Restructuring)"
            and  SEC Staff Accounting Bulletin No. 100 until the first quarter
            of 2001, the costs associated with this restructuring were not
            recorded in Fiscal 2000 and will be recorded in the first quarter
            of Fiscal 2001. The restructuring includes the sale of the
            businesses described above,


                                      F-30
<PAGE>

            the identification of a sublet tenant for the portion of unused
            office space currently leased in New York, severance and related
            employee costs, lease terminations and office closures, which is
            expected to be completed during fiscal 2001.

      c.    Line of Credit Agreement - On November 15, 2000, the Company
            entered into a $5,000 revolving credit facility (the "Facility")
            with Spherion to fund operations. The Facility expires in May 2002
            and is secured by a security interest in the Company's accounts
            receivable. Interest is payable at the prime rate plus 2% per
            annum. In connection with the Facility, Spherion received a warrant
            to purchase up to 3.5 million shares of the Company's common stock
            at a price of $1.6875 per share, which represented the closing
            price of the Company's common stock on the date immediately
            preceding the date of grant.


                                   * * * * * *


                                      F-31



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