ALTERNATIVE TECHNOLOGY RESOURCES INC, 10KSB, 1998-09-22

ALTERNATIVE TECHNOLOGY RESOURCES INC
10KSB, 1998-09-22
COMPUTER PROGRAMMING SERVICES

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JUNE 30, 1998

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _____ to _____

Commission file number 0-20468

ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(Exact name of small business issuer as specified in its charter)

Delaware 68-0195770
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)

629 J Street, Sacramento, CA 95814
(Address of principal executive offices, including zip code)
(916) 325-9370
(Issuer's telephone number, including area code)

Securities registered under Section 12 (b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None

Securities registered under Section 12(g) of the Act:

Common Stock, par value $0.01 per share
(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 the past 90 days. Yes X No__

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B 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-KSB or any amendment to
this Form 10-KSB. [ ]

State issuer's revenue for its most recent fiscal year. $5,250,002

Aggregate market value of the Registrant's common voting stock held by
non-affiliates of the Registrant on September 15, 1998 was $2,729,643 (based on
the final trading price on that date).

Number of shares of common stock outstanding at September 15, 1998:
26,120,499

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's definitive Proxy Statement for the Company's Annual
Meeting of Stockholders to be held on November 17, 1998 (which will be filed
within 120 days of the Company's fiscal year end) are incorporated by reference
into Part III.

Exhibit index is located on page 14.

<PAGE>1

PART I

Item 1. Description of Business

General

Alternative Technology Resources, Inc. ("ATR" or the "Company"), a Delaware
corporation, was founded in 1989 to develop and sell computer integrated
laboratory systems ("LIS"). The Company operated under the name 3Net
Systems, Inc. and was never successful in the LIS market. Therefore, in
fiscal 1996, the Company stopped new system development and later decided to
exit LIS entirely.

During fiscal 1997, the Company changed its name to Alternative Technology
Resources, Inc. ("ATR"). It has since focused its efforts entirely upon its
computer programmer placement business, whereby it recruits experienced,
qualified computer programmers primarily from the former Soviet Union, obtains
necessary visas, and places them for assignment in the United States. Recently,
the Company has begun to recruit programmers from South Korea for future
placement.

Based upon its experience in the market thus far and critical industry
forecasts, the Company believes that its current focus offers the best
opportunity for financial recovery and the development of a viable ongoing
enterprise. The Company has begun to generate new revenues and has reduced its
operating losses but did not generate sufficient cash flow in fiscal 1998 and
1997 to support operations.

The Company has incurred operating losses since inception which have resulted in
an accumulated deficit of $35,099,830 at June 30, 1998. In addition, at June 30,
1998 the Company had a working capital deficit and a stockholders' deficit of
$4,844,274. Therefore, the Company is pursuing additional funds through private
equity financing or additional debt financing. Although there can be no
assurances that additional financing can be obtained or that if obtained, such
financing will be sufficient to prevent the Company from having to further
materially reduce its level of operations or be forced to seek protection under
federal bankruptcy laws, management of the Company believes that sufficient
financing will be available until operations can be funded through contract
programming and consulting services. Ultimately, the Company will need to
achieve a profitable level of operations to fund growth and to meet its
obligations when they become due.

Services

Contract Programming, former Soviet Union (FSU)

ATR provides contract computer programming and consulting services to an
expanding base and variety of industrial customers by recruiting, training,
importing, and contractually deploying foreign information technology
professionals from the FSU for direct assignment to customer programming
projects. The mechanism by which such prospective foreign contractors are
identified and prepared for assignment to U.S. company projects is the Company's
business relationship with a technology firm based in the FSU. The Company has
an exclusive contract with PRIZE-ITM, LTD. ("PRIZE"), a Latvian company that
specializes in information technology recruiting, training and software
development. The key principals of PRIZE are former senior executives and
managers of the Research Division of the Riga Institute for Civil Aviation
Automation and Controls, Riga, Latvia. In the former Soviet Union, the Riga
Institute provided information technology education and software development
services to the Ministry of Civil Aviation (AEROFLOT). The original nucleus of
PRIZE employees came from the Riga

<PAGE>2

Institute after the major functions supporting AEROFLOT were discontinued. The
Company pays a monthly fee to PRIZE for the services they perform in recruiting
and training personnel for U.S. assignments. The process works as follows:

o The Company identifies information technology personnel requirements with
its U.S. customers, and provides PRIZE with a technical job profile that
describes the specific applications software, computer hardware, operating
systems and years experience required to qualify for the specific U.S.
customer-identified position. PRIZE uses these profiles to identify and
select appropriate candidates. PRIZE has developed a data base of resumes
of individuals from Riga and other parts of the former Soviet Union who
have technical and language proficiency skills necessary to work in the
United States, and who have indicated a desire to work overseas. This
data base is integrated with the specific job criteria, and any personnel
matches are further interviewed to ascertain if the individual is
technically qualified for the specific job and has a desire to participate
in the Company's U.S. placement program. PRIZE may also advertise in
local newspapers or industry periodicals for information technology
professionals with specific technical skills and work experience. These
advertisements are placed with a specific U.S. customer in mind that has
identified a need within its organization which cannot be filled through
its normal domestic U.S. personnel selection channels. In addition, PRIZE
has recruiting representatives in other cities in the former Soviet Union
who participate in job fairs, and who recruit potential candidates through
educational institutions, technical companies or on-line services in their
local area.

o PRIZE provides several types of training depending upon the U.S. based
customer needs and the needs of the people who are being recruited to fill
positions at the customer site. Computer based or classroom training is
provided in subjects such as specific programming languages, specific
computer operating systems, and business subjects for which computer
automation support is provided by the customer to its users. Additional
training is provided in English, and U.S. business and personal
lifestyles. Not all candidates recruited by PRIZE are trained in
technical subjects if they have the requisite skills based on their
previous work experience. Depending on the U.S. customer, some specific
training may be provided by the customer either in conjunction with
PRIZE's training program or once the contractors are at the customer's
site. This training is usually more detailed education regarding the
customer's business, applications software, and technical environment.

o The typical contract relationship with foreign contractors starts with a
representation agreement which allows the Company to represent the
candidate for a fixed period of time in the U.S. information technology
market. Further, this contract authorizes the Company to process an H1-B
work visa with the U.S. Immigration Service when an appropriate job has
been found for the candidate. This contract also identifies specific
training required to be performed by the candidate prior to reporting to
the U.S. customer's work site. After the H1-B visa is approved, the
Company and the candidate sign a three year, extendable contract which
supports the employment requirements of the H1-B visa, and identifies all
the services to be performed by the Company and the contractor. All
employment and compensation terms are between the Company as employer, and
the contractor as an employee of the Company.

o The Company provides all visa application support, including application
fees, and also provides international and domestic transportation to the
customer's work-site. When necessary, the Company also provides housing and
other support services, e.g. utilities and telephone, until the contractor is
capable of establishing credit in order to provide these services for
himself.

<PAGE>3

The Company believes it has an opportunity to place many FSU computer
specialists in U.S.-based computing assignments providing "legacy system"
support and maintenance. A legacy system is a business application system
developed ten or more years ago in an older computer language (such as COBOL,
PL/1, or Assembler Language) that continues to operate on a mainframe or
mid-frame hardware platform. The cost of maintenance for such systems has
steadily risen over the years. Even more problematic for the U.S. companies
operating legacy systems today is the ever-decreasing domestic labor pool of
programmers who are technically qualified and who desire to perform software
maintenance tasks.

The increasing disparity between the amount of legacy system maintenance demand
and the supply of qualified, motivated programmers to perform it is further
escalated by the Year 2000 conversion issue. Also known as the "millennium bug,"
this problem arises from the widespread use of only two digits to represent the
year in computer programs performing date computations and decision-making
functions. Unless these programs are modified, many may fail due to their
inability to interpret properly these date fields (e.g., such programs may
interpret "00" as the year "1900" rather than as "2000"). The Gartner Group, an
information technology market research firm, has estimated that it will cost the
public and private sectors between $300 and $600 billion worldwide to perform
the necessary Year 2000 conversions.

The Company has joint marketing agreements with three professional contract
services companies who market the Company's personnel resources. The Company is
the preferred provider of foreign workers to these companies.

At September 15, 1998, the Company had 89 foreign contractors actively employed
in U.S.-based contracts at 16 different customer business locations in 10
states.

Contract Programming, South Korea

As of September 15, 1998, the Company had begun recruiting programmers from
South Korea. Because of the recent business and economic difficulties being
experienced in Asia, many qualified computer programmers are under- or
unemployed in South Korea. The Company is developing contractual relationships
with a firm that represents many such programmers. It is expected that this
relationship will work in a similar fashion as the Prize relationship described
in the FSU section above. The major difference is that while FSU programmers are
often specialized in legacy system programming, South Korean programmers have
skills working with more modern computer systems languages and applications,
including the client-server and internet environments. The Company has
experienced early recruiting success and it's customers have shown an interest
in the South Korean programmers. However, no customer placements will be made
until more H1-B visas become available after October 1, 1998 (see "Item 1,
Description of Business Government Regulation").

System Service

Until May 1997, the Company provided software and hardware maintenance support
services to customers who licensed one or more of its proprietary system
products. In line with its business strategy to focus on contract programming
services, the Company transferred and assigned its right, title, and interest in
and to its LIS software and hardware customer service contracts to Omnitech
Migrations International, Inc. ("OMI") and delegated to OMI all the Company's
duties and obligations of performance thereunder.

<PAGE>4

Customers

The Company's customer base includes those companies to which it is providing
services in alternative programming resource services. In fiscal 1998 two
customers provided approximately 85% of the Company's total revenues. In fiscal
1997 two customers constituted approximately 73% of total revenues. It should be
noted that the two customers cited are third party placement agencies that work
with the Company to place programmers at several of their customer locations.

Sales

The Company's executive officers and certain technical staff members currently
participate in selling efforts by directly contacting potential contract
programming and consulting customers. The Company also relies upon and benefits
from the efforts of third-party business partners in the sale and placement of
foreign contractors in new customer contracts and the management of such
accounts after the sale.

Competition

Contract Programming

The information technology temporary services industry is highly competitive
with limited barriers to entry. Within local markets, smaller firms actively
compete with the Company for business, and in most of these markets no single
company has a dominant share of the market. The Company also competes with
larger full-service and specialized competitors in national, regional, and local
markets which have significantly greater marketing, financial, and other
resources than the Company.

Due to the niche definition of its alternative programming resources ("APR")
market segment and the growing general shortage of legacy and other systems
maintenance programmers, the Company does not believe that external competition
represents the primary impediment to its placement of its programmers in
customer contracts. Rather, the Company's APR business is limited primarily by
its ability to recruit, train, and present qualified candidates to the customer
and to obtain acceptance by potential customers of using foreign contractors.
Qualification attributes for placement in U.S. customer contracts include the
particular technical skills and experience corresponding to the customer's
requirements and sufficient English language skills to communicate effectively
in an American business environment.

Government Regulation

The Company's operations are subject to various federal and state laws. The
Company believes that its operations currently comply with such laws, but there
can be no assurance that subsequent laws, or subsequent changes in current laws
or legal interpretations, will not adversely affect the Company's operations.

In connection with its APR program using FSU or South Korean employees, the
Company must comply with the laws and regulations of the United States
Immigration and Naturalization Service (the "INS"). The Company has engaged the
services of a business immigration lawyer to assist in the filing of all
appropriate documents necessary for the Company to invite foreign

<PAGE>5

workers to the United States for contract programming assignments. While the
Company and its immigration lawyer are very familiar with the current rules and
regulations, there can be no assurance that the immigration laws of the United
States will not be changed, resulting in a potentially negative effect on the
Company's ability to engage qualified FSU employees. At present there is a
65,000 person nationwide limitation on the number of H1-B visas which can be
granted in a fiscal year. This limitation has been reached in the last two
years, and during fiscal year 1998 several placements were delayed by the lack
of available H1-B visas. The U.S. Congress is currently working on legislation
to increase the H1-B cap. However, future visa limitations could adversely
impact the Company's operations.

Year 2000 Issues

Management has made an assessment of its computer programs and has determined
that it has no Year 2000 impairment in its computer systems developed in-house
and is relying on vendor declarations that their accounting program has no
impairment related to the Year 2000 issue. Therefore, management does not
currently anticipate that the Company will incur significant operating expenses
or be required to invest heavily in computer systems improvements to be year
2000 compliant.

Human Resources

At September 15, 1998, the Company had 105 employees, consisting of 2 executive
officers, 93 contract programming personnel in the United States on visa from
the former Soviet Union, and 10 administrative support personnel. There are 12
employee's located at the Company's headquarters in Sacramento and 89 employees
located at customer locations as follows: 39 in Massachusetts, 13 in Georgia, 10
in Texas, 10 in Rhode Island, 8 in Connecticut, 5 in California, 3 in Missouri,
2 in Kansas, 2 in Colorado and 1 in Minnesota. None of the Company's employees
is represented by a labor union. Management considers its employee relations to
be good.

Insurance

The annual coverage limits for the Company's general premises liability and
workers' compensation insurance policies are $2,000,000 for liability insurance
policies and $1,000,000 for workers' compensation. The Company also has a
$1,000,000 policy for errors and omissions insurance. Management believes such
limits are adequate for the Company's business; however, there can be no
assurance that potential claims will not exceed the limits on these policies.

Item 2. Description of Property

The Company's headquarters are located in Sacramento, California. The Company
occupies approximately 5,400 square feet of office space which it leases from
James W. Cameron, Jr., a substantial shareholder, for a monthly rent of $7,157.
The lease expires and is expected to be renewed in December 1998.

Item 3. Legal Proceedings

The Company is not currently a party to any pending legal proceedings

<PAGE>6

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted during the quarter ended June 30, 1998 to a vote of
security holders.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

Price Range of Common Stock

The Company's common stock is traded on the OTC Bulletin Board under the symbol
"ATEK". Effective December 2, 1996, the Company changed its name from 3Net
Systems, Inc., to Alternative Technology Resources, Inc. Prior to December 2,
1996, the Company's common stock was traded under the symbol "TNET."
Transactions in the Company's common stock are subject to the "penny stock"
disclosure requirements of Rule 15g-9 under the Exchange Act.

Set forth below are the high ask and low bids for the common stock of the
Company for each of the last eight quarters. The prices have been adjusted
to give effect to a one-for-ten share consolidation of the Company's
outstanding common stock, par value $0.01 per share, which became effective
on December 2, 1996. The quotations are derived either from the IDD
Information Services, Tradeline Database or the National Association of
Securities Dealers, Inc. and reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not necessarily represent actual
transactions in the common stock. There is no public market for the
Company's Preferred Stock.

Period High Low
------ ---- ----

Quarter ended September 30, 1996 $ 2.50 $ 1.10
Quarter ended December 31, 1996 $ 2.20 $ 0.56
Quarter ended March 31, 1997 $ 1.25 $ 0.44
Quarter ended June 30, 1997 $ 1.25 $ 0.81
Quarter ended September 30, 1997 $ 1.31 $ 0.91
Quarter ended December 31, 1997 $ 1.19 $ 0.45
Quarter ended March 31, 1998 $ 1.06 $ 0.38
Quarter ended June 30, 1998 $ 1.22 $ 0.75

The Company had approximately 169 common stockholders of record and 3 preferred
stockholders of record as of September 15, 1998. The last reported sales price
for the Company's common stock was $0.4375 on September 15, 1998.

Dividend Policy

The Company has never paid a cash dividend on its common stock and does not
anticipate paying cash dividends on its common stock in the foreseeable future.
The Company's Series D Preferred Stock carries a cumulative dividend of $0.60
per share per year which has been accrued beginning July 1, 1994 and is payable
quarterly to the extent permitted by law.

The Company's future dividend policy will be determined by its Board of
Directors on the basis of various factors, including the Company's results of
operations, financial condition, capital requirements and other relevant
factors.

<PAGE>7

Item 6. Management's Discussion and Analysis

The following discussion provides information to facilitate the understanding
and assessment of significant changes in trends related to the financial
condition of the Company and its results of operations. It should be read in
conjunction with the audited financial statements and footnotes appearing
elsewhere in this report.

Results of Operation

Contract programming

Contract Programming Revenue. Contract programming revenue results primarily
from sales of programmer services. To a lesser extent during fiscal 1997, sales
of custom programming and software development are also included in Contract
Programming Revenue. These latter categories of sales were immaterial in fiscal
1998.

Revenues increased $3,232,000 or 160% in fiscal 1998 compared to fiscal 1997.
This increase was due to billing rate increases, growth in the number of
contract programmers working at customer sites in fiscal 1998 compared to fiscal
1997, and the length of time contract programmers were at customer sites during
each of the fiscal years.

Programmer Costs. Programmer costs are the salary and other wage and benefit
costs of ATR's programmer employees. These costs increased $2,203,000, or 133%
in fiscal 1998 compared to fiscal 1997. This increase is due primarily to
increasing the number of programmers and to increasing salaries for more
experienced programmers.

Start-up and Other Costs. Start-up and other costs are the costs of recruiting,
training, and travel for programmer employees coming to the United States from
the Former Soviet Union for the first time, relocation costs within the United
States, and legal and other costs related to obtaining and maintaining
compliance with required visas, postings and notifications.

Included in this category of costs is compensation paid by ATR whenever
programmer employees are hired and enter the United States or are relocated once
in the United States but before these programmers begin working at a customer's
work site. There are sometimes periods of several days when under immigration
law, ATR, as employer, must pay a programmer employee at least 95% of prevailing
wages for his or her specialty even when the programmer is not placed.

ATR expenses start-up and other costs as incurred, which results in timing
differences between the incurring of expense and recognition of resulting
revenue. Such differences may be particularly evident in ATR's case because of
its relatively small revenue base and rapid growth. The affect may be
particularly noticeable whenever the timing of placement of employees is such
that the major start-up costs occur late in one reporting period and the
revenues appear in subsequent periods. This was the case in the year ended June
30, 1997.

Start-up and other costs increased $424,000 or 98% in fiscal 1998 compared to
fiscal 1997. This increase is due to placing or relocating approximately 72
programmers during fiscal 1998 compared to placing or relocating 39 programmers
during fiscal 1997.

Contract Programming Gross Profit (Loss). The gross profit (loss) percentage on
contract programming revenue was 10% for fiscal 1998 compared to (4)% for fiscal
1997. The lower billing rates and the start-up and other costs that precede
revenue as discussed above contributed to the negative margins for fiscal 1997.

<PAGE>8

System Service

The discussion below relates to fiscal year 1997. In fiscal 1998, the Company
did not provide System Service.

System Service Gross Margin. Gross margin from this line of business was 68% in
fiscal 1997. This high margin is due to the recognition of previously deferred
service contract revenue in fiscal 1997 when the Company assigned those
contracts to OMI in May 1997 (see "Item 1, Description of Business --System
Service").

Selling, General and Administrative Expenses

Selling, General and Administrative Expenses ("SG&A"). SG&A expense increased
$176,000 or 15% in fiscal 1998 compared to fiscal 1997. An increase of $350,000
in personnel costs was partially offset by a decrease of $174,000 in facilities
and other costs. The increase in personnel costs is primarily due to increasing
the average number of employees currently assigned to administrative functions
in fiscal 1998 as compared to fiscal 1997. The facilities and other costs
decreased as a result of depreciation. Depreciation decreased in fiscal 1998
since almost all fixed assets were fully depreciated at the end of fiscal 1997.

Other Income (Expense)

Interest Expense. Interest expense increased $150,000 in fiscal 1998
compared to fiscal 1997 due to a net increase in notes payable and other debt
of $1,234,000.

Settlement of Dispute with Distributor. Since 1993, the Company and its Canadian
distributor (the "Distributor") disputed several provisions of their Distributor
and Co-Development Agreement, modified certain provisions of the agreement in
1994 and 1995, and continued to dispute several provisions of the modified
agreement during 1996 and 1997. In May 1997, the Company and the Distributor
signed a Mutual Release and Settlement Agreement wherein both parties agreed to
the settlement of any and all issues arising from or relating to the Distributor
and Co-Development Agreement, and any of its modifications, and any and all
other matters arising from or relating to any relationship or agreements(s)
between the Company and the Distributor by mutually agreeing to cancel and
terminate the agreement(s) and by releasing each other from any and all claims,
demands, or liabilities which have arisen or which may arise from the
agreement(s). As a result of this agreement, the Company reversed net accounts
payable to the Distributor previously recorded of $189,299.

Expiration of Accrued Customer Obligations. During fiscal 1992, the Company
recorded an estimated liability in the amount of $242,848 related to certain
software sales agreements. After discussion with legal counsel, management of
the Company believes the Company has no further obligation to perform under
these customer contracts. Therefore, in fiscal 1997, the Company reversed its
previously recorded liability of $242,848.

Reimbursement from Insurance Company. During fiscal 1997, legal expenses and
costs of $201,550 accrued in prior periods by the Company related to a suit from
a former consultant were reimbursed by insurers of Mr. Cameron and the Company.

Income Taxes

The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109. As of June 30, 1998, the Company had a net operating loss
carryforward for federal and state income tax purposes of $24 million and $13

<PAGE>9

million, respectively. The federal net operating loss carryforward expires in
the years 2006 through 2013 and the state net operating loss carryforward
expires in 1998 through 2003. In connection with the Company's initial public
offering, a change of ownership (as defined in Section 382 of the Internal
Revenue Code of 1986, as amended), occurred. As a result, the Company's net
operating loss carryforwards generated through August 10, 1992 are subject to an
annual limitation of $300,000.

In 1993, a controlling interest of the Company's stock was purchased, resulting
in a second annual limitation of $398,000 on the Company's ability to utilize
net operating loss carryforwards generated between August 11, 1992, and
September 13, 1993. The Company expects that the aforementioned annual
limitations will result in $3.6 million of net operating loss carryovers which
may not be utilized prior to the expiration of the carryover period.

Net Loss

Net loss increased to $1,243,944 in fiscal 1998 from $648,187 for fiscal 1997,
primarily due to non-recurring other income items in fiscal 1997.

Net Loss Per Share

The Company's net loss per share has been computed by dividing net loss after
deducting Preferred Stock dividends ($122,500 in each of the fiscal years 1998
and 1997) by the weighted average number of shares of common stock outstanding
during the periods presented. Net loss per share increased as a result of a
greater loss and only a slightly greater number of shares used in the
calculation in fiscal 1998 compared to fiscal 1997.

Liquidity and Capital Resources

The Company has used a combination of equity and debt financing and internal
cash flow to fund operations and finance accounts receivable but has incurred
operating losses since its inception.

As a result, the report of independent auditors on the Company's June 30, 1998
financial statements includes an explanatory paragraph indicating there is
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the
uncertainties related to the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the inability of
the Company to continue as a going concern. Based on the steps the Company has
taken to reduce its expenses and refocus its operations, the Company believes
that it has developed a viable plan to address the Company's ability to continue
as a going concern and that this plan will enable the Company to continue as a
going concern through the end of fiscal year 1999. However, considering, among
other things, the Company's historical operating losses and its short history in
the contract computer programming industry, there can be no assurance that this
plan will be successfully implemented. The Company expects to begin generating
positive cash flow from operations during fiscal 1999, but not at levels
sufficient to pay off current obligations and fund growth of its contract
computer programming and consulting services; therefore, the Company
contemplates needing to raise additional financing during fiscal 1999, the
receipt of which cannot be assured.

<PAGE>10

interest at 10.25%. In December 1997, Cameron and Negri extended the maturity
date on all notes payable originally maturing December 31, 1997, to the earlier
of December 31, 1998, or such time as the Company obtains equity financing.

On April 21, 1997, the Company issued an unsecured note payable (the "Straight
Note") to Cameron for $1,000,000 in accordance with the Reimbursement Agreement
the Company signed on February 28, 1994. Terms of the note provide for an
interest rate of 9.5% and monthly interest payments. No maturity date is stated
in the note; however, under the terms of the Reimbursement Agreement, upon
written demand by Cameron, the Straight Note will be replaced by a convertible
note (the "Convertible Note") in a principal amount equal to the Straight Note
and bearing interest at the same rate. The conversion ratio of the Convertible
Note is equal to 20%, multiplied by the average trading price of the Company's
common stock over the period of ten trading days ending on the trading day next
preceding the date of issuance of such Convertible Note.

The Company must obtain additional funds during fiscal 1999 in order to meet its
obligations while attempting to grow revenues to a level necessary to generate
cash from operations. Although the Company has not entered into any written
agreements with Cameron or Negri, management believes, based on discussions with
these two individuals, that they will continue to fund operations and extend the
maturity dates of the various notes payable until at least June 30, 1999, or
until such time as the Company can repay the notes. However, there can be no
assurance that events may arise which may affect these stockholders' ability to
finance the Company or that the Company may experience significant and
unanticipated cash flow problems which may cause these two stockholders to
reconsider their investment. Further, if the Company experiences significant
cash flow problems, the Company may be required to reduce the level of its
operating activities or be forced into seeking protection under federal
bankruptcy laws.

On December 31, 1996, the Board of Directors named Mr. W. Robert Keen as Chief
Executive Officer of the Company. In exchange for his services, Mr. Keen
initially received 225,000 shares of common stock with a fair market value on
the date of issuance of $168,750, and on November 18, 1997 Mr. Keen received
275,000 shares of common stock with a fair market value on the date of issuance
of $154,688. Both the 275,000 shares and the 225,000 shares are subject to
forfeiture in the event Mr. Keen voluntarily leaves the Company prior to January
1, 1999.

During fiscal 1997, the Company issued 303,871 shares of the Company's common
stock in settlement of approximately $237,000 in accrued legal costs and
approximately $158,000 in other claims accrued in prior years.

Effects of Inflation

The Company's most significant cost is personnel. To the extent personnel costs
increase, management of the Company believes that customer billing rates can be
increased to cover such personnel increases.

Item 7. Financial Statements

The financial statements of the Company, including the notes thereto and report
of the independent auditors thereon, are attached hereby as exhibits.

<PAGE>11

Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

Not applicable.

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act.

The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on November 17, 1998 under the Captions "Election of Directors",
"Further Information concerning the Board of Directors" and "Section 16(a)
Information." The Proxy Statement will be filed within 120 days of the Company's
fiscal year end.

Item 10. Executive Compensation

The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on November 17, 1998 under the Caption "Executive Compensation." The
Proxy Statement will be filed within 120 days of the Company's fiscal year end.

Item 11. Security Ownership of Certain Beneficial Owners and Management

The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on November 17, 1998 under the Caption "Principal Stockholders." The
Proxy Statement will be filed within 120 days of the Company's fiscal year end.

Item 12. Certain Relationships and Related Transactions

The information required by this item is incorporated by reference to the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on November 17, 1998 under the Caption "Certain Relationships and
Related Transactions." The Proxy Statement will be filed within 120 days of the
Company's fiscal year end.

<PAGE>12

Item 13. Exhibits and Reports on Form 8-K

Exhibit
Number Description of Document

3.1 Second Amended and Restated Bylaws of the Registrant
(incorporated by reference to Exhibit 3.3 to Amendment No.
1 to Registration Statement on Form S-18, Reg. No.
33-48666).

3.2 Amendment to Second Amended and Restated Bylaws of the
Registrant (incorporated by reference to Exhibit 3.3 of the
Registrant's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1994).

3.3 Amended and Restated Certificate of Incorporation of the
Registrant.

4.1 Amended and Restated Certificate of Incorporation of
Registrant, including Certificates of Designation with respect
to Series A, Series B, Series C, Series D, and Series E
Preferred Stock, including any amendments thereto
(incorporated by reference to Exhibit 4.1 to Reistration
Statement on Form S-3, Reg. No. 33-86962).

10.1 Form of Director and Executive Officer Indemnification
Agreement (incorporated by reference to Exhibit 10.19 to
Registration Statement on Form S-18, Reg. No. 33-48666).

10.2 Form of Reimbursement Agreement, dated February 28, 1994,
between the Registrant and James W. Cameron, Jr. (incorporated
by reference to Exhibit 10.29 to Form 10-KSB for the fiscal
year ended June 30, 1994).

10.3 Form of Stock Purchase Warrant issued in connection with the
Confidential Private Placement Memorandum of the Registrant,
dated February 13, 1992 (Class A Warrant) (incorporated by
reference to Exhibit 10.31 to Form 10-KSB for the fiscal year
ended June 30, 1994).

10.4 Form of Stock Purchase Warrant issued April 22, 1993 (Class B
Warrant) (incorporated by reference to Exhibit 10.32 to Form
10-KSB for the fiscal year ended June 30, 1994).

10.5+ Stock Purchase Warrant issued to William T. Manak on April
6, 1994 for the purchase of 57,286 shares [restated to
reflect one-for-ten consolidation of the Company's
outstanding common stock effective December 2, 1996] of the
Registrant's common stock (incorporated by reference to
Exhibit 10.34 to Form 10-KSB for the fiscal year ended June
30, 1994).

10.6 Stock Purchase Warrant issued to Dennis L. Montgomery on
April 6, 1994 for the purchase of 12,500 shares [restated
to reflect one-for-ten consolidation of the Company's
outstanding common stock effective December 2, 1996] of the
Registrant's common stock (incorporated by reference to
Exhibit 10.35 to Form 10-KSB for the fiscal year ended June
30, 1994).

10.7 Stock Purchase Warrant issued to Dennis L. Montgomery on
April 6, 1994 for the purchase of 58,000 shares [restated
to reflect one-for-ten consolidation of the Company's
outstanding common stock effective December 2, 1996] of the
Registrant's common stock (incorporated by reference to
Exhibit 10.36 to Form 10-KSB for the fiscal year ended June
30, 1994).

<PAGE>13

Exhibit
Number Description of Document

10.8 Form of Amended Stock Purchase Warrant issued to certain Class
A, Class B, Class C and Class D Warrant Holders (incorporated
by reference to Exhibit 10.37 to Form 10-KSB for the fiscal
year ended June 30, 1994).

10.9 Form of Stock Purchase Warrant, dated June 30, 1994, issued to
stockholders of record on September 7, 1993 (incorporated by
reference to Exhibit 10.38 to Form 10-KSB for the fiscal year
ended June 30, 1994).

10.10 Form of Stock Purchase Warrant to Jeff Buckner as designee
for James W. Cameron, Jr. (incorporated by reference to
Exhibit 10.40 to Form 10-KSB for the fiscal year ended June
30, 1994).

10.11+ 1993 Stock Option/Stock Issuance Plan (incorporated by
reference to Exhibit 10.47 to Form 10-KSB for the fiscal year
ended June 30, 1994).

10.12+ Stock Option Agreement, dated August 11, 1993, between the
Registrant and Russell J. Harrison (incorporated by reference
to Exhibit 10.51 to Form 10-KSB for the fiscal year ended June
30, 1994).

10.13 Contractor Agreement, dated June 3, 1996, between the
Registrant and Technical Directions, Inc. [formerly known as
The Systems Group, Inc.] (incorporated by reference to Exhibit
10.42 to Form 10-KSB for the year ended June 30, 1996).

10.14 Lease, dated November 6, 1995, between the Registrant and
James W. Cameron, Jr. (incorporated by reference to Exhibit
10.46 to Form 10-KSB for the year ended June 30, 1996).

10.15 Agreement with Technical Directions, Inc. (incorporated by
reference to Exhibit 10.47 to Form 10-KSB for the year
ended June 30, 1996).

10.16 First Addendum to Lease between James W. Cameron, Jr., and the
Registrant, dated October 1, 1996 (incorporated by reference
to Exhibit 10.52 to Form SB-2 filed December 18, 1996).

10.17 Agreement between Liberty Mutual Insurance Company and the
Registrant, dated October 9, 1996 (incorporated by reference
to Exhibit 10.53 to Form SB-2 filed December 18, 1996).

10.18 Note Payable between the Registrant and the Negri Foundation
dated December 24, 1996 (incorporated by reference to Exhibit
10.60 to Form 10-QSB for the quarter ended December 31, 1996).

10.19 Note Payable between the Registrant and the Negri Foundation
dated December 31, 1996 (incorporated by reference to Exhibit
10.61 to Form 10-QSB for the quarter ended December 31, 1996).

10.20 Note Payable between the Registrant and the Max Negri Trust
dated December 31, 1996 (incorporated by reference to Exhibit
10.62 to Form 10-QSB for the quarter ended December 31, 1996).

10.21 Note Payable between the Registrant and the Cameron Foundation
dated December 31, 1996 (incorporated by reference to Exhibit
10.63 to Form 10-QSB for the quarter ended December 31, 1996).

<PAGE>14

Exhibit
Number Description of Document

10.22 Note Payable between the Registrant and the James W. Cameron,
Jr., as an individual, dated December 31, 1996 (incorporated
by reference to Exhibit 10.64 to Form 10-QSB for the quarter
ended December 31, 1996).

10.23 Note Payable between the Registrant and James W. Cameron, Jr.,
as an individual, dated January 16, 1997 (incorporated by
reference to Exhibit 10.65 to Form 10-QSB for the quarter
ended December 31, 1996).

10.24 Note Payable between the Registrant and James W. Cameron, Jr.,
as an individual, dated January 31, 1997 (incorporated by
reference to Exhibit 10.66 to Form 10-QSB for the quarter
ended December 31, 1996).

10.25 Note Payable between the Registrant and James W. Cameron, Jr.,
as an individual, dated February 7, 1997 (incorporated by
reference to Exhibit 10.67 to Form 10-QSB for the quarter
ended December 31, 1996).

10.26 Agreement between the Registrant and Adept, Inc. dated
February 1997 (incorporated by reference to Exhibit 10.68 to
Form 10-QSB for the quarter ended March 31, 1997).

10.27 Sale of Cortex between the Registrant and Omnitech Migrations
International, Inc. (formerly known as Centre de Traitment
I.T.I. Omnitech, Inc.), dated May 2, 1997 (incorporated by
reference to Exhibit 10.69 to Form 10-QSB for the quarter
ended March 31, 1997).

10.28 Mutual Release and Settlement Agreement between the Registrant
and Omnitech Migrations International, Inc. (formerly known as
Centre de Traitment I.T.I. Omnitech, Inc.), dated May 6, 1997
(incorporated by reference to Exhibit 10.70 to Form 10-QSB for
the quarter ended March 31, 1997).

10.29 Note Payable between the Registrant and James W. Cameron, Jr.,
dated April 21, 1997 (incorporated by reference to Exhibit
10.29 to Form 10-KSB for the year ended June 30, 1997).

10.30 Second Addendum to Lease between James W. Cameron, Jr., and
the Registrant, dated June 3, 1997 (incorporated by reference
to Exhibit 10.30 to Form 10-KSB for the year ended June 30,
1997).

10.31 Joint Services Agreement between the Registrant and Prize-ITM,
Ltd., dated August 1, 1997 (incorporated by reference to
Exhibit 10.31 to Form 10-KSB for the year ended June 30,
1997).

10.32 Third Addendum to Lease between James W. Cameron, Jr., and the
Registrant, dated January 5, 1998 (incorporated by reference
to Exhibit 10.32 to Form 10-QSB for the quarter ended December
31, 1997).

10.33+ Alternative Technology Resources, Inc. 1997 Stock Option
Plan

10.34 Memorandum regarding rent reduction on that Lease between
James W. Cameron, Jr., and the Registrant, dated July 15,
1998.

23.1 Consent of Independent Auditors

+ Indicates a management contract or compensatory plan or arrangement as
required by Item 13(a).

<PAGE>15

Reports on Form 8-K

There were no reports on Form 8-K filed during the last quarter of the
period covered by this report.

<PAGE>16

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

Dated: September 22, 1998 ALTERNATIVE TECHNOLOGY RESOURCES, INC.

By /S/ W. ROBERT KEEN
------------------------
W. Robert Keen
Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

Signature Title Date

/S/ W. ROBERT KEEN Chief Executive Officer September 22, 1998
W. Robert Keen and Director
(Principal Executive Officer)

/S/ EDWARD L. LAMMERDING Chairman of the Board, September 22, 1998
Edward L. Lammerding Chief Financial Officer
and Director
(Principal Financial Officer)

/S/ THOMAS W. O'NEIL, JR. Director September 22, 1998
Thomas W. O'Neil, Jr.

<PAGE>

INDEX TO FINANCIAL STATEMENTS

Alternative Technology Resources, Inc.

Page

Report of Independent Auditors.....................................F-1
Balance Sheet at June 30, 1998.....................................F-2
Statements of Operations for the Years Ended June 30, 1998
and 1997 .........................................................F-3
Statements of Stockholders' Deficit for the Years Ended
June 30, 1998 and 1997............................................F-4
Statements of Cash Flows for the Years Ended June 30, 1998
and 1997..........................................................F-5
Notes to Financial Statements......................................F-7

<PAGE>F-1

Report of Independent Auditors

The Board of Directors and Stockholders
Alternative Technology Resources, Inc.

We have audited the accompanying balance sheet of Alternative Technology
Resources, Inc. as of June 30, 1998, and the related statements of operations,
stockholders' deficit, and cash flows for the years ended June 30, 1998 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alternative Technology
Resources, Inc. at June 30, 1998, and the results of its operations and its cash
flows for the years ended June 30, 1998 and 1997 in conformity with generally
accepted accounting principles.

The accompanying financial statements have been prepared assuming that
Alternative Technology Resources, Inc. will continue as a going concern. As more
fully described in Note 1, the Company has incurred recurring operating losses
and has a working capital deficiency. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments to reflect the uncertainties related
to the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.

Sacramento, California
August 17, 1998

<PAGE>F-2

Alternative Technology Resources, Inc.

Balance Sheet
June 30, 1998

Assets
-------

Current assets:
Cash $ 89,696
Accounts receivable, net of allowance for
doubtful accounts of $5,516 639,357
Accounts and notes receivable from employees
and officers 104,737
Other current assets 3,563
-------------
Total current assets 837,353

Property and equipment:
Equipment 12,908
Furniture and fixtures 148,445
-------------
161,353
Accumulated depreciation and amortization (161,353)
-------------
Property and equipment, net -
-------------

$ 837,353
=============

Liabilities and Stockholders' Deficit
-------------------------------------

Current liabilities:
Notes payable to stockholders $ 4,006,565
Notes payable to officers 37,919
Accounts payable to stockholders 562,245
Accounts payable 130,174
Accrued payroll and related expenses 346,502
Accrued preferred stock dividends 490,001
Other current liabilities 108,221
Other notes payable -
-------------
Total current liabilities 5,681,627

Commitments and contingencies

Stockholders' deficit:
Preferred stock, $6.00 par value--1,200,000
shares authorized, 204,167 shares designated
Series D issued and outstanding;liquidation
preference value of $1,715,003 1,225,002
Common stock, $0.01 par value--100,000,000
shares authorized, 26,120,499 shares issued
and outstanding 261,205
Unearned compensation (77,343)
Additional paid-in capital 28,846,692
Accumulated deficit (35,099,830)
-------------
Total stockholders' deficit (4,844,274)
-------------
$ 837,353
=============

See accompanying notes.

<PAGE>F-3

Alternative Technology Resources, Inc.

Statements of Operations

Year ended June 30,
1998 1997
---------------------------
Contract Programming:
Contract programming revenue $ 5,250,002 $ 2,018,064
Programmer costs (3,860,641) (1,657,701)
Start-up and other costs (858,982) (434,638)
---------------------------
Contract programming gross profit (loss) 530,379 (74,275)
---------------------------

System service:
Service revenue - 360,870
Cost of service - (117,159)
---------------------------
System service gross profit 243,711
---------------------------

Selling, general and administrative 1,336,342 1,160,015
---------------------------

Loss from operations (805,963) (990,579)

Other income (expense):
Interest expense (437,981) (287,830)
Settlement of dispute with distributor - 189,299
Expiration of accrued customer obligations - 242,848
Reimbursement from insurance company - 201,550
Other, net - (3,475)
---------------------------
(437,981) 342,392
---------------------------

Net loss $ (1,243,944) $(648,187)
===========================

Preferred stock dividends in arrears (122,500) (122,500)
---------------------------

Net loss applicable to common stockholders $ (1,366,444) $(770,687)
===========================

Basic and diluted net loss per share $ (0.05) (0.03)
===========================

Shares used in per share calculations 25,964,142 25,369,315
===========================

See accompanying notes.

<PAGE>F-4

Alternative Technology Resources, Inc.
Statements of Stockholders' Deficit

Years ended June 30, 1998 and 1997
<TABLE>
<CAPTION>

Common Additional Total
Preferred Stock Common Stock Stock to Unearned Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Be Issued Compensation Capital Deficit Deficit
---------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 204,167 $1,225,002 20,000,000 $ 200,000 $ 680,101 $ - $ 27,847,081 $ (33,207,699) $(3,255,515)
Issuance of common
stock from common
stock to be issued - - 5,218,676 52,186 (521,867) - 469,681 - -
Issuance of common
stock in settlement of
accounts payable and
other claims - - 303,871 3,039 (158,234) - 391,807 - 236,612
Issuance of common
stock for future
compensation - - 225,000 2,250 - (168,750) 166,500 - -
Amortization of
unearned compensation - - - - - 84,375 - - 84,375
Warrants and options
exercised - - 36,379 364 - - 16,338 - 16,702
Preferred stock
dividends - - - - - - (122,500) - (122,500)
Net loss - - - - - - - (648,187) (648,187)

---------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 204,167 1,225,002 25,783,926 257,839 - (84,375) 28,768,907 (33,855,886) (3,688,513)

Issuance of common
stock in settlement of
accounts payable and
other claims - - 5,712 57 - - 5,265 - 5,322
Issuance of common
stock for future
compensation - - 275,000 2,750 - (154,688) 151,938 - -
Amortization of
unearned compensation - - - - - 161,720 - - 161,720
Options exercised - - 55,861 559 - - 43,082 - 43,641
Preferred stock
dividends - - - - - - (122,500) - (122,500)
Net loss - - - - - - - (1,243,944) (1,243,944)

--------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 204,167 $1,225,002 26,120,499 $261,205 $ - $ (77,343) $28,846,692 $(35,099,830 $ (4,844,274)
========================================================================================================
</TABLE>

See accompanying notes.

<PAGE>F-5

Alternative Technology Resources, Inc.

Statements of Cash Flows
Increase (Decrease) in Cash

Year ended June 30,
1998 1997
--------------------------

Cash flows from operating activities:
Net loss $(1,243,944) $ (648,187)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 8,525 133,392
Non-cash employee compensation 161,720 84,375
Settlement of dispute with distributor - (189,299)
Expiration of accrued customer obligations - (242,848)
Reimbursement from insurance company - (201,550)
Changes in operating assets and liabilities:
Accounts receivable (420,099) (108,752)
Other current assets (99,746) 45,037
Accounts payable to stockholders 286,016 169,129
Accounts payable (38,545) (21,650)
Accrued payroll and related expenses 70,755 132,100
Deferred revenue - (180,254)
Other current liabilities 25,884 19,838
--------------------------
Net cash used in operating activities (1,249,434) (1,008,669)
--------------------------

Cash flows from investing activities:
Disposal of property and equipment 2,062 6,165
--------------------------
Net cash provided by investing activities 2,062 6,165
--------------------------

<PAGE>F-6

Alternative Technology Resources, Inc.

Statements of Cash Flows
Increase (Decrease) in Cash
(continued)

Year ended June 30,
1998 1997
---------------------------

Cash flows from financing activities:
Proceeds from exercise of warrants and options $ 43,642 $ 16,702
Proceeds from notes payable to stockholders 1,494,303 1,048,510
Payments on notes payable to stockholders (275,000) -
Notes payable to officers 37,919 -
Payments on other notes payable (23,539) (44,912)
Payments on capital lease obligations - (10,159)
---------------------------
Net cash provided by financing activities 1,277,325 1,010,141
---------------------------

Net increase in cash 29,953 7,637
Cash at beginning of year 59,743 52,106
---------------------------
Cash at end of year $ 89,696 $ 59,743
===========================

Supplemental disclosure of cash flow
information:
Cash paid during the year for interest $ 73,448 $ 153,198

See accompanying notes.

<PAGE>F-7

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

June 30, 1998 and 1997

1. Summary of Significant Accounting Policies

Description of Business

The Company was founded in 1989 to develop and sell computer integrated
laboratory systems ("LIS"). The Company operated under the name 3Net Systems,
Inc. and was never successful in the LIS market. Therefore, in fiscal 1996, the
Company stopped new system development and later decided to exit the LIS
software market entirely.

Basis of Presentation

The report of independent auditors on the Company's June 30, 1998 financial
statements includes an explanatory paragraph indicating there is substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the uncertainties related
to the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the inability of the Company
to continue as a going concern. Based on the steps the Company has taken to
reduce its expenses and refocus its operations, the Company believes that it has
developed a viable plan to address the Company's ability to continue as a going
concern and that this plan will enable the Company to continue as a going
concern through the end of fiscal year 1999. However, considering, among other
things, the Company's historical operating losses and its short history in the
contract computer programming industry, there can be no assurance that this plan
will be successfully implemented. The Company expects to begin generating
positive cash flow from operations during fiscal 1999, but not at levels
sufficient to pay off current obligations and fund growth of its contract
computer programming and consulting services; therefore, the Company
contemplates needing to raise additional financing during fiscal 1999, the
receipt of which cannot be assured.

<PAGE>F-8

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

June 30, 1998 and 1997

1. Summary of Significant Accounting Policies (continued)

Property and Equipment

Property and equipment are recorded at cost and are depreciated or amortized on
a straight-line basis over the estimated useful lives of the assets or the lease
term, whichever is shorter. The estimated useful lives range from three to five
years. The Company's assets were fully depreciated at June 30, 1998.

Revenue Recognition

Contract programming revenue represents work performed for customers, primarily
on a time and materials basis, and is recorded when the related services are
rendered. System service revenues are derived from support and maintenance
contracts which are deferred when billed and recognized ratably over the
contract term. In connection with its business strategy to exit the LIS products
market, the Company entered into an agreement with Omnitech Migrations
International, Inc. ("OMI") on May 2, 1997 to transfer its LIS product and its
software and hardware customer service contracts to OMI. Under this agreement,
the Company transferred and assigned to OMI all of the Company's right, title,
and interest in and to these customer agreements and delegated to OMI all the
Company's duties and obligations of performance thereunder. As consideration,
the Company retained all fees previously paid to it under these service
agreements. As a result of this agreement, the Company recognized $131,181 in
service revenue in fiscal year 1997 previously recorded as deferred revenue.

Income Taxes

The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS
No. 109, the liability method is used to account for income taxes. Deferred tax
assets and liabilities are determined based on differences between the 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.

Stock-Based Compensation

As permitted under the provisions of Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company
has

<PAGE>F-9

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

June 30, 1998 and 1997

1. Summary of Significant Accounting Policies (continued)

Stock-Based Compensation (continued)

elected to account for stock-based compensation using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"). Under the intrinsic value method,
compensation cost is the excess, if any, of the quoted market price or fair
value of the stock at the grant date or other measurement date over the amount
an employee must pay to acquire the stock. Disclosures required under SFAS No.
123 are included in Note 6 to the financial statements.

Concentration of Credit Risk

The Company's accounts receivable are primarily with companies in the contract
placement and consulting industry. The Company performs periodic credit
evaluations of its customers and believes that adequate provision for
uncollectable accounts receivable has been made in the accompanying financial
statements. The Company maintains substantially all of its cash at one financial
institution.

Net Loss Per Share

The Company's net loss per share has been computed by dividing net loss after
deducting preferred stock dividends ($122,500 in each of the fiscal years 1998
and 1997) by the weighted average number of shares of common stock outstanding
during the periods presented, including common stock to be issued. Common stock
issuable upon conversion of preferred stock, common stock options and common
stock warrants have been excluded from the net loss per share calculations as
their inclusion would be anti-dilutive.

In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("SFAS 128"). SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All loss per share amounts for all

<PAGE>F-10

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

June 30, 1998 and 1997

1. Summary of Significant Accounting Policies (continued)

Net Loss Per Share (continued)

periods have been presented in accordance with SFAS 128. As the Company has
reported net losses in all periods presented, basic and diluted loss per share
have been calculated on the basis of net loss applicable to common stockholders
divided by the weighted average number of common stock shares outstanding
without giving effect to outstanding options, warrants, and convertible
securities whose effects are anti-dilutive. As of June 30, 1998 and 1997, there
were stock options, stock warrants and a convertible note payable (Notes 3 and
6) which could potentially dilute basic earnings per share in the future but
were not included in the computation of diluted loss per share as their effect
was anti-dilutive in the periods presented.

Significant Customers

During the year ended June 30, 1998, two customers individually accounted for
51% and 34% of total revenues. During the year ended June 30, 1997, two
customers individually accounted for 37% and 36% of total revenues.

Use of Estimates in Preparation of Financial Statements

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Reclassifications

Certain reclassifications have been made to amounts reported as of and for the
year ended June 30, 1997 to conform with the June 30, 1998 presentation.

2. Investor Group Transactions

In fiscal 1994, the Company entered into a series of agreements with James W.
Cameron, Jr. ("Cameron") pursuant to which Cameron and Dr. Max Negri ("Negri")
became principal stockholders of the Company, holding more than 5% of the
Company's common stock and Preferred Stock, Series D.

<PAGE>F-11

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

June 30, 1998 and 1997

2. Investor Group Transactions (continued)

As of June 30, 1998, Cameron beneficially owned 19,881,315 shares of common
stock, which includes 63,980 shares issuable upon conversion of 76,167 shares of
Preferred Stock, Series D, which are currently convertible. Also included are
213,250 shares held by the Cameron Foundation, for which Cameron disclaims
beneficial ownership.

As of June 30, 1998, Negri beneficially owned 2,608,500 shares of common stock,
which includes 69,740 shares issuable upon conversion of 83,000 shares
of Preferred Stock, Series D, which are currently convertible.

During fiscal 1998 and 1997, the Company did not generate sufficient cash flow
from operations and borrowed from these two stockholders. Notes payable to
stockholders were $4,006,565 at June 30, 1998 (Note 3). Accrued interest of
$220,628 on these notes is included in accounts payable to stockholders at June
30, 1998. The Company also leases its office facilities from Cameron (Note 5).
Accrued rent expense of $341,617 is also included in accounts payable to
stockholders at June 30, 1998.

3. Financing Arrangements

Since its inception, the Company has used a combination of equity and debt
financing and internal cash flow to fund operations and finance accounts
receivable. The Company expects to begin generating positive cash flow from
operations during fiscal 1999, but not at levels sufficient to pay off current
obligations and fund growth of its contract computer programming and consulting
services; therefore, the Company contemplates needing to raise additional
financing during fiscal 1999, the receipt of which cannot be assured.

The Company received short-term, unsecured financing in the form of notes
payable of approximately $1.3 million, $1.0 million, and $0.7 million during
fiscal years 1998, 1997 and 1996, respectively, from two stockholders, Cameron
and Negri, to fund its operations. These notes bear interest at 10.25%. In
December 1997, Cameron and Negri extended the maturity date on all originally
maturing December 31, 1997, to the earlier of December 31, 1998, or such time as
the Company obtains equity financing.

On April 21, 1997, the Company issued an unsecured note payable (the"Straight
Note")to Cameron for $1,000,000 in accordance with the Reimbursement Agreement

<PAGE>F-12

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

June 30, 1998 and 1997

3. Financing Arrangements (continued)

the Company signed on February 28, 1994. Terms of the note provide for an
interest rate of 9.5% and monthly interest payments. No maturity date is stated
in the note; however, under the terms of the Reimbursement Agreement, upon
written demand by Cameron, the Straight Note will be replaced by a convertible
note (the "Convertible Note") in a principal amount equal to the Straight Note
and bearing interest at the same rate. The conversion ratio of the Convertible
Note is equal to 20%, multiplied by the average trading price of the Company's
common stock over the period of ten trading days ending on the trading day next
preceding the date of issuance of such Convertible Note.

4. Income Taxes

Significant components of the Company's deferred tax assets and liabilities for
federal and state income taxes as of June 30, 1998 are as follows:

Net operating loss carryforwards $ 8,748,000
Research credits 123,000
Common stock options 2,543,000
Common stock warrants 789,000
Other - net 406,000
--------------
Total deferred tax assets 12,609,000
Valuation allowance for deferred tax assets (12,609,000)
==============

Net deferred tax assets $ -
==============

<PAGE>F-13

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

June 30, 1998 and 1997

4. Income Taxes (continued)

The Company's valuation allowance as of June 30, 1997 was $12,220,000, resulting
in a net change in the valuation allowance of $389,000.

As of June 30, 1998 the Company has net operating loss carryforwards for federal
and state income tax purposes of approximately $24 million and $13 million,
respectively. The federal net operating loss carryforward expires in 2006
through 2013 and the state net operating loss carryforward expires in 1998
through 2003. The Company also has approximately $98,000 and $25,000 of research
and development tax credit carryforwards for federal and state income tax
purposes, respectively. The federal research and development tax credit
carryforwards expire in 2005.

In connection with the Company's initial public offering in August 1992, a
change of ownership (as defined in Section 382 of the Internal Revenue Code of
1986, as amended) occurred. As a result, the Company's net operating loss
carryforwards generated through August 20, 1992 (approximately $1,900,000) will
be subject to an annual limitation in the amount of approximately $300,000.

In August and September of 1993, a controlling interest of the Company's stock
was purchased, resulting in a second annual limitation in the amount of
approximately $398,000 on the Company's ability to utilize net operating loss
carryforwards generated between August 11, 1992 and September 13, 1993
(approximately $7,700,000).

The Company expects that the aforementioned annual limitations will result in
approximately $3,600,000 of net operating loss carryovers which may not be
utilized prior to the expiration of the carryover period.

5. Commitments

In November 1995, the Company entered into a lease agreement for its current
facility under a one year lease with Cameron. The lease has been extended to
December 31, 1998. At June 30, 1998, $341,617 of rent owed for fiscal years
1998, 1997 and 1996 is included in the balance of accounts payable to
stockholders. Rental expense for all operating leases was $181,589 and $96,710
for the years ended June 30, 1998 and 1997, respectively. Annual minimum rental
payments for all non-cancelable

<PAGE>F-14

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

June 30, 1998 and 1997

5. Commitments (continued)

operating leases for fiscal years 1999, 2000, and 2001 are $151,126,
$97,823, and $21,747, respectively.

6. Stockholders' Deficit

On December 31, 1996, the Board of Directors named Mr. W. Robert Keen as Chief
Executive Officer of the Company. In exchange for his services, Mr. Keen
initially received 225,000 shares of common stock with a fair market value on
the date of issuance of $168,750, and on November 18, 1997 Mr. Keen received
275,000 shares of common stock with a fair market value on the date of issuance
of $154,688. Both the 275,000 shares and 225,000 shares are subject to
forfeiture in the event Mr. Keen voluntarily leaves the Company prior to January
1, 1999.

Series D Preferred Stock

In June 1994, existing stockholders purchased 204,167 shares of Series D
Convertible Preferred Stock for $1,225,002. The Company is required to pay
cumulative preferential dividends to holders of Series D Preferred Stock on a
quarterly basis beginning July 1, 1994, at a rate of $0.60 per year per share.
As of June 30, 1998, cumulative unpaid, undeclared dividends were $490,001. Each
share of Series D Preferred Stock is convertible at the option of the
stockholder into such number of fully paid and nonassessable shares of common
stock as is determined by dividing the sum of $6.00 and the accrued but unpaid
dividends by the Series D conversion price, as defined in the agreement, in
effect on the conversion date. The Series D conversion price is $10.00 per
share. Additionally, the Series D Preferred Stock is redeemable at any time, at
the Company's option, at a price of $6.00 per share plus accrued but unpaid
dividends. The liquidation preference is $6.00 per share plus accrued but unpaid
dividends.

Series E Preferred Stock

On December 1, 1995, the holders of all the outstanding shares of the Company's
Series E Preferred Stock tendered those shares for conversion into 22,335,932

<PAGE>F-15

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

June 30, 1998 and 1997

6. Stockholders' Deficit (continued)

Series E Preferred Stock (continued)

shares of the Company's common stock pursuant to the terms of the Series E
Preferred Stock purchase agreement. As of the conversion date, 20,000,000 common
shares were authorized; therefore 5,218,677 shares were recorded as common stock
to be issued. During fiscal 1997 the number of authorized shares was increased
and the previously unissued shares were then issued.

Warrants

Warrant activity during the periods indicated is as follows:

Weighted
Range of Average
Number of Exercise Exercise
Shares Prices Price
------------------------------------------

Balance at June 30, 1996 1,443,251 $0.00-$50.00 $16.30

Granted 14,400 $0.75 $0.75
Exercised (15,000) $0.00 $0.00
Expired/Canceled (265,236) $30.00-$50.00 $40.00
------------------------------------------

Balance at June 30, 1997 1,177,415 $0.01-$28.80 $10.87

Expired/Canceled (471,832) $13.75-$28.80 $21.94
------------------------------------------

Balance at June 30, 1998 705,583 $0.01-$28.80 $3.47
==========================================

At June 30, 1998 and 1997, the weighted-average remaining contractual life of
outstanding warrants was 4.2 years and 4.3 years, respectively. All warrants
were immediately exercisable for common stock at June 30, 1998.

<PAGE>F-16

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

June 30, 1998 and 1997

6. Stockholders' Deficit (continued)

1993 and 1997 Stock Option/Stock Issuance Plans (continued)

The 1993 Stock Option/Stock Issuance Plan (the "1993 Plan"), pursuant to which
key employees (including officers) and consultants of the Company and the
non-employee members of the Board of Directors may acquire an equity interest in
the Company, was adopted by the Board of Directors on August 31, 1993 and became
effective at that time. The 1993 Plan provided that up to 400,000 shares of
common stock could be issued over the ten year term of the 1993 Plan.

The 1997 Stock Option Plan (the "1997 Plan"), pursuant to which key employees
(including officers) and consultants of the Company and the non-employee members
of the Board of Directors may acquire an equity interest in the Company, was
adopted by the Board of Directors on November 18, 1997 and became effective at
that time.

An aggregate of 3,000,000 shares of common stock may be issued over the five
year term of the 1997 plan. Subject to the oversight and review of the Board of
Directors, the 1997 Plan shall generally be administered by the Company's
Compensation Committee consisting of at least two non-employee directors as
appointed by the Board of Directors. The grant date, the number of shares
covered by an option and the terms and conditions for exercise of options, shall
be determined by the Committee, subject to the 1997 Plan requirements. The Board
of Directors shall determine the grant date, the number of shares covered by an
option and the terms and conditions for exercise of options to be granted to
members of the Committee.

Outstanding option activity for the 1993 and the 1997 Plans during the periods
indicated is as follows:

<PAGE>F-17

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

June 30, 1998 and 1997

6. Stockholders' Deficit (continued)

1993 and 1997 Stock Option/Stock Issuance Plans (continued)

Weighted
Range of Average
Number of Exercise Exercise
Shares Prices Price
------------------------------------------

Balance at June 30, 1996 312,622 $0.78-$13.10 $1.19
Granted 166,000 $0.75- $0.91 $0.83
Exercised (21,380) $0.78 $0.78
Forfeited (41,462) $0.78 $0.78
------------------------------------------

Balance at June 30, 1997 415,780 $0.75-$13.10 $1.11
Granted 240,000 $0.75 $0.75
Exercised (55,861) $0.78 $0.78
Expired/Canceled (30,000) $0.78 $0.78
------------------------------------------
Balance at June 30, 1998 569,919 $0.75-$13.10 $1.01
==========================================

The following table summarizes information about stock options outstanding at
June 30, 1998:
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Exercise Options Exercise Contractual Options Exercise
Prises Outstanding Price Life Exercisable Price
- ------------- ------------ ----------- ----------- ----------- -----------

$0.75-$0.78 469,919 $ 0.76 8.47 145,919 $ 0.78
$0.91-$1.62 90,000 $ 0.95 8.43 8,333 $ 1.37
$ 13.10 10,000 $13.10 5.90 10,000 $13.10
============ ===========
569,919 164,252
============ ===========

SFAS No.123 requires presentation of pro forma information regarding net income
(loss) and earnings per share as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
ATR options was estimated at the date of grant using the binomial option pricing
model with the following weighted average assumptions for both fiscal 1998 and
1997: dividend yield of 0%, an expected life of three years from grant date,

<PAGE>F-18

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

June 30, 1998 and 1997

6. Stockholders' Deficit (continued)

1993 Stock Option/Stock Issuance Plan (continued)

risk-free interest rate of 6.6%; and an expected volatility of .955 and 1.104
for fiscal 1998 and 1997, respectively.

The model was developed for use in estimating the fair value of traded options
which have no vesting restrictions and are fully transferable. It requires the
input of highly subjective assumptions, the quality of which cannot be judged
except by hindsight. The Company's pro forma information follows:

1998 1997
---------------------------
Net loss applicable to common stockholders:
As reported $ (1,366,444) (770,687)
Pro forma $ (1,477,071) $(924,327)

Basic and diluted net loss per share:
As reported $ (0.05) $ (0.03)
Pro forma $ (0.06) $ (0.04)

The weighted average fair value of options granted during the years ended June
30, 1998 and 1997 was $0.47 and $0.66, respectively. Because SFAS No. 123 is
applicable only to options granted subsequent to June 30, 1995, its pro forma
effect will not be fully reflected until 1999.

In addition to options granted pursuant to the 1993 and 1997 Stock Option/Stock
Issuance Plans, the Company has granted options outside these plans. In
fiscal year 1994, the Company granted to its then-new Chief Executive Officer
and director, stock options for 400,000 shares of common stock exercisable at
$0.10 per share, and recorded compensation expense of $1,400,000. The option is
fully vested as of June 30, 1998 and expires on August 10, 2003. In April 1996,
the Company's former Chief Executive Officer exercised options for 10,000
Shares.

In September 1996, the Board of Directors granted a non-statutory option to
purchase 20,000 shares of the Company's common stock at an exercise price of
$2.00 per share to Edward L. Lammerding, Chairman of the Board. The option vests
over 3 years and expires in September 2001.

<PAGE>F-19

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

June 30, 1998 and 1997

6. Stockholders' Deficit (continued)

Stock Reserved for Issuance

As of June 30, 1998, the Company has reserved a total of 4,608,175 shares of
common stock pursuant to outstanding warrants, options, conversion of Series D
Preferred Stock, and future issuance of options to employees and non-employee
directors.

7. Settlement of Dispute with Distributor

Since 1993, the Company and its Canadian distributor (the "Distributor") have
disputed several provisions of their Distributor and Co-Development Agreement,
modified certain provisions of the agreement in 1994 and 1995, and continued to
dispute several provisions of the modified agreement during 1996 and 1997. In
May 1997, the Company and the Distributor signed a Mutual Release and Settlement
Agreement wherein both parties agreed to the settlement of any and all issues
arising from or relating to the Distributor and Co-Development Agreement, and
any of its modifications, and any and all other matters arising from or relating
to any relationship or agreements(s) between the Company and the Distributor by
mutually agreeing to cancel and terminate the agreement(s) and by releasing each
other from any and all claims, demands, or liabilities which have arisen or
which may arise from the agreement(s). As a result of this agreement, during
fiscal 1997 the Company reversed net accounts payable to the Distributor
previously recorded of $189,299.

8. Expiration of Accrued Customer Obligations

During fiscal 1992, the Company recorded an estimated liability in the amount of
$242,848 related to certain software sales agreements. After discussions with
legal counsel, management of the Company believes that the Company has no
further obligation to perform under these customer contracts. Therefore, in
fiscal 1997, the Company reversed its previously recorded liability of $242,848.

9. Reimbursement from Insurance Company for Suit from Former Consultant

The Company is not currently a party to any pending legal proceedings. A
previously reported action between the Company and a former consultant was
resolved during fiscal 1997 in favor of the Company. In addition, during fiscal

<PAGE>F-20

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

June 30, 1998 and 1997

1997, legal expenses and costs of $201,550 accrued in prior periods by the
Company related to this litigation were reimbursed by insurers of Mr. Cameron
and the Company.

<PAGE>

Exhibit 10.33

ALTERNATIVE TECHNOLOGY RESOURCES, INC.
1997 STOCK OPTION PLAN

1. PURPOSE; DEFINITIONS.

1.1 Purpose. The purpose of the Plan is to attract, retain, and motivate
the officers and employees of the Company who are not subject to a
collective bargaining agreement, as well as the consultants to and
directors of the Company, by giving all of them the opportunity to acquire
Stock ownership in the Company and thereby instilling in them the same
goals as the Company's other equity owners.

1.2 Definitions. For purposes of the Plan, the following terms shall have
the following meanings:

1.2.1 "Administrator" shall mean the Compensation Committee referred to in
Section 4 in its capacity as administrator of the Plan in accordance with
Section 4.

1.2.2 "Board" shall mean the Board of Directors of the Company.

1.2.3 "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.

1.2.4 "Company" shall mean Alternative Technology Resources, Inc., a
Delaware corporation.

1.2.5 "Director" shall mean a member of the Board.

1.2.6 "Effective Date" shall have the meaning set forth in Section 2.

1.2.7 "Eligible Person" shall mean, in the case of the grant of an
Incentive Stock Option, all employees of the Company who are not subject
to a collective bargaining agreement, and in the case of a Non-qualified
Stock Option, any director (including a director who is also a member of
the Compensation Committee), officer, consultant, or employee of the
Company who is not subject to a collective bargaining agreement.

1.2.8 "Fair Market Value" shall mean the value established by the
Administrator for purposes of granting Options under the Plan.

1.2.9 "Grant Date" shall mean the date of grant of any Option.

1.2.10 "Incentive Stock Option" shall mean an option which is an option
within the meaning of Section 422 of the Code, the award of which contains
such provisions as are necessary to comply with that Section.

1.2.11 "Non-qualified Stock Option" shall mean an option which is
designated a Non-qualified Stock Option.

<PAGE>

1.2.12 "Option" shall mean an option to purchase common stock under this
Plan. An Option shall be designated by the Committee as either an
Incentive Stock Option or a Non-qualified Stock Option.

1.2.13 "Option Agreement" shall mean the written option agreement with
respect to an Option.

1.2.14 "Optionee" shall mean the holder of an Option.

1.2.15 "Plan" shall mean this Alternative Technology Resources, Inc., 1997
Stock Option Plan, as amended from time to time.

1.2.16 "Stock" shall mean the common stock of the Company, par value
$0.01, and any successor entity to the Company.

1.2.17 "Tax Date" shall mean the date defined in Section 7.

1.2.18 "Vesting Date" shall mean the date on which an Option becomes
wholly or partially exercisable, as determined by the Administrator in its
sole discretion.

2. EFFECTIVE DATE; TERM OF PLAN.

The Effective Date of this Plan shall be upon shareholder approval of this
Plan pursuant to Delaware Corporation Laws Section 216 which shall occur
within twelve (12) months of the date of Board approval. This Plan, but
not Options already granted, shall terminate automatically five (5) years
after its adoption by the Board, unless terminated earlier by the Board
under Section 13. No Options shall be granted after termination of this
Plan but all Options granted prior to termination shall remain in effect
in accordance with their terms.

3. NUMBER AND SOURCE OF SHARES OF STOCK SUBJECT TO THE PLAN.

Subject to the provisions of Section 8, the total number of shares of
Stock with respect to which Options may be granted under this Plan is
three million (3,000,000) shares of Stock. The shares of Stock covered by
any canceled, expired, or terminated Option or the unexercised portion
thereof shall become available again for grant under this Plan. The shares
of Stock to be issued hereunder upon exercise of an Option may consist of
authorized and unissued shares or treasury shares.

4. ADMINISTRATION OF THE PLAN.

This Plan shall be administered by a committee of at least two (2)
non-employee members of the Board to which administration of this Plan is
delegated by the Board (the "Compensation Committee"). The "Administrator"
shall mean the "Compensation Committee" referred to in this Section 4 in
its capacity as administrator of the Plan in accordance with this Section
4. The Administrator may delegate nondiscretionary administrative duties
to such employees of the Company as it deems proper.

<PAGE>

Subject to the express provisions of this Plan, the Administrator shall
have the authority to construe and interpret this Plan and any agreements
defining the rights and obligations of the Company and Optionees under
this Plan; to further define the terms used in this Plan; to prescribe,
amend, and rescind rules and regulations relating to the administration of
this Plan; to determine the duration and purposes of leaves of absence
which may be granted to Optionees without constituting a termination of
their employment for purposes of this Plan; and to make all other
determinations necessary or advisable for the administration of this Plan.

Any decision or action of the Administrator in connection with this Plan
or Options granted or shares of Stock purchased under this Plan shall be
final and binding. The Administrator shall not be liable for any decision,
action, or omission respecting this Plan, or any Options granted or shares
of Stock sold under this Plan. The Board at any time may abolish the
Compensation Committee and revest in the Board the administration of the
Plan.

To the extent permitted by applicable law in effect from time to time, no
member of the Compensation Committee or the Board of Directors shall be
liable for any action or omission of any other member of the Compensation
Committee or the Board of Directors, nor for any act or omission on the
member's own part, excepting only the member's own willful misconduct or
gross negligence, arising out of or related to the Plan. The Company shall
pay expenses incurred by, and satisfy a judgment or fine rendered or
levied against, a present or former director or member of the Compensation
Committee or Board in any action against such person (whether or not the
Company is joined as a party defendant) to impose liability or a penalty
on such person for an act alleged to have been committed by such person
while a director or member of the Compensation Committee or Board arising
with respect to the Plan or administration thereof, or out of membership
on the Compensation Committee or Board, or by the Company, or all or any
combination of the preceding; provided, the director or Compensation
Committee member was acting in good faith, within what such director or
Compensation Committee member reasonably believed to have been within the
scope of his or her employment or authority, and for a purpose which he or
she reasonably believed to be in the best interests of the Company or its
shareholders. Payments authorized hereunder include amounts paid and
expenses incurred in settling any such action or threatened action. The
provisions of this section shall apply to the estate, executor,
administrator, heirs, legatees, or devisees of a director or Compensation
Committee member, and the term "person" as used in this section shall
include the estate, executor, administrator, heirs, legatees, or devisees
of such person.

5. GRANT OF OPTIONS; TERMS AND CONDITIONS OF GRANT.

5.1 Grant of Options. One or more Options may be granted to any Eligible
Person. Subject to the express provisions of the Plan, the Administrator
shall determine from the Eligible Persons those individuals to whom
Options under the Plan may be granted. Each Option so granted shall be
designated by the Administrator as either a Non-qualified Stock Option or
an Incentive Stock Option. However, any Options designated as Incentive
Stock Options that are subsequently determined to not qualify, shall then
be deemed to be Non-qualified Stock Options.

<PAGE>

Subject to the express provisions of this Plan, the Administrator shall
specify the Grant Date, the number of shares of Stock covered by the
Option, the exercise price, and the terms and conditions for exercise of
the Options. If the Administrator fails to specify the Grant Date, the
Grant Date shall be the date of the action taken by the Administrator to
grant the Option. As soon as practicable after the Grant Date, the Company
shall provide the Optionee with a written Option Agreement in the form
approved by the Administrator, which sets out the Grant Date, the number
of shares of Stock covered by the Option, the exercise price, and the
terms and conditions for exercise of the Option.

The Administrator may, in its absolute discretion, grant Options under
this Plan to an Eligible Person at any time and from time to time before
the expiration of five (5) years from the Effective Date.

5.2 General Terms and Conditions. Except as otherwise provided herein, the
Options shall be subject to the following terms and conditions and such
other terms and conditions not inconsistent with this Plan as the
Administrator may impose.

5.3 Exercise of Option. In order to exercise all or any portion of any
Option granted under this Plan, an Optionee must remain as an officer or
employee who is not subject to a collective bargaining agreement, or as a
consultant to or director of the Company, until the Vesting Date. The
Option shall be exercisable on or after each Vesting Date in accordance
with the terms set forth in the Option Agreement.

5.4 Option Term. Each Option and all rights or obligations thereunder
shall expire on such date as shall be determined by the Administrator, but
not later than ten (10) years after the grant of the Option (five (5)
years in the case of an Incentive Stock Option when the Optionee owns more
than ten percent (10%) of the total combined voting power of all classes
of stock of the Company), and shall be subject to earlier termination as
hereinafter provided.

5.5 Exercise Price. Unless otherwise specified by the Administrator, the
exercise price of any option shall be one hundred percent (100%) of the
fair market value of the Company's common stock on the date of option
grant. However, in the case of Incentive Stock Options to an Optionee who
owns more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company, the exercise price shall be one hundred
ten percent (110%) of the fair market value and shall be subject to
earlier termination as hereinafter provided.

5.6 Method of Exercise. To the extent the right to purchase shares of
Stock has accrued, Options may be exercised, in whole or in part, from
time to time in accordance with their terms by written notice from the
Optionee to the Company stating the number of shares of Stock with respect
to which the Option is being exercised and accompanied by payment in full
of the exercise price.

<PAGE>

5.7 Payment for Option Shares.

5.7.1 General Rule. The entire Exercise Price of Stock issued upon
exercise of Options shall be payable in cash, wire transfer, certified
check, or, at the absolute discretion of the Administrator, by
non-certified check, at the time when such Stock is purchased, except as
follows:

(a) In the case of an Incentive Stock Option granted under the Plan,
payment shall be made only pursuant to the express provisions of the
applicable Option Agreement. The Option Agreement may, in the Compensation
Committee's sole discretion, specify that payment may be made in any
form(s) described herein.

(b) In the case of a Non-Qualified Stock Option, the Compensation
Committee, in its sole discretion, may specify payment in any form(s)
described herein.

5.7.2 Surrender of Stock. To the extent that this Section 5.7.2 is
applicable, payment for all or any part of the exercise price, but not the
payment of withholding taxes, may be made with Stock which has already
been owned by the Optionee for more than six (6) months. Such Stock shall
be valued at its fair market value on the date of exercise of the new
Stock being purchased under the Plan.

5.7.3 Exercise/Sale. To the extent that this Section 5.7.3 is applicable,
payment may be made by the delivery (on a form prescribed by the Company)
of an irrevocable direction to a securities broker approved by the Company
to sell Stock and to deliver all or part of the sales proceeds to the
Company in payment of all or part of the exercise price and/or any
withholding taxes.

5.7.4 Exercise/Pledge. To the extent that this Section 5.7.4 is
applicable, payment may be made by the delivery (on a form prescribed by
the Company) of an irrevocable direction to pledge Stock to a securities
broker or lender approved by the Company, as security for a loan, and to
deliver all or part of the loan proceeds to the Company in payment of all
or part of the exercise price and/or any withholding taxes.

5.8 Restrictions on Stock; Option Agreement. At the time it grants Options
under this Plan, the Company may retain, for itself or others, rights to
repurchase the shares of Stock acquired under the Option or impose other
restrictions on such shares. The terms and conditions of any such rights
or other restrictions shall be set forth in the Option Agreement
evidencing the Option. No Option shall be exercisable until after
execution of the Option Agreement by the Company and the Optionee.

5.9 Non-Assignability Of Option Rights. No Option shall be transferable
other than by will or by the laws of descent and distribution. During the
lifetime of an Optionee, only the Optionee may exercise an Option.

5.10 Exercise After Certain Events.

5.10.1 Termination as an employee, director, or consultant, or becoming
subject to a collective bargaining agreement. If for any reason other than
permanent and total disability or death (as defined below) an Optionee

<PAGE>

ceases to be employed by or to be a consultant to or director of the
Company, or if an Optionee becomes subject to a collective bargaining
agreement, Options held on the date of such termination or on the date the
employee becomes subject to a collective bargaining agreement (to the
extent then exercisable) may be exercised, in whole or in part, at any
time within three (3) months after such date, or such lesser period
specified in the Option Agreement (but in no event after the earlier of
(i) the expiration date of the Option as set forth in the Option
Agreement, and (ii) ten (10) years from the Grant Date).

If an Optionee granted an Incentive Stock Option terminates employment but
continues as a consultant, advisor, or in a similar capacity to the
Company, the Optionee need not exercise the Option within three (3) months
of termination of employment but shall be entitled to exercise within
three (3) months of termination of services to the Company (one (1) year
in the event of permanent disability or death). However, if the Optionee
does not exercise within three (3) months of termination of employment,
the Option will not qualify as an Incentive Stock Option.

5.10.2 Permanent Disability and Death. If an Optionee becomes permanently
and totally disabled (within the meaning of Section 22(e)(3) of the Code),
or dies while employed by the Company, or while acting as an officer,
consultant, or director of the Company (or if the Optionee dies within the
period that the Option remains exercisable after termination of employment
or affiliation), Options then held (to the extent then exercisable) may be
exercised by the Optionee, by the Optionee's personal representative, or
by the person to whom the Option is transferred by will or the laws of
descent and distribution, in whole or in part, at any time within one (1)
year after the disability or death or any lesser period specified in the
Option Agreement (but in no event after the earlier of (i) the expiration
date of the Option as set forth in the Option Agreement, and (ii) ten (10)
years from the Grant Date).

5.11 Compliance With Securities Laws. The Company shall not be obligated
to issue any shares of Stock upon exercise of an Option unless such shares
are at that time effectively registered or exempt from registration under
the federal securities laws and the offer and sale of the shares of Stock
are otherwise in compliance with all applicable securities laws. Upon
exercising all or any portion of an Option, an Optionee may be required to
furnish representations or undertakings deemed appropriate by the Company
to enable the offer and sale of the shares of Stock or subsequent
transfers of any interest in such shares to comply with applicable
securities laws. Evidences of ownership of shares of Stock acquired upon
exercise of Options shall bear any legend required by, or useful for
purposes of compliance with, applicable securities laws, this Plan, or the
Option Agreement evidencing the Option.

6. LIMITATIONS ON GRANT OF INCENTIVE STOCK OPTIONS.

6.1 The aggregate Fair Market Value (determined as of the Grant Date) of
the Stock for which Incentive Stock Options may first become exercisable
by any Optionee during any calendar year under this Plan, together with
that of Stock subject to Incentive Stock Options first exercisable (other
than as a result of acceleration pursuant to Section 9(a) by such Optionee
under any other plan of the Company or any Subsidiary), shall not exceed
$100,000.

<PAGE>

6.2 There shall be imposed in the Option Agreement relating to Incentive
Stock Options such terms and conditions as are required in order that the
Option be an "incentive stock option" as that term is defined in Section
422 of the Code.

6.3 No Incentive Stock Option may be granted to any person who, at the
time the Incentive Stock Option is granted, owns shares of outstanding
Stock possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company, unless the exercise price of
such Option is at least one hundred ten percent (110%) of the Fair Market
Value of the Stock (determined as of the Grant Date) subject to the Option
and such Option by its terms is not exercisable after the expiration of
five (5) years from the Grant Date.

6.4 No Incentive Stock Option may be granted to any person who is not an
employee of the Company.

7. PAYMENT OF TAXES.

Upon the disposition by an Optionee or other person of shares of an Option
prior to satisfaction of the holding period requirements of Section 422 of
the Code, or upon the exercise of a Non-qualified Stock Option, the
Company shall have the right to require such Optionee or such other person
to pay by cash, or by check payable to the Company, the amount of any
taxes which the Company may be required to withhold with respect to such
transactions. Any such payment must be made promptly when the amount of
such obligation becomes determinable (the "Tax Date") and may be a
condition prior to the delivery of any certificate for shares or
registration of the transfer of such shares.

8. ADJUSTMENT FOR CHANGES IN CAPITALIZATION.

The existence of outstanding Options shall not affect the Company's right
to effect adjustments, recapitalizations, reorganizations, or other
changes in its or any other corporation's capital structure or business,
any merger or consolidation, any issuance of bonds, debentures, preferred
or prior preference stock ahead of or affecting the Stock, the dissolution
or liquidation of the Company's or any other corporation's assets or
business, or any other corporate act, whether similar to the events
described above or otherwise. Subject to Section 9, if the outstanding
shares of the Stock are increased or decreased in number or changed into
or exchanged for a different number or kind of securities of the Company
or any other corporation by reason of a recapitalization,
reclassification, stock split, combination of shares, stock dividend, or
other event, an appropriate adjustment of the number and kind of
securities with respect to which Options may be granted under this Plan,
the number and kind of securities as to which outstanding Options may be
exercised, and the exercise price at which outstanding Options may be
exercised, will be made.

9. DISSOLUTION, LIQUIDATION, OR MERGER.

9.1 Company Not the Survivor. In the event of a dissolution or liquidation
of the Company, a merger, consolidation, combination, or reorganization in

<PAGE>

which the Company is not the surviving corporation, or a sale of
substantially all of the assets of the Company, any outstanding Options
shall become fully vested immediately upon the Company's public
announcement of any one of the foregoing. The Board of Directors shall
determine, in its sole and absolute discretion, when the Company shall be
deemed to survive for purposes of this paragraph. If the Optionee does not
exercise the entire Option within ninety (90) days, the Administrator, in
its sole and absolute discretion, may, with respect to the unexercised
portion of the Option:

9.1.1 cancel the Option upon payment to the Optionee of an amount equal to
the difference between the closing price of the stock underlying the
Option quoted the date before such liquidation, dissolution, merger,
consolidation, combination, or reorganization, and the exercise price of
the Option; or

9.2.1 assign the Option and all rights and obligations under it to the
successor entity, with all such rights and obligations being assumed by
the successor entity.

9.2 Company Is the Survivor. In the event of a merger, consolidation,
combination, or reorganization in which the Company is the surviving
corporation, the Board of Directors shall determine the appropriate
adjustment of the number and kind of securities with respect to which
outstanding Options may be exercised, and the exercise price at which
outstanding Options may be exercised. The Board of Directors shall
determine, in its sole and absolute discretion, when the Company shall be
deemed to survive for purposes of this Plan.

10. CHANGE OF CONTROL.

If there is a "change of control" in the Company, all outstanding Options
shall fully vest immediately upon the Company's public announcement of
such a change. A "change of control" shall mean an event involving one
transaction or a related series of transactions in which any one of the
following occurs: (i) the Company issues securities equal to twenty-five
percent (25%) or more of the Company's issued and outstanding voting
securities, determined as a single class, to any individual, firm,
partnership, limited liability company, or other entity, including a
"group" within the meaning of SEC Exchange Act Rule 13d-3, (ii) the
Company issues voting securities equal to twenty-five percent (25%) or
more of the issued and outstanding voting stock of the Company in
connection with a merger, consolidation, or other business combination,
(iii) the Company is acquired in a merger or other business combination
transaction in which the Company is not the surviving company, or (iv) all
or substantially all of the Company's assets are sold or transferred. See
Section 9 with respect to Options vesting upon the occurrence of either of
the events described in (iii) or (iv) of this Section 10 and the result
upon the non-exercise of the Options.

11. SUSPENSION AND TERMINATION.

In the event the Board or the Administrator reasonably believes an
Optionee has committed an act of misconduct specified below, the
Administrator may suspend the Optionee's right to exercise any Option
granted hereunder pending final determination by the Board or the
Administrator. If the Administrator determines that an Optionee has

<PAGE>

committed an act of embezzlement, fraud, breach of fiduciary duty, or
deliberate disregard of the Company rules resulting in loss, damage or
injury to the Company, or if an Optionee makes an unauthorized disclosure
of any Company trade secret or confidential information, engages in any
conduct constituting unfair competition, is involved in the spreading of
rumors or misinformation about the Company, induces or attempts to induce
an employee to leave the employment of the Company, induces any Company
customer to breach a contract with the Company or induces any principal
for whom the Company acts as agent to terminate such agency relationship,
neither the Optionee nor his estate shall be entitled to exercise any
Option hereunder. In making such determination, the Board or the
Administrator shall act fairly and in good faith and shall give the
Optionee an opportunity to appear and present evidence on the Optionee's
behalf. The determination of the Board or the Administrator shall be final
and conclusive.

12. NO RIGHTS AS SHAREHOLDER OR TO CONTINUED EMPLOYMENT.

An Optionee shall have no rights as a shareholder with respect to any
shares of Stock covered by an Option. An Optionee shall have no right to
vote any shares of Stock, or to receive distributions of dividends or any
assets or proceeds from the sale of Company assets upon liquidation until
such Optionee has effectively exercised the Option and fully paid for such
shares of Stock. Subject to Sections 8 and 9, no adjustment shall be made
for dividends or other rights for which the record date is prior to the
date title to the shares of Stock has been acquired by the Optionee. The
grant of an Option shall in no way be construed so as to confer on any
Optionee the rights to continued employment by the Company.

13. TERMINATION; AMENDMENT.

The Board may amend, suspend or terminate this Plan at any time and for
any reason, but no amendment, suspension, or termination shall be made
which would impair the right of any person under any outstanding Options
without such person's consent not unreasonably withheld. Further, any
amendment which materially increases the benefits accruing to participants
under this Plan shall be subject to the approval of the Company's
shareholders. Further, the Board may amend this Plan to comply with
Federal and State securities laws.

14. GOVERNING LAW.

This Plan and the rights of all persons under this Plan shall be construed
in accordance with and under applicable provisions of the laws of the
State of California.

15. FINANCIAL INFORMATION.

Each optionee shall receive a copy of the Company's Annual and Quarterly
reports on Forms 10-KSB and 10-QSB as filed with the Securities and
Exchange Commission.

Exhibit 10.34

MEMORANDUM TO LEASE

Effective July 15, 1998 your [Alternative Technology Resources, Inc.]
rent is reduced by $109 per month [to $5,168 per month] to reflect your
move out of the computer room.

Agreed and Accepted

LESSOR: LESSEE:
JAMES W. CAMERON, JR., Alternative Technology
Resources, Inc.

A Delaware Corporation

By: CLARK H. CAMERON By: W. ROBERT KEEN
---------------- ----------------------

Printed Printed
Name: Clark H. Cameron Name: W.Robert Keen
---------------- -------------

Title: Attorney in Fact Title: CEO

Date: 7/15/98 Date: 7/15/98

EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements
listed below of our report dated August 17, 1998, with respect to the financial
statements of Alternative Technology Resources, Inc. included in the Annual
Report (Form 10-KSB) for the year ended June 30, 1998:

Form S-8 No. 33-60100 pertaining to the 3Net Systems, Inc.Employee Savings Plan
Form S-8 No. 33-73166 pertaining to the 3Net Systems, Inc.Employee Savings Plan
Form S-8 No. 33-80186 pertaining to the 3Net Systems, Inc. Special Stock Option
Plan
Form S-8 No. 33-80300 pertaining to the 3Net Systems, Inc. 1993 Stock
Option/Stock Issuance Plan
Form S-8 No. 33-84576 pertaining to the Nonstatutory Stock Option Agreement
by and between 3Net Systems, Inc. and Russell J. Harrison
Form S-3 No. 33-86962 pertaining to 3Net Systems, Inc. common stock being
offered by selling stockholders

/S/ ERNST & YOUNG LLP
Sacramento, California
September 22, 1998

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED BY THE
10-KSB FOR THE PERIOD ENDED JUNE 30, 1998 FOR ALTERNATIVE TECHNOLOGIES
RESOURCES, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 89,696
<SECURITIES> 0
<RECEIVABLES> 639,357
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 837,353
<PP&E> 161,353
<DEPRECIATION> 161,353
<TOTAL-ASSETS> 837,353
<CURRENT-LIABILITIES> 5,681,627
<BONDS> 0
0
1,225,002
<COMMON> 261,205
<OTHER-SE> 28,846,692
<TOTAL-LIABILITY-AND-EQUITY> 837,353
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<CGS> 0
<TOTAL-COSTS> 6,055,965
<OTHER-EXPENSES> 437,981
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<INTEREST-EXPENSE> 437,981
<INCOME-PRETAX> (1,243,944)
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