<PAGE>
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-Q

  /X/    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
         SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 1999

                                       or

  / /    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
         SECURITIES EXCHANGE ACT OF 1934

        For the transition period from ______________ to ______________

                       Commission File Number: 000-26263

                              APPNET SYSTEMS, INC.
                 ---------------------------------------------
             (Exact name of registrant as specified in its charter)

                  DELAWARE                             52-2077860
  ----------------------------------------  ---------------------------------
      (State or other jurisdiction of        (I.R.S. Employer Identification
       incorporation or organization)                     No.)

                            6707 DEMOCRACY BOULEVARD
                               BETHESDA, MD 20817
                       ----------------------------------
          (Address of principal executive offices including zip code)

                                 (301) 493-8900
                 ----------------------------------------------
              (Registrant's telephone number, including area code)

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                Yes / /  No /X/

    As of August 6, 1999, there were 31,096,138 outstanding shares of the
Registrant's Common Stock, $0.0005 par value.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                              APPNET SYSTEMS, INC.

                         QUARTERLY REPORT ON FORM 10-Q

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                PAGE
                                                                                                                -----
<S>                                                                                                          <C>
PART I. FINANCIAL INFORMATION

Item 1. Unaudited Consolidated Financial Statements

       Consolidated Balance Sheets at June 30, 1999 and December 31, 1998..................................           3

       Consolidated Statements of Operations for the three months ended June 30,1999 and 1998 and the six
      months ended June 30, 1999 and 1998..................................................................           4

       Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998...............           5

       Notes to Consolidated Financial Statements..........................................................           6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............          13

Item 3. Quantitative and Qualitative Disclosure About Market Risk..........................................          23

PART II. OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds..........................................................          24

Item 6. Exhibits and Reports on Form 8-K...................................................................          24

Signature..................................................................................................          25
</TABLE>

                                       2
<PAGE>
PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

                              APPNET SYSTEMS, INC.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                      JUNE 30,      DECEMBER 31,
                                                                                        1999            1998
                                                                                   --------------  --------------
<S>                                                                                <C>             <C>
                                                                                    (UNAUDITED)      (AUDITED)
ASSETS
Current assets:
  Cash and cash equivalents......................................................  $   11,497,000  $    2,447,000
  Accounts receivable, net of allowance for doubtful accounts of $1,578,000 and
    $1,124,000, respectively.....................................................      23,213,000      11,238,000
  Other current assets...........................................................       1,608,000       1,118,000
                                                                                   --------------  --------------
    Total current assets.........................................................      36,318,000      14,803,000
Property and equipment, net......................................................       5,619,000       3,012,000
Intangible assets, net...........................................................     116,074,000      99,380,000
    Other assets.................................................................       1,550,000       1,175,000
                                                                                   --------------  --------------
Total assets.....................................................................  $  159,561,000  $  118,370,000
                                                                                   --------------  --------------
                                                                                   --------------  --------------
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable...............................................................  $    3,611,000  $    2,737,000
  Accrued expenses...............................................................      22,129,000       6,911,000
  Current portion of convertible notes and long-term debt........................       2,230,000       2,426,000
                                                                                   --------------  --------------
    Total current liabilities....................................................      27,970,000      12,074,000
Credit facilities................................................................       8,100,000      37,461,000
Convertible notes, net of current portion........................................       8,800,000       2,706,000
Other long-term debt, net of current portion.....................................       3,517,000       1,199,000
Other long-term liabilities......................................................       1,066,000       3,398,000
                                                                                   --------------  --------------
    Total liabilities............................................................      49,453,000      56,838,000
                                                                                   --------------  --------------
Class A Preferred Stock, $.01 par value, 96,621 shares authorized, zero and
  38,093 shares issued and outstanding as of June 30, 1999 and December 31, 1998,
  respectively, liquidation value $1,000 per share...............................              --      37,646,000
Common stock subject to put rights, $.0005 par value, zero and 48,771 shares
  issued and outstanding as of June 30, 1999 and December 31, 1998,
  respectively...................................................................              --         278,000
Stockholders' equity:
  Class B Preferred Stock, $.01 par value, 20,000 shares authorized, zero and
    11,576 shares issued and outstanding as of June 30, 1999 and December 31,
    1998, respectively, liquidation value $1,000 per share.......................              --      11,576,000
  Common stock, $.0005 par value; 75,000,000 shares authorized, 31,079,947 and
    19,504,173 shares issued and outstanding as of June 30, 1999 and December 31,
    1998, respectively...........................................................          16,000          10,000
  Additional paid in capital.....................................................     164,302,000      27,222,000
  Notes receivable from management...............................................        (679,000)       (821,000)
  Deferred compensation..........................................................        (446,000)              -
  Accumulated deficit............................................................     (53,085,000)    (14,379,000)
                                                                                   --------------  --------------
    Total stockholders' equity...................................................     110,108,000      23,608,000
                                                                                   --------------  --------------
Total liabilities, redeemable stock and stockholders' equity.....................  $  159,561,000  $  118,370,000
                                                                                   --------------  --------------
                                                                                   --------------  --------------
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       3
<PAGE>
                              APPNET SYSTEMS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED              SIX MONTHS ENDED
                                                               JUNE 30,                       JUNE 30,
                                                     -----------------------------  -----------------------------
<S>                                                  <C>             <C>            <C>             <C>
                                                          1999           1998            1999           1998
                                                     --------------  -------------  --------------  -------------

Revenues...........................................  $   25,063,000  $     823,000  $   44,706,000  $   1,020,000

Cost of revenues...................................      14,220,000        886,000      25,677,000      1,031,000
                                                     --------------  -------------  --------------  -------------

  Gross profit.....................................      10,843,000        (63,000)     19,029,000        (11,000)

Operating expenses:

  Selling and marketing............................       1,594,000          9,000       2,784,000         12,000

  General and administrative.......................       7,957,000        670,000      14,711,000        916,000

  Stock-based and other acquisition-related
    compensation...................................       5,464,000             --       7,951,000             --

  Depreciation and amortization....................      15,104,000        371,000      27,839,000        429,000
                                                     --------------  -------------  --------------  -------------

    Total operating expenses.......................      30,119,000      1,050,000      53,285,000      1,357,000
                                                     --------------  -------------  --------------  -------------

Loss from operations...............................     (19,276,000)    (1,113,000)    (34,256,000)    (1,368,000)

  Interest expense.................................       2,479,000        100,000       3,741,000        124,000

  Other expense, net...............................         558,000             --         558,000             --
                                                     --------------  -------------  --------------  -------------

Loss before income taxes...........................     (22,313,000)    (1,213,000)    (38,555,000)    (1,492,000)

Income tax provision...............................          50,000             --         150,000             --
                                                     --------------  -------------  --------------  -------------

Net loss...........................................     (22,363,000)    (1,213,000)    (38,705,000)    (1,492,000)

Dividends on and accretion of preferred stock......      (1,100,000)            --      (2,139,000)            --
                                                     --------------  -------------  --------------  -------------

Net loss attributable to common stockholders.......  $  (23,463,000) $  (1,213,000) $  (40,844,000) $  (1,492,000)
                                                     --------------  -------------  --------------  -------------
                                                     --------------  -------------  --------------  -------------

Basic and diluted net loss per share...............  $        (1.09) $       (0.22) $        (1.97) $       (0.44)
                                                     --------------  -------------  --------------  -------------
                                                     --------------  -------------  --------------  -------------

Weighted average common shares outstanding.........      21,579,874      5,507,421      20,681,104      3,363,283
                                                     --------------  -------------  --------------  -------------
                                                     --------------  -------------  --------------  -------------
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       4
<PAGE>
                              APPNET SYSTEMS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                           SIX MONTHS ENDED
                                                                                               JUNE 30,
                                                                                     -----------------------------
<S>                                                                                  <C>             <C>
                                                                                          1999           1998
                                                                                     --------------  -------------
Cash flows from operating activities:
  Net loss.........................................................................  $  (38,705,000) $  (1,492,000)
  Adjustments to reconcile net loss to net cash used in operating activities:
    Amortization...................................................................      26,847,000        414,000
    Depreciation...................................................................         992,000         14,000
    Stock-based and other acquisition-related compensation.........................       7,951,000             --
    Write-off of deferred financing costs..........................................         559,000             --
    Beneficial conversion charge...................................................       1,052,000             --
    Changes in operating assets and liabilities:
      Accounts receivable, net.....................................................      (9,347,000)       (64,000)
      Other current assets.........................................................        (100,000)       (64,000)
      Accounts payable.............................................................        (475,000)       107,000
      Accrued liabilities..........................................................       7,754,000        (30,000)
                                                                                     --------------  -------------
        Net cash used in operating activities......................................      (3,472,000)    (1,115,000)
Cash flows from investing activities:
  Purchase of property and equipment, net..........................................      (2,451,000)      (161,000)
  Cash paid for acquired businesses, net of cash acquired..........................     (26,181,000)    (2,177,000)
  Other assets.....................................................................        (437,000)      (242,000)
                                                                                     --------------  -------------
        Net cash used in investing activities......................................     (29,069,000)    (2,580,000)
Cash flows from financing activities:
  Proceeds from long-term debt.....................................................              --        389,000
  Repayments of long-term debt.....................................................        (153,000)            --
  Borrowings under credit facilities...............................................      68,500,000      2,374,000
  Repayments of credit facilities..................................................     (97,861,000)            --
  Debt issue costs.................................................................        (628,000)            --
  Proceeds from issuance of common stock...........................................         375,000      2,949,000
  Net proceeds from initial public offering........................................      64,119,000             --
  Repurchase of common stock.......................................................         (22,000)            --
  Proceeds from issuance of preferred stock........................................       7,046,000             --
  Proceeds from exercise of stock options..........................................         215,000             --
                                                                                     --------------  -------------
        Net cash provided by financing activities..................................      41,591,000      5,712,000
Net increase in cash and cash equivalents..........................................       9,050,000      2,017,000
Cash and cash equivalents at beginning of period...................................       2,447,000             --
                                                                                     --------------  -------------
Cash and cash equivalents at end of period.........................................  $   11,497,000  $   2,017,000
                                                                                     --------------  -------------
                                                                                     --------------  -------------
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       5
<PAGE>
                              APPNET SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  (UNAUDITED)

1. BASIS OF PRESENTATION

    The accompanying consolidated financial statements of AppNet Systems, Inc.
and its subsidiaries (the "Company") are unaudited and include all normal
recurring adjustments which are, in the opinion of management, necessary for a
fair presentation of the results for the periods presented pursuant to the
instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information
and footnote disclosures normally included in the consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with the
Company's Registration Statement on Form S-1, which includes consolidated
financial statements and the notes thereto for the year ended December 31, 1998
and for the three months ended March 31, 1998 and 1999. The consolidated
operating results of operations for the three- and six-month periods ended June
30, 1999 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1999.

    On June 15, 1999, the Company declared a 2.85-for-one reverse stock split.
All share and per-share amounts, including stock option information, have been
restated in these notes and the accompanying consolidated financial statements
to reflect this reverse stock split.

2. INITIAL PUBLIC OFFERING

    On June 23, 1999, the Company completed its initial public offering of
securities and issued 6,000,000 shares of common stock at $12.00 per share,
which generated proceeds, net of issuance costs, of approximately $64.1 million.
The proceeds of the offering were used to repay outstanding borrowings under
various credit facilities and other outstanding debt, as well as fund general
corporate purposes, including working capital expenditures.

3. ACQUISITIONS

    From March 1998 through March 29, 1999, the Company acquired 12 businesses
in the Internet and electronic commerce professional services industry.
Collectively, these entities are referred to as the "Acquired Businesses." The
accounts of the Acquired Businesses are included in the accompanying
consolidated financial statements from the date of their respective
acquisitions. The five acquisitions occurring during 1999 (collectively, these
entities are referred to as the "1999 Acquired Businesses") are described as
follows:

    On January 8, 1999, the Company acquired all the outstanding stock of i33
communications corp. ("i33"), which is based in New York City. i33 provides
media buying and planning services, and, specializes in the design of creative
Internet solutions to its customers. The aggregate purchase price was
approximately $21.6 million, plus transaction costs, consisting of $10.3 million
paid in cash and $11.3 million paid in the form of convertible notes to the
previous i33 shareholders.

    On March 4, 1999, the Company acquired all of the issued and outstanding
stock of Sigma6, Inc. ("Sigma6"), which is based in Michigan and specializes in
providing brand identity services to its customers. The aggregate purchase price
was approximately $2.5 million, plus transaction costs, consisting of $1.25
million paid in cash and $1.25 million paid in shares of Company Common Stock.
If certain performance criteria are met during the 12-month period ending
December 31, 1999, the former stockholders of Sigma6 are entitled to a
contingent payment of up to $2.8 million consisting of cash and Company Common
Stock.

                                       6
<PAGE>
                              APPNET SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

3. ACQUISITIONS (CONTINUED)

    On March 15, 1999, the Company acquired certain assets of Salzinger &
Company, Inc. ("Salzinger"). The aggregate purchase price was approximately $8.5
million, plus transaction costs, consisting of $5.0 million in cash and $3.5
million in Company Common Stock. If certain performance criteria are met during
the period ending September 30, 2000, Salzinger is entitled to a contingent
payment of up to $5.0 million in cash or, cash and Company Common Stock.
Salzinger is based in Vienna, Virginia and provides business-level strategic
consulting services.

    On March 26, 1999, the Company acquired all of the issued and outstanding
stock of Internet Outfitters, Inc. ("Internet Outfitters"), which is based in
Santa Monica, California and provides localization and creative Web-development
services. The aggregate purchase price was approximately $9.5 million, plus
transaction costs, consisting of cash, $2.7 million in Company Common Stock, and
the issuance of 22,300 options to purchase Company Common Stock. If certain
performance criteria are met during the year ending December 31, 1999, the
former stockholders are entitled to a contingent payment of up to $3.5 million
in cash and Company Common Stock.

    On March 29, 1999, the Company acquired certain assets of Transform IT,
Incorporated ("Transform IT") which is based in Alexandria, Virginia and
provides process-level strategic consulting services. The aggregate purchase
price was approximately $5.1 million, plus transaction costs, consisting of $3.5
million in cash and $1.6 million in Company Common Stock. If certain performance
criteria are met during the twelve-month period ending March 31, 2000, Transform
IT is entitled to a contingent payment of up to $3.5 million in cash.

ALLOCATION OF PURCHASE CONSIDERATION

    The acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the recognized purchase price has been allocated,
based on preliminary estimates of fair value, to the tangible assets acquired
and liabilities assumed and, with the advice of independent valuation experts,
to the identifiable intangible assets, on the acquisition dates.

    In the six month period ended June 30, 1999, the Company recorded
identifiable intangibles related to the 1999 Acquired Businesses of
approximately $2.9 million. This purchase price allocation also resulted in the
allocation of approximately $43.0 million to goodwill. During the three months
ended June 30, 1999, management revised certain estimates related to certain tax
contingencies which resulted in a reduction of goodwill of approximately $2.6
million. As of June 30, 1999, the purchase price in excess of identified
tangible and intangible assets and liabilities assumed for the Acquired
Businesses in the amount of $135.0 million was allocated to goodwill. As a
result of the early stage of development of the Internet and electronic
commerce, the dynamics of this rapidly evolving industry and the expectation of
increasing competition, the recorded goodwill is being amortized on a
straight-line basis over three years, the estimated period of its benefit.

CONTINGENT PAYMENTS

    The Company may be required to make contingent payments through November
2000 to some of the businesses it acquired. These contingent payments are
payable in cash and stock, in one case at the option of the selling
stockholders. The amount of these payments will depend on the level of
achievement of the operating targets and the market price of the Company's
common stock. The majority of the former stockholders must remain employed

                                       7
<PAGE>
                              APPNET SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

3. ACQUISITIONS (CONTINUED)

by the Company in order to remain eligible to receive these payments. The
maximum aggregate amount of the cash portion of these payments, assuming the
operating targets are fully met, is approximately $20.0 million. During the six
months ended June 30, 1999 contingent payments were $0.2 million.

    The following unaudited pro forma consolidated amounts give effect to the
1999 and 1998 acquisitions as if they had occurred on January 1, 1998, by
consolidating the results of operations of the Acquired Businesses with the
results of AppNet for the six months ended June 30, 1999 and 1998. The pro forma
amounts do not purport to be indicative of the results of operations that would
have been achieved had the transactions been consummated as of the beginning of
1999 and 1998 and are not necessarily representative of future results of
operations.

<TABLE>
<CAPTION>
                                                                      FOR THE SIX MONTHS
                                                                        ENDED JUNE 30,
                                                                 ----------------------------
<S>                                                              <C>            <C>
                                                                     1999           1998
                                                                 -------------  -------------
Revenues.......................................................  $  47,334,000  $  29,401,000
Net loss attributable to common stockholders...................    (41,194,000)   (39,768,000)
Basic and diluted net loss per share...........................  $       (1.97) $       (2.33)
</TABLE>

4. ACCRUED LIABILITIES

    Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                                                        JUNE 30,     DECEMBER 31,
                                                                                          1999           1998
                                                                                      -------------  ------------
<S>                                                                                   <C>            <C>
Accrued compensation and benefits...................................................  $   3,496,000   $2,590,000
Accrued dividends on Class A Preferred Stock and Class B Preferred Stock............             --      689,000
Payments due to former shareholders of Acquired Businesses..........................      1,600,000    1,500,000
Accrued stock-based and other acquisition-related compensation......................      6,421,000           --
Other accrued liabilities...........................................................     10,612,000    2,132,000
                                                                                      -------------  ------------
Accrued liabilities.................................................................  $  22,129,000   $6,911,000
                                                                                      -------------  ------------
                                                                                      -------------  ------------
</TABLE>

5. DEBT

    In connection with the initial public offering, the Company converted
promissory notes of approximately $0.7 million plus accrued interest into 75,129
shares of the Company's common stock at a conversion price at 80% of the $12.00
initial public offering price. The Company recognized an interest charge of $1.1
million related to this conversion as the notes contained beneficial conversion
features which allowed the holders to convert at a discount from the initial
public offering price of the common stock.

    During May 1999, the Company converted promissory notes of approximately
$1.0 million plus accrued interest to former owners of an acquired business into
123,210 shares of the Company's common stock at a conversion price of $8.55 per
share.

                                       8
<PAGE>
                              APPNET SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

5. DEBT (CONTINUED)

    On January 8, 1999, the Company replaced its two existing credit agreements
("the 1998 Credit Facilities") with two credit agreements (together the "1999
Credit Facilities") entered into with a syndicate of lenders providing for $55.0
million in borrowings. The 1999 Credit Facilities consisted of $40.0 million in
credit loans (the "Guaranteed Loans"), which were guaranteed by a significant
stockholder and $15.0 million of additional credit loans (the "Unguaranteed
Loans"). On March 10, 1999, the Company amended the Unguaranteed Loans
increasing available borrowings from $15.0 million to $26.0 million. On June 23,
1999, in connection with the initial public offering, the Company terminated the
Guaranteed Loans and amended the Unguaranteed Loans decreasing available
borrowings from $26.0 million to $20.0 million (the "Amended 1999 Credit
Facility"). The Amended 1999 Credit Facility matures on August 24, 2001.

    The Amended 1999 Credit Facility includes certain restrictive covenants
which require the Company, among other things, to maintain minimum levels of
earnings before interest, taxes, depreciation, and amortization, ratios of cash
flow to debt service, place limits on capital expenditures and as of June 30,
1999 maintain a $10.0 million compensating balance with the lender. The
compensating balance requirement was removed by the lender subsequent to June
30, 1999 and is no longer required.

    In conjunction with the modification of the credit facilities on June 23,
1999, a charge of $0.6 million was recorded to write-off financing costs related
to the facilities.

    The Unguaranteed Loans bear interest, at the Company's option, at various
LIBOR rates or the lenders' base rate plus an applicable margin, as determined
by the Company's operating performance.

    Debt consists of the following:

<TABLE>
<CAPTION>
                                                                                       JUNE 30,     DECEMBER 31,
                                                                                         1999           1998
                                                                                     -------------  -------------
<S>                                                                                  <C>            <C>
Credit facilities:
Credit facility, bearing interest at the lender's prime rate plus .5% (8.25% at
  December 31, 1998), interest due monthly.........................................  $           -  $  19,730,000
Credit facility, bearing interest at the lender's prime rate (7.75% at December 31,
  1998), interest due monthly......................................................              -     17,731,000
Credit facility, bearing interest at the lender's prime rate plus .25% to 1.5% or
  various LIBOR rates plus 2.25% to 3.5%, interest due at varying monthly
  intervals, interest rate of 8.64% at June 30, 1999...............................      8,100,000              -
                                                                                     -------------  -------------
                                                                                         8,100,000     37,461,000
</TABLE>

                                       9
<PAGE>
                              APPNET SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

5. DEBT (CONTINUED)

<TABLE>
<CAPTION>
                                                                                       JUNE 30,     DECEMBER 31,
                                                                                         1999           1998
                                                                                     -------------  -------------
<S>                                                                                  <C>            <C>
Convertible notes:
Note payable, principal and interest due October 13, 1999, bearing interest at 7%,
  convertible at the option of the holder for common stock at $8.55 per share......        988,000      2,000,000
Note payable, principal and interest due June 29, 2003, bearing interest at 5%,
  convertible at 80% of common stock price upon a sale of Company or an initial
  public offering..................................................................              -        406,000
Notes payable, principal and interest due December 14, 2001, bearing interest at
  8%, convertible at the option of the holder for common stock at $11.40 per
  share............................................................................      2,000,000      2,000,000
Note payable, principal and interest due April 30, 2003, bearing interest at the
  prime rate (7.75% at December 31, 1998), interest payable quarterly at July 31,
  October 31, January 31 and April 30, convertible at the option of the holder at
  80% of common stock price on a sale of Company or an initial public offering.....              -        300,000
Note payable, principal and interest due January 8, 2002, bearing interest at 4.3%,
  two notes totaling $6,800,000 convertible at the option of the holder for common
  stock at $11.40 per share........................................................      6,800,000              -
                                                                                     -------------  -------------
                                                                                         9,788,000      4,706,000
Other long-term debt:
Note payable, principal and interest due January 8, 2002, bearing interest at 6%...      3,500,000              -
Notes payable, principal and interest due January 1, 2000, bearing interest at
  6%...............................................................................      1,000,000      1,000,000
Note payable to Smart Technology, L.L.C., due the earlier of an initial public
  offering or June 29, 2000, bearing interest at 12%...............................              -        150,000
Other notes payable................................................................        259,000        475,000
                                                                                     -------------  -------------
                                                                                         4,759,000      1,625,000
                                                                                     -------------  -------------
      Total debt...................................................................     22,647,000     43,792,000
Less current portion...............................................................     (2,230,000)    (2,426,000)
                                                                                     -------------  -------------
      Long-term debt, net of current portion.......................................  $  20,417,000  $  41,366,000
                                                                                     -------------  -------------
                                                                                     -------------  -------------
</TABLE>

6. CAPITAL STOCK

COMMON STOCK SUBJECT TO PUT RIGHTS

    In conjunction with a business acquisition in 1998, the Company issued
266,796 shares of Series A-1 Convertible Preferred Stock with a liquidation
value of $1.1 million. Pursuant to their terms, these shares were converted into
187,225 shares of Company Common Stock at the time of the GTCR Investment. As
part of the GTCR Investment, the Board of Directors authorized the repurchase of
138,455 shares of the common stock issued upon the conversion for $5.70 per

                                       10
<PAGE>
                              APPNET SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

6. CAPITAL STOCK (CONTINUED)

share which provided the holders a return equivalent to the liquidation value of
the Series A-1 Convertible Preferred Stock. In addition, the Board of Directors
agreed to grant the holders of the remaining 48,771 shares of Company Common
Stock the right to require the Company to repurchase their shares for cash at
$5.70 per share beginning on March 11, 1999, and extending for thirty days. The
Company repurchased 3,889 shares and the put rights on the remaining 44,882
shares expired in April 1999.

CLASS A AND CLASS B PREFERRED STOCK

    In connection with the initial public offering, the Company exchanged 45,430
shares of Class A Preferred Stock and 11,576 shares of Class B Preferred Stock,
including accrued dividends, for 4,936,808 shares of common stock at an exchange
rate based on the initial public offering price of $12.00 per share. Of the
4,936,808 shares of common stock, 3,813,864 shares of common stock were issued
to GTCR Golder Rauner, L.L.C. ("GTCR"), a significant investor of the Company.

    The dividends and accretion of financing costs associated with the Class A
and Class B Preferred Stock was $2.1 million for the six months ended June 30,
1999 and is classified as Dividends on and accretion of preferred stock in the
accompanying statements of operations.

STOCK WARRANTS

    The Company has issued warrants to purchase 84,795 shares of Company Common
Stock at $0.3007 per share, of which Smart Technology, L.L.C., a party related
to the Company's President and Chief Executive Officer held 70,175. In July
1999, a holder of a warrant for 14,620 shares exercised its warrants. The values
attributable to these warrants at the time of issuance are not significant and,
therefore, have not been separately presented in the consolidated financial
statements.

RESERVED STOCK

    At the time of the GTCR Investment, the Company's President and Chief
Executive Officer purchased 1,251,228 shares of Company Common Stock (the
"Reserved Stock") from the Company at a price of $0.3007 per share in exchange
for cash equal to the aggregate par value of the Reserved Stock and a promissory
note for the balance of the aggregate purchase price. The Company and the
Company's President and Chief Executive Officer are parties to a Senior
Management Agreement, dated June 29, 1998. The Senior Management Agreement
provides that the Company may repurchase any or all of the Reserved Stock at the
original purchase price in order to issue a corresponding number of shares and
options to purchase Company Common Stock to certain employees. This repurchase
right terminated upon the closing of the Company's initial public offering, at
that time 210,119 shares of Reserved Stock had not been repurchased by the
Company.

    The Company recognized a compensation charge of $2.5 million, recorded as
stock-based and acquisition-related compensation expense, upon completion of the
initial public offering in connection with the termination of the Company's
right to repurchase the remaining shares. The amount of the compensation charge
was determined based on the number of common shares that the Company could have
repurchased and the difference between $0.3007, the repurchase price, and the
initial public offering price of $12.00 per share.

                                       11
<PAGE>
                              APPNET SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

6. CAPITAL STOCK (CONTINUED)

DEFERRED COMPENSATION

    In March 1999, the Company issued 337,776 stock options to a member of
management. These options have an exercise price of $12.83 and vest ratably over
4 years. As a result of this grant, the Company recorded deferred compensation
expense of $481,000. The amount of deferred compensation expense was based on
the difference between the estimated fair market value of the Company Common
Stock at the date of grant, as determined by the most recent third party stock
transaction, and the stated exercise price. The Company amortized $35,000 of the
deferred compensation expense for the six months ended June 30, 1999 in the
unaudited consolidated statement of operations.

7. EARNINGS PER SHARE

    SFAS No. 128 "Earnings Per Share," requires the presentation of basic and
diluted earnings per share. Basic net income (loss) per share is computed by
dividing income (loss) attributable to common stockholders by the weighted
average number of common shares outstanding for the period. The diluted net
income (loss) per share data is computed using the weighted average number of
common shares outstanding plus the dilutive effect of common stock equivalents,
unless the common stock equivalents are antidilutive. Shares of common stock
which are contingently payable pursuant to the acquisition agreements are not
included in the calculation of weighted average shares outstanding for the
period presented, as circumstances may arise in which the shares would not be
issued. In addition, the impact of other potentially dilutive securities are
excluded from diluted earnings per share due to their antidilutive effect as of
June 30, 1999 as follows:

<TABLE>
<S>                                                                <C>
Stock options....................................................  1,819,000
Warrants.........................................................     85,000
Convertible notes................................................    888,000
</TABLE>

8. SEGMENT INFORMATION

    The Company currently operates in two operating segments: professional
services and electronic commerce processing. For the six months ended June 30,
1999 and 1998, the electronic commerce processing segment was not significant to
the overall financial statements.

                                       12
<PAGE>
                              APPNET SYSTEMS, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS

    The following discussion and analysis compares the three- and six-month
periods ended June 30, 1999 to the corresponding periods ended June 30, 1998 for
AppNet Systems, Inc. and its subsidiaries ("AppNet," the "Company," "we," "us"
and "our") and should be read in conjunction with the Company's consolidated
financial statements and notes thereto appearing elsewhere in this Form 10-Q and
in conjunction with the Company's March 29, 1999 Registration Statement on Form
S-1, as amended. The matters discussed herein and elsewhere in this 10-Q may
include forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include, without
limitation, any statement that may predict, forecast, indicate or imply future
results, performance or achievements and may contain the words "believe,"
"anticipate," "expect," "estimate," "project," "will be," "will continue," "will
likely result" or similar words or phrases. The matters discussed herein involve
risks and uncertainties which could result in operating performance that is
materially different from that implied in the forward- looking statements. Risks
that could cause actual results to differ materially from those in the
forward-looking statements include, but are not limited to, risks related to
government regulation of the Internet and electronic commerce, risks related to
increased competition in the Internet and electronic commerce industry, the need
to respond to rapid technological advances in the Internet and electronic
commerce industry, risks posed by the Year 2000 problem for the Internet and
electronic commerce industry and general economic conditions. Additional
information concerning these and other risks and uncertainties is contained from
time to time in the Company's filings with the Securities and Exchange
Commission. New risk factors emerge from time to time, and it is not possible
for management to predict all such risk factors nor can it assess the impact of
all such risk factors on the Company's business or the extent to which any
factor or combination of factors may cause actual results to differ materially
from those contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward- looking
statements as a prediction of actual results.

OVERVIEW

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

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

    On June 15, 1999, AppNet declared a 2.85-for-one reverse stock split. All
share and per-share amounts, including stock option information, have been
restated to reflect this reverse stock split.

    On June 23, 1999, the Company completed its initial public offering of
securities and issued 6,000,000 shares of common stock at $12.00 per share,
which generated proceeds, net of issuance costs, of approximately $64.1 million.
The proceeds of the offering were used to repay outstanding borrowings under
various credit facilities and other outstanding debt, as well as fund general
corporate purposes, including working capital expenditures.

                                       13
<PAGE>
    Operating results may fluctuate from quarter to quarter and from year to
year based on such factors as the number, size, type and profitability of
projects in which we are engaged. Other factors that could cause our quarterly
results to fluctuate include:

    - effectiveness of integrating acquisitions with existing operations;

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

    - the entrance of new competitors; and

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

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
  1998

    REVENUES.  Revenue for the three months ended June 30, 1999 increased $24.2
million to $25.1 million from $0.8 million for the three months ended June 30,
1998 due to acquisitions the Company made during the second half of 1998 and the
first half of 1999, as well as internal growth.

    COST OF REVENUES.  Cost of revenues for the three months ended June 30, 1999
increased $13.3 million to $14.2 million from $0.9 million for the three months
ended June 30, 1998. The increase in cost of revenues was primarily driven by an
increase in average billable headcount resulting from the acquisitions that
occurred during 1998 and 1999, as well as internal growth. As a percentage of
revenues, cost of revenues for the three months ended June 30, 1998 decreased to
56.7% from 107.7% for the three months ended June 30, 1998.

    OPERATING EXPENSES.  Operating expenses for three months ended June 30, 1999
increased by $29.1 million to $30.1 million from $1.1 million for the three
months ended June 30, 1998. The increase in operating expenses for the three
months ended June 30, 1999 was attributable primarily to an increase in selling
and marketing, general and administrative, and stock-based and other
acquisition-related compensation expense as well as depreciation and
amortization expenses.

    SELLING AND MARKETING.  Selling and marketing expenses for the three months
ended June 30, 1999 increased $1.6 million to $1.6 million from $9,000 for the
three months ended June 30, 1998. As a percentage of revenue, selling and
marketing expenses for the three months ended June 30, 1999 increased to 6.4%
from 1.1% for the three months ended June 30, 1998. The increase in selling and
marketing expenses is a result of the acquisitions we completed during the
second half of 1998 and the first half of 1999 and the development of our
corporate sales and marketing staff. Selling and marketing expenses could
continue to increase as a percentage of our revenues in future periods as we
continue to build our corporate sales team and expand our marketing strategy.

    GENERAL AND ADMINISTRATIVE.  General and administrative expenses for the
three months ended June 30, 1999 increased $7.3 million to $8.0 million from
$0.7 million for the three months ended June 30, 1998. The increase in general
and administrative expenses is a result of the build up of corporate
infrastructure through 1998 and into 1999 to assist in the integration of
acquisitions. As a result of anticipated additional hiring costs associated with
the integration of the businesses we acquired in 1998 and 1999, our general and
administrative expenses are expected to continue to increase, although they may
decline as a percentage of our revenues. As a percentage of revenue, general and
administrative expenses for the three months ended June 30, 1999 decreased to
31.7% from 81.4% for the three months ended June 30, 1998.

    STOCK-BASED AND OTHER ACQUISITION-RELATED COMPENSATION.  Stock-based and
other acquisition-related compensation expenses for the three months ended June
30, 1999 was $5.5 million. The Company recognized a compensation charge of $2.5
million during the three months ended June 30, 1999, recorded

                                       14
<PAGE>
as stock-based and acquisition-related compensation expense, upon completion of
the initial public offering in connection with the termination of the Company's
right to repurchase shares of its common stock from an officer of the Company.
The amount of the compensation charge was determined based on the number of
common shares that the Company could have repurchased from the officer and the
difference between $0.3007, the repurchase price, and the initial public
offering price of $12.00 per share. The remaining balance of $3.0 million is
attributable to the contingent payments due to former shareholders of businesses
acquired that must remain employed by AppNet to receive the contingent payments.
The amount is computed based on the fair market value of our common stock at the
end of the reporting period and assumes that operating targets will be fully
met. The amount of this compensation expense may fluctuate in future reports
based on the probability of achievement of the operating targets by each of the
acquired businesses and the market price of our common stock at the end of each
reporting period.

    DEPRECIATION AND AMORTIZATION.  Depreciation and amortization expense for
the three months ended June 30, 1999 increased $14.7 million to $15.1 million
from $0.4 million for the three months ended June 30, 1998. The increase is
primarily due to the amortization of intangible assets resulting from the
acquisitions made during the second half of 1998 and the first half of 1999. Our
goodwill and related amortization may increase in future periods if AppNet is
required to pay additional consideration for its acquisitions.

    INTEREST EXPENSE.  Interest expense for the three months ended June 30, 1999
increased $2.4 million to $2.5 million from $0.1 for the three months ended June
30, 1998 due to additional borrowings under our credit facilities and issuance
of notes payable to sellers of businesses acquired during the second half of
1998 and the first half of 1999. In connection with our initial public offering,
we recorded an interest charge of $1.1 million during the three months ended
June 30, 1999 related to beneficial conversion rights of convertible notes
because the notes contained conversion features requiring their conversion at a
discount from the initial public offering price of the common stock.

    OTHER EXPENSE, NET.  Other expense of $0.6 million for the three months
ended June 30, 1999 includes the write-off of deferred financing costs in
connection with the refinancing of our credit facilities during the period.

    INCOME TAX PROVISION.  The provision for income taxes was $50,000 for the
three months ended June 30, 1999 and is related to state income taxes.

SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998

    REVENUES.  Revenue for the six months ended June 30, 1999 increased $43.7
million to $44.7 million from $1.0 million for the six months ended June 30,
1998 due to acquisitions the Company made during the second half of 1998 and the
first half of 1999, as well as internal growth.

    COST OF REVENUES.  Cost of revenues for the six months ended June 30, 1999
increased $24.6 million to $25.7 million from $1.0 million for the six months
ended June 30, 1998. The increase in cost of revenues was primarily driven by an
increase in average billable headcount resulting from the acquisitions that
occurred during 1998 and 1999, as well as internal growth. As a percentage of
revenues, cost of revenues for the six months ended June 30, 1998 decreased to
57.4% from 101.1% for the six months ended June 30, 1998.

    OPERATING EXPENSES.  Operating expenses for six months ended June 30, 1999
increased $51.9 million to $53.3 million from $1.4 million for the six months
ended June 30, 1998. The increase in operating expenses for the six months ended
June 30, 1999 was attributable primarily to an increase in selling and
marketing, general and administrative, and stock-based and other
acquisition-related compensation expenses as well as depreciation and
amortization expenses.

                                       15
<PAGE>
    SELLING AND MARKETING.  Selling and marketing expenses for the six months
ended June 30, 1999 increased $2.8 million to $2.8 million from $12,000 for the
six months ended June 30, 1998. As a percentage of revenues, selling and
marketing expenses for the six months ended June 30, 1999 increased to 6.2% from
1.2% for the six months ended June 30, 1998. The increase in selling and
marketing expenses is a result of the acquisitions we completed during the
second half of 1998 and the first half of 1999 and the development of our
corporate sales and marketing staff. Selling and marketing expenses could
continue to increase as a percentage of our revenues in future periods as we
continue to build our corporate sales team and expand our marketing strategy.

    GENERAL AND ADMINISTRATIVE.  General and administrative expenses for the six
months ended June 30, 1999 increased $13.8 million to $14.7 million from $0.9
million for the six months ended June 30, 1998. The increase in general and
administrative expenses is a result of the build up of corporate infrastructure
through 1998 and into 1999 to assist in the integration of acquisitions. As a
result of anticipated additional hiring costs associated with the integration of
the businesses we acquired in the second half of 1998 and the first half of
1999, our general and administrative expenses are expected to continue to
increase, although they may decline as a percentage of our revenues. As a
percentage of revenue, general and administrative expenses for the six months
ended June 30, 1999 decreased to 32.9% from 89.8% for the six months ended June
30, 1998.

    STOCK-BASED AND OTHER ACQUISITION-RELATED COMPENSATION.  Stock-based and
other acquisition-related compensation expenses for the six months ended June
30, 1999 was $8.0 million. Approximately $5.5 million is attributable to the
contingent payments due to former shareholders of businesses acquired that must
remain employed by AppNet to receive the contingent payments. The amount is
computed based on the fair market value of our common stock at the end of the
reporting period and assumes that operating targets will be fully met. The
amount of this compensation expense may fluctuate in future periods based on the
probability of achievement of the operating targets by each of the acquired
businesses and the market price of our common stock at the end of each reporting
period. In addition, the Company recognized a compensation charge of $2.5
million during the six months ended June 30, 1999, recorded as stock-based and
acquisition-related compensation expense, upon completion of the initial public
offering in connection with the termination of the Company's right to repurchase
shares of its common stock from an officer of the Company. The amount of the
compensation charge was determined based on the number of common shares that the
Company could have repurchased from the officer and the difference between
$0.3007, the repurchase price, and the initial public offering price of $12.00
per share.

    DEPRECIATION AND AMORTIZATION.  Depreciation and amortization expense for
the six months ended June 30, 1999 increased $27.4 million to $27.8 million from
$0.4 million for the six months ended June 30, 1998. The increase is primarily
due to the amortization of intangible assets resulting from the acquisitions
made during the second half of 1998 and the first half of 1999. Our goodwill and
related amortization may increase in future periods if AppNet is required to pay
additional consideration for its acquisitions.

    INTEREST EXPENSE.  Interest expense for the six months ended June 30, 1999
increased $3.6 million to $3.7 million from $0.1 for the six months ended June
30, 1998 due to additional borrowings under our credit facilities and issuance
of notes payable to sellers of businesses acquired during the second half of
1998 and the first half of 1999. In connection with our initial public offering,
we had an interest charge of $1.1 million during the six months ended June 30,
1999 related to beneficial conversion rights of convertible notes because the
notes contained conversion features requiring their conversion at a discount
from the initial public offering price of the common stock.

    OTHER EXPENSE, NET.  Other expense of $0.6 million for the six months ended
June 30, 1999 includes the write-off of deferred financing costs in connection
with the refinancing of our credit facilities during the period.

                                       16
<PAGE>
    INCOME TAX PROVISION.  The provision for income taxes was $0.2 million for
the six months ended June 30, 1999 and is related to state income taxes.

PRO FORMA RESULTS OF OPERATIONS

    The pro forma consolidated statements of operations for the three and six
months ended June 30, 1998 give effect to the 12 acquisitions we made in 1998
and 1999 and GTCR's investment in AppNet, as if these transactions had occurred
on January 1, 1998. The pro forma consolidated statement of operations for the
six months ended June 30, 1999 give effect to the acquisitions we made in 1999
as if these transactions had occurred on January 1, 1998. The consolidated
statement of operations for the three months ended June 30, 1999 represents
actual results due to no acquisitions occurring during the period. The pro forma
consolidated results of operations may not be indicative of future operations as
a result of our continued integration of acquired companies and the development
of our corporate infrastructure.

    The information in the pro forma consolidated statement of operations for
the six months ended June 30, 1999 and for the three and six months ended June
30, 1998 have been derived from the unaudited consolidated statements of
operations of AppNet for the six months ended June 30, 1999 and the three and
six months ended June 30, 1998, and the unaudited statements of operations for
the companies acquired in 1999 for the periods during 1999 prior to their
acquisition.

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

                                       17
<PAGE>
                              APPNET SYSTEMS, INC.

                PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED               SIX MONTHS ENDED
                                                              JUNE 30,                        JUNE 30,
                                                   ------------------------------  ------------------------------
<S>                                                <C>             <C>             <C>             <C>
                                                        1998            1999            1998            1999
                                                   --------------  --------------  --------------  --------------

<CAPTION>
                                                                      (ACTUAL)
<S>                                                <C>             <C>             <C>             <C>
Revenues.........................................  $   15,198,000  $   25,063,000  $   29,401,000  $   47,334,000
Cost of revenues.................................       9,197,000      14,220,000      17,651,000      27,352,000
                                                   --------------  --------------  --------------  --------------
    Gross profit.................................       6,001,000      10,843,000      11,750,000      19,982,000
Operating expenses:
    Selling and marketing........................         682,000       1,594,000       1,148,000       2,947,000
    General and administrative...................       4,057,000       7,957,000       7,638,000      15,359,000
    Stock-based and other acquisition-related
      Compensation...............................       4,162,000       5,464,000       8,343,000       8,024,000
    Depreciation and amortization................      14,974,000      15,104,000      29,608,000      27,951,000
                                                   --------------  --------------  --------------  --------------
      Total operating expenses...................      23,875,000      30,119,000      46,737,000      54,281,000
                                                   --------------  --------------  --------------  --------------
Loss from operations.............................     (17,874,000)    (19,276,000)    (34,987,000)    (34,299,000)
    Interest expense.............................       1,478,000       2,479,000       2,977,000       3,955,000
    Other expense, net...........................         277,000         558,000          64,000         558,000
                                                   --------------  --------------  --------------  --------------
Loss before income taxes.........................     (19,629,000)    (22,313,000)    (38,028,000)    (38,812,000)
Income tax provision (benefit)...................          64,000          50,000          30,000         150,000
                                                   --------------  --------------  --------------  --------------
Net loss.........................................     (19,693,000)    (22,363,000)    (38,058,000)    (38,962,000)
Dividends on and accretion of preferred stock....        (855,000)     (1,100,000)     (1,710,000)     (2,232,000)
                                                   --------------  --------------  --------------  --------------
Net loss attributable to common stockholders.....  $  (20,548,000) $  (23,463,000) $  (39,768,000) $  (41,194,000)
                                                   --------------  --------------  --------------  --------------
                                                   --------------  --------------  --------------  --------------
Basic and diluted net loss per share.............  $        (1.12) $        (1.09) $        (2.33) $        (1.97)
                                                   --------------  --------------  --------------  --------------
                                                   --------------  --------------  --------------  --------------
Weighted average common shares outstanding.......      18,369,443      21,579,874      17,076,044      20,935,645
                                                   --------------  --------------  --------------  --------------
                                                   --------------  --------------  --------------  --------------
</TABLE>

THREE MONTHS ENDED JUNE 30, 1999 (ACTUAL) COMPARED TO THE THREE MONTHS ENDED
  JUNE 30, 1998 (PRO FORMA)

    REVENUES.  Revenues for the three months ended June 30, 1999 increased $9.9
million, or 64.9%, to $25.1 million from pro forma revenues of $15.2 million for
the three months ended June 30, 1998 due to an increase in fees for professional
services that resulted from internal growth.

    COST OF REVENUES.  Cost of revenues for the three months ended June 30, 1999
increased $5.0 million, or 54.6%, to $14.2 million from pro forma cost of
revenues of $9.2 million for the three months ended June 30, 1998, which was
primarily driven by internal growth. As a percentage of revenues, cost of
revenues for the three months ended June 30, 1999 decreased to 56.7% from 60.5%
for the three months ended June 30, 1998, due to increases in average bill rates
and utilization.

                                       18
<PAGE>
    OPERATING EXPENSES.  Operating expenses for the three months ended June 30,
1999 increased $6.2 million, or 26.2%, to $30.1 million from pro forma operating
expenses of $23.9 million for the three months ended June 30, 1998. The increase
in operating expenses for the three months ended June 30, 1999 was attributable
primarily to an increase in selling and marketing, general and administrative,
and stock-based and other acquisition-related compensation expenses, as well as
depreciation and amortization expenses.

    SELLING AND MARKETING.  Selling and marketing expenses for the three months
ended June 30, 1999 increased $0.9 million, or 133.7%, to $1.6 million from pro
forma selling and marketing expenses of $0.7 million for the three months ended
June 30, 1998. As a percentage of revenues, selling and marketing expenses for
the three months ended June 30, 1999 increased to 6.4% from 4.5% for the three
months ended June 30, 1998. The increase in selling and marketing expenses is a
result of the development of our corporate sales and marketing staff and promote
our brand identity.

    GENERAL AND ADMINISTRATIVE.  General and administrative expenses for the
three months ended June 30, 1999 increased $3.9 million, or 96.1%, to $8.0
million from pro forma general and administrative expenses of $4.1 million for
the three months ended June 30, 1998. As a percentage of revenues, general and
administrative expenses for the three months ended June 30, 1999 increased to
31.7% from 26.7% for the three months ended June 30, 1998, which is a result of
the build up of corporate infrastructure through 1998 and into 1999 to assist in
the integration of acquisitions.

    STOCK-BASED AND OTHER ACQUISITION-RELATED COMPENSATION.  Stock-based and
other acquisition-related compensation expenses for the three months ended June
30, 1998 increased $1.3 million, or 31.3%, to $5.5 million from pro forma
stock-based and other acquisition-related compensation expenses of $4.2 million
for the three months ended June 30, 1998. The pro forma amounts are computed
based on the assumption that operating targets will be fully met and that the
fair market value of our common stock is $12.00 per share, the initial public
offering price, as if the 1999 acquisitions had occurred on January 1, 1998.

    INTEREST EXPENSE.  Interest expense for the three months ended June 30, 1999
increased $1.0 million, or 67.7%, to $2.5 million from pro forma interest
expense of $1.5 for the three months ended June 30, 1998 due to additional
borrowings under our credit facilities and issuance of notes payable in
connection with the acquisitions. In connection with our initial public
offering, we had an interest charge of $1.1 million during the three months
ended June 30, 1999 related to beneficial conversion rights of convertible notes
because the notes contained conversion features requiring their conversion at a
discount from the initial public offering price of the common stock.

    OTHER EXPENSE, NET.  Other expense of $0.6 million for the three months
ended June 30, 1999 includes the write-off of deferred financing costs in
connection with the refinancing of AppNet's credit facilities during the period.
For the three months ended June 30, 1998, pro forma other expense of $0.3
million includes the write-off of an investment in a joint venture that was
deemed to have no value due to the failure of the venture to generate a customer
base and to generate sufficient revenues to cover operating expenses, which
resulted in the abandonment of the operations of the venture.

    INCOME TAX PROVISION.  The provision for income taxes was $50,000 for the
three months ended June 30, 1999 and the pro forma income tax provision for the
three months ended June 30, 1998 was $64,000.

SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998

    REVENUES.  Pro forma revenues for the six months ended June 30, 1999
increased $17.9 million, or 61.0%, to $47.3 million from $29.4 million for the
six months ended June 30, 1998 due to increase in fees for professional services
that resulted from internal growth.

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    COST OF REVENUES.  Pro forma cost of revenues for the six months ended June
30, 1999 increased $9.7 million, or 55.0%, to $27.4 million from $17.7 million
for the six months ended June 30, 1998. This increase in pro forma cost of
revenues was primarily driven by internal growth. The decrease of cost of
revenues as a percentage of pro forma revenues is the result of increases in
average bill rates and utilization. As a percentage of pro forma revenues, pro
forma cost of revenues for the six months ended June 30, 1998 decreased to 57.8%
from 60.0% for the six months ended June 30, 1998.

    OPERATING EXPENSES.  Pro forma operating expenses for six months ended June
30, 1999 increased $7.5 million, or 16.1%, to $54.3 million from $46.7 million
for the six months ended June 30, 1998. The increase in pro forma operating
expenses for the six months ended June 30, 1999 was attributable primarily to an
increase in pro forma selling and marketing and pro forma general and
administrative expenses, offset by a decrease in pro forma stock-based and other
acquisition-related compensation expenses as well as pro forma depreciation and
amortization expenses.

    SELLING AND MARKETING.  Pro forma selling and marketing expenses for the six
months ended June 30, 1999 increased $1.8 million, or 156.7%, to $2.9 million
from $1.1 million for the six months ended June 30, 1998. As a percentage of pro
forma revenues, pro forma selling and marketing expenses for the six months
ended June 30, 1999 increased to 6.2% from 3.9% for the six months ended June
30, 1998. The increase in pro forma selling and marketing expenses is a result
of the development of our corporate sales and marketing staff and promote our
brand identity.

    GENERAL AND ADMINISTRATIVE.  Pro forma general and administrative expenses
for the six months ended June 30, 1999 increased $7.7 million, or 101.1%, to
$15.4 million from $7.6 million for the six months ended June 30, 1998. As a
percentage of pro forma revenues, pro forma general and administrative expenses
for the six months ended June 30, 1999 increased to 32.4% from 26.0% for the six
months ended June 30, 1998, which is a result of the build up of corporate
infrastructure through 1998 and into 1999 to assist in the integration of
acquisitions.

    STOCK-BASED AND OTHER ACQUISITION-RELATED COMPENSATION.  Pro forma
stock-based and other acquisition-related compensation expenses for the six
months ended June 30, 1998 decreased $0.3 million, or 3.8%, to $8.0 million from
$8.3 million for the six months ended June 30, 1998. The pro forma amounts are
computed based on the assumption that operating targets will be fully met and
that the fair market value of our common stock is $12.00 per share, the initial
public offering price, as if the 1999 acquisitions had occurred on January 1,
1998.

    DEPRECIATION AND AMORTIZATION.  Pro forma depreciation and amortization
expense for the six months ended June 30, 1999 decreased $1.7 million, or 5.6%,
to $28.0 million from $29.6 million. The decrease is due to intangible assets,
such as assembled workforce and proprietary technology that have useful lives of
12 to 48 months, which would have been fully amortized on a pro forma basis as
of June 30, 1999 if the acquisitions had occurred on January 1, 1998.

    INTEREST EXPENSE.  Pro forma interest expense for the six months ended June
30, 1999 increased $1.0 million, or 32.9%, to $4.0 million from $3.0 for the six
months ended June 30, 1998 due to additional borrowings under our credit
facilities and issuance of notes payable in connection with the acquisitions. In
connection with our initial public offering, we had an interest charge of $1.1
million during the six months ended June 30, 1999 related to beneficial
conversion rights of convertible notes because the notes contained conversion
features requiring their conversion at a discount from the initial public
offering price of the common stock.

    OTHER EXPENSE, NET.  Pro forma other expense of $0.6 million for the six
months ended June 30, 1999 includes the write-off of deferred financing costs in
connection with the refinancing of our credit facilities during the period. Pro
forma other expense of $0.3 million for the six months ended June 30, 1998
includes the write-off of an investment in a joint venture that was deemed to
have no value due to the failure of the

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<PAGE>
venture to generate a customer base and to generate sufficient revenues to cover
operating expenses, which resulted in the abandonment of the operations of the
venture.

    INCOME TAX PROVISION.  The pro forma provision for income taxes was $150,000
and $30,000 for the six months ended June 30, 1999 and 1998, respectively.

LIQUIDITY AND CAPITAL RESOURCES

    At June 30, 1999, we had approximately $11.5 million in cash and cash
equivalents. We have financed our operations and acquisitions primarily through
the issuance of preferred stock, borrowings under credit facilities and the
issuance of common stock. For the six months ended June 30, 1999, cash used in
operations was $3.5 million and $29.1 million was used in investing activities.
The principal use of cash in investing activities was to finance acquisitions.
As we continue to grow our business and integrate the businesses we have
acquired, we expect to use cash from operations to fund these activities and to
fund selling and marketing activities.

    Net cash provided by financing activities was $41.6 million for the six
months ended June 30, 1999. Financing activities included net proceeds from the
initial public offering of $64.1 million, proceeds from issuance of preferred
stock, common stock and exercise of stock options of $7.6 million, additional
borrowings of $68.5 million, offset, in part, by debt repayments of $98.0
million.

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

    In connection with certain acquisitions, we issued notes to the selling
stockholders some of which are convertible into shares of our common stock. The
balance of the notes at June 30, 1999 was approximately $14.3 million, $9.8
million of which is convertible into shares of our common stock. These notes
have varying maturities, from October 1999 through April 2003, and bear interest
at rates between 4.33% and 8.0% as of June 30, 1999.

    In June 1999, we terminated one of our credit facilities that provided for a
revolving line of credit up to $40.0 million, which was guaranteed by an
affiliate, and decreased the available borrowings from $26.0 million to $20.0
million on our other unguaranteed facility. The amended unquaranteed credit
facility expires on August 24, 2001, and bears interest, at our option, at LIBOR
or the lenders' prime rate, plus an applicable margin based on our operating
performance. The credit facility is secured by all of our assets and contains
various restrictive covenants that, among other things, require us to maintain
specified financial ratios, restrict us from paying dividends to our common
stockholders and, as of June 30, 1999, maintain a compensating balance of $10.0
million. The compensating balance requirement was removed by the lender
subsequent to June 30, 1999 and is no longer required. At June 30, 1999,
approximately $10.7 million remained available for borrowing under our credit
facility based on the level of financial ratios, as set forth in the credit
facility.

    Our capital expenditures for the six months ended June 30, 1999 were
approximately $2.5 million. Historically, capital expenditures have been used to
make leasehold improvements to our leased office space and to purchase computer
hardware and software and furniture and fixtures. We do not have any material
commitments for capital expenditures for the foreseeable future. However, we do
plan to make capital expenditures, which may include office space, over the next
two years to further develop our electronic commerce outsourcing services.

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<PAGE>
    We may be required to make contingent payments through November 2000 to some
of the businesses we acquired. These contingent payments are payable in cash and
stock, in one case at the option of the selling stockholders. The amount of
these payments will depend on the level of achievement of the operating targets
and the market price of our common stock. The majority of the former
stockholders must remain employed by us in order to remain eligible to receive
these payments. The maximum aggregate amount of the cash portion of these
payments, assuming the operating targets are fully met, is approximately $20.0
million. During the six months ended June 30, 1999 contingent payments were $0.2
million.

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

RECENT ACCOUNTING PRONOUNCEMENTS

    In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities", which establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. We have determined that the adoption of SFAS No. 133 will
not have a material effect on our results of operations, financial position or
cash flows.

YEAR 2000

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

    We are in the process of obtaining assurances from our suppliers that they
are year 2000 compliant. We have established a year 2000 Executive Steering
Committee, appointed a year 2000 Compliance Program Manager and adopted a formal
compliance program to oversee and coordinate our year 2000 compliance efforts
throughout our organization. This program is designed to ensure consistency and
minimize the impact of year 2000 problems on our operations. Our year 2000
compliance program consists of the following five phases: awareness, assessment,
remediation, testing and implementation. Based on the early stages of our year
2000 compliance program, we cannot estimate the percentage of completion for
each of these phases.

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

    Our costs in connection with year 2000 compliance to date are approximately
$0.2 million. At this time, we estimate the potential costs of becoming year
2000 compliant to be between $0.3 million and $0.6 million, which includes the
cost to replace hardware and software, engage outside consulting services and
internal labor costs. However, as we continue to implement our year 2000
compliance program, these cost estimates may need to be significantly revised,
which could have a material adverse effect on our business, financial condition
or results of operations. To date, we have completed the following tasks at
several locations: installation of year 2000 compliant security systems,
installation of year 2000 compliant phone and telecommunications equipment and
installation of year 2000 compliant workstations and servers.

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

    If we fail to address a year 2000 compliance problem in one of our systems,
the result could be a failure or interruption of normal business operations. We
believe that our year 2000 compliance program, when fully implemented, should
minimize the risk of significant interruptions to our operations. We expect to
complete our compliance program during the fourth quarter of 1999. At this
point, we believe that the most reasonably likely worst case scenario may
involve areas we do not directly control, such as:

    - Our suppliers may provide inaccurate or misleading information to us with
      respect to their products' and/or services' year 2000 compliance. If we
      had to replace every information technology system developed by a third
      party throughout our organization, we estimate the cost to be $7.2 million
      and that it would result in significant interruption of our operations.

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

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

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

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

ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    We are exposed to market risk related to changes in interest rates on our
long-term credit facility. We are able to manage our interest rate risk to some
degree through management's option to select the factor used to determine its
interest rate. Our credit facility is a variable rate credit facility and bears
interest, at

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<PAGE>
our option, at LIBOR or the lenders' prime rate plus an applicable margin based
on our operating performance. The balance outstanding as of June 30, 1999 was
$8.1 million, which bears interest at a rate of 8.64%. Assuming the amount
outstanding at June 30, 1999, which was $8.1 million, was outstanding for the
entire year, we estimate that a one percentage point change to the weighted
average interest rate at June 30, 1999 would equal a $0.1 million change in
interest expense.

PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

    On June 23, 1999, AppNet issued 4,936,808 shares of its common stock in
exchange for 45,430 shares of its Class A Preferred Stock and 11,576 shares of
its Class B Preferred Stock at an exchange rate of $12.00 per share. These
securities were issued without registration under the Securities Act of 1933, as
amended, in reliance upon an exemption from registration under Section 3(a)(9).

    On June 23, 1999, AppNet issued 75,129 shares of its common stock upon the
conversion of promissory notes of approximately $0.7 million plus accrued
interest at a conversion price of $9.60 per share. These securities were issued
without registration under the Securities Act of 1933, as amended, in reliance
upon an exemption from registration under Section 3(a)(9).

    On June 17, 1999, the Securities and Exchange Commission declared the
Company's Registration Statement on Form S-1 (File No. 333-75205) effective. On
June 23, 1999, the Company closed its offering of an aggregate of 6,000,000
shares of its common stock at an offering price of $12.00 per share for an
aggregate offering price of $72.0 million. The managing underwriters for the
offering were Credit Suisse First Boston Corporation, Hambrecht & Quist LLC,
Deutsche Bank Securities Inc., The Robinson-Humphrey Company, LLC and Charles
Schwab & Co., Inc. Net proceeds to the Company, after deducting underwriting
discounts of and commissions of $5.0 million and offering expenses of $2.9
million, were approximately $64.1 million. None of the expenses incurred in the
initial public offering were direct or indirect payments to directors or
officers of AppNet, their associates or to others, or to persons owning ten (10)
percent or more of any class of equity securities of AppNet or to affiliates of
AppNet.

    The Company used the net proceeds from its initial public offering to repay
outstanding borrowings under various credit facilities and other outstanding
debt in an amount aggregating $62.4 million and for general corporate purposes,
including working capital expenditures, in an amount aggregating $1.7 million.
Except for a repayment of approximately $3,300 to Smart Technology, L.L.C., an
associate of our Chief Executive Officer, none of the net proceeds were used to
make direct or indirect payments to directors or officers of AppNet, their
associates or to others, or to persons owning ten (10) percent or more of any
class of equity securities of AppNet or to affiliates of AppNet.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

    (a) Exhibits required by Item 601 of Regulation S-K:

        27 Financial Data Schedule

    (b) Reports on Form 8-K during the three months ended June 30,1999:

        None.

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<PAGE>
SIGNATURE

    Pursuant to the requirements 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.

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

Date: August 16, 1999                         By: /s/ JACK PEARLSTEIN
                                              ---------------------------------------------
                                              Jack Pearlstein
                                              Senior Vice President, Chief Financial Officer
                                              and Treasurer
</TABLE>

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