10-K 1 doc1.txt FORM 10-K APPIANT 9-30-2002 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K {X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended SEPTEMBER 30, 2002 { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________to ___________ COMMISSION FILE NUMBER 0-21999 ------------------------------ APPIANT TECHNOLOGIES INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 84-1360852 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 6663 OWENS DRIVE PLEASANTON, CALIFORNIA 94588 (Address of principal executive offices) (925) 251-3200 (Registrant's telephone number) ------------------------------- Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, $.01 par value OTCBB Securities registered pursuant to Section 12(g) of the Act: None 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 Issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES {X} NO { } Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. { } As of February 14, 2003, there were 17,194,841 shares of Common Stock outstanding. The aggregate market value of the Common Stock held by non-affiliates of the Issuer (based on the closing price for the Common Stock on the OTCBB Market on February 14, 2003 was approximately $1.7 million. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference in this report: Registrant's Proxy Statement for its 2002 Annual Meeting of Shareholders This Form 10-K was the subject of a Form 12b-25, which was timely filed. TABLE OF CONTENTS PART I.........................................................................3 Item 1. BUSINESS...........................................................3 Item 2. PROPERTIES.........................................................8 Item 3. LEGAL PROCEEDINGS..................................................9 Item 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS..............10 Part II.......................................................................10 Item 5. MARKET FOR ISSUER'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS...........................................................10 Item 6. SELECTED FINANCIAL DATA...........................................14 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................................14 Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.........30 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................30 PART III......................................................................31 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE ISSUER....................31 Item 11. EXECUTIVE COMPENSATION............................................32 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....34 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................35 PART IV.......................................................................35 Item 14. EXHIBITIS, FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS ON FORM 8-K..........................................................35 2 PART I ITEM 1. BUSINESS GENERAL NEW BUSINESS MODEL Our new business model and main goal is to become a leading provider of internet protocol-based (IP-based) unified communications and unified information applications designed to allow users access to communications and information in a highly-personalized format as set by the individual user from private, public and enterprise sources anytime, anywhere from any type of communications device such as a cell phone, computer, personal digital assistant ("PDA"), etc., in a hosted, service model. We have created an IP-based portal that we named inUnison-TM- in which we have incorporated or will incorporate both our proprietary UC/UI applications including, but not limited to, our own speech recognition technologies, data mining, data analysis, navigation, channel management, recommendation engines and client relationship management ("CRM") applications, as well as various third party applications and integrations. Our inUnison-TM- portal is an open system incorporating or integrating third party applications and programs. Our customers offer their subscribers inUnison applications in a web-based portal that can be custom-branded for each customer. As a company that has legacy telephony experience, we understand that many service providers such as wireless service providers (WSPs"), Internet service providers ("ISPs'), and Competitive Local Exchange Carriers ("CLECs") have made extensive capital investments over the years in legacy systems, and that it would be difficult and expensive for these customers to suddenly abandon these legacy systems. Therefore, as we built our inUnison-TM- portal, we purposely have allowed for service provider customers to maintain their legacy systems and legacy interfaces should they desire to do so. Our customers who have unique interfaces e.g., WSPs who maintain unique dialing commands for their users to send, receive or save voice mails, can continue to maintain their interfaces with our portal so that their customers need not learn a new set of commands to use our applications. We believe that our customers' use of our applications will be seamless, and that allowing our customers the ability to maintain legacy interfaces while offering their customers our inUnison-TM- applications will greatly reduce difficulties in adopting our applications. Our hosted service-based inUnison-TM- unified communications and unified information business model was built recognizing that users of information demand the benefits of non-real time messaging services such as email, fax and voicemail, calendar, contact database, and corporate or enterprise information, with real time features such as connectivity, call delivery, and live call management. Our technology is essentially a disrupter: today the sender of a communication, e.g., a phone call, email or voicemail, is generally in control of when the communication is received by the receiver (for example, the time of day), and how the communication is received (by phone, voicemail, or email). But by using our applications, the receiver of the communication takes control of the communication process. The receiver can, for example, determine which phone calls follow the receiver and will get connected real-time, which ones get sent to voicemail, or which emails notify the receiver (either over the phone, computer or PDA), that an email message has been received. And if an email or voicemail has been received, the receiver can either listen to or read the e-mail or voicemail with our speech-to-text and text-to-speech technologies. We are offering our inUnison-TM- UC/UI applications in a hosted, recurring service-based revenue model to targeted markets and industry segments. Our goal is to be the "service provider's service provider", offering our inUnison-TM- applications in a resale model where we will price our applications separately and/or in packages to our service provider customers for resale to their subscribers. We also enter into revenue sharing arrangements with certain customers where we will share revenues from our applications and, in some cases, minutes from outbound calls made from and in-bound calls made to the portal. In the future we also plan to license our proprietary technology or portions of it to third parties. We intend to develop continuously new applications and to integrate third party applications into our portal. Our customers will be able to offer these applications in a portal that we maintain, but which can be custom-branded. We believe that increased competition, shorter time to market trends and the reduced importance of geographical borders make it imperative that customers achieve and maintain state-of-the-art communication and information systems that unify information from any internet-accessible source with communication devices and communication channels. 3 OUR INUNISON-TM- PROPRIETARY TECHNOLOGIES Our inUnison-TM- portal contains or will contain a number of our proprietary technologies. Our portal includes or will include a Navigation engine that is designed to allow for the continuous, simultaneous search of multiple databases, both public such as the internet, and enterprise, to search for important information to be brought into the portal that the user has determined is important and to perform data mining for computing profitability models. Our Recommendation engine is designed to make intelligent, specific, targeted recommendations to users based on information brought into the portal. For example, sales professionals who use our inUnison-TM- applications to track their customers' order histories will be prompted by the portal (for example, by phone call, email, etc.) to offer new products or services based on the customers' needs, previous purchases or new products or services that are likely to appeal to the customer. Our Notification engine in the portal can notify a user (by calling the user's cell phone or sending a voicemail or email message) that his or her scheduled flight has been delayed or cancelled and can query the user whether alternative flight arrangements should be made. Should the user desire to book an alternative flight, he or she will be able to do so directly through the portal without ever hanging up and having to dial directly. Instead, the user can place the call to the airline through the portal either by dialing or through voice commands, make alternative flight arrangements, and then return to the portal. We also will feature a web phone and a web collaboration engine. Our proprietary speech recognition technologies are exciting, and will provide for distributed interaction with the inUnison-TM- portal that cannot be realized with existing third party voice recognition products on the market today. Our feature extraction technology is expected to reduce by 100 times or more the amount of data required to travel from a phone to a data center over that of conventional speech recognition products on the market today, thereby making our speech recognition faster. We have also developed proprietary filtering technology to eliminate noise and cross talk that often operate to limit the effectiveness of voice recognition products. Our speech recognition applications are speaker and dialect-independent. OUR TARGETED MARKETS We are marketing our inUnison-TM- UC/UI products initially to several target markets: - Affinity Groups - Multilevel Marketing Organizations - Internet Service Providers ("ISPs") - Application Service Providers ("ASPs") - Enterprises with moble or geographically dispersed workforces We believe that there are compelling value propositions to our targeted customers to sell our inUnison-TM- applications. ISPs and ASPs, for example, are intensely competitive, and are continuously fighting to offer new applications to their customers to increase "sticky" minutes over their networks to generate additional revenues and to reduce churn. CLECs, for example, need to offer new value-added applications to drive new revenues and generate higher margins. Our applications may result in additional revenue sources for these targeted customers. Current financial spending constraints in most of these market sectors make inUnison-TM- even more attractive, as only minor cash outlays are required for these service providers to offer our advanced applications. Affinity groups and multilevel marketing organizations can utilize the features of inUnison-TM- to provide the infrastructure they require to do business, Enterprises with distributed, mobile employees may want to offer our inUnison-TM- applications to help increase productivity. The value proposition to such large enterprises is a more efficient work force that can translate into additional revenues and reduced cost of operations. Through our direct sales force, we have developed formal selling tools, techniques and methods to assist our customers in selling our applications to their customers. We also provide cooperative marketing and advertising support to our customers. 4 OUR STRATEGIC PARTNER RELATIONSHIPS We have built significant, valuable, strategic relationships with a number of partners including Cisco Systems ("CISCO") and these partnering relationships are important to our success. Although, Cisco decided to exit the software business, which had substantial negative effects to the Company we remain a CISCO Powered Network member and a New World Ecosystem partner ("Ecosystem partner"). As a CISCO Ecosystem partner, we are part of a technology community where we can partner with CISCO and its Ecosystem partners; tap into CISCO's sales channel, customer base and technical experience; participate in technology sharing, joint marketing and customer support; enjoy preferential pricing on products and services; and receive other benefits. As an Ecosystem partner, CISCO has committed to introducing customers to us. In Fiscal 2001, we also discontinued our relationship with our major data center hosting partner and now perform these duties internally within the Company. As a consequence of this change our product rollout was delayed. During fiscal 2002, this partner forgave approximately $4.5 million of lease financing. The Company successfully implemented its own data center during fiscal 2001. OUR COMPANY NAME CHANGED TO REFLECT NEW BUSINESS MODEL Appiant Technologies, Inc., has been trademarked upon receiving shareholder approval at our Fiscal 2000 shareholder meeting. We have filed and received U.S. Trademark applications for the name "inUnison" that we use for our unified communications and unified information software applications. While we have begun to market our new, hosted unified communications and unified information applications business model, our results for fiscal year ended September 2002 reflect generally the results of the legacy business of our Infotel Subsidiary in Singapore. LEGACY BUSINESS We were incorporated in October 1996 to pursue a business combination opportunity with Nhancement Technologies North America ("APPIANT NA") (then named Voice Plus). APPIANT NA was then engaged in the business of integrating voice-processing systems with telecommunications equipment. Appiant Technologies Inc. acquired APPIANT NA on February 3, 1997, along with a development stage company whose operations were later merged with those of APPIANT NA. On February 4, 1997, we completed an initial public offering of shares of our Common Stock. We acquired Infotel on June 22, 1998. Infotel is an integrator of infrastructure communications equipment products, providing radar system integration, turnkey project management services and test instrumentation, as well as a portfolio of communications equipment in Asia. Infotel is headquartered in Singapore. On February 4, 2000, we completed our acquisition of the assets of SVG Software Services, Inc., a California corporation ("SVG"), pursuant to the Plan and Agreement of Reorganization (the "Agreement"), dated February 4, 2000, between Appiant and SVG. On February 4, 2000, we acquired all the shares of Nhancement Technologies (India) Pte. Ltd. ("NHAN India") a company incorporated in Chennai, India that engages in the business of web design and software products development. NHAN India conducts substantial software development activities for the inUnison-TM- portal. NHAN India was also focusing on call center solutions and outsourcing for enterprises seeking to establish call centers in India. NHAN India and is call center business was sold in fiscal 2001, a number of the members of the engineering team remained with Appiant. Both acquisitions were consummated with a view of gaining access to important technologies and engineering skills critical to developing our software applications, both of which remain within the Company. On January 21, 2000, we acquired Trimark, Inc., headquartered in San Diego, California and doing business as Triad Marketing ("Triad"). The Triad acquisition provided us with recommendation engine software tools for inclusion with our inUnison-TM- unified communications and unified information applications. The market profile selling services were discontinued in fiscal 2001 and most of the related employees were laid-off. On February 4, 2000, we acquired all the shares of Appiant Technologies (India) Pte. Ltd. ("APPIANT India") a company incorporated in Chennai, India that engages in the business of web design and software products development. 5 In fiscal year 2001, we sold our Appiant India subsidiary to a related party. The disposition did not have a significant impact on our financial position or results of operations. On May 23, 2001, Appiant Technologies Inc. ("Appiant") acquired all of the outstanding stock of Quaartz, Inc. ("Quaartz"). Quaartz is a pioneering Internet affinity marketing company that provides Internet-hosted applications enabling companies and organizations to deliver event announcements, communication tools and e-commerce directly to their online communities. The acquisition was consummated with a view of gaining access to important technologies and engineering skills critical to developing our software applications. During fiscal 2002, we sold certain assets of the legacy North America and ceased the legacy business in North America. The legacy business in North America had decline substantially and its discontinuance is not expected to materially impact the financial operations of the Company. Our remaining legacy businesses in Singapore include infrastructure communications equipment, turnkey system products and test measurement equipment. LEGACY PRODUCTS AND SERVICES NT-BASED COMMUNICATION SERVERS Legacy communications have included NT-based communication server solutions from Enterprise Information Center ("EIC") that are manufactured by Interactive Intelligence, Inc. ("I3"). These EIC servers allow multiple integrated forms of communications through a single system. The forms of communications supported by the EIC system include voice, data, email, facsimile, voicemail interactive voice response. All are web capable. The Company discontinued these operations in fiscal 2001 to focus on our own new inUnison services and applications. VOICE PROCESSING AND MULTIMEDIA MESSAGING The legacy voice messaging, text messaging, LAN messaging and interactive voice response or self-inquiry systems have been delivered through third party manufacturers such as NEC and ADC which acquired Centigram Communications in 2000 was discontinued in fiscal 2002. INFOTEL INFRASTRUCTURE COMMUNICATIONS EQUIPMENT Infotel has offered a wide range of infrastructure communications equipment products and system integration services that have satisfied the most demanding communications projects. With over a decade of experience, Infotel has completed numerous projects, both in complex radio and networking systems. Infotel supports products manufactured by Motorola, Ericsson, Raytheon, Newbridge and Shiva Corp., Rohde & Schwarz Gmbh, and Siemens. Infotel has focused principally on large projects in the government, institutional and commercial sectors, and has targeted opportunities for regionalization and Internetworking. TURNKEY SYSTEMS PROJECTS Our customers that have awarded turnkey projects have done so only to vendors or systems integrators that have had full capabilities in design, installation, commissioning, project management and documentation. In such projects, our emphasis and competitive edge lies in the practice of sourcing the best product that meets the customer's requirements. Emphasis is placed on design and project management in which we maintain strong technical competency. Other communications activities include the supply and installation of various voice and data communications equipment on a tender basis. TEST MEASURING SYSTEMS Infotel also has an established test measuring instrumentation and testing business that grew out of a communications relationship with German conglomerate Rohde & Schwarz Gmbh that ultimately evolved into Infotel servicing other Rohde & Schwarz Gmbh products such as test instruments. Infotel is now the regional distributor and test and repair center for Rohde & Schwarz Gmbh test instruments. Infotel has since expanded its repair capability to include Alcatel mobile telephones. 6 SALES AND MARKETING We have been marketing our products and services primarily through focused telemarketing and calls to prospective customers in specific markets, participation in trade shows, acquisition of databases and inclusion of our products and services on bidders' lists. We focus on pre-sale analysis of our customers' needs and the rate-of-return potential of specific sales opportunities to determine whether we believe they justify the investment of time and effort of our sales and marketing organization. Typically, we focus on sales opportunities where we believe the value added from our products and services provides significant benefits for the customer. We also participate in competitive bidding for government agency work. In evaluating a prospective sales situation, we also consider the lead-time to revenue, the complexities of the customer's requirements and our ability to satisfy the customer and provide it with the necessary support. RESEARCH AND DEVELOPMENT Our industry is characterized by rapid technological change and product innovation. Our early "beta" customers have also requested numerous changes to our original product release and management expects new customers will also request product changes and innovations. We believe that continued timely development of products for both existing and new markets is necessary to remain competitive. Therefore, we devote significant resources to programs directed at developing new and enhanced products, as well as new applications for existing products. CUSTOMERS, BACKLOG Our five largest customers, Japan Radio Company, LTD., Defence Science & Technology Agency of Singapore, Motorola Electronics PTE. Ltd. and Siemens Medical Instruments, Pte. Ltd., accounted for approximately 24.3%, 7.9%,6.6%, 6.4% and 5.2% respectively of total net revenues during the fiscal year ended September 30, 2002. Backlog at September 30, 2002 was $3.3 million as compared to $5.5 million at September 30, 2001. On a stand-alone basis, backlog for our new inUnison service was $1.2 and $2.1 million for Infotel at September 30, 2002. GOVERNMENTAL REGULATION The Telecommunications Act of 1996 eliminated government mandated barriers between local and long distance calling, cable television, broadcasting and wireless service. As a result, CLECs, traditional long distance carriers and cable television companies have entered these markets to provide both local telephone and long distance service as well as television programming. Such increased competition likely will change the infrastructure for implementing communications applications, such as voice and electronic messaging. We anticipate that this increased competition -particularly by CLECs - will drive demand for our new, hosted inUnison-TM-applications as CLECs generally understand these technologies and will be aggressive in offering their customers unique applications to reduce churn and drive revenues from minutes from their voice over internet protocol ("VOIP") networks. EMPLOYEES As of September 30, 2002, we employed a total of 80 employees worldwide: 28 in the United States and 52 in Singapore employed by Infotel. Our employees are not covered by a collective bargaining agreement. We believe that our relations with our employees worldwide are good. COMPETITION NEW BUSINESS MODEL - UNIFIED COMMUNICATIONS AND UNIFIED INFORMATION We are executing a new business model to provide unified communications and unified information applications to our customers in a hosted, carrier-grade, recurring revenue model that we believe will be both dynamic and competitive. For a number of years, we have competed in providing non-hosted unified messaging solutions with a number of companies including legacy voicemail providers. The unified messaging market, which we see as generally consisting of bringing together non-real time voice mail, e-mail and fax communications into one "box", is, in our view, fragmented and filled with many competitors. In the unified messaging sector, we may generally compete with companies such as uReach, Call Sciences, Webbley, and Tornado Development Corporation. 7 In the unified communications sector, which we generally define to include the non-real time communications that are brought together with real time communications such as call delivery and connectivity, we anticipate competing with much larger competitors such as Lucent Technologies ("Lucent") and Nortel. We may also face competition from some of our legacy business vendors such as ADC (which in 2000 acquired Centigram Communications, one of our legacy business vendors), and Interactive Intelligence. Other competition in the unified communications space may include AirTrac Chicago, Inc., CentreCom, HotVoice and uReach. To compete with these companies, we plan to work closely with our current and future strategic partners. At the present time, we are one of the first companies in unified information which, as we define it, incorporates or will incorporate into our inUnison-TM- portal all of the unified communications solutions and unifies information from private, public and enterprise sources and, through our various proprietary engines, allows individuals to access this information anytime and anywhere in any format from any communications device. We anticipate that with our success, we may indeed begin to face additional competition in this space. Our proprietary technologies will be key to the success of our new inUnison-TM-portal and applications. Our speech recognition technologies are speaker and dialect-independent, and are expected to augment future versions of our inUnison-TM- portal working in conjunction with existing third party voice recognition products. Our speech recognition vocabulary at present is among the largest, consisting of approximately 300,000 words. We anticipate increased competition from other speech recognition vendors such as Speechworks, IBM, Lernout & Hauspie and Nuance. LEGACY BUSINESSES INFOTEL Infrastructure Communications Equipment Through Infotel, we sell infrastructure communications equipment products and system integration services. Generally Infotel does not compete for business with small companies, competing instead with larger system integrators and distribution companies. In the data-communications market, our key competitors have been Datacraft Asia Ltd, Teledata Ltd, National Computer Systems Pte Ltd and ST Computer Systems Ltd. These competitors distribute products manufactured by Cisco Systems, Ascend Communications, Marconi Communications and others. In the radio communications market, which largely serves the Singapore government, there are fewer competitors, most of which have ties to the government. CET Technologies Pte Ltd and Keppel Communications Pte Ltd. are Infotel's main competitors. In some instances, Infotel works together with these competitors in fulfilling government contracts. In the test instrumentation market, Infotel has only one major competitor, which is Agilent Technologies, a large electronic test equipment manufacturer. ITEM 2. PROPERTIES FACILITIES Our corporate offices occupy approximately 15,110 square feet of office space in premises shared with North American operations. This facility is leased pursuant to a lease agreement expiring April 3, 2007. The lease provides for approximately 3% rent escalations during each year of the lease. Rental payments average U.S. $21,100 per month over the term of the lease. We have received a decrease in our monthly rent and are currently negotiating an overall modification of our lease. Quaartz offices had occupied approximately 6,600 square feet of office space in premises in Santa Clara, California. This facility was leased pursuant to a lease agreement expiring July 14, 2002, which was not renewed, and employees from that facility now work at our corporate office. Infotel has recently renewed its office lease, which will now expire September 30, 2004, the lease is for approximately 11,000 square feet. The monthly rent expense for Infotel's office space is US $14,000. We believe that leased office space at market rates is readily available at all locations. 8 In addition, we maintain small sales offices in various states. ITEM 3. LEGAL PROCEEDINGS In October 2001, a software vendor filed suit against the Company for breach of contract totaling approximately $703,000 plus interest and attorney's fees. On December 28, 2001, Appiant filed an answer denying this general demand, and is preparing a counter-suit for return of over $600,000 paid to this vendor. In August 2002, the parties entered into a mutual settlement agreement and release of claims wherein the Company has agreed to make cash payments totaling $200,000 between February 2003 and May 2003, and will issue warrants to purchase 50,000 shares of Appiant common stock at an exercise price of $0.37, the Company has accrued $200,000 as of September 30, 2002. In January 2002, a default judgment was issued against the Company in favor of an equipment vendor in the amount of $123,000. The Company was successful in having that default judgment set-aside on February 6, 2002. The Company subsequently entered into a mutual settlement agreement and release of claims in July 2002 wherein the Company has agreed to make payments totaling $69,000, which is accrued at September 30, 2002. In January 2002, a services and equipment provider filed suit in Texas for breach of contract totaling $117,000. The Company is currently in negotiations to resolve this claim, but has fully accrued this potential liability at September 30, 2002. In February 2002, the Company resolved an arbitration matter and litigation action involving a dispute over employment contract terms for two former Company management employees. The settlement provides for payment of $88,000 to one claimant over six months, and payment of $147,000 to the second claimant over a total of twelve months. The company has accrued $235,000 for this matter. Also in February 2002, these same claimants filed suit against the Company regarding the Company's calculation of additional common stock due to the claimants under an unrelated agreement. The Company is in settlement negotiations with the claimant to resolve matters. In May 2002, a customer requested indemnification of its internal defense costs and expenses arising from its defense of a lawsuit involving claims of infringement of certain patents which Appiant has licensed and which are included in Appiant's legacy voice mail product. In lieu of seeking reimbursement from Company of future defense fees, the customer offered to accept a subrogated assignment of the Company's indemnification rights form the patent owner. The Company agreed to tender the indemnification claim on to the patent owner and assign that claim to the customer to directly seek indemnification. The Company believes that this assignment to the customer is a final resolution of this matter. In May 2002, a former note holder tendered notice of the Company's default on a settlement agreement and release relating to a $2.75 million indebtedness arising out of the cancelled notes, the entire $2.75 million is recorded on the company's books at September 30, 2002. The Company is currently in negotiations toward an agreement to cure the default and amend the payment plan called for in the settlement agreement. In June 2002, the Company's former trademark counsel tendered notice of its claim for $51,260 in unpaid fees and indicated that it would file suit to collect these fees. The Company disputes some of these fees, but intends to work with counsel towards a mutually agreed resolution of the matter. In June and July 2002, several holders of debentures issued in April 2002 provided formal notices of default by the company for failing to register the shares underlying the debentures or receive shareholder approval of the issuance of all underlying shares. The Company and the debenture holders are currently in discussions regarding options for curing these defaults and/or otherwise resolving the matter. In July 2002, a former vendor tendered notice of a demand for payment of approximately $200,000 alleging breach of contract and open book account. The Company disputes the claims as stated, and intends to work with the vendor towards a mutually agreed resolution of the matter. The Company has not accrued for this potential liability as it believes we will prevail. In July 2002, counsel claiming to represent holders of certain Promissory Notes due in June 2003 wrote the Company claiming that material information was withheld from certain unidentified note holders by the Company when the Notes were issued in June 2001. The Company is investigating this claim and has requested information from the note holders, and intends to continue to vigorously defend the matter. 9 In July 2002, a former supplier of equipment filed suit against the Company for breach of contract and breach of guarantee totaling $419,581 plus interest and attorney's fees. The Company has negotiated a settlement to a payment schedule totaling $400,000. In September 2002, a former vendor filed suit in Texas for breach of contractual obligation totaling $107,956. The Company disputes a portion of the total but intends to negotiate with counsel to settle the claim. The amount of the claim is accrued at September 30, 2002. While management intends to defend these matters vigorously, there can be no assurance that any of these complaints or other third party assertions will be resolved without costly litigation, or in a manner that is not adverse to our financial position, results of operations or cash flow. No estimate can be made of the possible loss or possible range of loss associated with the resolution of these matters in excess of amounts accrued. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended September 30, 2002. PART II ITEM 5. MARKET FOR ISSUER'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Our Common Stock is traded on the OTCBB Market under the symbol "APPS". As of February 14, 2003, there were 17,194,841 shares of Common Stock outstanding held by approximately 3,600 beneficial holders of record. The following table sets forth, for the periods indicated, the high and low sales prices for the Common Stock on the OTCBB Market. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions. The trading market in our securities may at times be relatively illiquid due to low trading volume. COMMON STOCK HIGH LOW ---- --- 2000 January................................. $ 9.563 $ 4.563 February................................ 14.875 8.313 March................................... 19.500 11.625 April................................... 20.750 11.500 May..................................... 24.750 15.938 June.................................... 18.250 10.000 July.................................... 13.875 6.938 August.................................. 15.500 8.313 September............................... 17.438 13.313 October................................. 25.250 15.000 November................................ 24.875 12.8125 December................................ 15.1875 4.000 2001 January................................. $ 6.750 $ 4.880 February................................ 6.250 4.813 March................................... 5.500 3.109 April................................... 3.550 2.400 May..................................... 2.850 1.570 June.................................... 4.900 1.540 July.................................... 2.830 1.800 August.................................. 2.190 1.800 September............................... 2.180 1.380 October................................. 2.190 1.520 November................................ 1.660 1.290 December................................ 3.050 1.140 2002 January................................. $ 3.280 1.660 February................................ 1.900 1.400 March................................... 1.540 1.170 April................................... 1.420 1.180 May..................................... 1.287 0.800 10 June.................................... 0.820 0.280 July.................................... 0.290 0.171 August.................................. 0.610 0.210 September............................... 0.700 0.380 October................................. 0.550 0.240 November................................ 0.390 0.170 December................................ 0.300 0.190 On February 14, 2003, the last reported sales price for the Common Stock as reported on the OTCBB Market was $0.10. DIVIDEND POLICY We have never paid cash dividends on our Common Stock. Our board of directors does not anticipate paying cash dividends in the foreseeable future as it intends to retain future earnings to finance the expansion of our business and for general corporate purposes. The payment of future cash dividends will depend on such factors as our earnings levels, anticipated capital requirements, operating and financial condition, consent from any lender, if applicable, and other factors deemed relevant by our board of directors. UNREGISTERED SALES OF SECURITIES Effective April 19, 2002, Appiant commenced a secured financing of up to $4,025,000 with certain accredited investors ("Investors") pursuant to a Debenture and Warrant Purchase Agreement (the "Agreement"), dated April 19, 2002. As of May 28, 2002, $3,525,000 of Convertible Debentures including $105,750 of Debentures issued as a finder's fee had closed. Under the terms of the Agreement, Appiant agreed to issue to the Investors Convertible Debentures bearing an interest rate of 8%. The Convertible Debentures may be converted into unregistered, restricted shares of Appiant Common Stock for a purchase price per share equal to the lower of (a) $1.21, which was the deemed closing price and was determined based on the closing bid prices of the Common Stock for the five trading days immediately prior to the closing date of the initial sale of the Debentures, or (b) the average of the two lowest closing bid prices of Appiant shares for the 20-day period immediately preceding any conversion. The Convertible Debenture can be converted, at the option of the holder, at any time until one year after the Closing Date. In the event the Convertible Debentures are not converted, Appiant has the option to repay the indebtedness. Appiant also has the right to redeem the Convertible Debentures prior to maturity for an amount per share equal to 110% to 125% of the principal amount of the Convertible Debentures being redeemed, as determined by the date of redemption. In addition, Appiant issued to Investors warrants to purchase up to an aggregate of 1,456,612 shares of unregistered, restricted Appiant Common Stock on the total financing of $3,525,000. Appiant has also agreed to issue warrants for 100,000 shares of unregistered, restricted Appiant Common Stock as part of the finders fee for this financing. The warrants have a term of five years and are exercisable at a warrant price equal to 110% of the closing price or $1.33 per share. The estimated value of the warrants of $1,846,000 was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate of 4.52%, a dividend yield of 0% and volatility of 145%. The allocation of the Convertible Notes proceeds to the fair value of the warrants of $2,052,000 was recorded as a discount on the Convertible Notes and as additional paid-in capital. In addition, as a result of the beneficial conversion feature described above for the Convertible Notes, the Company recorded $2,052,000 additional paid-in capital, and a discount on the notes payable, which is accreted over the note maturity period to interest expense. As a result, these discounts are accreted over the note maturity period and $1,193,000 was recorded as non-cash interest expense for the year ended September 30, 2002. Terms of the financing also provide that the Investors may nominate up to two additional members to the Appiant Board of Directors, and provide the Investors certain rights and options regarding possible future equity based financings by Appiant. Appiant paid a cash finder's fee of 7% and Convertible Debentures of 3% and warrants to purchase 100,000 shares of Common Stock, and other related expenses. No underwriters were involved in this private placement. 11 The sale of the debentures and the warrants to the investors was exempt from the registration provisions of the Securities Act, under Sections 4(2) and 4(6) of the Securities Act, and the rules and regulations there under, because of the nature of the offerees and Investors and the manner in which the offering was conducted. The investors have acknowledged that the securities cannot be resold unless registered or exempt from registration under the securities laws. Appiant has agreed to register for resale on Form S-3 up to 12,000,000 shares of the Common Stock (the "Registrable Shares") issued to the Shareholders as soon as practicable following the Effective Date. Moreover, Appiant has agreed to seek shareholder approval of the issuance of the Registrable Shares in excess of 19.99% of issued and outstanding Appiant Common Stock. In addition, the Company entered into several Convertible Promissory Notes Payable (the "Convertible Notes") in the aggregate principal amount of $125,000 with a related party. The Notes accrue interest at 10% per annum, which is payable in common stock at the time of conversion and are collateralized by the Company's legacy business accounts receivables, and the assets of the Infotel subsidiary, and matured on various dates from April 30, 2002 through June 22, 2002. The conversion price is equal to the lower of 90% of the closing price of the Company's common stock on the trading day immediately preceding the maturity date, or 90% of any subsequent interim financing that occurs between the issuance date of the notes and the maturity date. Upon conversion, the Convertible Notes have no specific registration rights. As of September 30, 2002, the aggregate amount of $90,000 of these Convertible Notes had been redeemed. In connection with these Convertible Notes, the Company issued warrants to purchase 123,174 shares of the Company's common stock at an exercise price of ranging from $0.90 per share to $1.26 per share. The estimated value of the warrants of $112,000 was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate ranging from 4.34% to 4.81%, a dividend yield of 0% and volatility ranging from 144% to 145%. The allocation of the Convertible Notes proceeds to the fair value of the warrants of $ 59,000 was recorded as a discount on the Convertible Notes and as additional paid-in capital. Upon exercise of the warrants, the holder has no specific registration rights. In addition, as a result of the beneficial conversion feature described above for the Convertible Notes, the Company recorded $66,000 additional paid-in capital, and a discount on the notes payable, which is accreted over the note maturity period to interest expense. As a result, these discounts are accreted over the note maturity period and $26,000 was recorded as non-cash interest expense for the year ended September 30, 2002. During the three months ended March 31, 2002, the Company entered into several Convertible Promissory Notes Payable (the "Convertible Notes") with certain investors in the aggregate principal amount of $2,025,000, of which $1,550,000 was with members of the board of directors or shareholders. The Notes accrue interest at 10% per annum, which is payable in common stock at the time of conversion and are collateralized by the Company's legacy business accounts receivables, and the assets of the Infotel subsidiary, and mature on various dates from April 30, 2002 through October 15, 2002. The conversion price is equal to the lower of 90% of the closing price of the Company's common stock on the trading day immediately preceding the maturity date, or 90% of any subsequent interim financing that occurs between the issuance date of the notes and the maturity date. Upon conversion, the Convertible Notes have no specific registration rights. In connection with these Convertible Notes, the Company issued warrants to purchase 1,315,000 shares of the Company's common stock at an exercise price of ranging from $1.32 per share to $1.80 per share. The estimated value of the warrants of $1,878,000 was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate of 3.375%, a dividend yield of 0% and volatility of 145%. The allocation of the Convertible Notes proceeds to the fair value of the warrants of $974,000 was recorded as a discount on the Convertible Notes and as additional paid-in capital. Upon exercise of the warrants, the holder has no specific registration rights. In addition, as a result of the beneficial conversion feature described above for the Convertible Notes, the Company recorded $1,051,000 additional paid-in capital, and a discount on the notes payable, which is accreted over the note maturity period to interest expense. Between October 31, 2001 and December 20, 2001, the Company entered into several Convertible Promissory Notes Payable (the "Convertible Notes") with certain investors in the aggregate principal amount of $1,390,000, of which $400,000 was with members of the board of directors or shareholders. The Notes accrue interest at 8% per annum, which is payable in common stock at the time of conversion and are collateralized by the Company's legacy business accounts 12 receivables, and the assets of the Infotel subsidiary, and mature on various dates from December 27, 2001 to November 16, 2003. The conversion price is equal to the lower of 90% of the closing price of the Company's common stock on the trading day immediately preceding the maturity date, or 90% of any subsequent interim financing that occurs between the issuance date of the notes and the maturity date. Upon conversion, the Convertible Notes have no specific registration rights. In connection with these Convertible Notes, the Company issued warrants to purchase 945,000 shares of the Company's common stock at an exercise price of ranging from $1.20 per share to $1.77 per share. The estimated value of the warrants of $1,269,000 was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate of 3.92%, a dividend yield of 0% and volatility of 148%. The allocation of the Convertible Notes proceeds to the fair value of the warrants of $663,000 was recorded as a discount on the Convertible Notes and as additional paid in capital. Upon exercise of the warrants, the holder has no specific registration rights. In addition, as a result of the beneficial conversion feature described above for the Convertible Notes, the Company recorded $726,000 additional paid-in capital, and a discount on the notes payable. These discounts are accreted over the note maturity period. Under the June 8, 2001 Convertible Notes Payable purchase agreement, the common stock issuable pursuant to the conversion of the notes and exercise of the related warrants were to be registered within 30 days after the next round of financing. Due to the registration requirement, the warrants were classified as liabilities and re-measured at each reporting date. On December 1, 2001, certain of the warrant agreements were amended to remove the requirement to register the common stock under these warrants. Accordingly, the liability related to these warrants on December 1, 2001 of $670,000 was reclassified to stockholders' equity, additional paid-in capital. Under the April 19, 2002, Debenture and Warrant Purchase Agreement, the conversion price is not fixed. Due to this uncertainty in price, EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" applies. In accordance with the provisions of EITF 00-19, the Company estimated the fair value of all outstanding warrants as of June 30, 2002, using the Black-Scholes option-pricing model with the following assumptions: Volatility of 133%; dividend yield of 0%; risk-free interest rate of 4.080%; and expected lives of 5 years. The value of all warrants as of June 30, 2002, was estimated at $1,496,000, which was recorded as a reclassification from additional paid-in capital to notes payable. For future quarters, the value of these warrants will be re-calculated based on their market value at quarter end. In connection with Convertible Notes issued on the September 26 and 28, 2002 , the Company issued warrants to purchase 572,727 shares of the Company's common stock at an exercise price of ranging from $0.45 per share to $0.50 per share. The estimated value of the warrants of $143,000 was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate of 2.82%, a dividend yield of 0% and volatility of 144%. The allocation of the Convertible Notes proceeds to the fair value of the warrants of $143,000 was recorded as a discount on the Convertible Notes and as additional paid in capital. Upon exercise of the warrants, the holder has no specific registration rights. In addition, as a result of the beneficial conversion feature described above for the Convertible Notes, the Company recorded $157,000 additional paid-in capital, and a discount on the notes payable. These discounts are accreted over the note maturity period and $9,873 was recorded as non-cash interest expense for the three months ended September 30, 2002. 13 ITEM 6. SELECTED FINANCIAL DATA

~~TABLE~~YEARS OFENDED ~~CONTENTS~~SEPTEMBER ~~PART~~30,2002,2001, ~~I.........................................................................................4~~2000, ~~Item~~1999 1.and ~~BUSINESS..........................................................................13~~1998 ~~Item~~------------------------------------------------------- 2.2002 ~~PROPERTIES........................................................................13~~2001 ~~Item~~2000 3.1999 ~~LEGAL~~1998 ~~PROCEEDINGS~~--------- --------- --------- -------- -------- (IN THOUSANDS) Total net revenues. . . . . . . . . .~~.......................................................14~~ ~~Item~~$ 4.11,812 ~~SUBMISSIONS~~$ OF21,748 ~~MATTERS~~$ TO25,529 A$23,340 ~~VOTE~~$ OF9,442 ~~SECURITY~~Loss ~~HOLDERS..............................14~~from ~~Part~~continuing IIoperations . .~~.....................................................................................14~~ ~~Item 5~~. ~~MARKET~~(11,202) ~~FOR~~(21,009) ~~ISSUER'S~~(10,174) ~~COMMON~~(512) ~~EQUITY~~(1,430) ~~AND~~Net ~~RELATED~~loss ~~SHAREHOLDER~~from ~~MATTERS~~continuing operations.~~................20~~ ~~Item~~(15,771) 6.(26,479) ~~SELECTED~~(12,844) ~~FINANCIAL~~(717) ~~DATA...........................................................21~~(1,523) ~~Item~~Loss 7from discontinued operations . ~~MANAGEMENT'S~~. ~~DISCUSSION~~- ~~AND~~- ~~ANALYSIS~~- OF- ~~FINANCIAL~~(581) ~~CONDITION~~Loss ~~AND~~on ~~RESULTS~~disposal OFof ~~OPERATIONS~~discontinued operations. . . . . . . . . . . . .~~...........................................................21~~ ~~Item~~- 7A- ~~QUANTITATIVE~~- ~~AND~~- ~~QUALITATIVE~~(369) ~~DISCLOSURE~~Net ~~ABOUT~~loss ~~MARKET~~per ~~RISK.........................38~~share ~~Item~~-- 8.basic ~~FINANCIAL~~and ~~STATEMENTS~~diluted ~~AND~~continuing ~~SUPPLEMENTARY~~operations ~~DATA~~. . . $ (0.97) $ (2.32) $ (1.~~.................................39~~25) ~~PART~~$ ~~III~~(0.~~.....................................................................................39~~23) ~~Item~~$ 10(0.41) ~~DIRECTORS~~Net ~~AND~~loss ~~EXECUTIVE~~per ~~OFFICERS~~share OF-- ~~THE~~basic ~~ISSUER~~and diluted discontinuing operations. .~~..................................39~~ ~~Item~~$ ~~11.~~- ~~EXECUTIVE~~$ ~~COMPENSATION............................................................41~~- ~~Item~~$ 12- $ - $ (0.20) ~~SECURITY~~Shares ~~OWNERSHIP~~used OFin ~~CERTAIN~~net ~~BENEFICIAL~~loss ~~OWNERS~~per ~~AND~~share ~~MANAGEMENT~~-- basic and diluted. . . . .~~...............43~~ ~~Item~~16,296 ~~13.~~14,687 ~~CERTAIN~~10,303 ~~RELATIONSHIPS~~6,249 ~~AND~~4,802 ~~RELATED~~Total ~~TRANSACTIONS~~assets. . . . . . . . . . .~~.........................45~~ ~~PART IV~~.~~......................................................................................46~~ ~~Item 14~~. ~~EXHIBITIS~~$ 30,233 ~~FINANCIAL~~$ ~~STATEMENTS~~40,880 ~~AND~~$ ~~SCHEDULES~~38,785 ~~AND~~$16,021 ~~REPORTS~~$12,871 ONLong-term ~~FORM~~obligations ~~8-K~~. . . . . . . .~~..................................................................46~~ $ 419 $ 511 $ 4,717 $ 62 $ 68

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained in this Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, hopes, intentions or strategies regarding the future. Forward-looking statements include statements regarding: future product or product development; future research and development spending and our product development strategies; the levels of international sales; future expansion or utilization of manufacturing capacity; future expenditures; and statements regarding current or future acquisitions, and are generally identifiable by he use of the words "may", "should", "expect", "anticipate", "estimates", "believe", "intend", or "project" or the negative thereof or other variations thereon or comparable terminology. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements or industry results, performance or achievements) expressed or implied by these forward-looking statements to be substantially different from those predicted. The factors that could affect our actual results include, but are not limited to, the following: - general economic and business conditions, both nationally and in the regions in which we operate; - adoption of our new recurring revenue service model; - competition; - changes in business strategy or development plans; - delays in the development or testing of our products; - technological, manufacturing, quality control or other problems that could delay the sale of our products; our inability to obtain appropriate licenses from third parties, protect our trade secrets, operate without infringing upon the proprietary rights of others, or prevent others from infringing on our proprietary rights; - our inability to retain key employees; - our inability to obtain sufficient financing to continue to expand operations; and - changes in demand for products by our customers. Certain of these factors are discussed in more detail elsewhere in this report, including under the caption "Risk Factors; Factors That May Affect Operating Results". We do not undertake any obligation to publicly update or revise any forward-looking statements contained in this Report or incorporated by reference, whether as a result of new information, future events or otherwise. Because of these risks and uncertainties, the forward-looking events and circumstances discussed in this Report might not transpire. 14 CRITICAL ACCOUNTING POLICY AND ESTIMATES Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of the Company's financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, primarily allowance for doubtful accounts receivables, accruals for other costs, and the classification of net operating loss and tax credit carry forwards between current and long-term assets. These accounting policies are described at relevant sections in this discussion and analysis and in the notes to them consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2002. OVERVIEW Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the consolidated financial statements included herein. In addition, you are urged to read this report in conjunction with the risk factors described herein. The discussion of financial condition includes changes taking place or believed to be taking place in connection with: our execution of our new, unified communications and unified information hosted business model; the software, voice processing, data processing and communications industry in general and how we expect these changes to influence future results of operations; and liquidity and capital resources, including discussions of capital financing activities and uncertainties that could affect future results. We are a software applications and services company that is transitioning our business model to specialize in unified communications and unified information (UC/UI) solutions. We are transitioning our business model to provide our hosted, IP-based unified communications and unified information portal and applications branded under the name "inUnison-TM-" in an ASP recurring revenue model. Our inUnison-TM- portal and applications incorporate or will incorporate both our proprietary UC/UI applications including, but not limited to, our own speech recognition technologies, data mining, data analysis, navigation, web collaboration, recommendation engines, web phone, and client relationship management ("CRM") applications, as well as various third party applications. Our inUnison-TM- portal serves as a single means of accessing information from multiple sources. Our inUnison-TM- portal is an open system incorporating or integrating third party applications and programs. Our customers offer their subscribers inUnison applications in a web-based portal that can be custom-branded for each customer. We are offering our inUnison-TM- UC/UI applications in a hosted, recurring service-based revenue model to targeted markets and industry segments. Our goal is to be the "service provider's service provider", offering our inUnison-TM- applications in a resale model where we will price our applications separately and/or in packages to our service provider customers for resale to their subscribers. We also enter into revenue sharing arrangements with certain customers where we will share revenues from our applications and, in some cases, minutes from outbound calls made from and in-bound calls made to the portal. In the future we also plan to license our proprietary technology or portions of it to third parties. We intend to develop continuously new applications and to integrate third party applications into our portal. Our customers will be able to offer these applications in a portal that we maintain, but which can be custom-branded. Our consolidated financial statements include our results as well as the results of our significant operating subsidiary: Infotel Technologies (Pte) Ltd ("Infotel. The legacy business of Appiant NA and Trimark were discontinued and Enhancement India call center business was sold, these businesses are not expected to have a materially adverse effect on the Company's financial condition. On February 5, 2001, Appiant acquired certain assets of Quaartz, Inc., the results of the operations of Quaartz from February 1, 2001 to September 30, 2001 and for all of fiscal 2002 are included in our consolidated financial statements. For our legacy operations, the Company derives its revenue primarily from Infotel. The revenue derived from Infotel primarily relates to the distribution and integration of telecommunications and other electronic products and providing services primarily for radar system integration, turnkey project management and test instrumentation. Equipment sales and related integration services revenue is recognized upon acceptance and delivery if a signed contract exists, the fee is fixed or determinable, collection of the resulting receivable is reasonably assured, and product returns are reasonably estimable. Provisions for estimated warranty costs and returns are made when the related revenue is recognized. Revenue from maintenance services related to ongoing customer support is recognized ratably over the period of the maintenance contact. Maintenance service fees are generally received in advance and are non-refundable. Service revenue is recognized as the related services are performed. Revenues from projects undertaken for customers under fixed price contracts are recognized under the percentage-of-completion method of accounting for which the estimated revenue is based on the ratio of cost incurred to costs incurred plus estimated costs to complete. When the Company's current estimates of total contract revenue and cost indicate a loss, the Company records a provision for estimated loss on the contract. While we have been and are in the process of launching our new, hosted unified communications and unified information applications business model, our results for fiscal year ended September 30, 2002 reflect generally the results of our legacy business in Singapore from our Infotel subsidiary. Our revenues for 15 fiscal year 2002 were derived substantially from our legacy businesses. Revenues related to our offering of the inUnison-TM- UC/UI applications in a hosted, recurring ASP revenue model were less than $1 million in fiscal 2002. Revenues from legacy systems have steadily decline in North America and the Company discontinued its legacy business in fiscal 2002, due to declining market demand for legacy voicemail systems and to the introduction of inUnison-TM-. Due to economic conditions and as a result of discontinued operations, we have decreased significantly our headcount in the United States (sales, sales engineering, operations, and engineering). Currently our new business model for providing unified communications and unified information in a hosted, recurring revenue service model makes us one of the first companies in this new market. We anticipate competition in this relatively new market space to increase significantly. We will continue to invest heavily in software development and in the operations personnel necessary to deploy and operate our applications to provide our customers with carrier grade or "99.95%" reliability. In fiscal year 2002, we entered into a number of financing transactions designed to provide us with funding for our new, hosted unified communications and unified information business model. We successfully closed on a $7.1 million convertible debentures with warrants. We continued to invest heavily in research and development, and acquired various technologies. We acquired certain assets of Quaartz, Inc. including the intellectual property related to the calendar applications that we have incorporated into our inUnison-TM- portal. RESULTS OF OPERATIONS Management's discussions address audited financial data for the years ended September 30, 2002, 2001 and 2000. The following table shows audited results of operations, as a percentage of net sales, for the fiscal years ended September 30, 2002, 2001 and 2000: APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES Years Ended September 30, ----------------------------------- ------------------------- 2002 2001 2000 ----------------------------------- -------- ------- ------ Net Sales 100.0% 100.0% 100.0% Cost of Sales 119.6% 80.7% 72.4% Gross Profit (19.6)% 19.3% 27.6% Restructuring, selling, general and administrative expenses 67.7% 90.0% 64.8% Impairment charges (24.0)% 17,0% --% Amortization of goodwill 31.6% 9.0% 2.2% Loss from operations (94.8)% (96.7)% (39.9)% Other expenses 37.9% 24.6% 9,4% Income Loss before taxes (132.7)% (120.5)% (49.3)% Income tax 0.8% 1.3% 1.0% Net loss (133.5)% (121.8)% (50.3)% ----------------------------------- -------- ------- ------ Net Revenues For the fiscal year ended September 30, 2002, our net revenues were $11.8 million as compared to $21.7 million for the same period ending September 30, 2001 and $25.5 million for the same period in 2000, representing a decrease of $9.9 million or 45.6% compared to fiscal 2001 and $3.8 million or a 14.9% decrease for the same period in 2000. Our net revenues for fiscal year 2002 were adversely affected by the transition to our new business model of providing unified communications and unified information applications in our inUnison-TM- portal in a hosted service, recurring revenue model. The decline also represents a decline in our legacy revenues in North America and a decision by management to de-emphasis several legacy products such as call centers and proprietary voice messaging products. On a full year basis, APPIANT NA's net revenues were $2.2 million for the fiscal year ended September 30, 2002 as compared to $8.7 million for the period ending September 30, 2001 and $14.0 million for the same period in 2000. The 2002 16 year-to-date decrease in APPIANT NA net revenues came from reduced legacy products, which were discontinued and slower than expected revenues from our inUnison-TM- product offering. Net revenues for our Infotel subsidiary were $9.6 million for the fiscal year ended September 30, 2002 as compared to $13.1 million for our fiscal year ended September 30, 2001 and $11.6 million for the same period in 2000. The decrease in such net revenues in fiscal year 2002 occurred within the all product segments due to an overall weak Singapore economy. Our legacy business backlog decreased to $2.1 million at September 30, 2002 as compared to $5.5 million as of September 30, 2001 and $9.5 million for the same period in 2000. APPIANT NA's order backlog decreased to zero from $1.0 million at September 30, 2001 and from $2.9 million at September 30, 2000. Infotel's backlog decreased at September 30, 2002 to $2.1 million from $2.3 million at September 30, 2001 and from $6.6 million at September 30, 2000. Orders for our inUnison product total approximately $1.2 million as of September 30, 20002. Gross Margin Our gross margin for fiscal year 2002 was $(2.3) million or (19.6)% of net revenues, as compared to $4.2 million or 19.3% for fiscal year 2001 and $7.1 million or 27.6% for the same period in 2000. The decrease principally relates to reductions in our legacy business revenues both in the US and Singapore, coupled with the fixed nature of operating costs in our APPIANT NA operation associated with the delivery of inUnison services. APPIANT NA's gross margin on a stand-alone basis for the fiscal year 2002 was $(5.1) million or (237.0)%, as compared to $1.0 million or 8.0% for the fiscal year ended September 30, 2001 and $3.0 million or 23.0% for the same period in 2000. The decrease in gross margin in APPIANT NA was due to reduced revenue levels and the continuing unabsorbed cost of operations that are part of cost of delivery of inUnison services. Infotel's gross margin percentage on a stand-alone basis increases from 29.2% for the fiscal year ended September 30, 2002 to 27.4% for the fiscal year ended September 30, 2001. This increase in Infotel's gross margin percentage is due to a decrease in spending and cost controls implemented during fiscal 2002 in anticipation of a downward trend in the Singapore economy. Research and Development Our industry is characterized by rapid technological change and product innovation. Our early "beta" customers have also requested numerous changes to our original product release and management expects new customers will also request product changes and innovations. We believe that continued timely development of products for both existing and new markets is necessary to remain competitive. Therefore, we devote significant resources to programs directed at developing new and enhanced products, as well as new applications for existing products. Our capitalized research and development expenditures were $1.8 million in fiscal year 2002 excluding $1.6 million of internal engineering costs that were capitalized during fiscal 2002, reflecting our continued investment in research and development. We have adopted AICPA Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed and Obtained for Internal Use," ("SOP 98-1") and capitalize our research and development costs related to software development, and we will begin amortizing these costs when the capitalized software is substantially complete and ready for its intended use. Selling, General and Administrative Expenses Our selling, general and administrative expenses ("SG&A") excluding research and development, but including goodwill amortization, restructuring charge, impairment loss, and non-cash charges related to options and warrants, as a percentage of net revenues, increased to 59.5% for the fiscal year ended September 30, 2002, as compared to 102.2% for fiscal year 2001 and 67.5% for fiscal year 2000. The non-cash expenses included in fiscal 2002 were $0.1 million associated with cashless exercise options included in warrants issued to officers and board of director members, which are accounted for using variable accounting. This means that the difference between the exercise price of the warrant and the current market value of our common stock is charged to expense as the warrant vests until such warrants are exercised, canceled or expire. The non-cash expenses included in fiscal 2001 were $3.7 million of impairment costs, amortization charges of $1.9 million associated with acquisitions and a benefit of $1.7 million of non-cash compensation associated with cashless exercise options included in warrants issued to officers and board of director members. Non-cash compensation associated with such cashless exercise options of $4.4 million was recorded in fiscal 2000. The Company recorded amortization charges of $0.7 million during 2000. 17 SG&A expenses for Appiant NA and Infotel on a stand-alone basis was as follows: YEARS ENDED SEPTEMBER 30 ------------------------- 2002 2001 2000 ------ -------- ------- (In thousands) Appiant North American Operations: Non-cash Compensation $ 113 $(1,700) $ 4,400 Other 4,533 16,239 9,465 ------ -------- ------- 4,646 14,539 13,865 Infotel 2,387 2,139 2,500 ------ -------- ------- Total SG&A Expense $7,033 $16,678 $16,365 ====== ======== ======= SG&A, excluding non-cash charges totaled $6.9 million for fiscal 2002, $18.4 million for 2001 and $12.2 million for 2000. The decrease in fiscal 2002 is primarily due to substantial reductions in headcounts and spending implemented by management during the year. The increase in fiscal 2001 as a percentage of revenue is primarily due to the reduction in revenues for fiscal 2001 and increased costs as we accelerated our transition to our new business model. SG&A, excluding non-cash charges for Appiant's North American operations on a stand-alone basis decreased to $4.5 million or 70.9% for fiscal year 2002 due to a substantial reduction in headcount and spending implemented by management during the year. SG&A, excluding non-cash charges increased to $16.2 million or 187.4% of Appiant NA revenues in fiscal year 2001 from $9.7 million or 69.1% in fiscal year 2000 mainly because of the significant decrease in North American revenues during fiscal year 2001 and expenditures in Sales and Marketing related to the service offering. On a stand-alone basis, Infotel's SG&A increased to $2.4 million during fiscal 2002 representing an increase of $0.2 million over the same period a year earlier. Infotel's SG&A decreased to $2.1 million in fiscal 2001 compared to $2.5 million in fiscal 2000. On a stand-alone basis, Infotel's SG&A increased as a percentage of revenues to 24.7% for fiscal year 2002 from 16.3% for fiscal year 2001 and 21.6% in fiscal year 2000. Infotel's SG&A expenses increased as a percentage of revenues mainly because of the decrease in Infotel's revenues and slightly higher expenditures during fiscal year 2002. Unusual or Infrequent Events or Transactions that Materially Affected Income -------------------------------------------------------------------------------- From Continuing Operations ---------------------------- Impairment of Equipment and Capitalized Software and Release of Lease Liability: ------------------------------------------------------------------------------- The Company had capitalized $1.2 million of purchased software related to software obtained for billing and provisioning. In June 2001, the Company concluded that the software would not be placed in service and recorded an impairment charge of $1.2 million in fiscal year 2001. In fiscal year 2002, the Company and its billing and provisioning vendor negotiated a settlement whereby the related account payable was written-off. In connection with the above transaction, the Company entered into lease financing arrangements with a hardware vendor, under which approximately $2.1 million related to hardware and related product costs and $2.5 million related to consulting services acquired for its first data center in Atlanta, Georgia. On June 29, 2001, the Company returned $1.6 million of computer and related equipment at the Atlanta data center to the vendor. The vendor reduced the lease payments due by $1.6 million and as a result the Company reduced equipment and the related capital lease obligations by an equal amount. The Company relocated its data center to Sunnyvale, California in June 2001 and relocated the hardware of $500,000 to this location in September 2001. The remaining $2.5 million of consulting services were charged to operating expenses, which related to the installation of the hardware in the Atlanta data center, as such costs had no future value following the relocation. During fiscal year 2002, the Company and its hardware vendor agreed that the balances due under the leases, were forgiven and the Company wrote-off the lease obligations. Non-Cash Compensation Charges included in SG&A: Included in selling, general ------------------------------------------------- and administrative expenses ("SG&A") are non-cash compensation charges associated with cashless exercise options included in warrants issued to officers and board of director members, which are accounted for using variable accounting. Thus the difference between the exercise price of the warrant and the current market value of our common stock is charged to expense as the warrant vests until such warrants are exercised, canceled or expire. Non-cash compensation charges recorded amounted to a $0.1 million charge in fiscal 2002, a benefit of $1.7 million during 2001 and an expense of $4.4 million in fiscal 2000. 18 Goodwill arising on the acquisition of the Infotel subsidiary was $2.4 million. Further, we advise the amortization periods for the Company's acquisitions are as follows: AMORTIZATION ------------ PERIOD ------ Infotel 10 years SVG Software Services 5 years Triad 5 years Quaartz 3 years We determined the useful life of the goodwill at the date of acquisition as the period over which the acquired business was expected to contribute directly or indirectly to our future cash flows. The estimate of the useful life was based on an analysis of all pertinent factors, in particular, our expected use of the acquired business and our best estimate of the effects of obsolescence, demand, competition, and other economic factors (such as the stability of the industry and known technological advances). Interest and Other Income, Net Our net interest expense decreased to $6.4 million or 25.6% in fiscal year 2002 from $8.6 million or 39.4% in fiscal year 2002 and from $2.3 million during fiscal 2000. The decrease in net interest expense in fiscal year 2002 results primarily from non-cash charges related to a beneficial conversion feature associated with debentures that we issued in fiscal years 2000, 2001 and 2002. Non-cash Charges Included in Interest Expense: Included in interest expense are --------------------------------------------- certain non-cash charges relating to warrants issued and associated beneficial conversion features in connection with various notes payable. Interest expense for the years ended September 30, 2002, 2001 and 2000 is summarized as follows: YEARS ENDED SEPTEMBER 30, 2002 2001 2000 ----------- ----------- ----------- (In thousands) Non-cash charges relating to warrants issued $ 822 $ 4,007 $ - Revaluation of Warrant Liability (5,624) (3,864) - Non-cash charges relating to amortization of non-cash beneficial conversion features arising on issuance of various convertible notes payable 7,417 3,572 1,595 Accrued interest on notes payable and convertible notes payable 1,174 641 188 Interest on capital leases, lines of credit and other loans 156 317 524 ----------- ----------- ----------- Total interest expense $ 3,945 $ 4,673 $ 2,307 =========== =========== =========== 19 Income taxes We currently have approximately $56 million in US federal net operating loss carry-forwards. The use of approximately 8 million of these net-operating losses are subject to an annual limitation of $250,000. At September 30, 2002, we provided a 100% valuation allowance against our deferred tax asset. We believe that since sufficient uncertainty exists regarding the realization of the deferred tax asset, a full valuation allowance is required. Income tax of $91,000 relates to accrued income tax liabilities for Infotel, our subsidiary in Singapore. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our capital requirements through a combination of sales of equity securities, convertible and other debt offerings, bank borrowings, asset-based secured financings, structured financing and cash generated from operations. During our fiscal year ended September 30, 2002 net cash used in operating activities was $7.3 million. Although we incurred a loss of $14.3 million for the fiscal year, $9.6 million of this loss was attributed to various non-cash charges. Further, our cash loss was increased by substantial increases in accounts receivables and deferred revenue and substantial decreases in accounts payable and other current liabilities. Net cash provided by investing and financing activities totaled $4.5 million consisting of proceeds from issuance of convertible debentures and warrants which were offset by payments on capital lease obligations and purchases of software, property and equipment. During our fiscal year ended September 30, 2002 net cash used in operating activities was $9.9 million. Although we incurred a loss of $24.6 million for the fiscal year, $12.2 million of this loss was attributed to various non-cash charges. Further, our loss was offset by a substantial decrease in accounts receivables. Net cash provided by investing and financing activities totaled $7.7 million consisting of proceeds from issuance of convertible debentures, the issuance of Common and Preferred Stock, the exercise of options and warrants, the proceeds of a note from a vendor which were offset by purchase of software and property and equipment. Our principal sources of liquidity at September 30, 2001 were as follows: Effective April 19, 2002, Appiant commenced a secured financing of up to $4,025,000 with certain accredited investors ("Investors") pursuant to a Debenture and Warrant Purchase Agreement (the "Agreement"), dated April 19, 2002. As of May 28, 2002, $3,525,000 of Convertible Debentures including $105,750 of Debentures issued as a finder's fee had closed. Under the terms of the Agreement, Appiant agreed to issue to the Investors Convertible Debentures bearing an interest rate of 8%. The Convertible Debentures may be converted into unregistered, restricted shares of Appiant Common Stock for a purchase price per share equal to the lower of (a) $1.21, which was the deemed closing price and was determined based on the closing bid prices of the Common Stock for the five trading days immediately prior to the closing date of the initial sale of the Debentures, or (b) the average of the two lowest closing bid prices of Appiant shares for the 20-day period immediately preceding any conversion. The Convertible Debenture can be converted, at the option of the holder, at any time until one year after the Closing Date. In the event the Convertible Debentures are not converted, Appiant has the option to repay the indebtedness. Appiant also has the right to redeem the Convertible Debentures prior to maturity for an amount per share equal to 110% to 125% of the principal amount of the Convertible Debentures being redeemed, as determined by the date of redemption. In addition, Appiant issued to Investors warrants to purchase up to an aggregate of 1,456,612 shares of unregistered, restricted Appiant Common Stock on the total financing of $3,525,000. Appiant has also agreed to issue warrants for 100,000 shares of unregistered, restricted Appiant Common Stock as part of the finders fee for this financing. The warrants have a term of five years and are exercisable at a warrant price equal to 110% of the closing price or $1.33 per share. The estimated value of the warrants of $1,635,000 was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate of 3.375%, a dividend yield of 0% and volatility of 133%. The allocation of the Convertible Notes proceeds to the fair value of the warrants of $1,109,000 was recorded as a discount on the Convertible Notes and as additional paid-in capital. In addition, as a result of the beneficial conversion feature described above for the Convertible Notes, the Company recorded $1,982,000 additional paid-in capital, and a discount on the notes payable, which is accreted over the note maturity period to interest expense. As a result, these discounts are accreted over the note maturity period and $727,000 was recorded as non-cash interest expense for the three months ended June 30, 2002. 20 Terms of the financing also provide that the Investors may nominate up to two additional members to the Appiant Board of Directors, and provide the Investors certain rights and options regarding possible future equity based financings by Appiant. Appiant paid a cash finder's fee of 7% and Convertible Debentures of 3% and warrants to purchase 100,000 shares of Common Stock, and other related expenses. No underwriters were involved in this private placement. The sale of the debentures and the warrants to the investors was exempt from the registration provisions of the Securities Act, under Sections 4(2) and 4(6) of the Securities Act, and the rules and regulations there under, because of the nature of the offerees and Investors and the manner in which the offering was conducted. The investors have acknowledged that the securities cannot be resold unless registered or exempt from registration under the securities laws. Appiant has agreed to register for resale on Form S-3 up to 12,000,000 shares of the Common Stock (the "Registrable Shares") issued to the Shareholders as soon as practicable following the Effective Date. Moreover, Appiant has agreed to seek shareholder approval of the issuance of the Registrable Shares in excess of 19.99% of issued and outstanding Appiant Common Stock. In addition, the Company entered into several Convertible Promissory Notes Payable (the "Convertible Notes") in the aggregate principal amount of $125,000 with a related party. The Notes accrue interest at 10% per annum, which is payable in common stock at the time of conversion and are collateralized by the Company's legacy business accounts receivables, and the assets of the Infotel subsidiary, and matured on various dates from April 30, 2002 through June 22, 2002. The conversion price is equal to the lower of 90% of the closing price of the Company's common stock on the trading day immediately preceding the maturity date, or 90% of any subsequent interim financing that occurs between the issuance date of the notes and the maturity date. Upon conversion, the Convertible Notes have no specific registration rights. As of June 30, 2002, the aggregate amount of $90,000 of these Convertible Notes had been redeemed. In connection with these Convertible Notes, the Company issued warrants to purchase 123,174 shares of the Company's common stock at an exercise price of ranging from $0.90 per share to $1.26 per share. The estimated value of the warrants of $40,000 was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate of 3.375%, a dividend yield of 0% and volatility of 133%. The allocation of the Convertible Notes proceeds to the fair value of the warrants of $ 39,000 was recorded as a discount on the Convertible Notes and as additional paid-in capital. Upon exercise of the warrants, the holder has no specific registration rights. In addition, as a result of the beneficial conversion feature described above for the Convertible Notes, the Company recorded $70,000 additional paid-in capital, and a discount on the notes payable, which is accreted over the note maturity period to interest expense. As a result, these discounts are accreted over the note maturity period and $26,000 was recorded as non-cash interest expense for the three months ended June 30, 2002. During the three months ended March 31, 2002, the Company entered into several Convertible Promissory Notes Payable (the "Convertible Notes") with certain investors in the aggregate principal amount of $2,025,000, of which $1,550,000 was with members of the board of directors or shareholders. The Notes accrue interest at 10% per annum, which is payable in common stock at the time of conversion and are collateralized by the Company's legacy business accounts receivables, and the assets of the Infotel subsidiary, and mature on various dates from April 30, 2002 through October 15, 2002. The conversion price is equal to the lower of 90% of the closing price of the Company's common stock on the trading day immediately preceding the maturity date, or 90% of any subsequent interim financing that occurs between the issuance date of the notes and the maturity date. Upon conversion, the Convertible Notes have no specific registration rights. In connection with these Convertible Notes, the Company issued warrants to purchase 1,315,000 shares of the Company's common stock at an exercise price of ranging from $1.32 per share to $1.80 per share. The estimated value of the warrants of $1,878,000 was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate of 3.375%, a dividend yield of 0% and volatility of 145%. The allocation of the Convertible Notes proceeds to the fair value of the warrants of $974,000 was recorded as a discount on the Convertible Notes and as additional paid-in capital. Upon exercise of the warrants, the holder has no specific registration rights. In addition, as a result of the beneficial conversion feature described above for the Convertible Notes, the Company recorded $1,051,000 additional paid-in capital, and a discount on the notes payable, which is accreted over the note maturity period to interest expense. As a result, these discounts are accreted over the note maturity period and $826,000 and $ 1,324,000 were recorded as non-cash interest expense for the three months and nine months ended June 30, 2002, respectively. 21 Between October 31, 2001 and December 20, 2001, the Company entered into several Convertible Promissory Notes Payable (the "Convertible Notes") with certain investors in the aggregate principal amount of $1,390,000, of which $400,000 was with members of the board of directors or shareholders. The Notes accrue interest at 8% per annum, which is payable in common stock at the time of conversion and are collateralized by the Company's legacy business accounts receivables, and the assets of the Infotel subsidiary, and mature on various dates from December 27, 2001 to November 16, 2003. The conversion price is equal to the lower of 90% of the closing price of the Company's common stock on the trading day immediately preceding the maturity date, or 90% of any subsequent interim financing that occurs between the issuance date of the notes and the maturity date. Upon conversion, the Convertible Notes have no specific registration rights. In connection with these Convertible Notes, the Company issued warrants to purchase 945,000 shares of the Company's common stock at an exercise price of ranging from $1.20 per share to $1.77 per share. The estimated value of the warrants of $1,269,000 was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate of 3.92%, a dividend yield of 0% and volatility of 148%. The allocation of the Convertible Notes proceeds to the fair value of the warrants of $663,000 was recorded as a discount on the Convertible Notes and as additional paid in capital. Upon exercise of the warrants, the holder has no specific registration rights. In addition, as a result of the beneficial conversion feature described above for the Convertible Notes, the Company recorded $726,000 additional paid-in capital, and a discount on the notes payable. These discounts are accreted over the note maturity period and $82,917 and $1,325,000 were recorded as non-cash interest expense for the three months and nine months ended June 30, 2002, respectively. Under the June 8, 2001 Convertible Notes Payable purchase agreement, the common stock issuable pursuant to the conversion of the notes and exercise of the related warrants were to be registered within 30 days after the next round of financing. Due to the registration requirement, the warrants were classified as liabilities and re-measured at each reporting date. On December 1, 2001, certain of the warrant agreements were amended to remove the requirement to register the common stock under these warrants. Accordingly, the liability related to these warrants on December 1, 2001 of $670,000 was reclassified to stockholders' equity, additional paid-in capital. Under the April 19, 2002, Debenture and Warrant Purchase Agreement, the conversion price is not fixed. Due to this uncertainty in price, EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" applies. In accordance with the provisions of EITF 00-19, the Company estimated the fair value of all outstanding warrants as of June 30, 2002, using the Black-Scholes option-pricing model with the following assumptions: Volatility of 133%; dividend yield of 0%; risk-free interest rate of 4.080%; and expected lives of 5 years. The value of all warrants as of June 30, 2002, was estimated at $1,496,000, which was recorded as a reclassification from additional paid-in capital to notes payable. For future quarters, the value of these warrants will be re-calculated based on their market value at quarter end. In connection with Convertible Notes issued on the September 26 and 28, 2002 , the Company issued warrants to purchase 271,700 shares of the Company's common stock at an exercise price of ranging from $0.45 per share to $0.50 per share. The estimated value of the warrants of $271,700 was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate of 2.82%, a dividend yield of 0% and volatility of 144%. The allocation of the Convertible Notes proceeds to the fair value of the warrants of $142,600 was recorded as a discount on the Convertible Notes and as additional paid in capital. Upon exercise of the warrants, the holder has no specific registration rights. In addition, as a result of the beneficial conversion feature described above for the Convertible Notes, the Company recorded $157,400 additional paid-in capital, and a discount on the notes payable. These discounts are accreted over the note maturity period and $9,873 was recorded as non-cash interest expense for the three months ended September 30, 2002. 22 RISK FACTORS; FACTORS THAT MAY AFFECT OPERATING RESULTS The following risk factors may cause actual results to differ materially from those in any forward-looking statements contained in the MD&A or elsewhere in this report or made in the future by us or our representatives. Such forward-looking statements involve known risks, unknown risks and uncertainties and other factors which may cause the actual results, performance or achievements expressed or implied by such forward-looking statements to differ significantly from such forward-looking statements. WE CURRENTLY HAVE A GOING CONCERN OPINION FROM OUR OUTSIDE AUDITORS The Company received a going concern opinion on its financial statements for both fiscal 2001 and 2002. A going concern opinion means that the Company does not have sufficient cash and liquid assets to cover its operating capital requirements for the preceding twelve-month period and if sufficient cash cannot be obtained the Company would have to substantially alter its operations or may not be forced to discontinue operations. The fact that the Company was able to continue operating for more than twelve-months since receiving a going concern opinion on its fiscal 2001 financial statements is not an indication that it will be able to do so in the future. To the contrary the Company's cash position has worsen since fiscal 2001 and its ability to continue its current operations is less likely. WE HAVE CURRENTLY RECORDED A NET LOSS, WE HAVE A HISTORY OF NET LOSSES AND WE CANNOT BE CERTAIN OF FUTURE PROFITABILITY. We recorded a net loss of $15.8 million on net revenues of $11.8 million our fiscal year ended September 30, 2002 and a net loss of $29.9 million on net revenues of $21.7 million during fiscal 2001. We also sustained significant losses for the fiscal years ended September 30, 1999 and 2000. We anticipate continuing to incur significant sales and marketing, product development and general and administrative expenses and, as a result, we will need to generate significantly higher revenue to sustain profitability as we build our organization for our new inUnison-TM- business model. In addition, we anticipate significant amortization of capitalized software and other assets that we have purchased or developed for our new inUnison-TM- business model in our fiscal year 2003. We cannot be certain that we will continue to realize sufficient revenue to return to or sustain profitability. Our financial condition and results of operations may be adversely affected if we fail to produce positive operating results. This could also: - adversely affect the value of our common stock; - adversely affect our ability to obtain debt or equity financing on acceptable terms to finance our operations; and - impair our ability to continue in business. OUR EQUITY AND DEBT FUNDING SOURCES MAY BE INADEQUATE TO FINANCE FUTURE ACQUISITIONS. The acquisition of complementary businesses, technologies and products has been and may continue to be key to our business strategy. Our ability to engage in acquisition activities depends on us obtaining debt or equity financing, neither of which may be available or, if available, may not be on terms acceptable to us. Our inability to obtain this financing may prevent us from executing successfully our acquisition strategy. Further, both debt and equity financing involve risks. Debt financing may require us to pay significant amounts of interest and principal payments, reducing our cash resources we need to expand or transform our existing businesses. Equity financing may be dilutive to our stockholders' interest in our assets and earnings. A NUMBER OF FACTORS COULD CAUSE OUR FINANCIAL RESULTS TO BE WORSE THAN EXPECTED, RESULTING IN A FURTHER DECLINE IN OUR STOCK PRICE. We have significantly decreased our operating expenses to including our sales and marketing activities, our customer support capabilities, development of new distribution channels, research and development, and our operational infrastructure. We base our operating expenses on anticipated revenue trends and 23 a high percentage of our expenses are fixed in the short term. As a result, any delay in generating or recognizing revenue could cause our quarterly operating results to be below the expectations of public market analysts or investors, if any, which could cause the price of our common stock to fall further. We may experience a delay in generating or recognizing revenue because of a number of reasons. We are dependent on our business partners and vendors to supply us with hardware, software, consulting services, hosting, and other support to launch and operate our new business. Our quarterly revenue and operating results have varied significantly in the past and may vary significantly in the future due to a number of factors, including: - Fluctuations in demand for our products and services; - Unexpected product returns or the cancellation or rescheduling of significant orders; - Our ability to develop, introduce, ship and support new products and product enhancements, and to project manage orders and installations; - Announcement and new product introductions by our competitors; - Our ability to develop and support customer relationships with service providers and other potential large customers; - Our ability to achieve required cost reductions; - Our ability to obtain sufficient supplies of sole or limited sourced third party products; - Unfavorable changes in the prices of the products and components we purchase; - Our ability to attain and maintain production volumes and quality levels for our products; - Our ability to retain key employees; - The mix of products and services sold; - Costs relating to possible acquisitions and integration of technologies or businesses; and - The effect of amortization of goodwill and purchased intangibles resulting from existing or future acquisitions. Due to the foregoing factors, we believe that period-to-period comparisons of our operating results should not be relied upon as an indicator of our future performance. OUR NEW PRODUCTS AND STRATEGIC PARTNERING RELATIONSHIPS MAY NOT BE SUCCESSFUL. We have launched our inUnison-TM- UC/UI product applications that are designed to provide our customers with hosted unifying communications and unifying information solutions. While we believe that our inUnison-TM- applications will provide our customers with scaled, carrier grade IP-based solutions, we cannot assure you that our customers will accept or adopt them on a large scale, in fact early indications are that adoption of unified communication services in general and inUnison-TM- in particular has been slower than expected. Our integration efforts with other third party software has and could continue to result in product delays and cost overruns. We cannot assure you that other software vendors whose software products we license or incorporate into our inUnison-TM- portal will continue to support their products. If these vendors discontinue their support, our business would be adversely affected. Further, we expect to continue incur substantial expenditures for equipment, systems, research and development, consultants and personnel to implement this new business model. As a result, our operating results and cash flows may be adversely affected. Significant working capital will be needed by the Company to meet its business plan. Although we believe that this new product offering will ultimately result in profitable operations, there can be no assurance that the implementation of our new business model will be successful or that we can attract the funds necessary to reach cash flow breakeven. 24 RAPID GROWTH WILL STRAIN OUR OPERATIONS AND REQUIRE US TO INCUR COSTS TO UPGRADE OUR INFRASTRUCTURE. Concerning the development and launch of our new hosted inUnison-TM- business model, if we were to experience periods of rapid growth, it would significant strain on our resources. Unless we manage such growth effectively, we may make mistakes in operating our business such as inaccurate sales forecasting, incorrect production planning, managing headcount, or inaccurate financial reporting, either or all of which may result in unanticipated fluctuations in our operating results and adverse cash flow and financing requirements. Rapid growth and expansion would strain our management, operational and financial resources. Our management team has had limited experience managing such rapidly growing companies on a public or private basis. To accommodate such growth, we will be required among other things to: - Improve existing and implement new operations, information and financial systems, procedures and controls; - Recruit, train, manage, and retain additional qualified personnel including sales, marketing, research and development personnel; - Manage multiple relationships with our customers, our customers' customers, our strategic partners, suppliers and other third parties; and - Acquire additional office space and remote offices in numerous locations within and without the United States that will require space planning and infrastructure to support these additional locations. We may not be able to install adequate control systems in an efficient and timely manner, and our current or planned financial, operational and personnel systems, procedures and controls may not be adequate to support our future operations. We would need to install various new management information system tools, processes and procedures, continue to modify and improve our existing information technology infrastructure, and invest in training our people to meet the increasing needs associated with our growth. The difficulties associated with installing and implementing these new systems, procedures and controls may place a significant burden on our management and our internal resources. In addition, as we grow internationally, we will have to expand our worldwide operations and enhance our communications infrastructure. Any delay in the implementation of such new or enhanced systems, procedures or controls, or any disruption in the transition to such new or enhanced systems, procedures or controls, could adversely affect our ability to accurately forecast sales demand, manage our hosted applications, and record and report financial and management information on a timely and accurate basis. THE UC/UI MARKET IS YOUNG AND UNTESTED. WE HAVE JUST COMMENCED PROVIDING UC/UI SERVICES IN A HOSTED SERVICE MODEL TO OUR CUSTOMERS UNDER OUR NEW BUSINESS MODEL. The UC/UI market is in its infancy, and indeed we are one of the first companies in unified information. Despite very positive and upbeat forecasts by a number of leading industry analysts of the market potential for unified communications and unified information applications, we have yet commenced providing our applications to our customers in a hosted service model. There is no assurance that our UC/UI applications will be adopted or, if adopted, that they will be successful in the marketplace. There is no assurance that our business model of offering our applications in a hosted, recurring revenue model will be successful. We are implementing a new business plan, and to the extent that we fail to execute it successfully, compete with new entrants to this market space, or otherwise are unable to build the complex network infrastructure necessary to provide such services to our customers, our results and cash flows will be negatively impacted and we could face serious needs for additional financing which may not be available. WE PRESENTLY RELY UPON LEGACY SYSTEMS REVENUES. For our fiscal year ended September 30, 2002, legacy systems revenues (which includes customer premises equipment revenues) accounted for approximately 16.1% of Company's total revenues and 81.7% of our North American revenues. The projected decline in our legacy business will have an adverse effect on our revenues and financial performance. Management believes that future revenues from legacy voicemail systems will decline in the short term due to current economic conditions. The Company discontinued its legacy business in North America during fiscal year 2002. Our ability to transition our product sales to our UC/UI hosted, recurring revenue model will be critical to our future growth. 25 THE SALES CYCLE FOR OUR NEW HOSTED APPLICATIONS MAY BE LONG, AND WE MAY INCUR SUBSTANTIAL NON-RECOVERABLE EXPENSES OR DEVOTE SIGNIFICANT RESOURCES TO SALES THAT DO NOT OCCUR OR OCCUR WHEN ANTICIPATED. Although, we have over 12,000 subscribers on our hosted inUnison service, the timing of significant recurring revenues from our hosted inUnison-TM- unified communications and unified information applications is difficult to predict because the unified communications and unified information market is relatively new. Our success will depend in large measure on market demand and acceptance of these applications and technologies, our ability to create a brand for our applications and technologies, our ability to target and sell customers and to drive demand for our applications to their customers, our ability to develop pricing models and to set pricing for our applications, and our ability to build market share. We plan initially to provide our hosted applications to service providers such as internet service providers (ISPs), application service providers (ASPs), affinity groups, multilevel marketing organization and certain corporations. We will need to create sales tools, service provider subscriber use models, methodologies and programs to work with our service provider customers to help devise cooperative advertising and sales campaigns to market and sell our inUnison-TM- applications to their customer. The sales process and sale cycle may vary substantially from customer to customer, and our ability to forecast accurately the sale opportunity for any customer, or to drive adoption of our inUnison-TM- applications in our customers' subscribers may be limited. There is no assurance that we will be successful in selling our applications or achieving targeted subscriber adoption, and our operating and cash flow requirements will be negatively impacted should we fail to achieve our targets within the time frames that we forecast. Our customers may require various testing and test markets of our hosted applications before they decide to contract with us to provide our hosted inUnison-TM- applications to their subscribers. We may incur substantial sales and marketing and operational expenses and expend significant management effort to carry out these tests. Consequently, if sales forecasted from a specific customer for a particular quarter are not realized within the time frames that we have forecasted, we may be unable to compensate for the shortfall, which could harm our operating and cash flow results. WE RELY UPON OUR DISTRIBUTOR AND SUPPLIER RELATIONSHIPS. Our current Singapore legacy operations rely significantly on products manufactured and services provided key third parties. Any disruption in our relationships with these suppliers would have a significant adverse effect on our business for an indeterminate period of time until new supplier relationships could be established. Any potential competition from our suppliers could have a material negative impact on our business and financial performance. WE ARE DEPENDENT UPON SIGNIFICANT CUSTOMERS. Revenues from our five largest customers accounted for approximately 24.3%, 7.9%, 6.6%, 6.4% and 5.2% of total revenues during our fiscal year ended September 30, 2002. No other customer accounted for over 5% of total revenues during this period. This concentration of revenue has resulted in additional risk to our operations, and any disruption of orders from our largest customers would adversely affect on our results of operations and financial condition. Our Singapore subsidiary, Infotel Technologies (Pte) Ltd., offers a wide range of infrastructure communications equipment products. It has an established business providing test measuring instrumentation and testing environments, and is the regional distributor and test and repair center for Rohde & Schwarz test instruments. Infotel is also a networking service provider, and manages data networks for various customers. Infotel's financial performance depends in part on a steady stream of revenues relating to the services performed for Rohde & Schwarz test instruments. Infotel's revenues constituted approximately 81.7% of our total revenues for the fiscal year ended September 30, 2002. Any material change in our relationship with our manufacturers, including but not limited to Rohde & Schwarz, would materially adversely affect our results of operations and financial condition. 26 OUR MARKET IS HIGHLY COMPETITIVE, AND IF WE DO NOT COMPETE EFFECTIVELY, WE MAY SUFFER PRICE REDUCTIONS, REDUCED GROSS MARGINS AND LOSS OF MARKET SHARE. The markets for our legacy businesses are highly competitive, and competition in this industry is expected to further intensify with the introduction of new product enhancements and new competitors. With such competition may come more aggressive pricing and reduced margins. We currently compete with a number of larger integrated companies that provide competitive voice-processing products and services as subsets of larger product offerings. Our existing and potential competitors include many large domestic and international companies that have better name and product recognition in the market for our products and services and related software, a larger installed base of customers, and substantially greater financial, marketing and technical resources than ourselves. With the launch of our inUnison-TM- UC/UI hosted applications, we have discontinued our legacy business revenues and its related gross margins as we focus on our UC/UI business. Any delays in the anticipated launch of our inUnison-TM- business plan, coupled with a decline in our legacy business, would have a significant adverse impact on our financial performance and financing requirements. Infotel competes against several large companies in Singapore that are better capitalized. Although Infotel has in the past managed to compete successfully against these larger companies on the basis of its engineering, systems and product management expertise, no assurances can be given that this expertise will allow Infotel to compete effectively with these larger companies in the future. Further, various large manufacturers headquartered outside of Singapore have established their own branch offices in Singapore and also compete with Infotel. WE RELY HEAVILY ON OUR STRATEGIC PARTNERS IN OUR NEW BUSINESS MODEL, AND WITHOUT SUPPORT FROM OUR PARTNERS OUR BUSINESS COULD SUFFER. We have built significant, valuable strategic partnering relationships with a number of partners including Cisco Systems, and these partnering relationships are important to our success. In the case of CISCO, they have committed to introducing customers to us. Hewlett-Packard also was an important strategic partner that was to assist us in designing, implementing and operating our backend solution to provide our UC/UI applications in a hosted, carrier grade environment. Hewlett-Packard was to provide consulting services in the design, build out and operation of our backend architecture. We were to host our applications in their data centers and to provide various levels of customer support. The deterioration of our relationships with Hewlett-Packard during fiscal 2001 had a material adverse affect on our UC/UI business and financial performance. While we believe that our partnering relationships with CISCO and other third parties are strong, we cannot assure you that these relationships will continue or that they will have a positive impact on our success. OUR REVENUES WILL LIKELY DECLINE IF WE DO NOT DEVELOP AND INTEGRATE THE COMPANIES WE ACQUIRE. We have in the past pursued, and may continue to pursue, acquisition opportunities. Acquisitions involve a number of special risks, including, but not limited to: - adverse short-term effects on our operating results; - the disruption of our ongoing business; - the risk of reduced management attention to existing operations; - our dependence on the retention, hiring and training of key personnel and the potential risk of loss of such personnel; - our potential inability to integrate successfully the personnel, operations, technology and products of acquired companies; - unanticipated problems or unknown legal liabilities; and - adverse tax or financial consequences. Two of our prior acquisitions, namely the acquisition of Voice Plus (now known as Appiant Technologies North America, Inc.) and Advantis Network & Systems Sdn Bhd, a Malaysian company, in the past yielded operating results that were significantly lower than expected. In fact, the poor performance of Advantis led to its divestiture less than one year after we acquired the company. 27 The legacy business of Triad Marketing was discontinued as we have focused the people and technologies of the Triad business on our new inUnison-TM- UC/UI business. Accordingly, no assurances can be given that the future performance of our subsidiaries will be commensurate with the consideration paid to acquire these companies. If we fail to establish the needed controls to manage growth effectively, our operating results, cash flows and overall financial condition will be adversely affected. OUR INTERNATIONAL OPERATIONS INVOLVE RISKS THAT MAY ADVERSELY AFFECT OUR OPERATING RESULTS. Infotel, our Singapore subsidiary, accounted for approximately 81.7% of our revenues for the fiscal year ended September 30, 2002, and approximately 60.4% of our revenues for the fiscal year ended September 30, 2001. There are risks associated with our international operations, including, but not limited to: - our dependence on members of management of Infotel and the risk of loss of customers in the event of the departure of key personnel; - unexpected changes in or impositions of legislative or regulatory requirements; - potentially adverse taxes and tax consequences; - the burdens of complying with a variety of foreign laws; - political, social and economic instability; - changes in diplomatic and trade relationships; and - foreign exchange and translation risks. Any one or more of these factors could negatively affect the performance of Infotel and result in a material adverse change in our business, results of operations and financial condition. We anticipate that the market for our inUnison-TM- UC/UI business is global. We anticipate that we will be expanding our business operations for our UC/UI applications outside the United States, and project that we will launch our UC/UI business in Asia from our existing Singapore operations. However, we do not yet have established operations for our UC/UI applications outside of the United States, and our business could suffer material adverse results if we cannot build an international organization to launch our UC/UI applications outside of the United States in time to meet market demand or alternative solutions or standards. OUR STOCK PRICE COULD EXPERIENCE FURTHER PRICE AND VOLUME FLUCTUATIONS. The markets for securities such as our common stock historically have experienced extreme price and volume fluctuations. Factors that may adversely affect the market price of our common stock include, but are not limited to, the following: - new product developments and our ability to innovate, develop and deliver on schedule our inUnison-TM- UC/UI applications; - technological and other changes in the voice-messaging, unified communications, and unified information; - fluctuations in the financial markets; - general economic conditions; - competition; and - quarterly variations in our results of operations. OUR MANAGEMENT TEAM IS CRUCIAL TO OUR SUCCESS. Our business depends heavily upon the services of its executives and certain key personnel, including Douglas S. Zorn, our President and Chief Executive Officer. Management changes often have a disruptive impact on businesses and can lead to the loss of key employees because of the uncertainty inherent in change. Within the last several years, we had significant changes in our key personnel. We 28 cannot be certain that we will be successful in attracting and retaining key personnel worldwide - particularly in the Silicon Valley, greater San Francisco Bay where we operate - as the employment markets there are intensely competitive. The loss of the services of any one or more of such key personnel, if not replaced, or the inability to attract such key personnel, could harm our business. While hiring efforts are underway to fill the vacancies created by the departure of other key employees, there is no assurance that these posts will be filled in the near future. The loss of these or other key employees could have a material adverse impact on our operations. Furthermore, the recent changes in management may not be adequate to sustain our profitability or to meet our future growth targets. FAILURE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS WILL HARM OUR ABILITY TO COMPETE. We have a number patents and copyrights, and while we are in the process of filing for trademark and patent protection on selected product names, technologies and processes which we have developed, we currently rely and have relied on general common law and confidentiality and non-disclosure agreements with our key employees to protect our trade secrets. We also have received trademark protection for the names Appiant Technologies and inUnison. Our success depends on our ability to protect our intellectual property rights. Our efforts to protect our intellectual property may not be sufficient against unauthorized third-party copying or use or the application of reverse engineering, and existing laws afford only limited protection. In addition, existing laws may change in a manner that adversely affects our proprietary rights. Furthermore, policing the unauthorized use of our product is difficult, and expensive litigation may be necessary in the future to enforce our intellectual property rights. OUR PRODUCTS COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, RESULTING IN COSTLY LITIGATION AND THE LOSS OF SIGNIFICANT RIGHTS. We may be subject to legal proceedings and claims for alleged infringement of proprietary rights of others, particularly as the number of products and competitors in our industry grow and functionalities of products overlap. This risk may be higher in a new market in which a large number of patent applications have been filed but are not yet publicly disclosed. We have limited ability to determine which patents our products may infringe and to take measures to avoid infringement. Any litigation could result in substantial costs and diversion of management's attention and resources. Further, parties making infringement claims against us may be able to obtain injunctive or other equitable relief, which could prevent us from selling our products or require us to enter into royalty or license agreements which are not advantageous to us. IF WE FAIL TO ADEQUATELY RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR EXISTING PRODUCTS WILL BECOME OBSOLETE OR UNMARKETABLE. Advances in technology could render our products and applications obsolete and unmarketable. We believe that to succeed we must enhance our existing software products and underlying technologies, develop new products and technologies on a timely basis, and satisfy the increasingly sophisticated requirements of our customers. We may not respond successfully to technological change, evolving industry standards or customer requirements. If we are unable to respond adequately to these changes, our revenues could decline. In connection with the introduction of new products and enhancements, we have in the past experienced development delays and unfavorable development cost variances that are not unusual in the software industry. To date, these delays have not had a material impact on our revenues. If new releases or products are delayed or do not achieve broad market acceptance, we could experience a delay or loss of revenues and customer dissatisfaction. IF OUR SOFTWARE CONTAINS DEFECTS, WE COULD LOSE CUSTOMERS AND REVENUES. Software applications that are as complex as ours often contain unknown and undetected errors or performance problems. Many defects are frequently found during the period immediately following the introduction of new software or enhancements to existing software. Furthermore, software which we may license from third parties for inclusion in our inUnison-TM- portal may also have undetected errors or may require significant integration, testing or re-engineering work to operate properly and as represented to our customers. 29 Although we attempt to resolve all errors that we believe would be considered serious by our customers, both our software and any third party software that we license may not be error-free. Undetected errors or performance problems may be discovered in the future, and errors that were considered minor by us may be considered serious by our customers. This could result in lost revenues or delays in customer acceptance, and would be detrimental to our reputation, which could harm our business. FLUCTUATIONS IN OPERATING RESULTS COULD CONTINUE IN THE FUTURE. Our operating results may vary from period to period as a result of the length of our sales cycle, purchasing patterns of potential customers, the timing of the introduction of new products, software applications and product enhancements by us and our competitors, technological factors, variations in sales by distribution channels, timing of stocking orders by resellers, competitive pricing, and generally nonrecurring system sales. For our legacy business, sales order cycles range generally from one to twelve months, depending on the customer, the type of solution being sold, and whether we will perform installation, integration and customization services. The period from the execution of a purchase order until delivery of system components to us, assembly, configuration, testing and shipment, may range from approximately one to several months. These factors may cause significant fluctuations in operating results in the future. The sales order cycle for our inUnison-TM- UC/UI applications in a hosted services model can only be projected at this time as we have little experience with customers for our inUnison-TM- services. To the extent that we do not sign up customers to our inUnison-TM- UC/UI applications according to our plan, our financial performance and results from operations will suffer. WE NEED SIGNIFICANT CAPITAL TO OPERATE OUR BUSINESS AND MAY REQUIRE ADDITIONAL FINANCING. IF WE CANNOT OBTAIN SUCH ADDITIONAL FINANCING, WE MAY NOT BE ABLE TO CONTINUE OUR OPERATIONS. We need significant capital to design, develop and commercialize our products. Currently available funds may be insufficient to fund operations. We may be required to seek additional financing sooner than currently anticipated or may be required to curtail our activities. Based on our past financial performance, coupled with our return to incurring operating losses with our transition to our new business model, our ability to obtain conventional credit has been substantially limited. Our ability to raise capital may also be limited or, if available, be very costly and possibly dilutive to our shareholders. CERTAIN PROVISIONS OF OUR CHARTER AND DELAWARE LAW MAY HAVE ANTI-TAKEOVER EFFECTS. The terms of our Certificate of Incorporation, as amended, and our ability to issue up to 2,000,000 shares of "blank check" preferred stock may have the effect of discouraging proposals by third parties to acquire a controlling interest in us, which could deprive stockholders and of the opportunity to consider an offer to acquire their shares at a premium. In addition, under certain conditions, Section 203 of the Delaware General Corporate Law would impose a three-year moratorium on certain business combinations between us and an "interested stockholder" (in general, a stockholder owning 15% or more of our outstanding voting stock). The existence of such provisions may have a depressive effect on the market price of our common stock in certain situations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We develop products in the United States and market our products in both the US and Asian markets. As a result, our financial results could be affected by changes in foreign currency exchange rates or weak economic conditions in foreign markets. Substantially all of our Appiant NA revenues are currently denominated in U.S. dollars. Our Infotel subsidiary also purchases a significant amount of goods from overseas suppliers. These purchase commitments are often denominated in foreign currencies. We often use forward exchange contracts to hedge these unrecognized firm purchase commitments although this also exposes us to risk as a result of fluctuations in foreign currency exchange rates. We do not have any such exposure at September 30, 2002 but may continue to use these instruments in the future. Our interest expense is sensitive to changes in the general level of interest rates because some of our borrowings are subject to interest rates that vary with the prime rate. Due to the nature of our investments, we believe that there is not a material risk exposure. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is included in Item 13 of this Form 10-K. 30 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE ISSUER Directors and Executive Officers: Name Title Age --------------------- --------------------------------- --- Douglas S. Zorn Chairman of the Board, Chief Executive Officer and President 53 L. Thomas Baldwin III Director 47 Allen F. Jacobson Director 76 Robert J. Schmier Director 54 N. Bruce Walko Director 62 Robert Landis Director 36 Fred E. Tannous Director 42 Tom Ku Chief Technology & Marketing Officer 42 Joachim Zippel Sr. Vice President, Engineering and Operations 48 Sandra W. Smith General Counsel and Corporate Secretary 39 Siravara Vijayendra Former Vice President Engineering and Operations 45 Christopher J. Borders Former Corporate Counsel and Corporate Secretary 39 Jennifer L. Pratt Vice President of Human Resources 42 DOUGLAS S. ZORN. Mr. Zorn has been our Chairman of the Board, Chief Executive Officer and President since May 2000. Mr. Zorn served as Executive Vice President, Chief Financial Officer, Secretary and a Director of the Company since our incorporation in October 1996 until May 2000. Mr. Zorn served as Executive Vice President, Secretary and Treasurer, and Chief Financial and Operating Officer of BioFactors, Inc. from December 1993 until February 1997 and as a Director from June 1994 until February 1997. L. THOMAS BALDWIN III. Mr. Baldwin has been a Director of the Company from December 2000 to February 2003. Mr. Baldwin is a prominent bond trader and investor. For more than the past five years, he has been Chairman of Baldwin Group Ltd., a parent company of various investment and financial services businesses. He has been a member of the Chicago Board of Trade, serving on its Executive Committee; as Chairman of the Advisory Subcommittee of the CPO/CTA Committee; and as Chairman of the Regulatory Compliance Subcommittee for Reg. 320.15 and 320.16 of the Exchange Relations Group. Mr. Baldwin also served as Vice Chairman of the T-Bond Pit Committee. ALLEN F. JACOBSON. Mr. Jacobson has been a Director of our Company since August 2000. Mr. Jacobson is a former Chairman and Chief Executive Officer of 3M Corporation, where he had a distinguished career that spanned over 40 years. Mr. Jacobson has also served on the board of directors of Mobil Corporation, Silicon Graphics, Sara Lee Corporation, Potlatch Corporation, Alliant Techsystems, Inc., and US West. Mr. Jacobson resigned in June 2002. ROBERT J. SCHMIER. Mr. Schmier has been a Director of our Company since January 1999. Mr. Schmier has been the President of Schmier & Feurring Properties, Inc. since 1981, and the President of Schmier & Feurring Realty, Inc. since 1985. These companies are involved in real estate development, leasing and property management of shopping centers and office buildings in Palm Beach County, Florida. Mr. Schmier resigned in July 2002. N. BRUCE WALKO. Mr. Walko has been a Director of our Company since January 1999. Mr. Walko has been the President of Cyberfast Systems, Inc., a company involved in international voice over internet protocol, since November 1999. Previously, Mr. Walko served as Southeast Regional General Manager for NextWave Telecom Inc. from 1994 until 1997. Mr. Walko was instrumental in the development of new technology telecommunication for NextWave and also for McCaw Cellular Inc. (now AT&T Wireless). ROBERT LANDIS. Mr. Landis was a Director of the Company from August 2002 to January 2003. He serves as Chairman and Chief Financial Officer of Comprehensive Care Corporation, a publicly traded, managed behavioral healthcare company. Mr. Landis earned a Bachelor of Science degree in Accounting from the University of Southern California and a Masters of Business Administration from the California State University at Northridge. Mr. Landis resigned in January 2003. 31 FRED E. TANNOUS. Mr. Tannous was a Director of the Company from August 2002 to February 2003. He is Co-Chairman and Chief Executive Officer of Health Sciences Group, a publicly traded healthcare company committed to vertically integrating a collaborative network of profitable nutraceutical and pharmaceutical companies. Mr. Tannous received an MBA in Finance and Accounting from the University of Chicago Graduate School of Business, and holds a Masters and Bachelors degree in Electrical Engineering from the University of Southern California. TOM KU was employed as an officer of the Company from May 2001 through December 2001. As the Chief Technology Officer and Chief Marketing Officer of Appiant Technologies, Inc. Tom founded Quaartz, Inc., a web based application company, in 1999 where he served as the Chief Executive Officer. He also led the professional services division of BEA Systems, Inc., the world leader in e-commerce transaction server software. JOACHIM ZIPPEL was employed as the Senior Vice President of Engineering and Operations of Appiant Technologies, Inc. from May 2001 to January 2002. Prior to joining Appiant, Joachim was the Executive Vice President of Operations and Services and co-founder of Quaartz, Inc., a web based application company. Joachim brings to the Company a wealth of experience in software development and data center operations from his 12-year tenure at Sun Microsystems. Communications, Corp. SANDRA SMITH was employed as the General Counsel and Corporate Secretary of Appiant Technologies, Inc. from February 2001 to February 2002. Sandra was most recently with Simpson Grierson Law. Prior to Simpson Grierson, Sandra was Managing Director of a Legal Consulting firm based in Singapore, advising on IT transactions throughout Asia. Sandra was also in-house counsel at EDS and AT&T for several years, as communications and regulatory counsel. SIRAVARA VIJAYENDRA. Mr. Vijayendra was Vice President of Engineering and Operations from January 2002 through December 2002. Siravara has over 15 years of experience in voice and unified messaging, voice and data encryption, and text-to-speech and speech recognition technologies. Prior to joining Appiant, Siravara was the Vice President of Engineering at Baypoint Innovations, a division of Mitel, Inc., Director of Engineering at Sensory Circuits, Inc., and Senior Manager at Centigram Communications. Additionally, Siravara has spent several years conducting research on seismic, radar and acoustic signal processing at Cylink and Omnitel Corp. Siravara holds Bachelor's of Science in Electrical Engineering from Bangalore University, India and a Masters in Electrical Engineering from Kansas State University. CHRISTOPHER J. BORDERS. Mr. Borders was General Counsel and Corporate Secretary of Appiant Technologies, Inc. from January 2002 through October 2002. He has over 13 years experience serving software, Internet and other technology companies, both as in-house counsel and in private practice. Chris was most recently General Counsel for MobShop, Inc., and was previously a business and litigation partner for Rivkin Radler LLP. Borders is an active member of the American Corporate Counsel Association and its Intellectual Property Committee, and a member of the Business Law Section of the California State Bar. He earned his juris doctor degree from the University of California, Davis, School of Law, and graduated from the University of California, Berkeley with a bachelor's degree in political science. JENNIFER L. PRATT. Ms. Pratt is the Vice President of Human Resources of Appiant Technologies, Inc. She has worldwide responsibility for all HR activities including compensation, benefits, stock administration, recruitment, and immigration and is a liaison with legal on all employment law issues. Jennifer has over 16 years human resource experience and brings strategic expertise in all aspects of human resource management, including partnering with the executive team on the design and implementation of strategic change. Prior to Appiant, Jennifer has held senior management positions with a variety of companies including technology, manufacturing and healthcare industries. Jennifer holds a B.S in Business Administration from Morningside College, Sioux City, Iowa. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information concerning compensation paid during the last three (3) fiscal years to (i) our Chief Executive Officer, (ii) our other most highly compensated executive officers at September 30, 2001, whose aggregate cash compensation exceeded $100,000 during the fiscal year ended September 30, 2002 and (iii) two (2) executive individuals for whom disclosure would have been provided but for the fact that the individual was not serving as an executive officer of the company at the end of the last completed fiscal year (collectively, the "Named Executive Officers"). 32

~~YEARS~~Annual ~~ENDED~~Compensation ~~SEPTEMBER~~Long 30Term compensation Awards Other Annual Restricted Securities Name and principal Compen- stock Under-lying position Year Salary Bonus sation awards options Douglas S. Zorn, 2002 $115,385 $ -- $ 13,637 (1) -- Chairman of the 2001 $172,500 $ -- $ 2,797 (1) 50,000 (3) Board, Chief 2000 $172,500 ~~1999~~$180,000 ~~AND~~$ ~~1997~~13,163 ~~AND~~(2) ~~THE~~200,000 ~~NINE~~(4) ~~MONTHS~~Executive ~~ENDED~~Officer ~~SEPTEMBER~~and 30President Officer Siravara Vijayendra 2002 $124,377 ~~1998~~$ -- $ 4,231 (1) 150,000 (5) ------------------------------------------------- ~~2001 2000 1999 1998 1997~~ ------ ------- ------- ------- ----------- ~~(IN THOUSANDS) Total net revenues~~1.~~......................~~ ~~$21,748~~Automobile ~~$25,529~~Allowance ~~$23,340~~and $Life ~~9,442~~Insurance $paid ~~8,738~~for ~~Loss~~by ~~from~~the ~~continuing~~Company. ~~operations~~2.~~.......~~ ~~(21,009)~~Automobile ~~(10,174)~~Lease ~~(512)~~paid ~~(1,430)~~for ~~(4,653)~~by ~~Net~~the ~~loss~~company ~~from~~for ~~continuing~~Mr. ~~operations~~Zorn. 3.~~....~~ ~~(29,929)~~Options ~~(12,844)~~granted ~~(717)~~on ~~(1,523)~~March (416,~~594)~~ ~~Loss~~2001 ~~from~~with ~~discountinued~~an ~~operations.......~~exercise -price ~~- - (581) 3 Loss on disposal~~ of ~~discontinued~~$4.50 ~~operations - - - (369) - Net loss~~ per share ~~-- basic and diluted continuing operations~~.~~.........~~ ~~$(2~~4.~~56)~~ $Options ~~(1.25)~~granted $July ~~(0.23)~~27, $2000 ~~(0.41)~~with $an ~~(1.18)~~exercise ~~Net~~price ~~loss~~of ~~per share -- basic and diluted discontinuing operations.......~~ $ ~~- $ - $ - $ (0~~8.~~20)~~75 ~~$ - Shares used in net loss~~ per share ~~-- basic and diluted~~5.~~............~~ ~~14,687~~Options ~~10,303~~granted ~~6,249~~January 412,~~802~~ ~~3,883~~2002 ~~Total~~with ~~assets.............................~~an ~~$40,366~~exercise $price ~~38,785~~of $~~16,021 $12,871 $ 6,310 Long-term obligations~~2.~~...................~~93 $per ~~511 $ 4,717 $ 62 $ 68 $ 158~~share.

Option Grants in Last Fiscal Year The following table sets forth certain information for each of our Named Officers concerning stock options granted to them during the fiscal year ended September 30, 2002.

~~APPIANT~~Individual ~~TECHNOLOGIES~~Grants ~~INC. AND SUBSIDIARIES Years Ended September 30,~~ -----------------~~------------------~~ ~~-------------------------~~Percent ~~2001~~of ~~2000~~Total ~~1999~~Potential ~~-----------------------------------~~Realizable ~~--------~~Number ~~-------~~of ~~------~~Options ~~Net~~Value ~~Sales~~at ~~100.0%~~Assumed ~~100.0%~~Annual ~~100.0%~~Securities ~~Cost~~Granted to Exercise Rate of ~~Sales~~Stock ~~80.7%~~Underlying ~~72.4%~~Employees ~~67.7%~~in ~~Gross~~Price ~~Profit~~Appreciation ~~19.3%~~for ~~27.6%~~Option ~~32.3%~~Options ~~Restructuring,~~Fiscal ~~selling,~~($/SHR) ~~general~~Expiration ~~and~~Terms ~~administrative~~(3) ~~expenses~~Name ~~90.0%~~Granted ~~64.8%~~Year ~~32.6%~~(1) ~~Impairment~~(2) ~~loss~~Date ~~17.0~~5% ~~--%~~($) --10%($) ~~Amortization~~Siravara ofVijayendra ~~goodwill~~50,000 917.07% $ 2.6%93 1~~.9%~~/12/2012 ~~Loss~~$ ~~from~~276,300 ~~operations~~$ ~~(96.7)%~~700,350 ~~(39~~1.~~9)%~~ ~~(2.2)%~~Based ~~Other~~on ~~expenses~~846,000 ~~39.6%~~options ~~9.4%~~granted ~~(0.7)%~~during ~~Income~~the ~~Loss~~fiscal ~~before~~year ~~taxes~~ended ~~(136.3)%~~September ~~(49~~30,2002.~~3)%~~ (2.~~9%)~~ ~~Income~~The ~~tax~~exercise price was deemed to be equal to be $1.3%00 1over the fair market value on the date of the grant date as determined by the closing price as reported on the NASDAQ SmallCap Market.0% 03.2% ~~Net~~The ~~loss~~potential ~~(137.6)%~~realizable ~~(50~~value portion of the foregoing table illustrates value that might be realized upon exercise of the options immediately prior to the expiration of their terms, assuming the specified compounded rates of appreciation on the Company's common stock over the term of the options.~~3)%~~ (3Actual gains, if any, on stock option exercise are dependent upon a number of factors, including the future performance of the common stock, overall stock market conditions, and the timing of option exercises, if any.~~1)%~~ ~~-----------------------------------~~There ~~--------~~can ~~-------~~be ~~------~~no assurances that amounts reflected in this table will be achieved.

Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values The following table sets forth certain information concerning exercises of stock options during the fiscal year ended September 30, 2002 by each of our Named Executive Officers and the number and value of unexercised options held by each of our Named Executive Officers on September 30, 2002.

~~-----------------------------------------------------------------------------------------------------------~~Number ~~Annual~~of ~~Compensation~~Unexercised ~~Long Term compensation Awards Other Annual Restrictd~~ Securities ~~Name~~Value ~~and~~of ~~principal~~Unexercised ~~Compen~~in- ~~stock Under~~the-~~lying~~money ~~position~~Underlying ~~Year~~Options ~~Salary~~at ~~Bonus~~September ~~sation awards options ----------------------------------------------------------------------------------------------------------- Douglas S. Zorn~~30,2002 ~~2001 $285,750 -- $ 2,797~~(1#) ~~50,000~~options ~~(3)~~at ~~Chairman~~September ~~of the 2000 $172~~30,~~500~~ ~~$180,000~~2002 ~~$ 13,163~~(21) ~~200,000~~ (~~4) Board, Chief 1999~~ $~~178,327 $193,883 $ 12,600(2~~) ~~325,500~~Name ~~(5)~~Exercisable ~~Executive~~Unexercisable ~~Officer~~Exercisable ~~and~~Unexercisable ~~President~~Douglas ~~Ram V~~S. ~~Mani,~~Zorn ~~Chief 2001 $164~~466,~~477~~833 ~~$ 75,000 $ 2,658~~ (12) 1091,~~000~~667 (3) ~~Technology Officer, 2000~~ $~~146,634~~ -- $ ~~9,311 (7) $ 62,500 Director 1999(6)~~ -- ~~Ken~~Siravara G.Vijayendra ~~Murray~~10,000 ~~2001~~(84) ~~$76~~140,~~598. $ 79,281 (9) 300,~~000 (105) ~~Chief Operations Officer John R. Zavoli, 2001(11)~~$~~70,170.~~ ~~$ 30,288 $ 88,599 (12) 175,000 (10) Chief Financial Officer~~ --~~---------------------------------------------------------------------------------------------------------~~ ~~1. Automobile Allowance and Life Insurance paid for by the Company. 2. Automobile Lease paid for by the company for Mr. Zorn. 3. Options granted on March 16, 2001 with an exercise price of~~ $~~4.50~~ per share. 4. Options granted July 27, 2000 with an exercise price of $8.75 per share 5. Options granted February 2, 1999 with an exercise price of $1.125 per share. Mr. Zorn was originally granted options on 325,000 shares and voluntarily relinquished options on 16,500 shares in July 2000. 6. Represents Mr. Mani's compensation from his hiring date of June 1999 through September 30, 1999. 7. Automobile lease paid for by the Company in the amount of $8,300 and life insurance in the amount of $1,011. 8. Represents Mr. Murray's compensation from October 1, 2000 through April 30, 2001. 9. Automobile allowance of $588, life insurance of $610, commission of $28,083 and Severance paid of $50,000 to Mr. Murray. 10. Options granted on July 28, 2000 with an exercise price of $8.75 per share. 11. Represents Mr. Zavoli's compensation from October 1, 2000 through February 14, 2001. 12. Automobile allowance of $678, life insurance of $421 and Severance paid of $87,500.--

33 1. Value of "in-the-money" stock options represents the positive spread between the exercise price of stock options and the fair market value for our common stock on September 30, 2002 based on a closing price of $0.45 per share. 2. Represents 308,500 options at $1.125 per share and 108,333 options at $8.75 per share and 50,000 options at $4.50 per share. 3. Represents 91,667 options at $8.75 per share. 4. Represents 10,000 at $2.93 per share. 5. Represents 140,000 at $2.93 per share. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants or issuable upon conversion of preferred stock held by that person that are currently exercisable or exercisable (or convertible) within 60 days of February 14, 2003 are deemed outstanding. Percentage of beneficial ownership of common stock as of February 14, 2003 is based upon 17,194,841 outstanding shares of common stock. Percentage of beneficial ownership of preferred stock as of February 14, 2003 is based upon 45,000 outstanding shares of preferred stock. To our knowledge, except as set forth in the footnotes to this table and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to the shares set forth opposite such person's name. The Company is not aware of any beneficial owner of more than 5% of the outstanding common stock other than as set forth in the following table.

~~Individual~~NUMBER ~~Grants~~OF SHARES BENEFICIALLY OWNED PERCENT OF CLASS ------------------------ Percent of Total Potential Realizable Number of Options Value at Assumed Annual Securities Granted to Exercise Rate of Stock Underlying Employees in Price Appreciation for Option Options Fiscal ($/SHR) Expiration Terms (3) Name Granted Year (1) (2) Date 5% ($) 10%($) ------------------- OFFICERS AND DIRECTORS (1) COMMON PREFERRED COMMON PREFERRED ------------------------------------------ ------------- --------- ------- ---------- Douglas S. Zorn 501,~~000~~ 520,850(2) -- 6.21% $--% ~~4.50~~Chairman ~~3/16/2011~~of $the 60Board,~~000~~ $Chief ~~229,000~~Executive ~~Ram~~Officer Vand President L. ~~Mani~~Thomas Baldwin III 10,~~000~~230,848(3) 0-- 41.40% $--% 4Director N.50 ~~3/16/2011~~Bruce $Walko 1261,000(4) $-- ~~45,800~~0.2% --% Director Fred E. Tannous -- -- --% --% Director Siravara Vijayendra 10,000(5) -- --% --% Vice President Engineering and Operations All officers, directors and proposed 11,822,698(6) --~~----------------------------------------------------------------------------------~~ 147.4% ~~Based~~--% ondirectors ~~2,323,650~~as ~~options~~a ~~granted~~group ~~during~~(5 ~~the~~persons) ~~fiscal~~(1) ~~year~~Each ~~ended~~beneficial ~~September~~owner ~~30,2001.~~for 2.whom ~~The~~an ~~exercise~~address ~~price~~is ~~was~~not ~~deemed~~listed tohas bean ~~equal~~address toc/o beAppiant $1Technologies Inc.00, ~~over~~6663 ~~the~~Owens ~~fair~~Drive, ~~market~~Pleasanton, ~~value~~California on94588. ~~the~~(2) ~~date~~Represents 151,937 shares of ~~the~~common ~~grant~~stock, ~~date~~vested asoptions ~~determined~~to bypurchase ~~the~~466,833 ~~closing~~shares ~~price~~of ascommon ~~reported~~stock, onimmediately ~~the~~exercisable ~~NASDAQ~~warrants ~~SmallCap~~to ~~Market.~~purchase 3.514,073 ~~The~~shares ~~potential~~of ~~realizable~~common ~~value~~stock ~~portion~~and ofnotes ~~the~~immediately ~~foregoing~~convertible ~~table~~into ~~illustrates~~388,007 ~~value~~shares ~~that~~of ~~might~~common bestock. ~~realized~~(3) ~~upon~~Represents ~~exercise~~3,191,334 shares of ~~the~~common ~~options~~stock, immediately ~~prior~~exercisable warrants to ~~the~~purchase ~~expiration~~3,443,819 shares of ~~their~~common ~~terms~~stock, ~~assuming~~notes ~~the~~immediately ~~specified~~convertible ~~compounded~~into ~~rates~~3,595,695 shares of ~~appreciation~~Common onStock. ~~the~~34 ~~Company's~~(4) ~~common~~Represents ~~stock~~immediately ~~over~~exercisable ~~the~~warrants ~~term~~to purchase 50,000 shares of ~~the~~common stock and vested options. ~~Actual~~to ~~gains~~purchase 11,000 ifshares ~~any,~~of oncommon stock. ~~option~~(5) ~~exercise~~Represents ~~are~~vested ~~dependent~~options ~~upon~~to apurchase ~~number~~10,000 shares of ~~factors,~~common ~~including~~stock.(6) ~~the~~Represents ~~future~~3,343,271 ~~performance~~shares of ~~the~~ common stock, ~~overall~~vested ~~stock~~options ~~market~~to ~~conditions~~purchase 487,833 ~~and~~shares ~~the timing~~ of ~~option~~common ~~exercises~~stock, ifimmediately ~~any.~~exercisable ~~There~~warrants ~~can~~to bepurchase no4,007,892 ~~assurances~~shares ~~that~~of ~~amounts~~common ~~reflected~~stock inand ~~this~~notes ~~table~~immediately ~~will~~convertible beinto ~~achieved~~3,983,702 shares of common stock.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has an employment agreement with Douglas S. Zorn, as Chairman of the board of directors, President and Chief Executive Officer of the Company. By its terms, the agreement has an Initial Term of three years with a provision that the Term will be extended for successive one-year periods beginning on the first day after the final day of the Initial Term, except in the event Mr. Zorn or the Company provides written notice to the other at least 180 days before the beginning of such one-year period, of the intention not to extend the Term. Mr. Zorn's base salary may be adjusted from time to time by mutual agreement between Mr. Zorn and the board of directors. Mr. Zorn's base salary for calendar years 2001 and 2002 was $300,000, however Mr. Zorn's salary has been accrued but not paid since early May 2002. Mr. Zorn's base salary for calendar year 2003 is $300,000 which is also being accrued but not paid. The employment agreement provides, subject to its terms, for an annual bonus to be paid to Mr. Zorn pursuant to a written bonus plan to be approved by our board of directors. The employment agreement provides that Mr. Zorn is entitled to reasonable expense reimbursements, four weeks paid vacation per year and participation in any of the Company's benefit and deferred compensation plans. The employment agreement also provides for payments in the event of termination prior to the end of the term, as follows: if Mr. Zorn is terminated without cause, then his base salary will be paid for the greater of two (2) years or the balance of the term and he will receive a bonus for each such year equal to his average bonus for the two (2) preceding years. If Mr. Zorn is terminated upon a change of control, then compensation equal to two (2) times the sum of the base salary plus average bonus will be paid to him for one (1) year. In the event of termination (except termination without cause), Mr. Zorn is subject to two-year non-competition agreements. On February 1, 2002, the Company acquired all the outstanding shares of Ximnet Corporation in exchange for 500,000 shares of the Company's Common stock. Two hundred and fifty thousand of the shares were placed in escrow until Ximnet management met certain objectives, these objectives were not met and the shares were retired. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS ON FORM 8-K The following documents are filed as part of the Annual Report on Form 10-K: 1. Financial Statements 2. Financial Statement Schedule 3. Exhibits (a) This is the financial statement index: EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION OF EXHIBIT -------------- ----------------------------------------------------- 2.3 Plan and Agreement of Reorganization, dated December 10, 1999, by and among Trimark Inc., d.b.a. Triad Marketing, Greg Darling, Richard Glover and the Company. (17) -------------------------------------------------------------------- 2.4 Agreement of Merger, by and between Nhancement Acquisition Corp. and Trimark, filed with the Secretary of State of the State of California effective January 21, 2000. (17) -------------------------------------------------------------------- 35 2.5 Plan and Agreement of Reorganization between the Company and SVG Software Services, Inc., a California corporation, dated February 4, 2000. (18) -------------------------------------------------------------------- 2.6 Stock Purchase Agreement between the Company and Vijay and Vinita Gulechha dated February 4, 2000. (18) -------------------------------------------------------------------- 3.1 Amended and Restated Certificate of Incorporation, as filed with the Delaware Secretary of State on January 27, 1997, as amended by Certificate of Designations, as filed with the Delaware Secretary of State on April 9, 1998, as further amended by Amended Certificate of Designations, as filed with the Delaware Secretary of State on April 13, 1998, as further amended by Amended Certificate of Designations, as filed with the Delaware Secretary of State on June 11, 1999. (1) -------------------------------------------------------------------- 3.2 Amended and Restated Bylaws. (2) -------------------------------------------------------------------- 4.1 Form of Common Stock Certificate. (3) -------------------------------------------------------------------- 4.2 Form of Underwriter Warrant. (4) -------------------------------------------------------------------- 4.3 Registration Rights Agreement, dated September 1, 1996, between BioFactors, Inc. ("BFI") and (i) a majority of the holders of securities pursuant to the Secured Note and Warrant Purchase Agreement dated December 1, 1994, as amended; (ii) a majority of the holders of securities issued pursuant to the Secured Note and Stock Purchase Agreement, dated December 1, 1995, as amended; iii) a majority of the holders of securities issued pursuant to the Unsecured Note and Stock Purchase Agreement, dated February 1, 1996, as amended; (iv) a majority of the holders of securities issued pursuant to the Unit Subscription Agreement, dated May 17, 1996, as amended; (v) the purchasers of securities issued pursuant to the Unit Subscription Agreement dated October 3, 1996; and (vi) the former holders of BFI's Series A Preferred Stock. (4) -------------------------------------------------------------------- 4.4 Registration Rights Agreement, dated October 25, 1996, between the Company and James S. Gillespie. (3) -------------------------------------------------------------------- 4.5 Form of Series A Preferred Stock Certificate. (5) ---------------------------------------------------------------- 4.6 Registration Rights Agreement, dated as of April 13, 1998, among the Company, The Endeavour Capital Fund S.A. and AMRO International S.A. ("AMRO")(5) -------------------------------------------------------------------- 4.7 Warrant Agreement dated February 2, 1999 between the Company and JWGenesis Capital Markets LLC.(6) -------------------------------------------------------------------- 4.8 Warrant Agreement dated February 2, 1999 between the Company and Kenneth L. Greenberg. (6) -------------------------------------------------------------------- 4.9 Warrant Agreement dated February 2, 1999 between the Company and Mark Goldberg. (6) -------------------------------------------------------------------- 4.10 Form of Warrant dated June 15, 1999 delivered to purchasers of Series A Convertible Preferred Stock. (7) -------------------------------------------------------------------- 4.11 Form of Warrant dated June 15, 1999 delivered to purchasers of Series A Convertible Preferred Stock (exercise contingent on redemption of Preferred Stock). (7) -------------------------------------------------------------------- 4.12 Warrant Agreement dated June 7, 1999 between the Company and James S. Gillespie. (7) -------------------------------------------------------------------- 4.13 Warrant Agreement dated June 15, 1999 between the Company and Grady & Hatch and Company, Inc. (7) -------------------------------------------------------------------- 4.14 Warrant, dated January 21, 2000, delivered to Richard Glover. (17) -------------------------------------------------------------------- 4.15 Warrant, dated January 21, 2000, delivered to Greg Darling. (17) -------------------------------------------------------------------- 36 4.16 Warrant dated December 10, 1999, issued to Douglas S. Zorn. (18) -------------------------------------------------------------------- 4.17 Warrant dated December 10, 1999, issued to James S. Gillespie. (18) -------------------------------------------------------------------- 4.18 Warrant dated December 10, 1999, issued to John M. Black. (18) -------------------------------------------------------------------- 4.19 Warrant dated December 10, 1999, issued to James S. Gillespie. (18) -------------------------------------------------------------------- 4.20 Warrant dated December 10, 1999, issued to N. Bruce Walko. (18) -------------------------------------------------------------------- 4.21 Warrant dated December 10, 1999, issued to Robert J. Schmier. (18) -------------------------------------------------------------------- 4.22 Warrant dated December 10, 1999, issued to Diane Nowak. (18) -------------------------------------------------------------------- 4.23 Warrant dated March 1, 2000, issued to William M. Stephens. (19) -------------------------------------------------------------------- 4.24 Convertible Debenture Purchase Agreement by and between NHancement Technologies Inc. and certain investors, dated May 19, 2000. (20) -------------------------------------------------------------------- 4.25 Common Stock Purchase Agreement by and between NHancement Technologies Inc. and Kedrick Investments Limited Inc. and certain investors, dated June 15, 2000. (20) -------------------------------------------------------------------- 4.26 Amendment to the Convertible Debenture Purchase Agreement by and between NHancement Technologies Inc. and Kedrick Investments Limited, dated June 30, 2000. (20) -------------------------------------------------------------------- 4.27 Amendment to the Common Stock Purchase Agreement by and between NHancement Technologies Inc. and Kedrick Investments Limited, dated June 30, 2000. (20) -------------------------------------------------------------------- 4.28 Form of Convertible Debenture. (20) -------------------------------------------------------------------- 4.29 Warrant dated May 1, 2000, issued to Cisco Systems Capital Corporation. (21) -------------------------------------------------------------------- 4.30 Warrant dated May 24, 2000, issued to Kedrick Investments Limited. (21) -------------------------------------------------------------------- 4.31 Certificate of Designation of NHancement Technologies Inc. filed with the Secretary of State of the State of Delaware on October 5, 2000. (22) -------------------------------------------------------------------- 4.32 Warrant dated July 31, 2000 issued to L. Thomas Baldwin III. (23) -------------------------------------------------------------------- 4.33 Warrant dated August 8, 2000 issued to Allen F. Jacobson. (23) -------------------------------------------------------------------- 4.34 Warrant dated November 28, 2000 issued to Jack T. Zahran. (23) -------------------------------------------------------------------- 4.35 Warrant dated October 31, 2000 issued to Joseph Stevens & Co. (26) -------------------------------------------------------------------- 4.36 Warrant dated November 28, 2000 issued to Jack T. Zahran. (26) -------------------------------------------------------------------- 4.37 Warrant dated January 10, 2001 issued to Baldwin Partners, L.P. (26) ---------------------------------- 4.38 Warrant dated May 31, 2001 issued to various investors as identified in Item 5. (26) -------------------------------------------------------------------- 4.39 Warrant dated June 2001 issued to various investors as identified in Item 5. (26) -------------------------------------------------------------------- 4.40 Warrant dated October 2001 issued to various investors as identified in Item 5. (26) -------------------------------------------------------------------- 4.41 Warrant dated November 2001 issued to various investors as identified in Item 5. (26) -------------------------------------------------------------------- 4.42 Warrant dated December 2001 issued to various investors as identified in Item 5. (26) -------------------------------------------------------------------- 4.43 Convertible promissory note dated March 21, 2001 issued to L. Thomas Baldwin III as identified in item 5. (26) -------------------------------------------------------------------- 4.44 Warrant dated March 21, 2001 issued to L. Thomas Baldwin III as identified in Item 5. (26) -------------------------------------------------------------------- 37 4.45 Warrant dated March 31, 2001 issued to L. Thomas Baldwin III as identified in Item 5. (26)_ -------------------------------------------------------------------- 4.46 Warrant dated March 31, 2001 issued to L. Thomas Baldwin III as identified in Item 5. (26) -------------------------------------------------------------------- 4.47 Amendment dated May 31, 2001 to the Convertible Promissory Note dated March 21, 2001 to L. Thomas Baldwin III as identified in Item 5. (26) -------------------------------------------------------------------- 4.48 Warrant Number 2002-36, issued August 9, 2002 (28) number exhibit 5.6 in error -------------------------------------------------------------------- 4.49 Warrant Number 2002-37, issued August 9, 2002 (28) numbered exhibit 5.7 in error. -------------------------------------------------------------------- 10.1 Formation Agreement, dated as of October 15, 1996, between BFI and Voice Plus, Inc. ("Voice Plus"). (3) -------------------------------------------------------------------- 10.2 Agreement and Plan of Merger, dated as of October 30, 1996, between the Company, BFI Acquisition Corporation and BFI. (4) -------------------------------------------------------------------- 10.3 Agreement and Plan of Merger, dated as of October 25, 1996, between the Company, Voice Plus Acquisition Corporation, Voice Plus and James S. Gillespie, together with Forms of Promissory Notes. (8) -------------------------------------------------------------------- 10.4 Agreement of Merger between Voice Plus and BFI dated as of October 10, 1997. (5) -------------------------------------------------------------------- 10.5 License Agreement, dated November 24, 1988, by and between BFI and Systems Technology, Inc., as amended by Addendum to License Agreement, dated May 19, 1994, as amended by Second Addendum to License Agreement, dated November 18, 1996. (4) -------------------------------------------------------------------- 10.7 Secured Note and Warrant Purchase Agreement, dated December 1, 1994, between BFI and the purchasers listed therein, as amended by the First Amendment to Secured Note and Warrant Purchase Agreement, dated July 1995, as amended by Amendment to Secured Note and Warrant Purchase Agreement, dated December 1, 1995, as amended by Third Amendment to Secured Note and Warrant Purchase Agreement, dated March 1, 1996, and as amended by Fourth Amendment to Secured Note and Warrant Purchase Agreement, dated October 1, 1996, together with Amended and Restated Security Agreement and Form of Secured Promissory Note. (4) -------------------------------------------------------------------- 10.8 Secured Note and Stock Purchase Agreement, dated December 1, 1995, between BFI and the purchasers listed therein, as amended by the First Amendment to Secured Note and Stock Purchase Agreement, dated March 1, 1996, as amended by Second Amendment to Secured Note and Stock Purchase Agreement, dated July 1, 1996, and as amended by Third Amendment to Secured Note and Stock Purchase Agreement, dated October 1, 1996, together with Form of Secured Promissory Note. (4) -------------------------------------------------------------------- 10.9 Unsecured Note and Stock Purchase Agreement, dated February 1, 1996, between BFI and the First Amendment to Unsecured Note and Stock Purchase Agreement, dated March 1, 1996, as amended by Second Amendment to Unsecured Note and Stock Purchase Agreement, dated July 1, 1996, and as amended by Third Amendment to Unsecured Note and Stock Purchase Agreement, dated October 1, 1996, together with Form of Unsecured Promissory Note. (4) -------------------------------------------------------------------- 10.10 Unit Subscription Agreement, dated May 17, 1996, between BFI and the purchasers listed therein, as amended by First Amendment to Unit Subscription Agreement, dated October 1, 1996, together with Form of Promissory Note. (4) -------------------------------------------------------------------- 38 10.11 Unit Subscription Agreement, dated October 1, 1996, between BFI and the purchasers listed therein, together with Form of Promissory Note and Form of Warrant. (2) -------------------------------------------------------------------- 10.12 Equity Incentive Plan. (2) -------------------------------------------------------------------- 10.13 Employment Agreement, dated as of October 30, 1996, between Douglas S. Zorn and the Company.(2) -------------------------------------------------------------------- 10.14 Employment Agreement, dated as of October 25, 1996, between James S. Gillespie and the Company. (3) -------------------------------------------------------------------- 10.15 Employment Agreement, dated as of October 30, 1996, between Esmond T. Goei and the Company. (3) ---------------------------------------------------------------- 10.16 Form of Factor 1000-Registered Trademark - Service Contract. (3) -------------------------------------------------------------------- 10.17 Office Building Lease, dated April 8, 1996, between BFI and Denver West Office Building No. 21 Venture. (4) -------------------------------------------------------------------- 10.18 Authorized U.S. Distributor Agreement, dated April 16, 1996, between Centigram Communications Corporation and Voice Plus. (3) -------------------------------------------------------------------- 10.19 Office Lease, dated October 16, 1995, between AJ Partners Limited Partnership and Voice Plus. (4) -------------------------------------------------------------------- 10.20 Agreement, dated October 16, 1995, between BFI, Burton Kanter and Elliot Steinberg, as amended by Amendment dated July 16, 1996, between BFI, Esmond Goei, Douglas Zorn, Burton Kanter and Elliot Steinberg. (4) -------------------------------------------------------------------- 10.21 Stockholder Agreement, dated October 25, 1996, between the Company and James D. Gillespie. (4) -------------------------------------------------------------------- 10.22 1997 Management and Company Performance Bonus Plan. (4) -------------------------------------------------------------------- 10.23 Employment Agreement, dated as of November 1, 1996, between Diane E. Nowak and Voice Plus. (2) -------------------------------------------------------------------- 10.24 Employment Agreement, dated as of November 1, 1996, between Bradley Eickman and Voice Plus. (2) -------------------------------------------------------------------- 10.25 Promissory Note Payable to the Company by Esmond T. Goei. (5) -------------------------------------------------------------------- 10.26 Agreement for the Sale of Shares in Advantis Network & System Sdn Bhd dated June 20, 1997, between the Company and the shareholders of Advantis, as amended by the Supplemental Agreement to the Agreement dated November 26, 1997, and the Second Supplemental Agreement dated November 26, 1997. (9) -------------------------------------------------------------------- 10.27 Building Lease dated June 9, 1997 by and between the Company, as Tenant and El Dorado Holding Company, Inc., as Landlord. (10) -------------------------------------------------------------------- 10.28 Form of Lock Up Agreement between the Company and the former shareholders of Advantis. (11) -------------------------------------------------------------------- 10.29 Securities Purchase Agreement, dated as of April 13, 1998, by and among the Company, the Endeavour Capital Fund S.A. and AMRO. (5) -------------------------------------------------------------------- 10.30 Form of Escrow Instructions related to Securities Purchase Agreement, dated as of April 13, 1998. (5) -------------------------------------------------------------------- 10.31 Form of Reseller Agreement between Interactive Intelligence Inc. and the Company dated July 8, 1998. (12) -------------------------------------------------------------------- 10.32 Form of Associate Agreement between NEC, Inc. and the Company dated May 26, 1998. (12) -------------------------------------------------------------------- 10.33 Form of Loan and Security Agreement between Aerofund Financial and the Company dated October 9, 1998. (12) -------------------------------------------------------------------- 10.34 Form of Guaranty from Lee Giam Teik, Man Yiew Ming and Ng Kok Wah dated September 30, 1998. (12) -------------------------------------------------------------------- 10.35 Letter Agreement between Lee Giam Teik, Man Yiew Ming and Ng Kok Wah and the Company dated September 30, 1998. (12) -------------------------------------------------------------------- 39 10.36 Agreement relating to the sale and purchase of 500,000 ordinary shares in the Capital of Infotel Technologies (Pte) Ltd ("Infotel"), dated as of January 19, 1998, by and between the Company and the stockholders of Infotel (the "Sale Agreement"). (13) -------------------------------------------------------------------- 10.37 Letter Agreement amending the Sale Agreement, dated as of April 2, 1998, by and between the Company and the stockholders of Infotel. (13) -------------------------------------------------------------------- 10.38 Form of letter agreement amending the Sale Agreement, as amended by Supplement No. 1, dated as of April 22, 1998, by and between the Company and the stockholders of Infotel. (13) -------------------------------------------------------------------- 10.39 Letter agreement amending the Sale Agreement, dated as of June 22, 1998, by and between the Company and stockholders of Infotel. (14) -------------------------------------------------------------------- 10.40 Promissory Note, dated as of June 15, 1998, in the original principal amount of $375,000, payable by the Company to AMRO. (14) -------------------------------------------------------------------- 10.41 Promissory Note, dated as of June 15, 1998, in the original principal amount of $375,000, payable by the Company to Endeavour Capital Fund S.A. ("Endeavour"). (14) -------------------------------------------------------------------- 10.42 Letter agreement, dated as of June 15, 1998, amending Securities Purchase Agreement, dated as of April 13, 1998, by and among the Company, AMRO and Endeavour. (14) -------------------------------------------------------------------- 10.43 Letter agreement, dated as of June 12, 1998, by and among the Company, Esmond T. Goei, Douglas S. Zorn and James S. Gillespie. (14) -------------------------------------------------------------------- 10.44 Promissory Note, dated as of June 12, 1998, in the original principal amount of $125,000 payable by the Company to Esmond T. Goei. (14) -------------------------------------------------------------------- 10.45 Promissory Note, dated as of June 12, 1998, in the original principal amount of $225,000 payable by the Company to Douglas S. Zorn. (14) -------------------------------------------------------------------- 10.46 Promissory Note, dated as of June 12, 1998, in the original principal amount of $300,000 payable by the Company to James S. Gillespie. (14) -------------------------------------------------------------------- 10.47 Separation Agreement dated January 13, 1999 between Esmond T. Goei and the Company. (15) -------------------------------------------------------------------- 10.48 Letter Agreement dated February 2, 1999 between the Company and JWGenesis Capital Markets LLC.(6) -------------------------------------------------------------------- 10.49 Amendment dated June 11, 1999, to Securities Purchase Agreement dated April 13, 1998. (1) ----------------------------------------------------------- 10.50 Termination, Consulting and Confidentiality Agreement dated June 7, 1999 between James S. Gillespie and the Company. (7) -------------------------------------------------------------------- 10.51 Loan and Security Agreement, dated as of August 31, 1999, by and among Eastern Systems Technology, Inc. ("Eastern"), Ram V. Mani ("Mani"), Front-End Technologies, Srini Ramakrishnan ("Ramakrishnan") and the Company. (16) -------------------------------------------------------------------- 10.52 Secured Promissory Note, dated as of August 31, 1999, in the principal amount of $250,000, payable by Eastern to the Company. (16) -------------------------------------------------------------------- 10.53 Employment Agreement, dated as of August 31, 1999, by and between Mani and the Company. (16) -------------------------------------------------------------------- 10.54 Plan and Agreement of Reorganization, dated August 31, 1999, among Eastern, Mani and the Company. (16) -------------------------------------------------------------------- 10.55 Form of Ratification Agreement, dated September 10, 1999, by the Company, Eastern, Mani and Ramakrishnan. (16) -------------------------------------------------------------------- 40 10.56 Employment Agreement, dated as of January 21, 2000, by and between Richard Glover and the Company. (17) -------------------------------------------------------------------- 10.57 Employment Agreement, dated as of January 21, 2000, by and between Greg Darling and the Company. -------------------------------------------------------------------- 10.58 Form of Non-Compete Agreement, dated as of January 21, 2000, by and among the Company, Merger Sub and each of Greg Darling and Richard Glover. (17) -------------------------------------------------------------------- 10.59 Letter dated December 10, 1999, terminating the Consultancy Agreement dated June 7, 1999 between the Company and James S. Gillespie. (18) -------------------------------------------------------------------- 10.60 Master Agreement to lease equipment entered into as of April 21, 2000 with Cisco Systems Capital Corporation. (21) -------------------------------------------------------------------- 10.61 Series B Preferred Stock Purchase Agreement dated as of October 31, 2000, by and between NHancement Technologies Inc. and certain investors. (22) -------------------------------------------------------------------- 10.62 Shelf Registration Agreement dated as of October 31, 2000, by and between NHancement Technologies Inc. and certain investors. (22) ----------------------------------------------- 10.63 Master Agreement to lease equipment entered into As of July 25, 2000 with Hewlett-Packard. (24) -------------------------------------------------------------------- 10.64 Form of Convertible Promissory Note dated March 21, 2001 issued to L. Thomas Baldwin III. (25) -------------------------------------------------------------------- 10.65 Master Services agreement dated as of March 22, 2001 by and between Appiant Technologies and InPhonic, Inc. (26)number exhibit 10.63 in error -------------------------------------------------------------------- 10.66 Debenture and Warrant Purchase Agreement, dated April 19, 2002. (27) numbered exhibit 10.1 in error. -------------------------------------------------------------------- 10.67 Secured Convertible Debenture, dated April 19, 2002 (27) numbered exhibit 10.2 in error. -------------------------------------------------------------------- 10.68 Warrant to Purchase Shares of Common Stock, issued April 19, 2002 (27) numbered exhibit 10.3 in error -------------------------------------------------------------------- 10.69 Registration Rights Agreement, dated April 19, 2002 (27) numbered exhibit 10.4 in error. -------------------------------------------------------------------- 10.70 Security Agreement, dated April 19, 2002 (27) numbered exhibit 10.5 in error. -------------------------------------------------------------------- 10.71 Asset Purchase Agreement, dated July 12, 2002 (28) numbered exhibit 5.1 in error. -------------------------------------------------------------------- 10.72 Equipment Lease Agreement, dated July 12, 2002 (28) numbered exhibit 5.2 in error. -------------------------------------------------------------------- 10.73 First Amendment to Equipment Lease Agreement, dated August 9, 2002 (28) numbered exhibit 5.3 in error. -------------------------------------------------------------------- 10.74 Bill of Sale, dated July 12, 2002 (28) numbered exhibit 5.4 in error. -------------------------------------------------------------------- 10.75 First Amendment to Master Services Agreement, dated August 9, 2002 (28) numbered exhibit 5.5 in error. -------------------------------------------------------------------- 21 Subsidiaries -------------------------------------------------------------------- 23.1 Consent of PricewaterhouseCoopers LLP. -------------------------------------------------------------------- 23.2 Consent of BDO Seidman, LLP. -------------------------------------------------------------------- 24 Power of Attorney (included on signature page to this Report on Form 10-K). -------------------------------------------------------------------- 27 Financial Data Schedule {Note: will be for the twelve months ended 9/30/00}. -------------------------------------------------------------------- 99.1 Sarbanes-Oxley Act Certification (27) -------------------------------------------------------------------- * To be filed herewith (1) Incorporated by reference to the document bearing the same exhibit number as contained in Issuer's Report on Form 8-K, as filed with the Securities and Exchange Commission on June 15, 1999. (2) Incorporated by reference to the document bearing the same exhibit number as contained in Amendment No. 2 to Issuer's Registration Statement on Form SB-2 (Reg. No. 333-15563), as filed with the Securities and Exchange Commission on January 13, 1997. 41 (3) Incorporated by reference to the document bearing the same exhibit number as contained in Issuer's Registration Statement on Form SB-2(Reg. No. 333-15563), as filed with the Securities and Exchange Commission on November 5, 1996. (4) Incorporated by reference to the document bearing the same exhibit number as contained in Amendment No. 1 to Issuer's Registration Statement on Form SB-2 (Reg. No. 333-15563), as filed with the Securities and Exchange Commission on December 20, 1996. (5) Incorporated by reference to the document bearing the same exhibit number as contained in Issuer's Annual Report on Form 10-KSB, as filed with the Securities and Exchange Commission on April 15, 1998. (6) Incorporated by reference to the document bearing the same exhibit number as contained in Issuer's Quarterly Report on Form 10-QSB, as filed with the Securities and Exchange Commission on February 16, 1999. (7) Incorporated by reference to the document bearing the same exhibit number as contained in Registrant's Quarterly Report on Form 10-QSB, as filed with the Securities and Exchange Commission on July 28, 1999. (8) Incorporated by reference to the document bearing the same exhibit number as contained in Amendment No. 3 to Issuer's Registration Statement on Form SB-2 (Reg. No. 333-15563), as filed with the Securities and Exchange Commission on January 28, 1997. (9) Incorporated by reference to Exhibit 2.01 to Issuer's Form 8-K, as filed with the Securities and Exchange Commission on December 30, 1997. (10) Incorporated by reference to the document bearing the same exhibit number as contained in Issuer's Quarterly Report on Form 10-QSB, as filed with the Securities and Exchange Commission on November 14, 1997. (11) Incorporated by reference to Exhibit 4.01 to Issuer's Form 8-K, as filed with the Securities and Exchange Commission on December 30, 1997. (12) Incorporated by reference to the document bearing the same exhibit number as contained in Issuer's Annual Report, as amended, on Form 10-KSB/A, as filed with the Securities and Exchange Commission on January 29, 1999. (13) Incorporated by reference from Issuer's Registration Statement on Form S-3 (Reg. No. 333-52709), as initially filed with the Securities and Exchange Commission on May 14, 1998. (14) Incorporated by reference from Issuer's Report on Form 8-K, as filed with the Securities and Exchange Commission on July 7, 1998. (15) Incorporated by reference to the document bearing the same exhibit number as contained on Form 8-K, as filed with the Securities and Exchange Commission on February 12, 1999. (16) Incorporated by reference from Issuer's Report on Form 8-K, as filed with the Securities and Exchange Commission on September 15, 1999. (17) Incorporated by reference from Issuer's Report on Form 8-K, as filed with Securities and Exchange Commission on February 7, 2000. (18) Incorporated by reference from Issuer's Quarterly Report on Form 10-QSB, as filed with the Securities and Exchange Commission on February 14, 2000. (19) Incorporated by reference from Issuer's Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on May 15, 2000. (20) Incorporated by reference from Issuer's Registration Statement on Form S-3 (Reg. No. 333-41474), as filed with the Securities and Exchange Commission on July 14, 2000. (21) Incorporated by reference from Issuer's Quarterly Report on Form 10-QSB as filed with Securities and Exchange Commission on August 14, 2000. (22) Incorporated by reference from Issuer's Current Report on Form 8-K as filed with the Securities and Exchange Commission on November 13, 2000. 42 (23) Incorporated by reference from Issuer's Annual Report on Form 10KSB as filed with the Securities and Exchange Commission on January 12, 2001. (24) Incorporated by reference from Issuer's Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on February 14, 2001. (25) Incorporated by reference from Issuer's Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on May 21, 2001. (26) Incorporated by reference from Issuer's Annual Report on Form 10-K as filed with the Securities and Exchange Commission on January 14, 2002. (27) Incorporated by reference from Issuer's Current Report on Form 8-K as filed with the Securities and Exchange Commission on May 3, 2002 (numbered exhibits 10.x in error). (28) Incorporated by reference from Issuer's Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 27, 2002 (numbered exhibits 5.x in error). (b) Reports on Form 8-K On May 3, 2002 we filed a report on form 8-K to announce a secured financing of up to 4,025,000 with certain accredited investors pursuant to a Debenture and Warrant Purchase Agreement dated April 19, 2002. On July 19, 2002 we filed a report on form 8-K to announce two members of the Appiant Technologies, Inc. Board of Directors, Allen F. Jacobson and Robert J. Schmier, have resigned their positions due to personal and business reasons unrelated to Appiant. On August 15, 2002 we filed a report on form 8-K to announce Mr. Robert Landis and Mr. Fred E. Tannous have been elected to become new outside directors on the Company's Board of Directors as of August 15, 2002. Both Mr. Landis and Mr. Tannous have been appointed to the audit and compensation committees of the Company. On August 27, 2002 we filed a report on form 8-K to announce an execution of execution of various agreements between Appiant Technologies and InPhonic, Inc. providing for the sale and lease back of equipment, purchase of additional license rights, minimum subscriber payments, and the issuance of additional warrants to purchase Appiant common stock. On September 20, 2002 we filed on form 8-K the Company requested a hearing before a NASDAQ Listing Qualifications Panel in order to appeal a NASDAQ Staff Determination indicating that, in association with its recent private placement of $3.525 million to accredited investors, the Company does not comply with the shareholder approval provisions set forth in Marketplace Rules 4350(i)(1)(B) and 4350(i)(1)(D)(ii), and that the Company's securities are subject to delisting from the NASDAQ Small Cap Market on September 13, 2002. SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF PLEASANTON, STATE OF CALIFORNIA ON THIS 14TH DAY OF JANUARY, 2002. APPIANT TECHNOLOGIES INC. By: /s/ DOUGLAS S. ZORN ------------------------------------ Douglas S. Zorn President and Chief Executive Officer 43 POWER OF ATTORNEY EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS DOUGLAS S.ZORN AS HIS OR HER TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION FOR HIM OR HER AND IN HIS OR HER NAME, PLACE AND STEAD IN ANY AND ALL CAPACITIES TO EXECUTE IN THE NAME OF EACH SUCH PERSON WHO IS THEN AN OFFICER OR DIRECTOR OF THE REGISTRANT ANY AND ALL AMENDMENTS TO THIS REPORT ON FORM 10-K AND TO FILE THE SAME WITH ALL EXHIBITS THERETO AND OTHER DOCUMENTS IN CONNECTION THEREWITH WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT AND AGENTS AND EACH OF THEM FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUIRED OR NECESSARY TO BE DONE IN AND ABOUT THE PREMISES AS FULLY AS HE OR SHE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS, OR ANY OF THEM, OR THEIR OR HIS SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE THEREOF. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED BELOW. SIGNATURE TITLE DATE /s/ Douglas S. Zorn Chairman of the Board, Chief Executive February 18, 2003 ------------------- and Financial Officer, President and Douglas S. Zorn Director (Principal Executive Officer) /s/ N. Bruce Walko Director February 18, 2003 ------------------ N. Bruce Walko 44 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION OF EXHIBIT --------------------------------------------------------------------------- All exhibits indicated in Item 14 of this Annual Report have been incorporated by reference herein as indicated in Item 14. 45 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2002, 2001 and 2000 INDEPENDENT AUDITORS' REPORT Board of Directors Appiant Technologies Inc. (f.k.a. Nhancement Technologies Inc.) and Subsidiaries Pleasanton, California We have audited the accompanying consolidated balance sheets of Appiant Technologies Inc. (f.k.a. Nhancement Technologies Inc.) and Subsidiaries as of September 30, 2002 and September 30, 2001 (restated), and the related consolidated statements of operations, and comprehensive loss stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Appiant Technologies Inc. (f.k.a. Nhancement Technologies Inc.) and Subsidiaries as of September 30, 2002 and September 30, 2001(restated), and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, has negative working capital and substantially all of its liabilities are in default, which raise substantial doubt about its 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 that might result from the outcome of this uncertainty. STONEFIELD JOSEPHSON, INC. CERTIFIED PUBLIC ACCOUNTANTS Santa Monica, California February 14, 2003 2

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 2001 (restated, See 2002 Note 1) ------------- ------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,026,000 $ 3,379,000 Restricted cash 117,000 117,000 Accounts receivable, less allowance for doubtful accounts of $63,000 and $335,000 2,252,000 1,200,000 Inventory 450,000 889,000 Equipment at customers under integration - 206,000 Prepaid expenses and other 1,430,000 856,000 --------------------------------------------------------------------------------------------------- ~~Number~~TOTAL ofCURRENT ~~Unexercised~~ASSETS ~~Securities~~5,275,000 ~~Value~~6,647,000 ~~of Unexercised in~~-~~the~~-~~money~~------------------------------------------------------------------------------------------------- ~~Underlying~~Property ~~Options~~and atequipment, ~~September~~net 302,~~2000~~859,000 ~~(#)~~5,381,000 ~~options~~Capitalized atsoftware, ~~September~~net 3016,070,000 ~~2001~~16,664,000 ~~(1)($)~~Goodwill ~~Name~~and ~~Exercisable~~other ~~Unexercisable~~intangible ~~Exercisable~~assets, ~~Unexercisable~~net 5,869,000 10,255,000 Other assets 160,000 1,933,000 ---------------------------------------------------------------------------------------------------~~------~~ ~~Douglas~~TOTAL S.ASSETS ~~Zorn~~$ ~~366~~30,~~833~~233,000 ~~(2)~~$ ~~191~~40,~~667~~880,000 ~~(3)~~=================================================================================================== LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Lines of credit $ ~~242~~300,~~173.~~000 0$ ~~Ram~~300,000 V.Accounts ~~Mani~~payable 937,~~166~~089,000 (9,344,000 Accrued liabilities 3,296,000 3,212,000 Deferred revenue 589,000 1,041,000 Income tax payable 236,000 302,000 Accrued liability related to warrants 1,921,000 4),430,000 ~~121~~Convertible promissory notes payable,~~834~~ (net of discounts - including related parties 8,933,000 1,496,000 Notes payable, net of discounts - including related parties 6,018,000 5),732,000 $Capital 2lease obligations,~~786~~ $current 2portion 587,~~638~~000 4,085,000 ---------------------------------------------------------------------------------------------------~~------~~ 1.TOTAL ~~Value~~CURRENT ofLIABILITIES ~~"in-the-money"~~28,969,000 ~~stock~~29,942,000 ~~options~~Capital ~~represents~~lease ~~the~~obligations, ~~positive~~net ~~spread~~of ~~between~~current ~~the~~portion ~~exercise~~393,000 ~~price~~93,000 ofLong ~~stock~~term ~~options~~notes ~~and~~payable, ~~the~~net ~~fair~~of ~~market~~current ~~value~~portion ~~for~~-- ~~our~~379,000 ~~common~~Other ~~stock~~26,000 on39,000 ~~September~~--------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 29,388,000 30,453,000 ~~2001~~--------------------------------------------------------------------------------------------------- ~~based~~COMMITMENTS onAND aCONTINGENGIES ~~closing~~(Note ~~price~~8) on-- ~~September~~-- ~~28,~~--------------------------------------------------------------------------------------------------- ~~2001~~REDEEMABLE ofCONVERTIBLE PREFERRED STOCK: $10.9101 ~~per~~par ~~share.~~value, 2.,000,000 ~~Represents~~shares ~~308~~authorized,~~500~~ ~~options at $~~1~~.125~~,500 ~~per~~shares ~~share~~issued and 58outstanding 253,~~333~~000 ~~options~~253,000 at--------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, $80.7501 ~~per~~par ~~share.~~value, 3.40,000,000 ~~Represents~~shares ~~141~~authorized,~~667~~ ~~options~~16,480,712 atand ~~$8.75~~15,983,200 ~~per~~shares ~~share~~issued and 50outstanding,~~000~~ ~~options~~respectively at164,000 ~~$4.50~~159,000 ~~per~~Additional ~~share~~paid-in 4.capital ~~Represents~~81,226,000 7975,~~625~~810,000 atUnearned ~~$1.875~~stock-based ~~per~~compensation ~~share~~(83,000) ~~and 13~~(401,~~541~~000) ~~options~~Accumulated atdeficit ~~$8.75~~(80,703,000) ~~per~~(64,932,000) ~~share.~~Accumulated 5.other ~~Represents~~comprehensive 75loss (12,~~375~~000) at(462,000) ~~$1.875~~--------------------------------------------------------------------------------------------------- ~~per~~TOTAL ~~share~~STOCKHOLDERS' EQUITY 592,000 10,174,000 ~~options~~--------------------------------------------------------------------------------------------------- atTOTAL ~~$4.50~~LIABILITIES, ~~per~~REDEEMABLE ~~share~~CONVERTIBLE ~~and~~PREFERRED ~~36,459~~STOCK ~~options~~AND atSTOCKHOLDERS' EQUITY $~~8.75~~ ~~per~~30,233,000 ~~share.~~$ 40,880,000 =================================================================================================== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

~~NUMBER~~APPIANT OFTECHNOLOGIES ~~SHARES~~INC. ~~BENEFICIALLY~~AND ~~OWNED~~SUBSIDIARIES ~~PERCENT~~CONSOLIDATED STATEMENTS OF ~~CLASS~~OPERATIONS AND COMPREHENSIVE LOSS ----------------------- ------------------------------------------------------------------------------------- ~~OFFICERS~~YEARS ~~AND~~ENDED ~~DIRECTORS~~SEPTEMBER ~~(1)~~30, ~~COMMON~~2002 ~~PREFERRED~~2001 ~~COMMON~~2000 ~~PREFERRED~~ --------------------------------------- ------------ --------- -------- ---------- ~~Douglas S. Zorn 748,673(2)~~ -- ~~4.7%~~ --%-------------------------- ~~Chairman~~(restated ofsee ~~the~~Note ~~Board,~~1) ~~Chief~~NET ~~Executive~~REVENUES: ~~Officer~~Products and ~~President~~integration L.services ~~Thomas~~$ ~~Baldwin~~687,000 ~~III~~$ 65,~~587~~492,~~676(3)~~000 --$ ~~41.2%~~11,236,000 ~~--%~~Other ~~Director~~services ~~James~~11,125,000 S.16,256,000 ~~Gillespie 884~~14,~~468(4)~~293,000 -- ~~5.5%~~ --~~% Director Robert J. Schmier 230,654(5)~~ -- ~~1.4%~~ --%----- ~~Director Allen F. Jacobson 112,725(6)~~ --------------- ~~0.7%~~ --%----------- ~~Director~~TOTAL N.NET ~~Bruce~~REVENUES ~~Walko~~11,812,000 6121,748,000~~(7)~~ 25,529,000 -- ~~0.4%~~ --~~% Director James Han~~ -- -- --% --%- ~~Managing Director of Infotel Subsidiary Ken G. Murray~~ -- -- --% --~~% Chief Operating Officer John Zavoli~~ -- -- --%- --~~% Chief Financial Officer Ram Mani~~ -- -- --% --%--- ~~Chief~~Cost ~~Technology~~of ~~Officer~~net ~~All~~revenues: ~~officers,~~Products ~~directors~~ and ~~proposed~~integration 9services 5,~~136~~454,~~490(8)~~000 --5,008,000 ~~57.2%~~9,852,000 ~~--%~~Other ~~directors~~services as8,676,000 a12,538,000 ~~group (10 persons) (~~8),621,000 ------------- --------------- ------------- TOTAL COSTS OF NET REVENUES 14,130,000 17,546,000 18,473,000 ------------- --------------- -------------~~----~~ GROSS PROFIT (1LOSS) ~~Each~~(2,318,000) ~~beneficial~~4,202,000 ~~owner~~7,056,000 ~~for~~OPERATING ~~whom~~EXPENSES anSelling, ~~address~~general isand ~~not~~administrative ~~listed~~6,146,000 ~~has~~16,587,000 an16,365,000 ~~address~~Research ~~c/o~~and ~~Appiant~~development ~~Technologies Inc.~~1, ~~6663 Owens Drive~~851,000 ~~Pleasanton~~2,981,000 ~~California 94588. (2) Represents 151~~189,~~937~~000 ~~shares~~Amortization of ~~common~~goodwill ~~stock,~~and ~~vested~~other ~~options~~intangibles ~~to purchase 379~~3,~~333~~614,000 ~~shares of common stock~~1,883,000 ~~immediately exercisable warrants to purchase 179~~676,~~524~~000 ~~shares~~Amortization of ~~common~~ stock-based ~~and~~compensation ~~notes~~113,000 ~~immediately~~91,000 ~~convertible~~- ~~into~~Impairment ~~37,879~~of ~~shares~~(gain ofon) ~~common~~equipment ~~stock.~~and 44capitalized software (32,840,000) ~~Represents~~ 3,~~191~~669,~~334~~000 ~~shares~~- of------------- ~~common~~--------------- ~~stock,~~------------- ~~immediately~~TOTAL ~~exercisable~~OPERATING ~~warrants~~EXPENSES to8,884,000 ~~purchase~~25,211,000 ~~896~~17,~~342~~230,000 ~~shares~~------------- of--------------- ~~common~~------------- ~~stock,~~LOSS ~~notes~~FROM ~~immediately~~OPERATIONS ~~convertible~~(11,202,000) ~~into~~(21,009,000) 2(10,~~500~~174,000) ~~shares~~------------- of--------------- ~~Common~~------------- ~~Stock.~~OTHER ~~Irrevocable~~INCOME ~~trusts~~(EXPENSE) ~~for~~Interest ~~Mr.~~income ~~Baldwin's~~412,000 ~~three~~265,000 ~~children~~217,000 ~~have~~Interest ~~purchased~~expense ~~$105~~(6,448,000) ~~each~~(5,352,000) of(2,307,000) ~~Series~~Other B1,558,000 ~~Preferred~~(104,000) ~~Stock.~~(312,000) ~~Mr.~~------------- ~~Baldwin~~--------------- ~~disclaims~~------------- ~~beneficial~~Total ~~ownership~~other ofexpense ~~these securities.~~ (4,478,000) ~~Represents~~(5,191,000) ~~517~~(2,~~065~~402,000) ~~shares~~------------- of--------------- ~~common~~------------- ~~stock,~~Loss ~~immediately~~before ~~exercisable~~provision ~~warrants~~for toincome ~~purchase~~taxes ~~329~~(15,~~524~~680,000) ~~shares~~(26,200,000) of(12,576,000) ~~common~~Provision ~~stock~~for ~~and~~income ~~notes~~taxes ~~immediately~~91,000 ~~convertible~~279,000 ~~into 37~~268,~~879~~000 ~~shares~~------------- of--------------- ~~common~~------------- ~~stock.~~NET LOSS $(515,771,000) ~~Represents~~$ 78(26,~~135~~479,000) ~~shares of common stock~~$(12,844,000) ~~vested~~PREFERRED ~~options~~STOCK toDIVIDENDS ~~purchase~~- 25(7,626,000) ~~shares of common stock~~(22,000) ~~immediately~~------------- ~~exercisable~~--------------- ~~warrants~~------------- toNET ~~purchase~~LOSS ~~127,519~~AVAILABLE ~~shares~~TO ofCOMMON ~~common~~STOCKHOLDERS ~~stock.~~(15,771,000) (634,105,000) ~~Represents 62~~(12,~~725~~866,000) ~~shares~~============= of=============== ~~common~~============= ~~stock~~BASIC ~~and~~AND ~~immediately~~DILUTED ~~exercisable~~NET ~~warrants~~LOSS toPER ~~purchase~~COMMON ~~50,000~~SHARE ~~shares~~$ of(0.97) ~~common~~$ ~~stock~~(2.32) $ (71.25) ~~Represents~~============= ~~vested~~=============== ~~options~~============= toSHARES ~~purchase~~USED ~~11,000~~IN ~~shares~~PER ofSHARE ~~common~~CALCULATION-BASIC ~~stock~~AND ~~and~~DILUTED ~~immediately~~16,295,947 ~~exercisable~~14,687,363 ~~warrants~~10,302,900 to============= ~~purchase~~=============== ~~50,000~~============= ~~shares~~COMPREHENSIVE ofLOSS ~~common~~Net ~~stock.~~loss $(815,771,000) ~~Represents~~$ 4(26,~~275~~479,~~407~~000) ~~shares~~$(12,844,000) ofOther ~~common~~comprehensive ~~stock,~~loss ~~vested~~Translation ~~options~~gain to(loss) ~~purchase~~450,000 ~~652~~(106,~~416~~000) ~~shares~~(147,000) of------------- ~~common~~--------------- ~~stock,~~------------- ~~immediately~~COMPREHENSIVE ~~exercisable~~LOSS ~~warrants~~$(15,321,000) to$ ~~purchase~~(26,585,000) 1$(12,~~632~~991,~~909~~000) ~~shares~~============= of=============== ~~common~~============= ~~stock~~THE ~~notes~~ACCOMPANYING ~~immediately~~NOTES ~~convertible~~ARE ~~into~~AN ~~2,575,758~~INTEGRAL ~~shares~~PART ofOF ~~common~~THESE ~~stock.~~FINANCIAL STATEMENTS

~~SIGNATURE~~APPIANT ~~TITLE~~TECHNOLOGIES ~~DATE~~INC. ~~/s/~~AND ~~Douglas~~SUBSIDIARIES SCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ------------------------------------------------------------------------------------------------------------------------------ Unearned Additional Stock Common Stock Paid-in -based Accumulated Shares Amount Capital Compensation Deficit ------------------------------------------------------------------------------------------------------------------------------ Balance at September 30, 1999 . ~~Zorn~~. ~~Chairman~~. . . . . . . . . . . . 8,219,700 $ 82,000 $24,473,000 $ -- $(17,965,000) Conversion of ~~the~~preferred ~~Board~~stock into common stock . . . . . 1,056,400 ~~Chief~~11,000 ~~Executive~~844,000 ~~January~~-- 14-- Issuance of common stock related to: Dividends on preferred stock paid in common stock . . . 23,700 ~~2002~~-- 22,000 -- -- Exercise of stock options and warrants. . . . . . . . . 1,580,500 15,000 2,381,000 -- -- Conversion of convertible debentures into common stock. . 685,400 7,000 5,890,000 -- -- Repurchase of common stock. . . . . . . . . . . . . . . . (216,500) (2,000) (789,000) -- -- Stock based compensation for the issuance of warrants to: Consultants for services. . . . . . . . . . . . . . . . -- -- 2,050,000 -- ~~and~~-- ~~Financial~~Employees ~~Officer~~for services. . . . . . . . . . . . . . . . . -- -- 2,036,000 ~~President~~-- -- Other third parties . . . . . . . . . . . . . . . . . . -- -- 2,827,000 -- -- Common stock and ~~Douglas~~warrants Sissued in acquisitions: Trimark, Inc. ~~Zorn~~. ~~Director~~. ~~(Principal~~. ~~Executive~~. ~~Officer~~. . . . . . . . . . . . . . . . 750,000 7,000 3,453,000 -- -- SVG Software Services, Inc. . . . . . . . . . . . . . 250,000 3,000 2,175,000 -- -- Unearned stock-based compensation . . . . . . . . . . . . -- -- 2,073,000 (2,073,000) ~~/s/~~-- ~~Robert~~Amortization Jof stock-based compensation. ~~Schmier~~. ~~Director~~. ~~January~~. 14. . . . . -- -- -- 61,000 ~~2002~~-- Deemed interest expense related to convertible debentures at a discount. . . . . . . . . . . . . . . . -- -- 1,595,000 -- -- Stock based compensation related to benefit associated with accelerated vesting of options . . . . . . . . . . -- -- 231,000 -- -- Net loss. . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- ~~Robert~~-- J(12,844,000) Translation loss. ~~Schmier~~. ~~/s/~~. N. ~~Bruce~~. ~~Walko~~. ~~Director~~. ~~January~~. 14. . . . . . . . . . . . . -- -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------ Balance at September 30, ~~2002~~2000 . . . . . . . . . . . . . . 12,349,200 $123,000 $49,261,000 $ (2,012,000) $(30,809,000) ------------------------------------------------------------------------------------------------------------------------------ N----------------------------------------------------------------------------------------- Accumulated Other Comprehensive Loss Total ----------------------------------------------------------------------------------------- Balance at September 30, 1999 . ~~Bruce~~. ~~Walko~~. ~~/s/~~. ~~Allen~~. F. ~~Jacobson~~. ~~Director~~. ~~January~~. 14. . . . . $ (209,000) ~~2002~~$ 6,381,000 Conversion of preferred stock into common stock . . . . . -- 855,000 Issuance of common stock related to: Dividends on preferred stock paid in common stock . . . -- 22,000 Exercise of stock options and warrants. . . . . . . . . -- 2,396,000 Conversion of convertible debentures into common stock. . -- 5,897,000 Repurchase of common stock. . . . . . . . . . . . . . . . -- (791,000) Stock based compensation for the issuance of warrants to: Consultants for services. . . . . . . . . . . . . . . . -- 2,050,000 Employees for services. . . . . . . . . . . . . . . . . -- 2,036,000 Other third parties . . . . . . . . . . . . . . . . . . -- 2,827,000 Common stock and warrants issued in acquisitions: Trimark, Inc. . . . . . . . . . . . . . . . . . . . . -- 3,460,000 SVG Software Services, Inc. . . . . . . . . . . . . . -- 2,178,000 Unearned stock-based ~~Allen~~compensation F. ~~Jacobson~~. ~~/s/~~. L. ~~Thomas~~. ~~Baldwin~~. ~~III~~. ~~Director~~. ~~January~~. 14. . . -- -- Amortization of stock-based compensation. . . . . . . . . -- 61,000 ~~2002~~Deemed interest expense related to convertible debentures at a discount. . . . . . . . . . . . . . . . -- 1,595,000 Stock based compensation related to benefit associated with accelerated vesting of options . . . . . . . . . . -- 231,000 Net loss. . . . . . . . . . . . . . . . . . . . . . . . . -- (12,844,000) Translation loss. . . . . . . . . . . . . . . . . . . . . (147,000) (147,000) ----------------------------------------------------------------------------------------- LBalance at September 30, 2000 . ~~Thomas~~. ~~Baldwin~~. ~~III~~. . . . . . . . . . . $ (356,000) $ 16,207,000 ----------------------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------------------------------------------------------------------------------------------------------- September 30, 2001 2000 --------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,379,000 $ 5,603,000 Restricted cash 117,000 116,000 Accounts receivable, less allowance for doubtful accounts of $335,000 and $402,000 1,123,000 3,907,000 Inventory 890,000 550,000 Equipment at customers under integration 206,000 1,708,000 Prepaid expenses and other 418,000 313,000 --------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 6,133,000 12,197,000 --------------------------------------------------------------------------------------------------------------------------- Property and equipment, net 5,381,000 3,395,000 Capitalized software, net 16,664,000 18,366,000 Goodwill and other intangible assets, net 10,255,000 2,443,000 Other assets 1,933,000 2,384,000 --------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 40,366,000 $ 38,785,000 --------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------- LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY $ $ CURRENT LIABILITIES: Lines of credit 300,000 343,000 Accounts payable 8,834,000 5,269,000 Accrued liabilities 3,209,000 2,478,000 Deferred revenue 1,041,000 2,919,000 Income tax payable 302,000 280,000 Advances for preferred stock 3,500,000 Accrued liability related to warrants 1,818,000 - Convertible promissory notes payable 2,700,000 - Notes Payable 5,726,000 - Capital lease obligations, current portion 4,085,000 3,072,000 --------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 28,015,000 17,861,000 Capital lease obligations, net of current portion 93,000 4,717,000 Long term notes Payable 379,000 - Other 39,000 - TOTAL LIABILITIES 28,526,000 22,578,000 --------------------------------------------------------------------------------------------------------------------------- REDEEMABLE CONVERTIBLE PREFERRED STOCK: $0.01 par value, 2,000,000 shares authorized, 1,500 shares issued and outstanding at September 30, 2001 253,000 - --------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common Stock, $0.01 par value, 40,000,000 and 20,000,000 shares authorized in 2001 and 2000 respectively, 15,983,200 and 12,349,200 shares issued and outstanding in 2001 and 2000 respectively. 157,000 123,000 Additional paid-in capital 80,657,000 49,261,000 Unearned stock-based compensation (401,000) (2,012,000) Accumulated deficit (68,364,000) (30,809,000) Accumulated other comprehensive loss (462,000) (356,000) --------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 11,587,000 $ 16,207,000 --------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY $ 40,366,000 $ 38,785,000 ============== ============= --------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~STOCKHOLDERS' ~~AND~~EQUITY ~~COMPREHENSIVE~~(CONTINUED) ~~LOSS~~ --------------------------------------------------------------------------------------------------------------------- Unearned Additional Stock- Common Stock Paid---in based Shares Amount Capital Compensation ---------------------------------------------------------------------------------------------------------------------~~----~~ ~~YEARS~~Balance ~~ENDED~~at ~~SEPTEMBER~~September 30, 2001(restated) ~~2000~~. ~~1999~~. ~~-------------------------------------------------------------------------------------------------------------------------~~. ~~Net~~. ~~revenues:~~. ~~Products~~. ~~and~~. ~~integration~~. ~~services~~. $. 5. . . 15,~~492~~983,~~000~~200 $11159,~~236,~~000 $1175,~~807~~810,000 ~~Other~~$ ~~services 16~~(401,~~256,~~000) ~~14,293,000~~Beneficial ~~11,533,000~~conversion ~~-------------------------------------------------------------------------------------------------------------------------~~feature ~~TOTAL~~related ~~NET~~to ~~REVENUES~~issuance ~~$21,748,000~~of ~~25,529,000~~convertible 23promissory notes payable. . . . . . . . . . . . . . . . . . . . 4,~~340~~761,000 ~~-------------------------------------------------------------------------------------------------------------------------~~Common ~~Cost~~stock issued for: Acquisition of ~~net~~XiMnet ~~revenues:~~. ~~Products~~. ~~and~~. ~~integration~~. ~~services~~. ~~5,008,000~~. ~~9,852,000~~. ~~8,530,000~~. ~~Other~~. ~~services~~. ~~12,538,000~~. ~~8,621,000~~. ~~7,269,000~~. ~~-------------------------------------------------------------------------------------------------------------------------~~. ~~TOTAL~~. ~~COST~~. OF. ~~NET~~. ~~REVENUES~~. 17. . 250,~~546,~~000 183,~~473,~~000 15437,~~799,~~000 ~~-------------------------------------------------------------------------------------------------------------------------~~Settlement. ~~GROSS~~. ~~PROFIT~~. ~~NET~~. ~~4,202,000~~. ~~7,056,000~~. ~~7,541,000~~. ~~-------------------------------------------------------------------------------------------------------------------------~~. ~~OPERATING~~. ~~EXPENSES~~. ~~Selling,~~. ~~general~~. ~~and~~. ~~administrative~~. ~~16,678,000~~. ~~16,365,000~~. ~~7,421,000~~. ~~Research~~. ~~and~~. ~~development~~. . . . . . . . 247,512 2,~~981,~~000 ~~189~~432,000 -Stock options granted in Quaartz acquisition Amortization of ~~goodwill~~stock-based ~~and~~compensation. ~~other~~. ~~intangibles~~. ~~1,883,000~~. ~~676~~. . . . . . . . . (214,000) ~~443~~318,000 ~~Impairment~~Net ofloss. ~~equipment~~. ~~and~~. ~~capitalized~~. ~~software~~. ~~3,669,000~~. -. -. ~~Restructuring~~. ~~charges~~. -. -. ~~189,000~~. ~~-------------------------------------------------------------------------------------------------------------------------~~. ~~TOTAL~~. ~~OPERATING~~. ~~EXPENSES~~. ~~25,211,000~~. ~~17,230,000~~. ~~8,053,000~~. ~~-------------------------------------------------------------------------------------------------------------------------~~. ~~LOSS~~. ~~FROM~~. ~~OPERATIONS~~. ~~(21,009,000)~~. ~~(10,174,000)~~. ~~(512,000)~~. ~~OTHER~~. ~~INCOME~~. ~~(EXPENSE)~~Translation ~~Interest~~gain. ~~income~~. ~~265,000~~. ~~217,000~~. ~~108,000~~. ~~Interest~~. ~~expense~~. ~~(8,802,000)~~. ~~(2,307,000)~~. ~~(414,000)~~. ~~Other~~. ~~(104,000)~~. ~~(312,000)~~. ~~135,000~~. . . . . . . . . . . . ---------------------------------------------------------------------------------------------------------------------~~----~~ ~~Total~~Balance ~~other~~at ~~expense~~September (830,~~641,000)~~ ~~(2,402,000)~~2002 ~~(171,000)~~. ~~Loss~~. ~~before~~. ~~provision~~. ~~for~~. ~~income~~. ~~taxes~~. ~~(29,650,000)~~. ~~(12,576,000)~~. ~~(683,000)~~. ~~Provision~~. ~~for~~. ~~income~~. ~~taxes~~. ~~279~~. . . . 16,480,712 $164,000 ~~268~~$81,226,000 34$ (83,000) ===================================================================================================================== ----------------------------------------------------------------------------------------------------------------~~---------~~ ~~NET~~Accumulated ~~LOSS~~Other ~~(29,929,000)~~Accumulated ~~($12,844,000)~~Comprehensive ~~($717,000)~~Deficit ~~PREFERRED~~Loss ~~STOCK~~Total ~~DIVIDENDS (7,626,000) (22,000) (738,000)~~ ----------------------------------------------------------------------------------------------------------------~~---------~~ ~~NET~~Balance ~~LOSS~~at ~~AVAILABLE~~September TO30, ~~COMMON~~2001(restated) ~~STOCKHOLDERS~~. (. . . . . . . . . . . . $37(64,~~555~~932,000) ($12 (462,~~866,~~000) ($1 10,~~455~~174,000) ~~-------------------------------------------------------------------------------------------------------------------------~~Beneficial ~~-------------------------------------------------------------------------------------------------------------------------~~conversion ~~BASIC~~feature ~~AND~~related ~~DILUTED~~to ~~NET~~issuance ~~LOSS~~of ~~PER~~convertible ~~COMMON~~promissory ~~SHARE~~notes ~~($2~~payable.~~56)~~ ~~($1~~.~~25)~~ ($.~~23)~~ ~~-------------------------------------------------------------------------------------------------------------------------~~. ~~-------------------------------------------------------------------------------------------------------------------------~~. ~~SHARES~~. ~~USED~~. IN. ~~PER~~. ~~SHARE~~. ~~CALCULATION-BASIC~~. ~~AND~~. ~~DILUTED~~. ~~14,687,363~~. ~~10,302,900~~. 6. . . . . 4,~~249~~761,000 ~~-------------------------------------------------------------------------------------------------------------------------~~Common ~~-------------------------------------------------------------------------------------------------------------------------~~stock ~~COMPREHENSIVE~~issued ~~LOSS~~for: ~~Net~~Acquisition ~~loss~~of ~~($29~~XiMnet . . . . . . . . . . . . . . . . . . . . . 440,~~929,~~000) ~~($12~~Settlement. . . . . . . . . . . . . . . . . . . . . . . . . . . 434,~~844,~~000) ~~($717~~Stock options granted in Quaartz acquisition Amortization of stock-based compensation. . . . . . . . . . . . . 104,000) ~~Other~~Net ~~comprehensive~~ loss:. ~~Translation~~. ~~loss~~. . . . . . . . . . . . . . . . . . . . . . . . . . . (~~106~~15,771,000) (~~147~~15,771,000) ~~(33~~Translation gain 450,000) 450,000 ----------------------------------------------------------------- ------------- ---------------~~----------------------------~~ -------------~~------------------------------------------------------------------------------------------------------------~~ ~~COMPREHENSIVE~~Balance ~~LOSS~~at ($September 30,~~035~~ 2002 . . . . . . . . . . . . . . . . . . $(80,703,000) ($ (12,~~991,~~000) ($~~750~~ 592,000) ~~-------------------------------------------------------------------------------------------------------------------------~~================================================================= ~~-------------------------------------------------------------------------------------------------------------------------~~============= =============== ============= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF ~~STOCKHOLDERS'~~CASH ~~EQUITY~~FLOWS ----------------------------------------------------------------------------------------------------------------------~~----------~~ ~~Additional~~YEARS ~~Unearned~~ENDED ~~Accumulated~~SEPTEMBER ~~Common~~30, ~~Stock~~2002 ~~Paid~~2001 in2000 ~~Stock~~-~~based Accumulate Comprehensive Shares Amount Capital Compensation Deficit Loss Total~~ ---------------------------------------------------------------------------------------------------------------------~~-----------~~ ~~Balance~~CASH atFLOWS ~~September~~FROM ~~30,~~OPERATING ~~1998~~ACTIVITIES ~~5,579,200~~Net loss $55(15,771,000) $21(26,~~021~~497,000) ~~- (~~$16(12,~~510~~844,000) Adjustments to reconcile net loss to net cash (~~$176~~used in) provided by operating activities: Provision for doubtful accounts (272,000) $622,000 411,000 Depreciation and amortization 4,~~390~~546,000 ~~Conversion~~2,673,000 1,071,000 Amortization of ~~preferred~~goodwill ~~stock~~and ~~into~~intangibles ~~common~~4,386,000 2,086,000 676,000 Amortization of stock 1based compensation 104,~~090~~000 91,~~700~~000 1161,000 ~~715~~Provision for excess and obsolete inventory 200,000 -397,000 -44,000 -Interest ~~726~~expense related to issuance of warrants to related party 822,000 ~~Additional~~4,044,000 ~~common~~-- ~~stock~~Impairment ~~issued~~of ~~For~~equipment ~~Infotel~~and ~~177~~capitalized software -- 3,~~200~~669,000 2-- Write-off of equipment 1,204,000 -- -- Gain on extinguishment of capital leases (23,662,000) -- -- Unearned stock-based compensation -- ~~Issuance~~-- 4,317,000 Amortization of ~~warrants~~discount inon ~~preferred~~convertible ~~financing~~notes -payable -7,653,000 ~~143~~3,572,000 1,595,000 Accrued liability related to warrants (5,624,000) (3,864,000) -- Issuance of common stock for settlement 428,000 -- -- ~~143~~Changes in operating assets and liabilities, net of acquisitions: Accounts receivable (780,000) ~~Deemed~~2,085,000 ~~dividend~~1,403,000 onInventory ~~preferred~~239,000 ~~stock~~(736,000) ~~convertible~~718,000 Equipment at acustomers ~~discount~~under -integration -206,000 ~~708~~1,502,000 -(1,426,000) Prepaid expenses and other 375,000 (~~708~~543,000) -(36,000) -Other ~~Cash~~assets ~~dividends~~811,000 on(559,000) ~~preferred~~(190,000) ~~stock~~Income -tax -payable -(66,000) 22,000 201,000 Deferred Revenue (452,000) (1,878,000) 1,311,000 Accounts payable and other current liabilities (2,171,000) 3,838,000 (799,000) ---------------------------------------------------------------------------------------------------------------------- CASH USED IN OPERATING ACTIVITIES (309,468,000) (9,476,000) (3,486,000) ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Restricted cash (301,000) ~~Compensation~~74,000 ~~related~~Proceeds tofrom ~~grant~~(payments Ofon) ~~stock~~note ~~options~~payable to ~~employees~~related -party -- ~~105~~574,000 -Proceeds -from sale of property and equipment -- ~~105~~17,000 ~~Dividends~~Cash onacquired ~~preferred~~in ~~stock~~connection ~~paid~~with Inacquisition ~~common~~89,000 ~~stock~~22,000 2145,~~900~~000 -Purchases 16of software (637,000) - - Capitalization of software development costs (1,565,000) (2,064,000) (618,000) Purchase of property and equipment -- 16(3,493,000) ~~Infotel~~(1,206,000) ~~debt~~---------------------------------------------------------------------------------------------------------------------- ~~converted~~NET toCASH ~~common~~USED ~~stock~~IN ~~559~~INVESTING ACTIVITIES (1,~~100~~476,000) (6,173,000) ~~629~~(1,114,000) ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Share repurchase -- (791,000) Repayments under lines of credit (343,000) (197,000) Advance payment on future lease obligation -- ~~635~~(2,000,000) ~~Common~~Proceeds ~~stock~~from ~~issued~~issuance ~~for~~of ~~purchase~~note Ofpayable to software ~~assets~~vendor 3,000,000 -- Repayment of notes payable (50,000) -- -- Proceeds from ~~Eastern~~issuance ~~675~~of common stock 1,745,000 -- Proceeds from issuance of convertible notes and warrants 7,111,000 15,~~022~~500,000 -5,397,000 Repayment of convertible notes (408,000) (400,000) -- Advanced payments for preferred stock -- 13,~~029~~559,000 ~~Stockholder~~Proceeds ~~debt~~from ~~converted~~warrants toand options exercised for common stock ~~116,600~~ 1,818,000 ~~116~~2,396,000 -Proceeds -from -issuance ~~117~~of preferred stock,~~000~~ ~~Net~~net ~~loss~~of -issuance -costs -4,956,000 -- Principal payments on capital lease obligations (~~717~~256,000) -(897,000) (~~717~~344,000) ~~Cumulative~~Principal ~~translation~~payment ~~loss~~on -notes -payable to stockholders -- -- ---------------------------------------------------------------------------------------------------------------------- ~~(33~~NET CASH PROVIDED BY FINANCING ACTIVITIES 6,497,000) ~~(33~~15,379,000) 8,020,000 ---------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 450,000 (106,000) (146,000) ---------------------------------------------------------------------------------------------------------------------- ~~Balance~~NET atINCREASE ~~September~~(DECREASE) 30IN CASH AND CASH EQUIVALENTS (2,353,000) ~~1999~~(2,224,000) 83,~~219~~274,~~700~~000 ~~$82~~CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,379,000 ~~$24~~5,~~473~~603,000 2,329,000 ---------------------------------------------------------------------------------------------------------------------- ~~(17~~CASH AND CASH EQUIVALENTS,~~965~~ END OF PERIOD $ 1,026,000) ($~~209~~ 3,379,000) $6 5,~~381~~603,000 ====================================================================================================================== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 8 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL CASH FLOW INFORMATION: ---------------------------------------------------------------------------------------------------------------------- YEARS ENDED SEPTEMBER 30, 2002 2001 2000 ---------------------------------------------------------------------------------------------------------------------- CASH TRANSACTIONS: Income taxes $ - $ 53,000 $ 6,000 Interest paid - 725,000 440,000 NON-CASH TRANSACTIONS: Issuance of Common Stock and options in acquisitions 438,000 8,740,000 5,638,000 Renegotiation of lease terms resulting in return of equipment 800,000 1,504,000 - Deemed dividends related to beneficial conversion feature of Preferred Stock - 7,626,000 - Beneficial conversion feature on convertible promissory notes payable 4,082,000 2,548,000 1,595,000 Cancellation of capital lease obligations 3,600,000 7,193,000 - Estimated value of warrants issued to customer 571,000 449,000 - Estimated value of warrants issued to underwriters - 2,226,000 - Conversion of Preferred Stock into Common Stock - 4,678,000 855,000 Property and equipment acquired under capital lease 720,000 5,092,000 1,481,000 Conversion of convertible debentures to common stock - - 5,897,000 Dividends on preferred stock paid in common stock - - 22,000 Unearned stock-based compensation - - 2,073,000 Conversion of advanced payment to preferred stock - 3,559,000 - Issuance of Common Stock for conversion of Stockholder debt - - - Conversion of Infotel debt to common stock - - - THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

9 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. OVERVIEW BACKGROUND AND BUSINESS We formally changed our name to Appiant Technologies, Inc. from Nhancement Technologies, Inc. upon receiving shareholder approval. We have also filed a trademark application for the name change. Appiant Technologies Inc., ("Appiant" or the "Company") is a Delaware corporation headquartered in Pleasanton, California and was incorporated in October 1996 as a holding company. The Company's businesses have been conducted through its operating Subsidiaries, Appiant Technologies North America, Inc. ("APPIANT NA"), a California corporation headquartered in Pleasanton, California, and Infotel Technologies (Pte), Ltd., based in Singapore. APPIANT NA has historically been a systems distributor and integrator of voice processing and multimedia messaging equipment and software and in fiscal 2000, began the development and purchase of software for its hosted internet protocol based unified communication and unified information portal services under the name inUnison(TM) . Infotel is a distributor of telecommunications and other electronic products and provides consulting and a range of other services for the telecommunications and information technology market. Infotel also provides radar system integration, turnkey project management, and electronic test instrumentation services. APPIANT NA revenues were 18%, 40% and 55% of consolidated net revenues in fiscal years 2002, 2001 and 2000. Infotel revenues were 82%, 60% and 45% of consolidated net revenues for fiscal years 2002, 2001 and 2000, respectively. During fiscal year 1999, the Company acquired the assets of Eastern Systems Technology, Inc. ("Eastern"), which primarily consisted of a software search engine capable of accessing information contained in multiple corporate databases. The Eastern acquisition provided the Company with a search engine for inclusion in the Company's inUnison(TM) portal services applications. During fiscal year 2000, the Company acquired the assets of SVG Software Services, Inc., a California corporation ("SVG"), which primarily consisted of customer relationship management software, and Appiant Technologies (India) Pte. Ltd. ("APPIANT India") a company incorporated in Chennai, India. APPIANT India had conducted software development activities for the inUnison(TM) portal and also focuses on call center solutions and outsourcing for enterprises seeking to establish call centers in India. During the fiscal year 2001, the Company sold Appiant India operations to rationalize costs and to focus on its core competencies. During fiscal year 2000, the Company acquired Trimark, Inc., headquartered in San Diego, California and doing business as Triad Marketing ("Triad"). Triad designs, manufactures and markets profile selling software products to corporate and credit union clients. During 2001, the legacy Triad operations were substantially terminated. The Company's acquisitions and the disposal of Appiant India are described further in Note 3 to the consolidated financial statements. The Triad and SVG acquisitions provided the Company with recommendation engine software tools and customer relationship management software, respectively, for inclusion in the Company's inUnison(TM) portal service applications. 10 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During fiscal year 2001, the Company acquired Quaartz, an application and service provider primarily involved in software development projects for the Company. Acquisition of Quaartz provided the Company with calendar software tools for inclusion in the Company's inUnison(TM) portal service applications. Quaartz is a pioneering Internet affinity marketing company that provides Internet-hosted applications enabling companies and organizations to deliver event announcements, communication tools and e-commerce directly to their online communities. The Company restructured its operations, closing a number of remote divisions and implementing a 20% work force reduction for the year ended September 30, 2001. Restructuring charges consisted principally of severance payments to former officers and executives and operational and administrative employees of APPIANT NA. A total of 63 employees were terminated during fiscal year 2001 and a total of $363,000 was expensed and included in selling, general and administrative expenses. The Company also has a Canadian subsidiary, which facilitates the sale of APPIANT NA's voice processing and multimedia messaging equipment and integration services. BASIS OF PRESENTATION The consolidated financial statements of the Company and its Subsidiaries contemplate the realization of assets and satisfaction of liabilities in the normal course of business. The Company recorded a net loss of $15.8 million for fiscal year 2002 and also sustained significant losses for the fiscal years ended 2001 and 2000. At September 30, 2002, the Company has negative working capital of $23.7 million and an accumulative deficit of $80.7 million. Additionally, substantially all the Company's liabilities are in default. As a result, the Company will need to generate significantly higher revenue to reach profitability as the organization of the new inUnison(TM) portal business is built. There remains significant uncertainly, however, about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management's plans to reverse the recent trend of losses are to increase revenues and gross margins while controlling costs, primarily based on expected revenues for the Company's inUnison(TM) portal services applications. Continued existence of the Company is dependent on the Company's ability to obtain adequate funding and eventually establish profitable operations. The Company intends to obtain additional equity and/or debt financing in order to further finance the development and market introduction of its inUnison(TM) portal services and to meet working capital requirements. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION The consolidated financial statements include the accounts of the Company and its wholly owned Subsidiaries. Inter-company accounts and transactions have been eliminated. Assets and liabilities of Infotel, which operates in a local currency environment, are translated into U.S. dollars at exchange rates in effect at the balance sheet date and income and expense accounts are translated at average exchange rates during the fiscal year. Resulting translation adjustments are recorded in other comprehensive loss. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 11 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FINANCIAL INSTRUMENTS The Company classifies highly liquid investments with an original or remaining maturity of three months or less at date of purchase as cash equivalents. The carrying amounts reported for cash and cash equivalents are considered to approximate fair values based upon the short maturities of those financial instruments and comprise cash deposits at September 30, 2002 and 2001. The carrying amounts of certain of the Company's other financial instruments including accounts receivable, accounts payable, lines of credit, notes payable and certain promissory notes payable approximate fair value due to their short maturities. The Company's Infotel subsidiary maintains fixed deposits to secure bankers' guarantees of its performance on radar system integration projects. The restrictions on these funds are released when the projects are completed. The Company expects guaranteed work collateralized by these deposits to be completed within one year. The Company has significant international sales transactions generated by its Singapore subsidiary, Infotel. The Company has historically used forward exchange contracts to hedge unrecognized firm purchase commitments that expose the Company to risk as a result of fluctuations in foreign currency exchange rates. Unrealized gains and losses of forward exchange contracts that are designated as hedges of firm purchase commitments are recorded in other current liabilities or assets and are included in the measurement of the underlying transaction. Hedge accounting was only applied if the derivative reduced the risk of the underlying hedged item and was designated at inception as a hedge. Derivatives were measured for effectiveness both at inception and on an ongoing basis. There were no foreign exchange forward contracts outstanding at September 30, 2002. CERTAIN RISKS AND UNCERTAINTIES Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company maintains substantially all of its cash and cash equivalent balances with one financial institution domiciled in the United States and another domiciled in Singapore. The Company maintains its cash in bank deposit accounts in the United States which, at times, may exceed federally insured limits. The amounts on deposit in Singapore are not insured. The Company has not experienced any losses in such accounts. The Company performs ongoing credit evaluations of its customers, generally does not require collateral of its customers and maintains allowances for potential credit losses. At September 30, 2002 and 2001, no customers constituted more than 10% of accounts receivable. Suppliers The Company's Enterprise operations of APPIANT NA depend upon the integration of hardware, software, and communications and data processing equipment manufactured by others into systems designed to meet the needs of customers. Although the Company has agreements with a number of equipment manufacturers, a major portion of the Company's revenues has been generated from the sale of products manufactured by three companies. The Company relies significantly on products manufactured and services provided by three major suppliers. Any disruption in the Company's relationships with the suppliers would have a significant adverse effect on the Company's business for an indeterminate period of time until new supplier relationships could be established. Any interruption in the delivery of products by key suppliers would materially adversely affect the Company's results of operations and financial conditions. 12 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Some of the Company's current suppliers may currently or, at some point, compete with the Company as it rolls out its inUnison(TM) Unified Communications/Unified Information ("UC/UI") applications. Any potential competition from the Company's suppliers could have a material negative impact on its business and financial performance. The Company's inUnison(TM) UC/UI product applications are designed to provide the Company's customers with hosted unifying communications and unifying information solutions. The Company's inUnison applications utilize a unified communications platform, Unified Open Network Exchange ("uOne"). While the Company believes that the Company's inUnison(TM) applications will provide the Company's customers with scaled, carrier grade IP-based solutions, the Company cannot assure that the Company's customers will accept or adopt them on a large scale. The Company's integration efforts with other third party software has and could continue to result in product delays and cost overruns. The Company cannot assure that other software vendors whose software products the Company licenses or incorporates into the inUnison-(TM)- portal will continue to support their products. If these vendors discontinue their support, the Company's business would be adversely affected. Infotel, the Company's Singapore subsidiary, offers a wide range of infrastructure communications equipment products. It has an established business-providing test measuring instrumentation and testing environments, and is the regional distributor and test and repair center for Rohde & Schwarz test instruments. Infotel is also a network service provider, and manages data networks for various customers. Infotel's financial performance depends in part on a steady stream of revenues relating to the services performed for Rohde & Schwarz test instruments. Any material change in Infotel's relationship with their manufacturers, including but not limited to Rohde & Schwarz, would materially adversely affect their results of operations and financial condition. Revenue Customer revenues from the Company's two largest customers accounted for approximately 24% and 8%, 16% and 10%, 29% and 5% of total revenues during fiscal years 2002, 2001 and 2000, respectively. This concentration of revenue has resulted in additional risk to the Company's operations and any disruption of orders from our largest customers would adversely affect the Company's results of operations and financial condition. INVENTORY Inventory consists of systems and system components and is valued at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets, generally three to seven years. Depreciation for leasehold improvements is recorded using the straight-line method over the shorter of the lease term or their estimated useful lives. Upon sale or retirement of assets, cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operations. Maintenance and repairs are expensed as incurred and improvements are capitalized and depreciated. The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, or whenever management has committed a plan to dispose of the assets. Recoverability of an asset is measured by comparison of its carrying amount to future net cash flows that the asset is expected to generate. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future cash flows arising from the assets. 13 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GOODWILL AND OTHER INTANGIBLES Goodwill, which is the excess of cost over net assets acquired, relates to the Company's acquisitions of Infotel, Triad and Quaartz and is amortized over periods of three to ten years using the straight-line method. Other intangible assets relate to acquired assembled workforce and are amortized over a period of two years using the straight-line method. In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be disposed of", whenever events or circumstances indicate the carrying value of goodwill and other intangible assets might not be recoverable, and periodically, the Company assesses the recoverability of intangible assets by determining whether the amortization of the asset balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operations. The amount of impairment, if any, is recognized to the extent that the carrying value exceeds the projected discounted future operating cash flows and is recognized as a write down of the intangible assets. At September 30, 2001, the Company had substantially terminated operations for its Triad subsidiary including termination of employees of Triad and sales activities. Consequently, the Company expects to generate no future cash flows from this operation. The company determined that the goodwill and workforce acquired had no remaining value and as a result, recorded an impairment charge of $204,000. The Company has retained the acquired customer relationship management software for integration into its inUnison(TM) portal. SOFTWARE DEVELOPMENT COSTS The Company has adopted SOP 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" as it intends to offer its software applications in a hosted service model. Software development costs, including costs incurred to purchase third party software, are capitalized beginning when the Company has determined factors are present, including among others, that technology exists to achieve the performance requirements, buy versus internal development decisions have been made and the Company's management has authorized the funding for the project. Capitalization of software costs ceases when the software is substantially complete and is ready for its intended use and is amortized over its estimated useful life of three to seven years using the straight-line method. To the extent that the Company were to license software, any revenues net of any direct incremental costs such as marketing, commissions, software reproduction costs, warranty, and service obligations, would be applied against the capitalized cost of software, and no profit would be recognized from such transactions unless and until net proceeds from licenses and amortization have reduced the capitalized carrying amount of the software to zero. Subsequent proceeds from licensing the software would be recognized as revenue. When events or circumstances indicate the carrying value of internal use software might not be recoverable, the Company will assess the recoverability of these assets by determining whether the amortization of the asset balance over its remaining life can be recovered through undiscounted future operating cash flows. The amount of impairment, if any, is recognized to the extent that the carrying value exceeds the projected discounted future operating cash flows and is recognized as a write down of the asset. In addition, when it is no longer probable that computer software being developed will be placed in service, the asset will be recorded at the lower of its carrying value or fair valueless direct selling costs, if any. 14 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) REVENUE RECOGNITION The Company derives its revenue from APPIANT NA and Infotel. Generally, revenue derived from APPIANT NA relates to the distribution and integration of voice processing and multimedia messaging equipment manufactured by others and maintenance services. Also, in 2002, APPIANT NA began recognizing revenue form its inUnison portal service. The Company recognizes revenue on a monthly basis for subscription services. The revenue derived from Infotel primarily relates to the distribution and integration of telecommunications and other electronic products and providing services primarily for radar system integration, turnkey project management and test instrumentation. Equipment sales and related integration services revenue is recognized upon acceptance and delivery if a signed contract exists, the fee is fixed or determinable, and collection of the resulting receivable is reasonably assured. Equipment at customer sites and related costs of integration are included in "Equipment at customers under integration" in the accompanying Consolidated Balance Sheet. Revenue from maintenance services related to ongoing customer support is recognized ratably over the period of the maintenance contact. Maintenance service fees are generally received in advance and are non-refundable. Service revenue is recognized as the related services are performed. Revenues from projects undertaken for customers under fixed price contracts are recognized under the percentage-of-completion method of accounting for which the estimated revenue is based on the ratio of cost incurred to costs incurred plus estimated costs to complete. When the Company's current estimates of total contract revenue and cost indicate a loss, the Company records a provision for estimated loss on the contract. Deferred revenue includes advance payments received for maintenance services for ongoing customer support, other prepaid services and revenues received or due under the terms of the contracts for which customer acceptance had not been received. INCOME TAXES Deferred tax assets and liabilities are determined based on differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the country and the period in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. STOCK-BASED COMPENSATION The Company uses the intrinsic value method to record stock-based compensation for employees provided the stock option terms meet the requirements for fixed accounting. The intrinsic value method requires that deferred stock compensation be recorded for the difference between the exercise price and the fair value of the underlying common stock on the grant date of the stock option. Pro forma net loss disclosures are presented in Note 11, assuming all employee options were valued using the Black-Scholes model and the resulting stock-based compensation is amortized over the term of the option as it becomes exercisable, using the straight-line method. Stock-based compensation to non-employees is based on the fair value of the option estimated using the Black-Scholes model on the date of grant and re-measured until vested. Compensation expense resulting from non-employee options is amortized to expense using an accelerated method described in Financial Accounting Standards Board ("FASB") Interpretation No. 28. 15 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company has granted warrants to purchase its common stock to non-employees and certain companies for services or software. Stock-based compensation is estimated using the Black-Scholes model on the date of grant if vested and if not vested, re-measured until vested. NET LOSS PER SHARE Basic net loss per share is computed based on the weighted average number of shares outstanding during the period. Diluted net loss per share is also computed based on the weighted average number of shares outstanding during the period. Diluted net loss per share does not include the weighted average effect of dilutive potential common shares including convertible preferred stock and debt, options and warrants to purchase common stock and common stock subject to repurchase in any period presented because the effect is anti-dilutive. The following table presents information necessary to reconcile basic and diluted net loss per common and common equivalent share:

~~CONSOLIDATED~~FISCAL ~~STATEMENTS~~YEARS ~~OF STOCKHOLDERS' EQUITY Additional Unearned Accumulated Common Stock Paid in Stock~~-~~based Accumulate Comprehensive Shares Amount Capital Compensation Deficit Loss Total~~ ------------------------------------------ 2002 2001 2000 ------------- ------------- -------------~~-----------------------------------------------~~ ~~Balance~~Net atloss ~~September 30, 1999 8,219,700~~ $ ~~82,000 $24,473,000 -~~ (~~$17~~14,~~965~~342,000) ($~~209~~(24,649,000) $6(12,~~381~~844,000) ~~Conversion~~Preferred ~~of preferred~~ stock ~~into~~dividends ~~common~~- ~~stock 1~~(7,~~056~~626,~~400 11,~~000) ~~844~~(22,000) - - - ~~855,000 Issuance of common stock related to: Dividends on preferred stock paid in common stock 23,700~~ - ~~22,000~~ - - - ~~22,000 Exercise of stock options and warrants 1,580,500 15,000 2,381,000~~ - - - ~~2,396,000 Conversion of convertible debentures into common stock 685,400 7,000 5,890,000~~ - - - ~~5,897,000 Repurchase of common stock (216,500) (2,000) (789,000)~~ - - - ~~(791,000) Stock based compensation for the issuance of warrants to: Consultants for services~~ - - ~~2,050,000~~ - - - ~~2,050,000 Employees~~ - - ~~2,036,000~~ - - - ~~2,036,000 Other third parties~~ - - ~~2,827,000~~ - - --------- ~~2,827,000~~Net ~~Common~~loss ~~stock~~attributable ~~and~~to ~~warrants~~common ~~issued~~stockholders ~~in acquisitions Trimark~~$(14, ~~Inc. 750~~342,000) 7$(32,275,000) 3$(12,~~453~~866,000) -============= -============= -============= ~~3,460,000~~Weighted ~~SVG~~average ~~Software~~shares ~~Services,~~used ~~Inc.~~in ~~250,000~~net ~~3,000~~loss ~~2,175,000~~per -share -calculation ~~- 2~~16,~~178~~295,~~000~~947 ~~Unearned stock-based Compensation - - 2~~14,~~073~~687,~~000~~363 (210,~~073~~302,~~000)~~900 -============= ~~Amortization~~============= of============= ~~stock~~Anti-~~based~~dilutive ~~compensation~~securities: -Convertible -preferred -stock 61253,000 ~~- - 61~~253,000 ~~Deemed~~- ~~interest~~Options ~~expense~~and ~~related~~warrants to ~~convertible~~purchase ~~debentures~~common atstock a10,352,823 ~~discount - - 1~~7,~~595~~418,000 ~~- - - 1~~4,~~595~~888,~~000~~500 ~~Stock~~Additional ~~based~~shares ~~compensation~~issuable ~~related~~as toconsideration ~~benefit~~in ~~associated~~connection with ~~accelerated~~acquisitions ~~vesting~~410,043 ~~of options - - 231~~250,000 ~~- - - 231~~250,000 ~~Net~~Convertible ~~loss~~promissory -notes -payable ~~- - (12~~18,~~844~~977,~~000)~~647 ~~- (12~~1,~~844~~605,000) ~~Cumulative translation loss~~ - - - - - ~~(147,000) (147,000)~~ --------- ------------- -------------~~-----------------~~ Anti-~~---------------------------------------------------------------------------~~dilutive ~~Balance~~securities atnot ~~September~~included ~~30,~~in ~~2000~~net ~~12,349,200~~loss ~~$123,000~~per ~~$49,261,000~~share (calculation $2 29,~~012~~927,~~000)~~513 ($30 9,~~809~~526,000) ($~~356,000)~~ ~~$16~~5,~~207~~138,~~000~~500 ~~---------------------------------------------------------------------------------------------------------------------------------~~============= ============= =============

RESTATEMENT OF FINANCIAL STATEMENTS These financial statements have been restated to reflect the correction of various errors for the year ended September 30, 2001. Under the terms of several convertible debentures issued on May 31, 2001 (see Note 6), the number of shares that could be required to be delivered upon conversion is essentially indeterminatable. As a result, in accordance with the guidelines of EITF 00-19, all warrants outstanding at that date that had initially been classified as equity, should have been reassessed and reclassified as Warrant Liabilities. Furthermore, the classification of the warrants as liabilities requires variable accounting, with remeasurement of the fair value of the warrants at each balance sheet date, with any adjustments reflected in earnings. The restatement reflects this reclassification of warrants out of permanent equity and into liabilities, with the change in fair value of the warrants presented in results of operations. Additionally, Accounts Receivable and Accounts Payable have been restated to reflect the offset of amounts prepaid to vendors incorrectly posted as debit balances in Accounts Payable. 16 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The effect of the accounting change on income as previously reported for 2001, and to the balance sheet accounts at September 30, 2001, including Stockholders' equity, is:

~~CONSOLIDATED~~As ~~STATEMENTS~~Previously OFReported ~~STOCKHOLDERS'~~As ~~EQUITY~~Restated --------------~~-------------------------------------------------------------------------------------------------------------~~ ~~Additional Accumulated Common Stock Paid in Stock~~-~~based Accumulated Comprehensive Shares Amount Capital Compensation Deficit Loss Total~~ ------------~~---------------------------------------------------------------------------------------------------------------~~ ~~Balance at~~ September 30, ~~2000~~2001: ~~12,349,200~~Net ~~$123,000~~loss ~~$49,261,000~~ ($229,~~012~~929,000) ($3026,~~809~~497,000) ~~($356,000)~~Net ~~$16,207,000~~loss ~~Issuance~~available ~~of warrants in in conjunction with Series B preferred stock - - 1,107,000 - - - 1,107,000 Beneficial conversion feature related~~ to ~~issuance~~Common ofStockholders ~~convertible promissory notes payable - - 2~~($37,~~548~~555,000) ~~- - - 2,548,000 Dividend related to beneficial conversion feature of preferred stock - - 7,626,000 -~~ (7$34,~~626~~105,000) -Basic -and ~~Conversion~~diluted ofnet ~~Series~~loss Bper ~~Preferred Stock to~~ Common ~~Stock~~share ~~831,000~~($2.56) ~~8,000 4,670,000 - - - 4,678,000 Issuance of common stock related to: Exercise of stock options 219,000~~ ($2~~,000~~.32) ~~319,000~~Comprehensive -loss ~~- - 321~~($30,~~000 Exercise of warrants 602~~035,000) 5(26,~~000 1~~585,~~492,~~000 ~~- - - 1,497,000 Equity Line Agreement 332,000 3,000 (3,000~~) -Additional -Paid ~~- - Stock based compensation for issuance of warrants to: consultants for services - - 436,000 - - - 436,000 Warrants issued~~ in ~~conjunction~~Capital ~~with convertible promissory notes payable - - 4~~80,~~883~~657,000 ~~- - - 4~~75,~~883~~810,000 ~~Common~~Accumulated ~~stock~~Deficit ~~issued for: Services 25~~(68,~~000 - - - - - - Quaartz acquisition 1~~364,~~500,~~000) 15(64,~~000 8~~932,~~295,~~000) -Total -Stockholders' -Equity 811,~~310~~587,000 ~~Convertible notes financing 100~~10,~~000 1~~174,000 ~~545,000~~Accounts -Receivable - - 546,000 Preferred stock consultants 25,000 - 568,000 - - - 568,000 Stock options granted in Quaartz acquisition - - 430,000 - - - 430,000 Reversal of unearned stock-based compensation related to employee terminations - - (1,~~520~~123,000) 1,~~520~~200,000 -Prepaids ~~- - Amortization of stock-based compensation - - - 91~~418,000 ~~- - 91~~856,000 ~~Net~~Accounts ~~loss~~Payable ~~- - - (29~~8,~~929~~834,000) ~~- (29~~9,~~929~~344,000) ~~Cumulative~~Debentures ~~translation loss - - - - - (106~~2,~~000) (106~~700,000) ~~--------------------------------------------------------------------------------------------------------------------------- Balance at September 30~~1, ~~2001 15~~496,~~983,200 $ 157,~~000 ~~$80,657,000~~Warrant $Liability ~~(401~~1,~~000) $(68~~818,~~364,~~000) ~~$(462~~4,~~000) $11~~430,~~587,~~000 ~~---------------------------------------------------------------------------------------------------------------------------~~

RECLASSIFICATION Certain amounts in prior years consolidated financial statements have been reclassified to conform to the current year presentation. COMPREHENSIVE LOSS Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive loss includes cumulative translation adjustments, the impact of which has been excluded from net loss and reflected in equity. The company has reported the components of comprehensive loss on its consolidated statement of stockholders' equity. RECENT ACCOUNTING PRONOUNCEMENTS In September 2001, the Emerging Issues Task Force "EITF" issued EITF Issue 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock". The Task Force discussed the accounting for freestanding contracts that are indexed to, and potentially settled in, a company's own stock (including options and warrants) and reached several consensuses. The consensuses are to be applied to all freestanding derivative financial instruments that are indexed to, and potentially settled in, a company's own stock. The Company adopted the EITF in fiscal year 2001 and recorded warrants with the June 8, 2001 Convertible Notes Payable as a liability (see Note 6). 17 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company believes that the adoption of SFAS 141 will not have a significant impact on its financial statements. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles." SFAS No. 142 addresses the initial recognition, measurement and amortization of intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination) and addresses the amortization provisions for excess cost over fair value of net assets acquired or intangibles acquired in a business combination. The statement is effective for fiscal years beginning after December 15, 2001, and is effective July 1, 2001 for any intangibles acquired in a business combination initiated after June 30, 2001. The Company is evaluating the accounting effect arising from the recently issued SFAS No. 142, "Goodwill and Other Intangibles" on the Company's financial position or results of operations, other than the cessation of the Goodwill amortization expense, which totaled approximately $4,386,000 for the year ended September 30, 2002. In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires companies to record the fair value of a liability for asset retirement obligations in the period in which they are incurred. The statement applies to a company's legal obligations associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, and development or through the normal operation of a long-lived asset. When a liability is initially recorded, the company would capitalize the cost, thereby increasing the carrying amount of the related asset. The capitalized asset retirement cost is depreciated over the life of the respective asset while the liability is accreted to its present value. Upon settlement of the liability, the obligation is settled at its recorded amount or the company incurs a gain or loss. The statement is effective for fiscal years beginning after June 30, 2002. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Statement 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets. The statement provides a single accounting model for long-lived assets to be disposed of. New criteria must be met to classify the asset as an asset held-for-sale. This statement also focuses on reporting the effects of a disposal of a segment of a business. This statement is effective for fiscal years beginning after December 15, 2001. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations. In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers". This Statement amends FASB Statement No. 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations. 18 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations. In October 2002, the FASB issued Statement No. 147, "Acquisitions of Certain Financial Institutions-an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9", which removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. In addition, this Statement amends SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. The requirements relating to acquisitions of financial institutions is effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions related to accounting for the impairment or disposal of certain long-term customer-relationship intangible assets are effective on October 1, 2002. The adoption of this Statement did not have a material impact to the Company's financial position or results of operations as the Company has not engaged in either of these activities. In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure", which amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of Statement 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The adoption of this statement did not have a material impact on the Company's financial position or results of operations as the Company has not elected to change to the fair value based method of accounting for stock-based employee compensation. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." Interpretation 46 changes the criteria by which one company includes another entity in its consolidated financial statements. Previously, the criteria were based on control through voting interest. Interpretation 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. A company that consolidates a variable interest entity is called the primary beneficiary of that entity. The consolidation requirements of Interpretation 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations. 19 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. BUSINESS AND ASSET ACQUISITIONS AND DISPOSITIONS EASTERN SYSTEMS TECHNOLOGY, INC. On August 31, 1999, the Company acquired software from Eastern, a software development company, in exchange for 675,000 shares of the Company's Common Stock with an estimated value of $1,029,000, calculated based on the average of the share price two days before and after the date of announcement of the acquisition on August 31, 1999, which was restricted stock for the period of one year, cash of $150,000 and extinguishment of a debt of $250,000 loaned to Eastern, resulting in a total purchase price of $1,429,000 for the software. The software was acquired for internal use for the Company's inUnison(TM) portal service applications and was capitalized. Amortization of the software will commence when the inUnison(TM) portal is substantially complete and is ready for its intended use. SVG SOFTWARE SERVICES, INC. AND APPIANT TECHNOLOGIES (INDIA) PTE. LTD. On February 4, 2000, the Company completed its acquisition of certain assets of SVG pursuant to the Plan and Agreement of Reorganization between Appiant and SVG. The transaction was structured as a tax-free reorganization. Under terms of the Agreement, The Company acquired all rights to SVG's intellectual property, primarily software, and the right to use its corporate name in exchange for 250,000 shares of the Company's Common Stock valued at $2,178,000, calculated based on the average of the share price two days before and after the announcement date on February 4, 2000. The purchase price was allocated to software and goodwill of $2,129,000 and $49,000, respectively. The software was acquired for internal use for the Company's hosted internet inUnison(TM) portal service applications and was capitalized. Amortization of the software will commence when the hosted internet portal is substantially complete and ready for its intended use. In February 2000, the Company also entered into an agreement with certain parties affiliated with the Company and SVG (their Subsidiary, SVG) to acquire all of the outstanding shares of the common stock of APPIANT India. The acquisition price of $50,000 and assets and liabilities acquired were not material to the Company's financial position or results of operations. The results of operations of APPIANT India have been included with the Company's results of operations since April 4, 2000, the date of acquisition. In fiscal year 2001 the Company sold its Appiant India Subsidiary to a related party. The disposition did not have a significant impact on the Company's financial position or results of operations as the net assets of the India subsidiary were not significant. 20 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TRIMARK, INC. On January 21, 2000, the Company completed its acquisition of all of the outstanding shares of common stock of Trimark, Inc. (d.b.a Triad) in exchange for approximately 750,000 shares of Common Stock of the Company, and warrants to purchase 250,000 shares of the Company's Common Stock at an exercise price of $1.56 per share. The transaction was structured as a tax free reorganization. The purchase agreement provides that in the event that the average closing price of Appiant Common Stock for the five consecutive trading days ending on the trading day immediately prior to the first anniversary and second anniversary of the transaction's closing (the "Valuation Formula") falls below $4.00, the Triad shareholders are entitled to additional consideration either in cash or Appiant Common Stock, at the Company's option. On the first anniversary date, Triad shareholders are entitled to additional consideration equal to one-half of the unregistered shares of the Company's Common Stock that they still own plus all of the registered shares of the Company's Common Stock that they still own, multiplied by the lesser of (i) $4.00 minus the Valuation Formula, or (ii) $2.50. At the second anniversary date, the Triad shareholders are entitled to additional consideration of equal to 250,000 unregistered shares owned by the Triad shareholders multiplied by the lesser of (i) $4.00 minus the Valuation Formula, or (ii) $2.50. As the guaranteed price of $4.00 per share was in excess of the fair value of the Company's common stock two days before and after the announcement of the acquisition on December 10, 1999, the common stock issued was valued at $4.00 per share or $3,000.000. The estimated value of the warrants issued to purchase the Company's common stock of $460,000 was estimated using the Black-Scholes option pricing model using the following assumptions: expected volatility of 90%, weighted-average risk free interest rate of 6%, term of 3 years and no expected dividends. The acquisition has been accounted for as a purchase, which means the purchase price was allocated to the assets acquired and liabilities assumed based on estimated fair values at the date of the acquisition. The results of operations of Triad have been included with the Company's results of operations since January 21, 2000, the date of acquisition. The total purchase price of $3,460,000 was allocated based on established valuation techniques used in the software industry as follows:

~~APPIANT~~Tangible TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW -------------------------------------------------------------------------------------------------------------------- YEARS ENDED SEPTEMBER 30 2001 2000 1999 -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss ($29assets,~~929,000)~~ ~~($12,844,000)~~primarily ~~($717~~cash,~~000)~~ ~~Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Provision for (reduction in) doubtful~~ accounts 622,000 411,000 - Depreciation and amortization 566,000 1,071,000 405,000 Amortization of goodwill and intangibles 1,987,000 676,000 443,000 Amortization of stock based compensation 91,000 61,000 - Provision for excess and obsolete inventory 397,000 - - Interest expense related to issuance of warrants to related party 3,799,000 - - Impairment of equipment and capitalized software 3,913,000 - - Stock-based compensation (1,369,000) 4,317,000 104,000 Amortization of discount on convertible notes payable 2,842,000 1,595,000 - Other - - (41,000) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable ~~2,178,000 1,403,000 (1,146,000) Inventory (737,000) - Inventory~~ and equipment at customers under integration 1,502,000 (664,000) (48,000) Prepaid expenses and other (55,000) (36,000) 131,000 Other assets (365,000) (190,000) 235,000 Income tax payable 201,000 (253,000) Accounts payable and other current liabilities 4,969,000 (799,000) 2,008,000 Deferred Revenue (1,878,000) 1,311,000 - -------------------------------------------------------------------------------------------------------------------- CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (11,467,000) (3,486,000) 1,121,000 -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Restricted cash (1,000) 74,000 179,000 Proceeds from (payments on)note payable to related party - 574,000 (238,000) Proceeds on sale of property and equipment -$ 1711,000 ~~159,000~~Purchased ~~Cash acquired in connection with acquisition 22,000 45,000 - Purchases of~~ software (23,~~292~~325,000) -Assembled ~~82,000~~work ~~Capitalization~~force ~~of software development costs (2,064,000) (618,000) - Purchase of property and equipment (940,000) (1,~~206,000) ~~(340,000)~~Goodwill ~~-------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (5~~250,~~275,~~000) ~~(1,114,000)~~Liabilities ~~(158,000)~~assumed ~~-------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Share repurchase~~ (~~791~~332,000) ~~Repayments under lines of credit (343,000) (197,000) 309,000 Advance payment on future lease obligation~~ - ~~(2,000,000) Proceeds from issuance of note payable to software vendor 3,000,000~~ - ~~Proceeds from issuance of common stock 1,745,000~~ - Proceeds from issuance of convertible notes and warrants 5,032,000 5,397,000 Advanced payments for preferred stock 3,559,000 Proceeds from warrants and options exercised for common stock 1,818,000 2,396,000 Proceeds from issuance of preferred stock, net of issuance costs 4,932,000 - ~~1,472,000 Principal payments on capital lease obligations (1,560,000) (344,000) (93,000) Principal payment on notes payable to stockholders~~ - - ~~(1,990,000)~~ -----~~---------------------------------------------------------------------------------------------------------------~~ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 14,624,000 8,020,000 (302,000) -------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (106,000) (146,000) (9,000) -------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,224,000) 3,274,000 652,000 -------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,603,000 2,329,000 1,677,000 CASH AND CASH EQUIVALENTS, END OF PERIOD $3,~~379~~460,000 ~~$5,603,000 $2,329,000 --------------------------------------------------------------------------------------------------------------------~~===========

QUAARTZ, INC. Effective May 23, 2001, the Company acquired all of the outstanding stock of Quaartz, Inc. ("Quaartz"). The total purchase price was $9.1 million and consisted of the following: a) 1,500,000 shares of Appiant's common stock with an estimated value of $8,310,000, calculated by multiplying the number of shares issued by Appiant by $5.54, which represents the average price of Appiant's common stock for the period two days preceding through two days following Appiant's announcement of the merger, which occurred on February 8, 2001, b) An estimated $342,000 of acquisition expenses, and c) an estimated fair value of $430,000 relating to 92,387 stock options issued by Appiant in relation to the cancellation of all of the stock options held by Quaartz employees. The stock options, which were fully exercisable, were valued using the Black-Scholes option pricing model with the following assumptions: fair market value of Appiant's common stock of $5.54, exercise price of $4.50, estimated life of the options of 4 years, volatility of 147%, dividend rate of 0%, and risk-free interest rate of 4.375%. 21 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The acquisition has been accounted for using the purchase method of accounting and accordingly the purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition date. The results of operations of Quaartz have been included with those of the Company since the date of acquisition, May 23, 2001. The total purchase price of $9.1 million was allocated based on established valuation techniques used in the software industry as follows:

~~SUPPLEMENTAL~~Tangible CASH FLOW INFORMATION: ------------------------------------------------------------------------------------------------------ YEARS ENDED SEPTEMBER 30 2001 2000 1999 ------------------------------------------------------------------------------------------------------ CASH TRANSACTIONS: Income taxes $ 53assets,~~000~~ $primarily ~~6,000~~property ~~$ 315,000 Interest paid 725,000 440,000 414,000 NON-CASH TRANSACTIONS: Issuance of Common Stock~~ and ~~options~~equipment in$ ~~acquisitions 8~~393,~~740,~~000 ~~5,638,000~~Workforce 1,~~029~~223,000 ~~Renegotiation~~Technology ~~of lease terms resulting in return of equipment 1~~2,~~504~~790,000 -Liabilities -assumed: ~~Deemed~~Fair ~~dividends~~value ~~related to beneficial conversion feature~~ of ~~Preferred Stock 7,626,000 - 708,000 Beneficial conversion feature on promissory~~ notes payable ~~2,548,000~~to -related -party ~~Cancellation~~(principle ofamount ~~software lease 7~~$3,~~193,~~000 ~~- - Estimated value of warrants issued to customer 449~~,000) ~~- - Estimated value of warrants issued to underwriters~~ (2,~~226~~729,000) -Other -liabilities ~~Conversion of Preferred Stock into Common Stock 4,678,000 855,000 726,200 Property and equipment acquired under capital lease 5,092,000~~ (1,~~481~~271,000) ~~125,200~~Goodwill ~~Conversion of convertible debentures to common stock - 5~~8,~~897~~675,000 - ~~Dividends on preferred stock paid in common stock~~ - ~~22,000 16,000 Unearned stock~~-~~based compensation~~ - ~~2,073,000~~ - ~~Conversion of advanced payment to preferred stock 3,559,000~~ - - ~~Issuance of Common Stock for conversion of Stockholder debt~~ - - ~~117,000 Conversion of Infotel debt to common stock~~ - -- ~~635~~$ 9,081,000 ============

The following unaudited pro forma financial information for fiscal year 2000 assumes the Triad acquisition occurred as of the beginning of fiscal 2000 and the Quaartz acquisition occurred as of the beginning of each of the respective periods, after giving effect to certain adjustments, including amortization of intangible assets. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations that may occur in the future or that would have occurred had the acquisition of Quaartz and Triad been affected on the dates indicated.

~~FISCAL~~Year ~~YEARS~~Ended ~~-----------------------------------------~~Year Ended September 30, September 30, 2001 2000 ~~1999~~ ------------- -- ----------- ----~~-------~~ Net ~~loss~~Revenues $~~(29~~ 25,~~929~~127,000) $~~(12~~ 27,~~844~~485,000) ~~(717,700)~~Net ~~Preferred~~loss ~~stock dividends~~ (755,~~626~~732,000) (2228,~~000) (738~~649,000) ------------- -- ----------- ----~~-------~~ Net loss ~~attributable~~per to common ~~stockholders~~share $ (~~37,555,000~~3.72) $~~(12,866,000)~~ (~~1,455,000~~2.43) ============= == =========== ====~~=======~~ Weighted average ~~shares~~common ~~used in net loss per 14,687,363 10,302,900 6,249,000 ============= ============= =========== Anti-dilutive securities: Convertible preferred stock 253,000 - 846,000 Options~~ and ~~warrants to purchase~~ common ~~stock~~equivalent ~~7,418,000 4,888,500 3,123,600 Additional~~ shares ~~issuable~~outstanding ~~as consideration in connection with acquisitions 250~~14,~~000 250~~980,000 ~~177~~11,~~200 Convertible promissory note payable 1~~803,~~605,~~000 ~~- - ------------- ------------- ----------- Anti-dilutive securities not included in Net loss per share calculation 9,526,000 5,138,500 4,146,800~~ ============= == =========== ====~~=======~~

22 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Sales Agreements On August 9, 2002, Appiant and the primary reseller of Appiant's inUnison(SM) unified communication system, InPhonic, Inc., entered into a series of agreements. In the first part of the agreements, InPhonic agreed to purchase certain Appiant assets, including the Company's data processing center, and lease them back to Appiant. The three-year equipment lease agreement provides for sub-market rate payments for the first six months. Lease payments subsequently increase to market rate for the following 30 months. In the second part of the agreements, InPhonic was to purchase a broader license for Appiant's inUnison(SM) product for $900,000. In the third and final part of the agreements, Appiant and InPhonic agreed that InPhonic would make minimum monthly payments to Appiant based on an assumed minimum of 10,000 paying subscribers. As additional consideration related to these agreements, the Company granted InPhonic additional warrants to purchase a number of common shares of Appiant stock equal to 19.9% of all outstanding shares. Subsequent to year end, on December 6, 2002, the second and third agreements described above were amended to an advance payment of $300,000 for services to be rendered by Appiant. Any excess of the advance over actual services delivered will be offset as payment for any service fees incurred after March 1, 2003. Additionally, InPhonic agreed to purchase from Appiant a communications server and associated equipment, for $300,000, which Appiant will lease back from InPhonic. Lastly, the amendment cancelled the warrants granted to purchase a number of common shares of the Company's stock equal to 19.9% of all outstanding, and replaced them with a grant for warrants to purchase 800,000 shares of the Company's common stock at an exercise price of $0.25. 4. BALANCE SHEET ACCOUNTS PROPERTY AND EQUIPMENT, NET

~~Year~~SEPTEMBER ~~Ended Year Ended September~~ 30, ~~September 30, 2001 2000~~ ------------------------- USEFUL LIVES IN YEARS 2002 2001 ------------ ----------- ~~Net~~Office ~~Revenues~~equipment 3 to 5 $ 251,~~127~~387,000 $ 27680,~~485,~~000 ~~Net~~Computers ~~loss~~and ~~(55~~software 3 to 5 3,~~732~~977,000) ~~(28~~6,~~649~~422,000) ~~Net~~Automobiles ~~loss~~3 ~~per~~to ~~common~~5 ~~share~~129,000 $100,000 (Furniture and fixtures 3~~.72)~~ $to ~~(2.43)~~7 ~~Weighted~~840,000 ~~average~~432,000 ~~common~~Leasehold Improvements 7 497,000 483,000 ------------ ----------- 6,830,000 8,117,000 Less accumulated depreciation and ~~common~~amortization ~~equivalent~~(3,971,000) ~~shares~~(2,736,000) ~~Outstanding~~------------ 14----------- $ 2,~~980~~859,000 11$5,~~803~~381,000 ============ ===========

Depreciation and amortization expense was $1,942,000, $2,637,000 and $650,000 for fiscal years 2002, 2001 and 2000, respectively. 23 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CAPITALIZED SOFTWARE, GOODWILL AND OTHER INTANGIBLE ASSETS

SEPTEMBER 30, ----------------------------- ~~USEFUL~~2002 ~~LIVES YEARS~~ 2001 ~~2000~~ --------------- ------------ Capitalized software: Purchased for internal use $ 13,277,000 $12,857,000 Developed for internal use 5,397,000 3,807,000 --------------- ------------ ~~Office equipment 3 to 5 $ 680~~18,674,000 ~~$ 1~~16,~~856~~664,000 ~~Computers~~Less ~~and~~accumulated ~~software~~amortization ~~3 to 5 6,422,000~~ 2,~~677~~604,000 ~~Automobiles~~- 3--------------- to------------ 5$ ~~100~~16,070,000 ~~296~~$16,664,000 ~~Furniture~~=============== ~~and~~============ ~~fixtures~~Goodwill 3$ ~~to 7 432~~12,303,000 ~~756~~$12,303,000 ~~Leasehold~~Other ~~Improvements~~intangible 7assets ~~483~~1,223,000 1,223,000 --------------- ------------ 813,~~117~~526,000 513,~~585~~526,000 Less accumulated ~~depreciation~~amortization (27,~~736~~657,000) (23,~~190~~271,000) --------------- ------------ $ 5,~~381~~869,000 $ 310,~~395~~255,000 =============== ============

During fiscal years 2002, 2001 and 2000, the Company capitalized approximately $ 1,590,000, $1,690,000 and 618,000 of internally developed software, respectively. During fiscal 2002 and 2001 the Company capitalized $645,000 and $3,802,000 of purchased software, of which, $2,790,000 was acquired with the acquisition of Quaartz. Also during 2001, the Company reduced purchased software by $7,200,000 for the cancellation of a capital lease. During fiscal year 2000 the Company capitalized 16,237,000 of purchased software. In December 2001, the Company began amortizing approximately $10.4 million of capitalized software costs, as project was substantially completed and ready for its intended use. Amortization expense for the period from the date placed in service to September 31, 2002 was approximately $2.6 million. Amortization expense related to goodwill and other intangibles was $4,386,000, $2,086,000 and 676,000 for fiscal years 2002, 2001 and 2000, respectively.

OTHER ASSETS SEPTEMBER 30, ---------------------- 2002 2001 ~~2000~~ ---------- ---------- Deferred finance charges for equity line $ ~~399,000~~- $2 399,~~144,~~000 Convertible promissory notes payable issuance costs - 462,000 - Prepaid license - 948,000 Security deposits 160,000 - Other - 124,000 ~~240,000~~ ---------- ---------- $1160,~~933,~~000 $21,~~384~~933,000 ========== ==========

24 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ACCRUED LIABILITIES SEPTEMBER 30, ---------------------- 2002 2001 ~~2000~~ ---------- ---------- Accrued payroll $1,~~145~~146,000 $1,~~325~~145,000 Accrued expenses ~~951~~335,000 ~~790~~954,000 Accrued interest 1,815,000 496,000 - Other - 617,000 ~~363,000~~ ---------- ---------- $3,~~209~~296,000 $23,~~478~~212,000 ========== ==========

5. LINE OF CREDIT AGREEMENTS The line of credit provides for unsecured borrowings of up to $300,000, and was due on June 30, 2001 and bears interest at a rate equal to the Wall Street Journal prime rate (4.75% at September 30, 2002). Under this line of credit, the Company is not required to maintain any financial covenants. As at September 30, 2002, $300,000 was outstanding under the line of credit, all of which was past due. The Company's subsidiary Infotel has two different short-term banking facilities and a long term foreign exchange line. The short-term banking facilities include an overdraft facility and a letter of credit facility with maximum limits of $118,000 and $765,000 respectively. The long term foreign exchange line (valid for 3 years) has a maximum draw limit of $588,000. As of September 30, 2002, Infotel had no amounts outstanding under any these facilities. The facilities are guaranteed by the company. 6. CONVERTIBLE PROMISSORY NOTES PAYABLE A summary of convertible promissory notes payable is as follows:

~~Weighted~~September ~~Average~~30, ~~Option~~September ~~Price~~30, ~~Per~~2002 ~~Outstanding~~2001 ~~Share~~ --------------- ---------------~~--------------~~ ~~-------------~~Notes ~~December~~Payable: ~~31,~~Face ~~1997~~amount $ ~~3.16 1~~11,~~133~~803,~~400 ----------------------------------------------------------- Granted 2.05 258,~~000 ~~Canceled 2.69 (186,900) ----------------------------------------------------------- SEPTEMBER 30, 1998~~ $ ~~3.00 1~~5,~~204~~100,~~500~~000 ~~Granted~~Discount ~~1.33 1,402,700 Canceled 2.91~~ (~~1,151,400) ----------------------------------------------------------- SEPTEMBER 30, 1999 $ 1.51 1,455,800 Granted 9.14~~ 2,~~265~~870,000 ~~Exercised 1.40 (390,500~~) ~~Canceled 1.89~~ (~~201~~3,~~900~~225,000) --------------- ---------------~~-----------------------------~~ ~~SEPTEMBER 30~~8, ~~2000 $ 7.03 3~~933,~~128,300~~000 ~~Granted 6.91 2,323,700 Exercised~~ 1~~.47 218~~,~~900 Canceled 9.74 2~~875,~~044,100~~000 ~~SEPTEMBER~~less ~~30,~~current ~~2001~~portion ~~5.58~~- 3(1,~~189~~496,000) --------------- ---------------~~-----------------------------~~ ~~OPTIONS EXERCISABLE AT: September 30, 2001~~ $ ~~6.18 856~~8,~~240 September 30~~933,000 ~~2000~~ $ ~~1.86 256~~379,~~600 September 30, 1999 $ 2.02 149,~~000 ~~-----------------------------------------------------------~~=============== ===============

May 19, 2000 convertible Notes Payable On May 19, 2000, the Company entered into a convertible debentures purchase agreement with certain investors in the aggregate principal amount of $5,850,000 (the "May 19, 2000 Debentures"). The May 19, 2000 Debentures accrued interest at 8% per annum from the date such convertible debentures were issued until the earlier of conversion into shares of our common stock or May 30, 2001, and was payable quarterly in arrears. The May 19, 2000 Debentures were convertible by the holder into shares of our common stock at any time prior to the close of business on May 30, 2001. The conversion price, as amended, is equal to the lesser of $13.00 per share or 91% of the average of the three lowest bid prices during the ten trading days immediately preceding the date on which the holder of the debenture gives us notice of the intent to convert the debenture, provided that the conversion price shall not be less than $8.00 per share. This beneficial conversion feature resulted in a non-cash deemed interest charge of $1,595,000 during the fiscal year 2000. In August 2000, all convertible debentures were converted into 685,400 shares of the Company's Common Stock. 25 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) March 21, 2001 Convertible Notes Payable On March 21, 2001, the Company entered into Convertible Promissory Notes Payable with a member of the Board of Directors and a shareholder in the principal amount of $2,500,000 (the "$2,500,000 Note"). The $2,500,000 Note accrues interest at 10% per annum and became fully due and payable on May 31, 2001 (the "Maturity Date"). Upon approval by the Company's shareholders, the principal and accrued interest under the $2,500,000 Note converts into shares of the Company's common stock at any time on or after the Maturity Date. The conversion price is equal to 80% of the average of the five days lowest closing market price of the Company's common stock during the period beginning on March 16, 2001 and ending on the Maturity Date. If the principal and accrued interest on the $2,500,000 Note is not paid in full or converted into Common Stock for any reason other than awaiting shareholder approval, and otherwise in accordance with the terms on or before the Maturity Date, then the conversion price shall be reduced 20% for each full week that this note is not paid or converted, provided that the conversion price shall not in any event be reduced to less than $1.00. If the shareholders fail to approve the issuance of equity, the related party may receive cash in the amount of $250,000 in addition to the repayment of the principal and unpaid accrued interest at 25% per annum. The $2,500,000 Note was past due and was not converted to common stock as of May 31, 2001 as the Company's shareholders had not approved it. Instead the Company entered into an Amendment To Convertible Promissory Note, extending the term of the note until May 31, 2002, and specifying the conversion price at $1.00. The modified debt instrument is considered substantially different under EITF 96-19 and is accounted for in the same manner as a debt extinguishment. The Amended Convertible Promissory Note in the principal amount of $ 2,500,000 is recorded at fair value. As a result a beneficial conversion feature of $1,800,000 was recorded as additional paid in capital, and as a discount. The discount was accreted over its maturity period as non-cash interest expense in the fiscal year 2001 and 2002. In conjunction with the $2,500,000 Note dated March 21, 2001, the Company issued warrants to purchase 462,963 shares of its common stock at an exercise price of $2.70 per share with a term of 7 years (see Note 11). The estimated value of the warrants was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of seven years, a risk free interest rate of 4.87% , a dividend yield of 0% and volatility of 141%. The allocation of note proceeds to the warrant was recorded as additional paid-in capital (and subsequently transferred to warrant liability) and a discount on the $2,500,000 Note and accreted over the note maturity period as non-cash interest expense in the fiscal year 2001. In addition, as a result of the beneficial conversion feature described above for the $2,500,000 Note, the Company recorded $1,327,000 as additional paid in capital, which was recorded as a discount on $2,500,000 Notes and was accreted over its maturity period as non-cash interest expense in the fiscal year 2001. In addition to the Amendment To Convertible Promissory Note on May 31, 2001, the Company issued 1,018,518 additional warrants to the same related party to purchase shares of the Company's common stock at an exercise price of $2.70 per share due to the failure of the Company's completion of an equity investment of at least $6 million on or before May 31, 2001 (See Note 10). The estimated value of the warrants of $1,800,000 was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of 7 years, a risk free interest rate of 4.822%, a dividend yield of 0% and volatility of 141%. The $1,800,000 was recorded as non-cash interest expense in fiscal year 2001. May 31, 2001 Convertible Notes Payable On May 31, 2001, the Company entered into Convertible Promissory Notes Payable with two related parties, the Company's Chief Executive Officer and the Vice President of Sales, in the principal amount of $100,000 each (the "$200,000 Notes"). The $200,000 Notes accrue interest at 14% per annum and became fully due and payable on June 21, 2001 ("maturity date"). The $200,000 Notes were also convertible on the maturity date into shares of the Company's common stock at 90% of the conversion price applicable to any security received in any interim financing subsequent to the date of the notes. If no interim financing was obtained on or before the maturity date, the $200,000 Notes were convertible into shares of the Company's common stock at 90% of the closing price on the trading day immediately preceding the issuance date. 26 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In addition, the Company issued warrants to the same related parties to purchase 40,000 shares of the Company's common stock at an exercise price of $1.57 per share. The estimated value of the warrants of $144,000 was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate of 4.625%, a dividend yield of 0% and volatility of 147%. The allocation of the $200,000 Note proceeds to the fair value of the warrants was recorded as a discount on the $200,000 Notes and accreted over the note maturity period as interest expense in fiscal year 2001. In addition, as a result of the beneficial conversion feature described above for the $200,000 Notes, the Company recorded additional paid-in capital of $67,000, which was recorded as a discount on the notes payable and accreted over the maturity period as interest expense in fiscal year 2001. The Chief Executive Officer's note was repaid in full on June 21, 2001. The Vice President of Sales' note has not been converted into common stock and remains outstanding at September 30, 2002. On May 31, 2001, the Company also entered into Convertible Promissory Notes Payable with the same terms as the $200,000 Notes, with a shareholder in the principal amount of $150,000 and a non-related party in the principal amount of $250,000 (the "$400,000 Notes"). In addition, the Company issued warrants to purchase 80,000 shares of the Company's common stock at an exercise price of $1.57 per share. The estimated value of the warrants of $88,000 was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, risk free interest rate of 4.625%, a dividend yield of 0% and volatility of 147%. The allocation of the $400,000 Note proceeds to the fair value of the warrants was recorded as additional paid in capital and a discount on the notes payable and fully accreted as interest expense in the fiscal year 2001. In addition, as a result of the beneficial conversion feature described above, the Company recorded additional paid-in capital and a discount of $133,000 on the $400,000 Notes, which was accreted to the note extinguishment date and as a result $51,000 was recorded as non-cash interest expense for fiscal year 2001. On the extinguishment date, the Company calculated the intrinsic value of the beneficial conversion feature of $44,000, reversed the beneficial conversion charge previously recorded and recorded additional non-cash interest expense. June 8, 2001 Convertible Notes Payable On June 8, 2001, the Company entered into a Convertible Notes purchase agreement with certain investors in the aggregate principal amount of $2,400,000 (the "June 8, 2001 Notes"). The June 8, 2001 Notes accrue interest at 8% per annum, payable in common stock at the time of conversion are collateralized by the assets of Infotel, and matures on June 8, 2003. The conversion price is equal to the lower of 110% of the average of any three closing bid prices selected by the investor during the 15 trading days prior to issuance or $2.44. In connection with the June 8, 2001 Notes, the Company issued warrants to purchase 1,065,152 shares of the Company's common stock at an exercise price of $2.89 per share. The allocated estimated value of the warrants of $ 1,116,000 was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate of 4.812%, a dividend yield of 0% and volatility of 142%. The allocation of the June 8, 2001 Notes proceeds to the fair value of the warrants was recorded as a discount on the June 8, 2001 Notes and as a warrant liability. The discount on the June 8, 2001 Notes is accreted over the note maturity period. In addition, as a result of the beneficial conversion feature described above for the June 8, 2001 Notes, the Company recorded $1,283,000 additional paid-in capital, and a discount on the notes payable which is accreted over the note maturity period to interest expense. 27 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company committed to issue warrants to purchase 293,750 shares of the Company's common stock to its strategic partner for services rendered in connection with the June 8, 2001 Notes at an exercise price of $1.60 per share. The estimated value of the warrants of $546,000 was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate of 4.63%, a dividend yield of 0% and volatility of 147%. The estimated value of $546,000 was accounted for as a convertible debentures issuance cost and recorded as a deferred charge in fiscal year 2001. In September 2001, the Company issued 100,000 shares of common stock instead of warrants. The fair value of common stock approximated the fair value of warrants. The issuance cost is amortized over the note maturity. As of September 30, 2002 and September 30, 2001 the total unamortized discount on the June 8, 2001 Convertible Notes Payable was $1,575,000 and 2,028,000, respectively. Between October 31, 2001 and December 20, 2001, the Company entered into several Convertible Promissory Notes Payable (the "Convertible Notes") with certain investors in the aggregate principal amount of $ 1,590,000, of which $400,000 was with members of the board of directors or shareholders. The Notes accrue interest at 8% per annum, which is payable in common stock at the time of conversion and are collateralized by the Company's legacy business accounts receivables, and the assets of the Infotel subsidiary, and mature on various dates from December 27, 2001 to November 16, 2003. The conversion price is equal to the lower of 90% of the closing price of the Company's common stock on the trading day immediately preceding the maturity date, or 90% of any subsequent interim financing that occurs between the issuance date of the notes and the maturity date. Upon conversion, the Convertible Notes have no specific registration rights. In connection with these Convertible Notes, the Company issued warrants to purchase 1,096,000 shares of the Company's common stock at an exercise price of ranging from $1.20 per share to $1.77 per share. The estimated value of the warrants of $1,461,000 was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate ranging from 3.59% to 4.40%, a dividend yield of 0% and volatility of ranging from 141% to 148%, depending on the respective issuance dates of the warrants . The allocation of the Convertible Notes proceeds to the fair value of the warrants was recorded as a discount on the Convertible Notes and as warrant liability . Upon exercise of the warrants, the holder has no specific registration rights. In addition, as a result of the beneficial conversion feature described above for the Convertible Notes, the Company recorded $726,000 additional paid-in capital, and a discount on the notes payable. These discounts are accreted over the note maturity period. Between January 17, 2002 and March 22, 2001, the Company entered into several Convertible Promissory Notes Payable (the "Convertible Notes") with certain investors in the aggregate principal amount of $2,025,000, of which $1,550,000 was with members of the board of directors or shareholders. The Notes accrue interest at 10% per annum, which is payable in common stock at the time of conversion and are collateralized by the Company's legacy business accounts receivables, and the assets of the Infotel subsidiary, and mature on various dates from April 30, 2002 through October 15, 2002. The conversion price is equal to the lower of 90% of the closing price of the Company's common stock on the trading day immediately preceding the maturity date, or 90% of any subsequent interim financing that occurs between the issuance date of the notes and the maturity date. Upon conversion, the Convertible Notes have no specific registration rights. 28 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In connection with these Convertible Notes, the Company issued warrants to purchase 1,379,000 shares of the Company's common stock at an exercise price of ranging from $1.32 per share to $1.80 per share.The estimated value of the warrants of $1,878,000 was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate ranging from 4.19% to 4.78%, a dividend yield of 0% and volatility of ranging from 146% to 148%, depending on the respective issuance dates of the warrants . The allocation of the Convertible Notes proceeds to the fair value of the warrants was recorded as a discount on the Convertible Notes and as warrant liability. Upon exercise of the warrants, the holder has no specific registration rights. In addition, as a result of the beneficial conversion feature described above for the Convertible Notes, the Company recorded $977,000 additional paid-in capital, and a discount on the notes payable. These discounts are accreted over the note maturity period. Effective April 19, 2002, Appiant commenced a secured financing of up to $4,025,000 with certain accredited investors ("Investors") pursuant to a Debenture and Warrant Purchase Agreement (the "Agreement"), dated April 19, 2002. As of May 28, 2002, $3,525,000 of Convertible Debentures including $105,750 of Debentures issued as a finder's fee had closed. Under the terms of the Agreement, Appiant agreed to issue to the Investors Convertible Debentures bearing an interest rate of 8%. The Convertible Debentures may be converted into unregistered, restricted shares of Appiant Common Stock for a purchase price per share equal to the lower of (a) $1.21, which was the deemed closing price and was determined based on the closing bid prices of the Common Stock for the five trading days immediately prior to the closing date of the initial sale of the Debentures, or (b) the average of the two lowest closing bid prices of Appiant shares for the 20-day period immediately preceding any conversion. The Convertible Debenture can be converted, at the option of the holder, at any time until one year after the Closing Date. In the event the Convertible Debentures are not converted, Appiant has the option to repay the indebtedness. Appiant also has the right to redeem the Convertible Debentures prior to maturity for an amount per share equal to 110% to 125% of the principal amount of the Convertible Debentures being redeemed, as determined by the date of redemption. In addition, Appiant issued to Investors warrants to purchase up to an aggregate of 1,456,612 shares of unregistered, restricted Appiant Common Stock on the total financing of $3,525,000. Appiant has also agreed to issue warrants for 100,000 shares of unregistered, restricted Appiant Common Stock as part of the finders fee for this financing. The warrants have a term of five years and are exercisable at a warrant price equal to 110% of the closing price or $1.33 per share. The estimated value of the warrants of $1,846,000 was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate of 4.52%, a dividend yield of 0% and volatility of 145%. The allocation of the Convertible Notes proceeds to the fair value of the warrants was recorded as a discount on the Convertible Notes and as warrant liability. In addition, as a result of the beneficial conversion feature described above for the Convertible Notes, the Company recorded $2,052,000 additional paid-in capital, and a discount on the notes payable, which is accreted over the note maturity period to interest expense. As a result, these discounts are accreted over the note maturity period. Terms of the financing also provide that the Investors may nominate up to two additional members to the Appiant Board of Directors, and provide the Investors certain rights and options regarding possible future equity based financings by Appiant. Appiant paid cash finder's fee of 7% and Convertible Debentures of 3% and warrants to purchase 100,000 shares of Common Stock, and other related expenses. No underwriters were involved in this private placement. 29 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The sale of the debentures and the warrants to the investors was exempt from the registration provisions of the Securities Act, under Sections 4(2) and 4(6) of the Securities Act, and the rules and regulations there under, because of the nature of the offerees and Investors and the manner in which the offering was conducted. The investors have acknowledged that the securities cannot be resold unless registered or exempt from registration under the securities laws. Appiant has agreed to register for resale on Form S-3 up to 12,000,000 shares of the Common Stock (the "Registrable Shares") issued to the Shareholders as soon as practicable following the Effective Date. Moreover, Appiant has agreed to seek shareholder approval of the issuance of the Registrable Shares in excess of 19.99% of issued and outstanding Appiant Common Stock. In addition, the Company entered into several Convertible Promissory Notes Payable (the "Convertible Notes") in the aggregate principal amount of $125,000 with a related party. The Notes accrue interest at 10% per annum, which is payable in common stock at the time of conversion and are collateralized by the Company's legacy business accounts receivables, and the assets of the Infotel subsidiary, and matured on various dates from April 30, 2002 through June 22, 2002. The conversion price is equal to the lower of 90% of the closing price of the Company's common stock on the trading day immediately preceding the maturity date, or 90% of any subsequent interim financing that occurs between the issuance date of the notes and the maturity date. Upon conversion, the Convertible Notes have no specific registration rights. As of September 30, 2002, the aggregate amount of $90,000 of these Convertible Notes had been redeemed. In connection with these Convertible Notes, the Company issued warrants to purchase 123,174 shares of the Company's common stock at an exercise price of ranging from $0.90 per share to $1.26 per share. The estimated value of the warrants of $112,000 was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate ranging from 4.34% to 4.81%, a dividend yield of 0% and volatility of ranging from 144% to 145%, depending on the respective issuance dates of the warrants. The allocation of the Convertible Notes proceeds to the fair value of the warrants was recorded as a discount on the Convertible Notes and as warrant liability. Upon exercise of the warrants, the holder has no specific registration rights. In addition, as a result of the beneficial conversion feature described above for the Convertible Notes, the Company recorded $66,000 additional paid-in capital, and a discount on the notes payable, which is accreted over the note maturity period to interest expense. As a result, these discounts are accreted over the note maturity. 7. ACCRUED WARRANT LIABILITY Under the terms of several convertible debentures issued on May 31, 2001 (see Note 6), the number of shares that could be required to be delivered upon conversion is essentially indeterminate. As a result, in accordance with the guidelines of EITF 00-19, all warrants outstanding at that date that had initially been classified as equity, with a value of $3,463,000 have been reassessed and reclassified as Warrant Liability. Furthermore, the classification of the warrants as a liability require variable accounting, with remeasurement of the fair value of the warrants at each balance sheet, with any adjustments reflected in earnings. 30 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) All outstanding warrants were remeasured at September 30, 2001 using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk-free interest rate of 3.864%, a dividend yield of 0% and volatility of 144%. The allocated liability related to the warrants was $4,430,000 at September 30, 2001 and the Company has recorded an additional $4,772,000 as a credit against interest expense in fiscal year 2001. All outstanding warrants were remeasured at September 30, 2002 using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk-free interest rate of 2.752%, a dividend yield of 0% and volatility of 144%. The liability related to the warrants was $1,921,000 at September 30, 2002 and the Company has recorded an additional $5,623,000 as a credit against interest expense in fiscal year 2002. 8. NOTES PAYABLE A summary of Notes Payable is as follows:

~~OPTIONS~~September ~~CURRENTLY~~30, ~~OPTIONS~~September ~~OUTSTANDING~~30, ~~EXERCISABLE~~2002 ~~WEIGHTED~~2001 ~~AVERAGE REMAINING WEIGHTED WEIGHTED NUMBER OF CONTRACTUAL AVERAGE AVERAGE EXERCISE SHARES LIFE IN EXERCISE NUMBER EXERCISE PRICE OUTSTANDING YEARS PRICE EXERCISABLE PRICE~~ --------------- ------------- --~~-----------~~ ~~---------~~Face ~~-----------~~amount ~~---------- 0.00 -~~ $~~2.20~~ ~~573,600~~ 6~~.4 $1.30 195~~,~~000 $1.57 2.20 - $4.40 354~~050,000 ~~7.0~~ $~~3.16~~ ~~41,300 $3.63 4.40 - $~~6~~.60 1~~,~~281~~000,~~600 6.7 $4.64 213,500 $4.58 6.60 - $8.80 722,300 7.0 $8.74 354,100 $8.74 8.80 - $11.00 63,~~000 ~~9.1~~Discount ~~$9.59 8~~(32,~~100 $9.72 11.00 - $13.20 - - - - - 13.20 - $15.40 75,~~000) ~~1.5 $14.75 22~~(268,~~500 $14.70 15.40 - $17.60 117,~~000) ~~8.9 $16.35 21,800 $16.12 17.60~~ - ~~$19.80~~ - - - - - ~~19.80~~ - ~~$22.00 2,500 9.1 $22.00~~ - - ------ ----- ---------- 3$ 6,~~189~~018,000 ~~856~~$ 5,~~300~~732,000 =============== ===============

On August 15, 2001, the Company executed a Settlement Agreement and Release, ("Settlement Agreement") effective as of July 27, 2001, with Cisco Systems, Inc. ("Cisco") and Cisco Systems Capital ("Cisco Capital"). The Settlement Agreement provides that Cisco Capital will convert Appiant's down payment of $3,000,000 into a software license fee for "Paid Up" uOne licenses. In addition, Cisco Capital forgave approximately $7,000,000 for the remaining sums owed for the Lease Licenses. Under the terms of the Settlement Agreement, Appiant may use the Paid Up licenses and Cisco will maintain its support for nine months (the "Transition Period") while Appiant evaluates its options of transitioning to the vendor that purchased Cisco's Unified Communication Software Business or otherwise pursuing other opportunities. Cisco also loaned Appiant $3,000,000 (the "Cisco Loan") for use during the Transition Period. On or before the end of the Transition Period, Appiant may elect to continue using the Paid Up licenses and repay the Cisco Loan, or return the Paid Up licenses, in which case, the Cisco Loan will be deemed to have been paid in full and completely discharged. As no interest is payable on this note, a discount of $93,000 is being amortized to interest expense, with an unamortized discount of $80,000 at September 30, 2001. The discount was fully amortized during the year ended September 30, 2002. In connection with the acquisition of Quaartz (see Note 3), the Company assumed certain notes payable to a related party comprised of a $1,000,000 recourse note and a $2,000,000 non-recourse note, both of which were originally due on December 31, 2000. No interest is payable on either of these notes, and accordingly the discount of $274,000 is being amortized to interest expense. In September 2002, the Company entered into a Promissory Notes Payable with a member of the Board of Directors and a shareholder in the principal amount of $300,000. The Notes accrue interest at 10% per annum and are payable on demand In connection with the September 2002 Notes, the Company issued warrants to purchase 572,727 shares of the Company's common stock at exercise prices of $0.45 and $0.495 per share. The allocated estimated value of the warrants of 143,000 was determined using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate of 2.82%, a dividend yield of 0% and volatility of 144%. The fair value of the warrants of $143,000 was expensed during the fiscal year 2002. 31 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases its principal office facilities pursuant to non-cancelable operating leases in Pleasanton, California, which expire in 2007. Infotel leases office space in Singapore with the lease expiring in December 2002. Future minimum rental payments under operating leases as of September 30, 2001 are as follows (in thousands): FISCAL YEAR 2003 $ 347,000 2004 300,000 2005 288,000 2006 275,000 2007 272,000 Thereafter 68,000 ---------- $1,550,000 ========== Rent expense was $ 721,000, $1,098,000 and $470,000 for fiscal years 2002, 2001, and 2000 respectively. Capital Leases During the years ended 2000 and 2001, the Company entered into lease financing arrangements for approximately $5.6 million related to hardware and related product costs and consulting services related to its data center in Atlanta, Georgia. The Company relocated its data center to Sunnyvale, California in June 2001 and relocated hardware of approximately $500,000 to this location in September 2001 and returned approximately $1.6 million of computer and related equipment from the Atlanta data center to the lessor. Also, the Company charged to operating expense as an "impairment of equipment and capitalized software" approximately $3.0 million with a net book value of approximately $2.5 million, which related to the installation of the hardware in the Atlanta data center, as such costs had no future value following the relocation. Also, the lessor reduced the lease payments due by $1.6 million and as a result the Company reduced equipment and the related capital lease obligations by an equal amount. In December 2001, the Company reached an agreement with the lessor under which the lessor agreed to release the Company from capital lease obligations of approximately $3.6 million. The agreement also provided for the return of equipment capitalized under the capital lease obligations of approximately $800,000. As discussed above, In June 2001, the Company had recognized an expense of $3.7 million of impairment in relation to the relocation of its first data center in Atlanta, Georgia. According, the Company has recorded a gain of $2.8 million within operating expenses equal to the difference between the capital lease obligation and the book value of the capitalized equipment returned to the lessor. At September 30, 2002, the Company leased other computer equipment and software under capital leases. These leases extend for varying periods through 2004. The Company also leases computer equipment and other software under capital leases. These leases extend for varying periods through 2004. Effective July 27, 2001, the Company entered into a settlement and release agreement with a software vendor which the Company has a leasing arrangement for the non-exclusive license of certain software (See Note 8). 32 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Equipment and software under capital leases included in property and equipment and capitalized software are as follows:

~~Years~~September ~~Ended~~30, September 30, 2002 2001 --------------- ---------------~~----------~~ ~~2001~~Equipment ~~2000~~$ ~~1999~~2,839,000 $ 2,119,000 Less: accumulated amortization (750,000) (614,000) ------------- -- ----------- ----~~------~~ ~~Net~~$ ~~loss~~2,089,000 ~~attributable~~$ to1,505,000 ~~common~~=============== ~~stockholders:~~=============== AsFuture ~~reported~~capital .lease .payments .are .as .follows: .September .30, .September .30, .2002 .2001 .--------------- .--------------- .2002 .$ .- ~~. . . . . .~~ $~~(37~~ 4,~~555~~250,000) ~~$(12~~2003 587,~~844,~~000) ~~(717~~316,000) ~~Pro~~2004 ~~forma~~344,000 .27,000 .2005 .205,000 .- .--------------- .--------------- .1,136,000 .4,593,000 .Less .amount .representing .interest ~~. . . . . . . . . . . $~~(39156,~~138,~~000) $(15415,~~703,~~000) ~~(855,000)~~--------------- ~~Net loss per share attributable to common stockholders~~--~~basic~~------------- ~~and~~Present ~~diluted:~~value Asof ~~reported~~minimum .future .payments .980,000 .4,178,000 .Less .current .portion ~~. . . . . . . . . . . . . . . $~~ (~~2.56~~587,000) (~~1.25~~4,085,000) ~~(0.23)~~--------------- ~~Pro~~--------------- ~~forma~~$ .393,000 ~~. . . . . . . . . . . . . . . . . . . . . .~~ $ ~~(2.66)~~93,000 ~~(1.52)~~=============== ~~(2.26)~~===============

Contingencies In October 2001, a software vendor filed suit against the Company for breach of contract totaling approximately $703,000 plus interest and attorney's fees. On December 28, 2001, Appiant filed an answer denying this general demand, and is preparing a counter-suit for return of over $600,000 paid to this vendor. In August 2002, the parties entered into a mutual settlement agreement and release of claims wherein the Company has agreed to make cash payments totaling $200,000 between February 2003 and May 2003, and will issue warrants to purchase 50,000 shares of Appiant common stock at an exercise price of $0.37. the entire amount of this liability has been recorded in the company's books. In January 2002, a default judgment was issued against the Company in favor of an equipment vendor in the amount of $123,000. The Company was successful in having that default judgment set aside on February 6, 2002. The Company subsequently entered into a mutual settlement agreement and release of claims in July 2002 wherein the Company has agreed to make payments totaling $69,000. This liability is recorded in the company's books. In January 2002, a services and equipment provider filed suit in Texas for breach of contract totaling $117,000. The Company is currently in negotiations to resolve this claim. This liability is recorded in the company's books. 33 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In February 2002, the Company resolved an arbitration matter and litigation action involving a dispute over employment contract terms for two former Company management employees. The settlement provides for payment of $88,000 to one claimant over six months, and payment of $147,000 to the second claimant over a total of twelve months. The company has accrued $235,000 for this matter. Also in February 2002, these same claimants filed suit against the Company regarding the Company's calculation of additional common stock due to the claimants under an unrelated agreement. The Company Is in settlement negotiations with the claimant to resolve matters. In May 2002, a customer requested indemnification of its internal defense costs and expenses arising from its defense of a lawsuit involving claims of infringement of certain patents which Appiant has licensed and which are included in Appiant's legacy voice mail product. In lieu of seeking reimbursement from Company of future defense fees, the customer offered to accept a subrogated assignment of the Company's indemnification rights form the patent owner. The Company agreed to tender the indemnification claim on to the patent owner and assign that claim to the customer to directly seek indemnification. The Company believes that this assignment to the customer is a final resolution of this matter. In May 2002, a former note holder tendered notice of the Company's default on a settlement agreement and release relating to a $2.75 million indebtedness arising out of the cancelled notes. The Company is currently in negotiations toward an agreement to cure the default and amend the payment plan called for in the settlement agreement. The entire $2.75 million liability is recorded in the Company's books. In June 2002, the Company's former trademark counsel tendered notice of its claim for $51,260.26 in unpaid fees and indicated that it would file suit to collect these fees. The Company disputes some of these fees, but intends to work with counsel towards a mutually agreed resolution of the matter. The Company has recorded the $51,260.26 on its books. In June and July 2002, several holders of debentures issued in April 2002 provided formal notices of default by the company for failing to register the shares underlying the debentures or receive shareholder approval of the issuance of all underlying shares. The Company and the debenture holders are currently in discussions regarding options for curing these defaults and/or otherwise resolving the matter. In July 2002, a former vendor tendered notice of a demand for payment of approximately $200,000 alleging breach of contract and open book account. The Company disputes the claims as stated, and intends to work with the vendor towards a mutually agreed resolution of the matter. In July 2002, counsel claiming to represent holders of certain Promissory Notes due in June 2003 wrote the Company claiming that material information was withheld from certain unidentified note holders by the Company when the Notes were issued in June 2001. The Company is investigating this claim and has requested information from the note holders, and intends to continue to vigorously defend the matter. In July 2002, a former supplier of equipment filed suit against the Company for breach of contract and breach of guarantee totaling $419,581.95 plus interest and attorney's fees. The Company has negotiated a settlement to a payment schedule totaling $400,000, which is fully accrued on the Company's books. In September 2002, a former vendor filed suit in Texas for breach of contractual obligation totaling $107,956. The Company disputes a portion of the total but intends to negotiate with counsel to settle the claim. The has accrued $32,438 for this matter. 34 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) From time to time, the company is involved in other legal actions arising in the ordinary course of business. While management intends to defend these matters vigorously, there can be no assurance that any of these complaints or other third party assertions will be resolved without costly litigation, or in a manner that is not adverse to our financial position, results of operations or cash flow. No estimate can be made of the possible loss or possible range of loss associated with the resolution of these matters in excess of amounts accrued. 10. REDEEMABLE CONVERTIBLE PREFERRED STOCK In October 2000, the Company sold 87,620 shares of Series B Preferred Stock to domestic "accredited investors" for aggregate gross proceeds of $8,762,000, including $3.5 million received in advance. In connection with this issuance, the Company also issued to its investment bankers a fully exercisable warrant to acquire 75,000 shares of its Common Stock at an exercise price of $13.50 per share and paid a placement fee of 10% of the proceeds, 35% in cash and 65% paid in common stock issued in the second quarter of 2001. Holders of the Series B Preferred Stock are entitled to a non-cumulative 5% per annum dividend, payable quarterly in arrears, when, if and as declared by the Company's Board of Directors, which may be paid in cash or shares of the Company's Common Stock, in the Company's sole discretion. Each share of Series B Preferred Stock is immediately convertible into shares of our Common Stock at the lesser of (i) $13.50 per share or (ii) 90% of the average closing bid prices for the 10 trading days immediately preceding the date of conversion, provided, that such conversion price shall not be less than $10.00. At any time after the third anniversary of the Closing, the Company may require the holders of the Series B Preferred Stock to convert. Upon voluntary or involuntary liquidation, dissolution or winding up of the Company, the investors will be entitled to receive, on a pari passu basis with holders of other shares of Preferred Stock, if any, an amount equal to such investors investment in the Offering and any declared but unpaid dividends. As a result, the net proceeds from the sale of the Series B Preferred Stock has been classified outside of stockholders' equity. As a result of the beneficial conversion feature described above, the Company recorded a deemed dividend of $7,626,000 during the year ended September 30, 2001. In addition, the Company estimated the value of the warrant at $1,107,000 issued to its investment bankers using the Black-Scholes option pricing model with the assumptions that follow: expected volatility of 135%, weighted average risk free interest rate of 5.8%, term of 1 year, and no expected dividend. The Company recorded this warrant as a cost of financing. As of September 30, 2001, 86,120 preferred shares have been converted into 831,000 shares of the Company's common stock and 1,500 preferred shares remain outstanding. 11. STOCKHOLDERS' EQUITY PREFFERED STOCK In fiscal 1999, the Company issued 17,500 shares of preferred stock for $1,472,000 net of issuance costs of $278,000. All of these preferred shares have been converted to common stock by September 30, 2000. STOCK PURCHASE AGREEMENT On June 6, 2000, the Company exercised its right under the terms of the Purchase and Sale Agreement for it's subsidiary Infotel, to repurchase 216,500 shares of its common stock at a price of approximately $3.65 per share from the former Infotel stockholders. The reacquired shares were originally issued to the Infotel stockholders in connection with the Company's acquisition of Infotel in June 1998. 35 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In fiscal year 2000 the Company entered into a common stock purchase agreement (the "Equity Line Agreement"), dated May 24, 2000 and amended as of June 30, 2000 with an investment corporation under which the Company may require the investment corporation to purchase up to $50 million of its common stock. Under the terms of the Equity Line Agreement, the Company is under no obligation to sell its common stock to the investment corporation. However, the Company may make up to a maximum of twelve requests for the purchase of its common stock with no single purchase exceeding $4 million unless otherwise agreed to by the investment corporation. In addition, the Equity Line Agreement does not require the investment corporation to purchase the Company's common stock if it would result in the investment corporation owning more than 9.9% of the Company's outstanding common stock. The purchase price of the common stock is 92% of the volume weighted average price per share of the Company's common stock over the eighteen-day period prior to the date the Company requests the investment corporation to purchase its common stock. In addition, the investment corporation will receive a 2% placement fee and an escrow agent fee from the proceeds due to the Company. In conjunction with the Equity Line Agreement, the Company issued a warrant to purchase 120,000 shares of its common stock. The warrant exercise price was subsequently adjusted to $13.50 per share on November 15, 2000 in exchange for a waiver from the investment corporation allowing the Company to issue Series B preferred stock to other investors, as well as engage in other financing transactions (see "Warrants" below). The Black-Scholes option pricing model was used to value the warrants and the following assumptions: contractual term of 3 years, a risk free interest rate of 5,8%, a dividend yield of 0% and a volatility of 135%. The estimated value of $2,144,000 was accounted for as a non-current asset. As and when stock was purchased under the equity line agreement, the non-current asset was reduced on a dollar for dollar basis with the amount of proceeds received from the sale of common stock. During the second quarter of 2001, the Company requested that the investment corporation purchase $1.745 million of the Company's common stock under the equity line agreement. As of January 2002, the Company had not exhausted the line and expensed approximately $399,000 of the remaining non-current asset. STOCK OPTIONS AND WARRANTS STOCK OPTION PLAN The Equity Incentive Plan (the "Plan") is administered by the Company's Board of Directors and the Company's Management. The Company has reserved 4,000,000 shares of common stock for issuance under the Plan. Options granted under the Plan may be either incentive stock options ("ISOs"), or non-qualified stock options ("NSOs"). ISOs generally must have an exercise price of not less than fair market value of the Common Stock on the date of grant (or, for a person holding more than 10% of the voting power of the Company, a price equal to 110% of the fair market value, and be exercisable only for a period of five years).The aggregate fair market value of the Common Stock subject to options granted to an optionee that are exercisable for the first time by an optionee during any calendar year may not exceed $100,000. Options generally expire three months following termination of employment. Historically, the Company's ISO's have become exercisable over periods of two to seven years and ranged from one-third becoming exercisable immediately and the remainder equally over the next two years, to seven year cliff exercisability. In fiscal year 2001, ISOs have generally become exercisable 25% after one year and the remainder ratably over 36 months. ISOs generally have a ten-year life. Exercisability of NSOs has generally been determined on a grant-by-grant basis. 36 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During 2001, the Company created a new stock option plan (the "Broad Based Plan"). The Company intends to use the plan to give each officer, and non-officer of the company who received a qualified stock option grant under the Plan with a strike price of more than $ 4.50 the opportunity to be eligible to receive the benefit of an additional options that allow for a strike price of $ 4.50 per share, for which the vesting schedules for such options shall be the same as the vesting schedule of the related option. The Primary purpose of the Broad Based Plan is to retain and provide additional incentives to employees and to promote business success for the Company. The exercise price shall be not less than 85% of the fair market value of the Company's common stock on the date of grant unless otherwise determined by the administrator and in the case of other awards, such price to be determined by the Board of Directors. The maximum aggregate number of shares issuable under the Broad Based Plan is 500,000 shares. Under the Broad Based Plan, the grants were made on March 16, 2001 for options to purchase 381,000 shares of the Company's common stock at an exercise price of $4.50. At September 30, 2002 and 2001, 1,692,000 and 3,189,000 options, respectively, were outstanding and 1,866,100 and 227,000 shares, respectively, were available for award. The following table summarizes transactions pursuant to the Company's Plans:

~~12.~~Weighted ~~INCOME~~Average ~~TAXES~~Option ~~Income~~Price ~~taxes~~Per ~~are~~Options ~~summarized~~Share ~~below:~~Outstanding ~~FISCAL YEARS, 2001 2000 1999~~ --------------- -- ----------- -~~---------~~ ~~Current:~~December ~~U.S.~~31, ~~federal~~1997 $ $3.16 ~~$ Foreign 279~~1,~~000 250~~133,~~000~~400 ~~32,000~~Granted ~~State~~2.05 ~~- 17~~258,000 Canceled 2.69 (186,~~000~~900) ------------~~---~~ ~~-------------~~SEPTEMBER ~~----------~~30, ~~Total~~1998 ~~Current~~3.00 ~~279~~1,~~000~~204,500 ~~268~~Granted 1.33 1,~~000~~402,700 34Canceled 2.91 (1,~~000~~151,400) ------------~~---~~ ~~-------------~~SEPTEMBER ~~----------~~30, ~~Deferred:~~1999 -1.51 -1,455,800 -Granted U9.S.14 ~~federal~~2,265,000 -Exercised -1.40 -(390,600) ~~Foreign~~Canceled -1.89 -(201,900) - ~~State~~ - - - --------~~-------~~ ~~-------------~~SEPTEMBER ~~----------~~30, ~~Total~~2000 ~~deferred~~7.03 03,128,300 0Granted 06.91 ~~---------------~~2,323,700 Exercised 1.47 (218,900) Canceled 9.74 (2,044,100) ------------- ~~----------~~SEPTEMBER ~~Total~~30, ~~provision~~2001 ~~for~~5.58 ~~income taxes $ 279~~3,~~000 $ 268~~189,000 $Granted 341.87 846,000 Exercised -- --~~-----------~~ Canceled 4.88 (2,343,000) ------------- ~~----------~~SEPTEMBER ~~The~~30, ~~Company's~~2002 ~~net~~$ ~~loss~~4.66 ~~is taxable as follows: FISCAL YEARS~~1,692,000 ~~2001~~============ ~~2000 1999~~ --------------- ------------- ~~----------~~OPTIONS ~~Continuing~~EXERCISABLE ~~operations~~AT: ~~United~~September ~~States $ (~~30,~~723,000)~~ ~~$(13,645,000)~~2002 $~~(863,000)~~ ~~Foreign~~4.66 1,~~073~~039,000 ~~1,069,000~~September ~~180~~30,~~000~~ ~~---------------~~2001 ~~-------------~~$ ~~----------~~6.18 ~~Total~~856,240 ~~Current~~September ~~$ (29~~30,~~650,000)~~ ~~$(12,576,000)~~2000 $~~(683,000)~~ ~~===============~~1.86 ~~============= ==========~~256,600

At September 30, 2002, 2001, and 2000, 1,866,100, 227,000 and 871,700 shares of common stock, respectively, were available for grant under the Plans. 37 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information about stock options outstanding and exercisable at September 30, 2002:

~~2001~~OPTIONS ~~2000~~CURRENTLY OPTIONS OUTSTANDING EXERCISABLE ------------ ------- ----------- ~~Net~~WEIGHTED ~~operating~~AVERAGE ~~loss~~REMAINING ~~carryforward~~WEIGHTED ~~$10,784,000~~WEIGHTED $NUMBER ~~4,073,000~~OF ~~Reserve~~CONTRACTUAL ~~and~~AVERAGE ~~accrued~~AVERAGE ~~liabilities~~EXERCISE ~~1,700,000~~SHARES ~~1,598,000~~LIFE ~~Tax~~IN ~~Credits~~EXERCISE ~~105,000~~NUMBER ~~105,000~~EXERCISE ~~Accumulated~~PRICE ~~depreciation~~OUTSTANDING ~~and~~YEARS ~~amortization~~PRICE ~~327,000~~EXERCISABLE -PRICE ------------ --- --------- ~~12,916,000 5,776000 Capitalized Software (3,853,000) (2,798,000) Accumulated Depreciation and amortization~~ -- ~~(108,000)~~ ----------- --------- ----------- --------- (30.00 - $2.20 573,~~853~~600 6.4 $ 1.30 195,000) ($ 1.57 2.20 - $4.40 354,~~906,~~000) ~~Net~~7.0 ~~total~~$ ~~deferred~~3.16 ~~assets/liabilities~~41,300 9$ 3.63 4.40 - $6.60 1,~~063~~281,~~000~~600 26.7 $ 4.64 213,~~870~~500 $ 4.58 6.60 - $8.80 722,300 7.0 $ 8.74 354,100 $ 8.74 8.80 - $11.00 63,000 ~~Valuation~~9.1 ~~allowance~~$ (9.59 8,~~063~~100 $ 9.72 13.20 - $15.40 75,000) (21.5 $ 14.75 22,~~870~~500 $ 14.70 15.40 - $17.60 117,000) 8.9 $ 16.35 21,800 $ 16.12 19.80 - $22.00 2,500 9.1 $ 22.00 - - --------- -- ---------- $ - $3,189,000 -856,300 ============ ============

At September 30, 2000 and 1999 options to purchase 256,000 and 149,000 shares, respectively, of the Company's common stock were exercisable. Had compensation cost for the Company's stock-based compensation plan been determined based on the fair value at the grant dates for the awards, the Company's net loss attributable to common stockholders would have been increased to the pro forma amounts indicated below:

~~2001~~YEARS ~~2000~~ENDED ~~1999~~SEPTEMBER 30, -------------- ------------- ---------------- ~~Federal~~2002 ~~tax~~2001 ~~($10,446,000)~~2000 ~~($4,276,000) ($258,000) State tax~~ ------------------------------------------- ~~12,000~~Net ~~(45,000)~~loss ~~Foreign~~attributable ~~taxes~~to ~~279,000~~common ~~250,000~~stockholders: ~~32,000~~As ~~Goodwill~~reported ~~amortization 624~~$(15,~~000 98~~771,000) ~~300~~$(34,~~000 Stock-based compensation Charges 31~~105,000) 1$(12,~~379~~844,000) 0Pro ~~Changes~~forma ~~in valuation allowance 7~~$(16,~~190~~700,000) 3$(37,~~294~~497,000) $(5115,703,000) ~~Impairment~~Net ~~charges~~loss ~~1,247,000~~per -share -attributable ~~Interest~~to ~~charges~~common onstockholders--basic ~~warrant~~and ~~1,292,000~~diluted: -As -reported ~~Other~~$ ~~61,000~~ (~~490,000~~0.97) ~~56,000~~$ ~~--------------~~(2.32) ~~-------------~~(1.25) ~~-----------~~Pro $forma ~~279,000~~ $ ~~267,000~~(1.02) $ ~~34,000~~(2.55) ~~============== ============= ===========~~(1.52)

The weighted average fair value of options granted in fiscal year 2002, 2001 and 2000 was $1.68, $4.07 and $8.56 per share under option, respectively. 38 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company estimated the fair value of each stock option at the date of grant using the assumptions that follow:

FISCAL YEAR ~~2001~~------------------------------------------- ~~AND~~2002 ~~AT SEPTEMBER 30,~~ 2001 (in thousands) APPIANT NA INFOTEL OTHER (2) TOTAL Net sales to external customers 8,291,000 13,085,000 372,000 21,748,000 Net income (loss) (15,757,000) 712,000 (5,964,000) 21,009,000 Interest income(2) 129,000 136,000 265,000 Interest expense (8,732,000) (70,000) (8,802,000) Tax expense - (29,000) (29,000) Total assets 23,673,000 9,939,000 6,754,000 40,366,000 Property and equipment, net 4,690,000 398,000 293,000 5,381,000 Depreciation and Amortization (646,000) (380,000) (1,493,000) (2,519,000) FISCAL YEAR 2000 ~~AND AT SEPTEMBER 30, 2000 (in thousands) APPIANT NA INFOTEL OTHER (2) TOTAL Net sales to external customers $13,979,000 $11,550,000 $~~ - ~~$25,529,000 Net income (loss) (5,700,000) 432,000 (7,576,000) (12,844,000) Interest income(2) 20,000 153,000 44,000 217,000 Interest expense (441,000)~~ ------------------------------------------ ~~(1,866,000)~~Dividend ~~(2,307,000)~~yield ~~Tax expense (18,000)~~ - - (268,000) Total assets 15,801,000 (332,000) 15,548,000 38,785,000 Property and equipment, net 2,336,000 78,000 308,000 3,395,000 Depreciation and Amortization (732,000) (12,000) (166,000) (1,395,000) FISCAL YEAR 1999 AND AT SEPTEMBER 30, 1999 (in thousands) APPIANT NA INFOTEL OTHER (2) TOTAL Net sales to external customers $13,660,000 $9,680,000 $ - ~~$23,340,000~~Volatility ~~Net income (loss)~~ 1~~,312,000~~.45 ~~840,000~~144% ~~(2,869,000)~~135% ~~717,000 Interest income(2) 14,000 64,000 30,000 108,000 Interest expense (327,000)~~ Risk-free ~~(86,000)~~interest ~~(413,000)~~rate ~~Tax~~3.4% ~~expense~~5.0% ~~1,000~~5.5% ~~32,000~~Estimated ~~1,000~~lives ~~34,000~~3 ~~Total~~to ~~assets~~8 ~~6,630,000~~years ~~6,298,000~~ 3~~,093,000~~ ~~16,021,000~~to ~~Property~~8 ~~and~~years ~~equipment,~~3 ~~net~~to ~~639,000~~8 ~~179,000 337,000 1,155,000 Depreciation and Amortization 446,000 333,000 69,000 848,000~~years

These pro forma amounts may not be representative of the effects on reported net loss for future years as options vest over several years and additional awards are generally made each year. WARRANTS In December 1999, the Company issued warrants to purchase 375,000 shares of its Common Stock to its outside advisors, all for services rendered, with an exercise price of $3.43 per share. During fiscal years 2000 and 2001, all warrants were exercised and as a result, no warrants to purchase the Company's common stock remained outstanding as of September 30, 2002. The Company valued these warrants using the Black-Scholes option pricing model and the following assumptions: contractual term of one to two years, a risk free interest rate of 5.15%, a dividend yield of 0% and volatility of 142%. The estimated value of $138,000 was expensed during fiscal year 2000. In December, 1999 the Company issued warrants to the President and Chief Executive Officer to purchase 100,000 shares of its Common Stock and warrants to the Company's Board members to purchase 50,000 shares of Common Stock at $3.43 per share, all of which were fully exercisable. The term of the warrants was one year and in fiscal 2001 they were extended one more year. Under the terms of the warrant agreements, upon exercise of the warrant, the warrant holders can pay the exercise price by having the Company issue the number of shares under the warrant less the number of shares having a fair value on the date exercised equal to the exercise price. As a result, the Company has used variable accounting to account for these awards and has recorded $2,036,000 of stock-based compensation related to the warrants during fiscal year 2000 which was reversed in fiscal year 2001 because of the decline in the fair market value of the Company's common stock. At September 30, 2002, all these warrants to purchase the Company's Common Stock have expired. On January 21, 2000 the Company issued warrants to purchase 250,000 shares of the Company's common stock at $1.53 per share to former owners of Trimark, Inc. (see Note 3). The warrants are fully exercisable and expire in 3 years. In December 2000, 150,000 of these warrants were exercised. No warrants to purchase the Company's common stock remained outstanding as of September 30, 2002. In January 2001, the Company issued warrants to purchase 300,000 shares of its Common Stock with an exercise price of $6.00 per share to an external financial advisor and shareholder for past services. The warrants were valued using the Black-Scholes option pricing model and the following assumptions: contractual term of one year, a risk free interest rate of 5.49%, a dividend yield of 0% and volatility of 133%. The estimated value of $1,912,000 was expensed during fiscal year 2000. In connection with a software purchase agreement, the Company on May 1, 2000 issued to the supplier a warrant to purchase 45,600 shares of its Common Stock at an exercise price of $15.50 per share. The Black-Scholes option pricing model was used to value the warrants with the following assumptions: contractual term of five years, a risk free interest rate of 5.8%, a dividend yield of 0% and volatility of 135%. The estimated value of approximately $684,000 was accounted for as purchased capitalized software. 39 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In October 2000 the Company issued a warrant to purchase 75,000 shares of common stock at $13.50 to its investment bankers for its Series B Preferred Stock (see Note 8). The warrants were valued using Black-Sholes option pricing model with the following assumptions: expected volatility of 135%, weighted average risk free interest rate of 5.80%, term of 1 year, and no expected dividend. The estimated value of the warrants of $1,107,000 was accounted as stock issuance costs in fiscal 2001. In November 2000, the Company issued a fully exercisable warrant to purchase 30,000 shares to a professional services firm in consideration for certain services rendered to us at an exercise price of $8.34 per share. The warrants were valued using the Black-Scholes option pricing model and the following assumptions: contractual term of five years, a risk free interest rate of 5.08%, a dividend yield of 0% and volatility of 135%. The estimated fair value of the warrants of $413,000 was expensed during the fiscal year 2001. In December 2001, the Company issued a warrant to purchase 9,469 shares of its common stock with an exercise price of $4.46 in connection with certain services rendered to the Company. The warrant is immediately exercisable and expires in 5 years. The warrants were valued using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate of 4.33%, a dividend yield of 0% and volatility of 148%. The estimated value of $12,000 was expensed during fiscal year 2002. In March 2001, the Company issued a warrant to purchase 1,500 shares of its common stock with an exercise price of $1.32 in connection with certain services rendered to the Company. The warrant is immediately exercisable and expires in 5 years. The warrants were valued using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate of 4.78%, a dividend yield of 0% and volatility of 146%. The estimated value of $2,000 was expensed during fiscal year 2002. In April 2001, the Company issued a warrant to purchase 200,000 shares of its common stock with an exercise price of $2.00 to a customer in connection with a Master Service Agreement. The warrant is immediately exercisable and expires in 5 years. The warrants were valued using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk free interest rate of 4.625%, a dividend yield of 0% and volatility of 147%. The estimated value of $449,000 was accounted for as a deferred cost of sales and recorded as an "Other asset." The deferred cost of sales will be amortized over the Master Service Agreement term and after the InUnison product is launched. On August 21, 2001, the company issued warrants to purchase 10,000 shares of its common stock to a consultant with an exercise price of $1.95 per share. The warrants were valued using the Black-Scholes option pricing model and the following assumptions: contractual term of 5 years, a risk-free interest rate of 4.51%, a dividend yield of 0% and a volatility of 144%. The estimated value of $18,000 was expensed during fiscal year 2001. 40 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At September 30, 2002, the following warrants to purchase the Company's common stock were outstanding, all of which were exercisable:

41 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) STOCK-BASED COMPENSATION In connection with stock option grants to employees to purchase 527,000 shares of the Company's Common Stock during fiscal year 2000, the Company recognized $2,073,000 of unearned stock-based compensation for the excess of the fair market value of the shares of common stock subject to such options over the exercise price of the options at the date of grant. Such amounts are included in stockholders' equity and are being amortized over the vesting period of generally four years. In 2001, the Company recorded a net benefit of $1,520,000 in connection with unearned stock-based compensation charges associated with employees who were terminated during 2001. The Company recorded unearned stock-based compensation amortization expense of $318,000, $91,000 and $61,000 for fiscal year 2002, 2001 and 2000, respectively. 12. EMPLOYEE COMPENSATION AND BENEFITS The Company's APPIANT NA subsidiary maintains a Sec. 401(k) profit sharing plan in which all qualifying employees with a minimum of 1,000 hours of service at year end are eligible to participate. Matching contributions are made at the discretion of the Company's Board of Directors. The Company pays all fees to administer the plan. The Company did not make any matching contributions the fiscal years 2002, 2001 and 2000, respectively. 13. INCOME TAXES Income taxes are summarized below:

42 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Due to uncertainty surrounding the realization of the favorable tax attributes in future tax returns, the Company has placed a 100% valuation allowance against its deferred tax assets. At such time it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced. As of September 30, 2001 the Company's net operating losses for federal income tax purposes were approximately $41.6 million, and will expire between the years 2008 and 2020. For state income tax purposes, as of September 30, 2001, the Company had net operating loss carry forwards of approximately $16.8 million, which begins to expire in 2003. The use of federal net operating loss carry forwards is subject to an annual limit of approximately $250,000 as the Company has incurred an 'ownership change'. The principal items accounting for the difference between income tax benefit at the U.S. statutory rate and total income taxes reflected in the statement of operations are as follows.

43 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. SEGMENT REPORTING The Company defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The operating segments disclosed are managed separately, and each represents a strategic business unit that offers different products and serves different markets. The Company's reportable operating segments include Appiant Technologies Inc. ("Appiant NA")and Infotel. This represents a change in the Company's internal organization. Accordingly, segment information for the year ended September 30, 2000 has been reclassed to conform to the current . Appiant NA includes the Company's enterprise operations in the US. Appiant NA enterprise operations include systems integration and distribution of voice processing and multimedia messaging equipment, technical support, ongoing maintenance and product development. The Company acquired Quaartz on May 23, 2001, an application and service provider primarily involved in software development. The results of Quaartz have been included with those of Appiant NA since the date of acquisition. The following table presents APPIANT NA's net revenue by country and is attributed to countries based on location of the customer:

Infotel is a distributor and integrator of telecommunications and other electronics products operating in Singapore and provides radar system integration, turnkey project management, networking and test instrumentation services. Infotel derives substantially all of its revenue from sales from Singapore to Asia. There are no intersegment revenues. The revenues from our five largest customers for approximately 9.4%, 9.3%, 7.0%, 5.5% and 5.2% of total revenues during our fiscal year ended September 30, 2001. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies.

44 APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(1) Other includes corporate expenses. Additionally, management reports goodwill for Infotel in total assets. (2) Intercompany interest is eliminated. 14. SUBSEQUENT EVENTS 45

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