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

                                    FORM 10-K

                  Annual Report Pursuant To Section 13 Or 15(D)
                     Of The Securities Exchange Act Of 1934

                   For the fiscal year ended December 31, 1999
                        Commission file number 000-26263
                                   APPNET, INC
             (Exact name of registrant as specified in its charter)

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

                            6707 Democracy Boulevard
                               Bethesda, MD 20817
                    (Address of principal executive offices)

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

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

           Securities registered pursuant to Section 12(g) of the Act:
                    Common Stock, par value $0.0005 per share
                              (Title of each class)

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

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

As of February 29, 2000,  approximately  33,934,000  shares of Common Stock were
outstanding,  and the  aggregate  market value of the Common Stock (based on the
closing  sale  price  of the  shares  on the  Nasdaq  National  Market)  held by
non-affiliates  was  approximately   $984.9  million.   Determination  of  stock
ownership by  affiliates  was made solely for the purpose of  responding to this
requirement,  and  registrant is not bound by this  determination  for any other
purpose.

                       DOCUMENTS INCORPORATED BY REFERENCE

The Company's  Proxy Statement for its 2000 Annual Meeting of Shareholders to be
filed with the Commission under Regulation 14A is incorporated by reference into
Part III of this Form 10-K to the extent indicated in Part III hereof.
<PAGE>



                                TABLE OF CONTENTS
                                                                          Page
                                     PART I
ITEM 1. BUSINESS                                                            3
        RISK FACTORS                                                       12
ITEM 2. PROPERTIES                                                         17
ITEM 3. LEGAL PROCEEDINGS                                                  17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                17

                                     PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
           RELATED STOCKHOLDER MATTERS                                     18
ITEM 6. SELECTED FINANCIAL DATA                                            19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS                   20
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES
           ABOUT MARKET RISK                                               26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                        26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
           ON ACCOUNTING AND FINANCIAL DISCLOSURE                          26

                                    PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                27
ITEM 11. EXECUTIVE COMPENSATION                                            28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
           OWNERS AND MANAGEMENT                                           28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                    28

                                     PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
           REPORTS ON FORM 8-K                                             29

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

                                CAUTIONARY NOTICE
                      REGARDING FORWARD-LOOKING STATEMENTS

        This report  contains  statements  that we believe are  "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of 1995. All statements other than statements of historical fact in this report,
including  statements  regarding our competitive  strengths,  business strategy,
expected  benefits  of any  acquisition,  future  financial  position,  budgets,
projected  costs and plans and  objectives  of  management  are  forward-looking
statements. In addition,  forward-looking statements generally can be identified
by the use of  forward-looking  terminology  such as  "may,"  "will,"  "expect,"
"should,"  "intend," " estimate," " anticipate,"  "believe," "plan," " continue"
or similar terminology.  We undertake no obligation to publicly update or revise
any forward-looking  statements contained in this report. These  forward-looking
are not guarantees of future performance and are subject to risks, uncertainties
and other factors, some of which are beyond our control, that could cause actual
results  to  differ   materially  from  those  we  express  or  imply  in  those
forward-looking  statements.  These  factors  include those we describe in "Risk
Factors" and elsewhere in this report,  and these factors  expressly qualify all
written and oral forward-looking statements attributable to us.


                                       2
<PAGE>
                                     PART I

Item 1. BUSINESS

Overview

        AppNet provides  end-to-end  e-business services and solutions to Global
1000 and dot.com  companies.  We develop  end-to-end  e-business  solutions that
improve  communication and commerce between  businesses and consumers as well as
among  businesses  and  their  trading  partners.  We  focus on  maximizing  the
opportunities  presented  by  e-business  to enhance all aspects of our clients'
operations,  from the front end of their business,  creative Website design,  to
the back  end,  back-office  integration  of  existing  systems  and  e-business
outsourcing,  creating an end-to-end solution. We are a Delaware corporation and
were formed in 1997. Our professional services include:

          *    strategy consulting;

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

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

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

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

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

Industry Background

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

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

        To date, businesses have primarily focused on using e-business solutions
to  improve   business-to-consumer   relationships.   However,   businesses  are
increasingly using e-business to open cost-effective, reliable, highly efficient
channels of  communication  and commerce with their suppliers and  distributors.
e-Business  solutions can improve the way businesses interact with their trading
partners by linking businesses'  back-office systems  electronically through the
Internet to trading partners and suppliers.

        Most  businesses  rely on  outside  specialists  to design  and  develop
e-business  solutions for a number of  compelling  reasons.  Because  e-business
technologies  have developed so rapidly,  few businesses have employees


                                       3
<PAGE>

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

The AppNet Solution

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

        *       End-to-end service offering

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

        *       Unique e-business outsourcing services

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

        *       Ability to solve increasingly complex business problems

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

        *       Reusable e-business solutions

        We have  developed  reusable  e-business  solutions  in the  process  of
designing, developing, implementing and managing end-to-end e-business solutions
for clients in a number of industries.  These reusable e-business solutions were
developed based on our industry-specific expertise and utilize reusable software
code and  content  objects.  These  solutions  enable us to give our clients the
benefit  of  our  knowledge  and  experience  in  addressing

                                       4
<PAGE>

complex business  challenges,  develop and implement  e-business  solutions more
quickly and efficiently,  focus our efforts on customizing solutions to meet our
clients' specific needs and deliver reliable  solutions based on components that
have been tested and perfected through repeated use in other solutions.

Our Strategy

        Our goal is to become the most recognized and  sought-after  provider of
end-to-end   e-business   professional  services  to  Global  1000  and  dot.com
companies. To achieve this goal we plan to:

        *       Expand client relationships

        We plan to cross-sell our comprehensive  range of end-to-end  e-business
professional  services to existing  clients.  We believe  that if we continue to
provide sophisticated solutions to our clients:

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

        *       we will  strengthen  our  reputation  as a  creative  source for
                e-business solutions; and

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

        We expect this  strategy to increase the  predictability  of our revenue
and result in additional and more extensive engagements with our clients.

        *       Increase repeat and recurring revenues

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

        *       Build  and  enhance   complementary   skill  sets  and  maintain
                technological expertise

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

        *       Pursue client-driven geographic expansion

        We  intend   to  open   additional   offices   both   domestically   and
internationally  in order to better  serve  clients in  locations  where we have
already attracted business. This allows us to serve clients locally,  cross-sell
services to existing local clients and win more local business.  Each new office
we have opened has enhanced our ability to attract and service large clients and
to hire additional staff without relocation  burdens.  We currently have offices
in 20  locations  in the U.S.,  including  the  metropolitan  areas of  Atlanta,
Boston, Chicago,  Denver, Detroit, Los Angeles, New York City, San Francisco and
Washington, DC.

                                       5
<PAGE>

        *       Expand and develop industry-specific expertise

        Through our experience designing, developing,  implementing and managing
e-business solutions for a wide variety of companies, we have gained significant
strategic knowledge and created industry-specific reusable e-business solutions.
This  industry-specific  expertise  significantly  enhances  our ability to help
other companies in the same industries  successfully adopt e-business solutions.
To  date,  we have  developed  reusable  e-business  solutions  for  the  retail
services, financial services,  healthcare,  manufacturing and telecommunications
industries.  We  intend to  broaden  the  range of  industries  in which we have
specialized knowledge and maximize the benefits to our clients of such knowledge
by  creating  additional   industry-specific  solution  templates  and  reusable
software. We employ strategic consultants,  sales, marketing and technical staff
with expertise in industries  that we believe can realize  significant  benefits
from e-business  solutions.  Further developing and strengthening this expertise
will  increase  our  knowledge  of industry  specific  business  challenges  and
increase the  industry-targeted  services we can offer,  thereby  improving  our
ability to penetrate specific industries.

        *       Attract and retain a highly specialized workforce

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

Services

        We offer a comprehensive  range of professional  services  involving the
design,  development,  implementation  and  management of end-to-end  e-business
solutions.  Our services include  strategy  consulting,  interactive  marketing,
e-business  application  development,   e-business  integration  and  e-business
outsourcing, each of which is described below. Our engagements generally include
more than one of these services.

        *       Strategy consulting

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

        *       Interactive marketing

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



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<PAGE>

and increasing the effectiveness of our clients' marketing efforts. We integrate
these services into our clients' overall solutions.

        *       e-Business application development

        e-Business  application  development  is  the  development  of  software
applications  that are  capable of running on the  Internet  and are  written in
languages  such as Java,  XML,  SxML,  C++ and Visual Basic.  These services are
designed to help our clients rapidly develop highly flexible and  cost-effective
e-business  applications.  We  develop  corporate  intranets,  which are  secure
Websites accessible only within a particular company, and e-business systems. We
also Web-enable  legacy systems,  which are existing  systems,  so that they can
operate  on the  Internet.  We design  and  develop  more  effective  e-business
solutions  by giving our  clients  on-line  access to the  development  of their
solutions.  We design, build and implement solutions that are secure,  adaptable
and easy to use and manage.

        *       e-Business integration

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

        *       e-Business outsourcing

        We perform  e-business  outsourcing  services  that would  otherwise  be
handled by the client's  internal staff using the client's  internal  resources.
Our e-business  outsourcing  services help clients  rapidly launch and implement
e-business solutions and then  cost-effectively  manage,  operate,  maintain and
continue to develop those  solutions.  Our e-business  outsourcing  centers have
been configured to provide services that facilitate  commerce and  communication
either   between    businesses   and   their   trading   partners,    known   as
business-to-business  services or between  businesses  and  consumers,  known as
business-to-consumer services.

e-Business Outsourcing Centers

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

        At our  business-to-business  e-business  outsourcing center, we process
and manage  thousands of  transactions  among hundreds of trading  partners on a
variety of hardware  and software  platforms,  over  private  networks,  and the
Internet.  We provide our  customers  detailed  transaction  reporting,  on-line
storage of data about the transactions, and multiple levels of security ensuring
only  authorized  users  have  access to and can  exchange  information.  At our
business-to-consumer  e-business  outsourcing  center we manage on-line  stores,
process  transactions  and  manage  and host  internet-based  applications.  Our
managing and hosting  services  include adding and editing material on a Website
and making sure the internet-based  applications are operating  according to its
specifications.



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<PAGE>

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

Clients

        We market our services to Global 1000 and dot.com companies from a range
of industries that we believe can benefit from end-to-end  e-business solutions.
Our engagements vary in scope from strategy consulting  assignments to designing
and implementing complex and highly functional intranets and extranets.  Because
we can  offer  every  client a  complete  spectrum  of  e-business  professional
services,  we can customize each of our  engagements to fit a client's  specific
needs. None of our clients represented more than ten percent of our consolidated
revenues during 1999.

        Because  of the  strategic  and  competitively  sensitive  nature of the
services  we perform for our  clients,  in many cases we have agreed to keep our
clients' identities confidential.

Sales and Marketing

        We employ a team of full-time sales  professionals and support personnel
that concentrate on selling our end-to-end  e-business  professional services to
clients in the industries in which they have extensive expertise.

        Our marketing  strategy is to demonstrate  to our potential  clients the
advantages of e-business solutions,  and our expertise and success in designing,
developing,  implementing  and  managing  end-to-end  e-business  solutions.  In
addition,  we have  retained an outside  advertising  firm to assist us with our
marketing  efforts  on a  company-wide  basis.  We  employ  a team of  full-time
marketing  professionals and support personnel that concentrate on promoting and
enhancing our brand on a nationwide basis.

Competition

        The markets for e-business  professional  services are  relatively  new,
intensely  competitive,  quickly  evolving  and  subject to rapid  technological
change.  We expect  competition  to continue and  intensify  in the  foreseeable
future.

        Our competitors can be divided into several groups:

        *      e-business professional services providers,  such as Agency.com,
                iXL,  MarchFirst,  Modem Media,  Proxicom,  Razorfish,  Sapient,
                Scient, US Interactive and Viant ;

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

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

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

        We believe we can distinguish ourselves from our competitors by offering
our  clients  end-to-end  e-business  solutions.   We  believe  we  can  compete
effectively  on the  basis of our  comprehensive  range of  services,  technical
expertise, creative talent, brand or name recognition and the speed, reliability
and price of the services


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<PAGE>

we  provide.  However,  our  competitors  have  also  begun  to offer a range of
e-business  professional  services,  rather than specialize in one area, or have
announced their intention to do so. These companies may continue to expand their
operations  so  that  they  offer  a  full  range  of  business-to-business  and
business-to-consumer  e-business professional services and products. Some of our
competitors listed above currently provide all of the services that we provide.

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

Acquired Companies

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

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

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

        Software Services Corporation. We acquired Software Services Corporation
on August 25, 1998.  Software  Services  specialized in e-business  applications
development, providing applications development, network architecture and design
services to our customers. It had approximately 190 consulting  professionals as
of the date of the acquisition. We paid approximately $22.9 million for Software
Services  with a combination  of cash,  shares of our common stock and shares of
our Class B  Preferred  Stock  that have since  been  converted  into our common
stock.

        New Media  Publishing,  Inc. We acquired New Media Publishing on October
2, 1998. New Media Publishing  specialized in interactive  marketing,  providing
interactive  community-building  services to our customers. It had approximately
40  consulting  professionals  as of  the  date  of  the  acquisition.  We  paid
approximately $19.0 million for New Media Publishing with a combination of cash,
shares of our common stock and options to purchase  shares of our common  stock.
The former New Media Publishing  stockholders are also entitled to an additional
performance-based  payment  of up to $14.0  million,  of which  $8.4  million is
payable in cash and $5.6 million or 654,971 shares of common stock is payable in
stock based on $8.55 per share,  the agreed to price for our common stock at the
time of the acquisition.  In January 2000, $5.1 million in cash was paid, a


                                       9
<PAGE>

note payable of approximately $800,000,  which accrues interest at 9% and is due
January  2001 was  issued for the  remaining  cash  portion  payable to a former
shareholder,  334,762  shares of our  common  stock  were  issued to the  former
shareholders and options to purchase 88,523 shares of our common stock at $11.70
per share were issued to certain employees.  The remaining  portion,  payable in
cash ($3.3 million) and stock, will be paid in January 2001 if certain employees
of the acquired business remain employed by AppNet through September 2000.

        Century  Computing,  Incorporated.  We  acquired  Century  Computing  on
October 12, 1998. Century  specialized in e-business  integration and e-business
outsourcing,  providing  systems  integration  and  processing  services  to our
customers.  It had  approximately 81 consulting  professionals as of the date of
the  acquisition.  We  paid  approximately  $29.0  million  for  Century  with a
combination of cash, a convertible promissory note that has since been converted
into shares of our common  stock and  options to  purchase  shares of our common
stock.

        Research & Planning, Inc. We acquired Research & Planning on October 20,
1998. Research & Planning  specialized in e-business  integration and e-business
outsourcing,  providing  enterprise  resource  planning and integration and data
warehousing  services  to our  customers.  It had  approximately  40  consulting
professionals as of the date of the  acquisition.  We paid  approximately  $20.5
million for Research & Planning with a  combination  of cash,  promissory  notes
that were repaid in January 2000 and shares of our common stock.

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

        i33 communications corp. We acquired i33 communications corp. on January
8, 1999. i33  communications  specialized in  interactive  marketing,  providing
media buying and planning  services to our customers.  It had  approximately  40
consulting   professionals  as  of  the  date  of  the   acquisition.   We  paid
approximately  $21.6 million for i33  communications  with a combination of cash
and promissory notes that are due in 2002.

        Sigma6,  Inc.  We  acquired  Sigma6,  Inc.  on  March  4,  1999.  Sigma6
specialized in interactive  marketing,  providing brand identity services to our
customers.  Sigma6 had approximately 25 consulting  professionals as of the date
of the  acquisition.  We paid  approximately  $2.5  million  for  Sigma6  with a
combination  of  cash  and  shares  of  our  common  stock.  The  former  Sigma6
stockholders are also entitled to a potential contingent payment payable in cash
and in shares of our common stock of up to $2.8 million based on the achievement
of  agreed-upon  performance  criteria  during  the  12-month  period  ending on
December 31, 1999. Based on Sigma6's results for the period of measurement, 100%
of the performance  criteria were met. The contingent  payment,  $1.4 million in
cash and $1.4 million in our common stock will be made in April 2000. The number
of shares to be issued will be based on the closing price of our common stock on
the day before  payment is made.  Further,  certain  employees  of the  acquired
business must remain  employed by AppNet  through March 2000 in order to receive
their contingent payment.

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



                                       10
<PAGE>

        Internet  Outfitters,  Inc. We acquired Internet Outfitters on March 26,
1999.  Internet  Outfitters  specialized  in  interactive  marketing,  providing
localization  and creative  Web-development  services to our  customers.  It had
approximately 25 consulting professionals as of the date of the acquisition.  We
paid  approximately  $9.5 million for Internet  Outfitters with a combination of
cash,  shares of our common  stock and options to purchase  shares of our common
stock. The former Internet Outfitters stockholders were also entitled to receive
a  potential   contingent  payment  based  on  the  achievement  of  agreed-upon
performance criteria for the year ending on December 31, 1999. Based on Internet
Outfitters' results for the period of performance, no contingent payment will be
made.

        In connection with our acquisition of Internet Outfitters, approximately
$1.45  million of the  purchase  price,  based upon the fair value of $17.10 per
share at the date of acquisition,  in the form of shares of our common stock was
pledged to us and escrowed to be available to satisfy any potential liability in
connection  with a  license  dispute.  We also held  back  $750,000  of the cash
purchase  price to be used to  satisfy  indemnification  claims,  including  any
potential  liability  arising from such license dispute.  Subsequent to December
31, 1999,  the license  dispute was settled with no  financial  consequences  to
AppNet.  The  shares of our  common  stock  pledged  and  escrowed  and the cash
purchase  price held back in connection  with the license  dispute are no longer
escrowed and will be released in March 2000.

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

Employees

        As of December 31,  1999,  we had  approximately  1,043  employees.  Our
continuing success will depend in large part on our ability to attract, motivate
and  retain  employees  who are  qualified  to offer the  services  we  provide.
Competition  for  qualified  employees  is  intense.  We  believe  we have  been
successful in attracting  and retaining  qualified  employees.  Our strategy for
attracting,  motivating  and retaining our employees is to encourage a corporate
culture  that  is  results-driven  and  rewards  creativity,  communication  and
cooperation,  pay competitive salaries and cash bonuses, grant stock options and
reimburse tuition expenses.

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


                                       11
<PAGE>

                                  RISK FACTORS

        The following  important  factors,  among other,  could cause our actual
operating and financial  results to differ  materially  from those  contained in
this  report  and our  other  oral and  written  communications.  The  risks and
uncertainties  described below are not the only ones we face.  Additional  risks
and  uncertainties,  including  those  that we do not know  about now or that we
currently deem immaterial, may also adversely affect our business.

Our future success depends on our ability to manage our growth.

        Our growth has placed, and will continue to place,  significant  demands
on our  management  and  operational  and  financial  resources.  Our  number of
employees has increased from eight as of March 15, 1998 to  approximately  1,043
as of December  31,  1999.  As we continue to grow,  we expect we will hire more
employees and expand the scope of our operating  and  financial  systems,  which
will increase our operating complexity and the level of responsibility exercised
by our management personnel. To manage our growth effectively,  we must continue
to develop and improve our own operational and financial systems,  including our
internal  systems and  controls.  The  failure to manage our growth  effectively
could have a material  adverse  effect on our business,  financial  condition or
results of operations.

We must attract and retain  professional staff in order to complete our projects
and obtain new projects.

        Our failure to attract and retain  qualified  employees could impair our
ability to complete existing projects and bid for or obtain new projects and, as
a result,  could  have a  material  adverse  effect on our  business,  financial
condition or results of operations.  Our ability to grow and increase our market
share largely  depends on our ability to hire,  train,  retain and manage highly
skilled   employees,   including  project  managers  and  technical,   creative,
consulting and sales and marketing  personnel.  There is a significant  shortage
of, and intense  competition  for,  personnel  who are  qualified to perform the
services we provide.  This shortage will probably  continue for the  foreseeable
future.  In  addition,  to  maintain  our  position  as a  premier  provider  of
end-to-end e-business solutions,  we must make sure our employees maintain their
technical  expertise and business  skills.  We cannot assure you that we will be
able to  attract a  sufficient  number of  qualified  employees  or that we will
successfully train and manage the employees we hire. In addition, our employees,
including key technical personnel, may leave us to join our competitors or start
new  businesses  that may compete with us. We cannot  assure you that we will be
able to prevent the unauthorized disclosure or use of our proprietary knowledge,
practices and procedures if our employees leave us.

We face intense competition.

        The market for  e-business  professional  services  is  relatively  new,
intensely  competitive,  quickly  evolving  and  subject to rapid  technological
change.  We expect  competition  to continue and  intensify  in the  foreseeable
future. Our competitors can be divided into several groups:

        *       e-business professional services providers,  such as Agency.com,
                iXL,  MarchFirst,  Modem Media,  Proxicom,  Razorfish,  Sapient,
                Scient, US Interactive and Viant;

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

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

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

        Our competitors  have begun to offer a range of e-business  professional
services,  rather than specialize in one area, or have announced their intention
to do so. These  companies may continue to expand their  operations so


                                       12
<PAGE>

that they offer a full range of e-business  professional  services and products.
Some of our competitors  listed above currently provide all of the services that
we provide.

        Some of our  competitors  have  longer  operating  histories  and client
relationships,  greater  financial,  technical,  marketing and public  relations
resources,  larger  client bases and greater brand or name  recognition  than we
have.  Our  competitors  may be able to respond  more  quickly to  technological
developments  and changes in  clients'  needs.  We must  promote and enhance our
reputation  and brand in order to attract new clients and  differentiate  AppNet
from our competitors.

The barriers to enter our business are low.

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

Our revenues are difficult to predict because they are primarily  generated on a
project-by-project basis and our projects can be terminated.

        If our  existing  agreements  with  clients  are  terminated  before  we
complete our engagements, or if we are unable to enter into new engagements, our
business,  financial  condition  or results of  operations  could be  materially
adversely  affected.  Our  success  will  depend  on our  ability  to  establish
relationships  with  additional  Global  1000 and  dot.com  companies  and other
corporate users of e-business  professional  services. We derive our revenues in
large part from fees for services generated on a project-by-project basis. These
projects  vary in size,  scope  and  duration.  A  client  that  accounts  for a
significant portion of our revenues in a particular period may not account for a
similar  portion  of our  revenues  in future  periods.  A client may or may not
engage us for further  services  once a project is completed.  As a result,  our
revenues  are not  recurring  from  period  to  period,  which  makes  them more
difficult to predict.

Loss of the  services  of our  senior  management  could  adversely  affect  our
business.

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

We must respond to rapid technological advances.

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

        *       rapidly changing technology;

        *       evolving industry standards and practices;

        *       frequent service and product introductions and enhancements; and

        *       changing user and client requirements and preferences.

        Any delay or failure on our part in responding quickly, cost-effectively
and sufficiently to these  developments  could render our existing  products and
services obsolete and have a material adverse effect on our business,  financial
condition  or  results  of  operations.   We  may  have  to  incur   substantial
expenditures to modify or


                                       13
<PAGE>

adapt our services or  infrastructure  to respond to the widespread  adoption of
new  Internet,   networking   or   telecommunications   technologies   or  other
technological  changes.  We must  stay  abreast  of  cutting-edge  technological
developments and evolving service offerings to remain competitive,  increase the
utility of our services and attract and retain qualified  employees.  We must be
able to incorporate new technologies into the e-business solutions we design and
develop to address the  increasingly  complex and varied  needs of our  customer
base.

Our business is dependent  on the  continued  use and growth of the Internet and
e-business.

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

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

Government  regulation  and legal  uncertainties  relating to the Internet could
adversely affect our business.

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

Our  international  operations  and expansion  involve  financial and operations
risks.

        We intend to expand our business into  international  markets.  Revenues
from our existing  international  operations were  insignificant in 1999. We may
incur significant costs in connection with our  international  expansion.  There
are also risks inherent in doing business in foreign countries, such as:

        *       changes in legal and regulatory requirements;

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

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



                                       14
<PAGE>

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

        *       longer  payment  cycles  and  problems  in  collecting  accounts
                receivable;

        *       political and economic instability;

        *       seasonal reductions in business activity; and

        *       potentially adverse tax consequences.

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

Our e-business outsourcing centers could be vulnerable to security and technical
risks and may require additional investment.

        We provide e-business outsourcing services to our customers.  We perform
e-business  functions that would otherwise be handled by the customer's internal
staff using the customer's resources.
        Our   e-business   outsourcing   services   rely   on   encryption   and
authentication  technology  licenses  from third parties to provide the security
and authentication needed to safely transmit confidential information.  Although
we have  designed  and  implemented  a variety  of  network  security  measures,
unauthorized access, computer viruses,  accidental or intentional acts and other
disruptions may occur. Our e-business  outsourcing centers may experience delays
or service  interruptions  as a result of the accidental or intentional  acts of
Internet  users,  current  and  former  employees  or  others.  Such acts  could
potentially jeopardize the security of confidential information,  such as credit
card and bank account numbers,  stored in our and our clients' computer systems.
Such a breach in security  could  result in  liability  to us and in the loss of
existing clients or the deterrence of potential clients.

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

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

Our contracts contain pricing risks.

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



                                       15
<PAGE>

We have potential liability to clients who are dissatisfied with our services.

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

Our failure to protect our  intellectual  property rights or maintain our rights
to use licensed intellectual property could adversely affect our business.

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

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

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

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

We are dependent on additional capital for future growth.

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



                                       16
<PAGE>

Item 2. PROPERTIES

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

Item 3. LEGAL PROCEEDINGS

        We are subject to lawsuits, investigations and claims arising out of the
ordinary  course  of  our  business,   including  those  related  to  commercial
transactions,  contracts,  government regulation and employment matters. Certain
claims, suits and complaints have been filed or are pending against the Company.
In the opinion of management,  based on all known facts, all matters are without
merit, and except as related to the claims mentioned below, are of such kind, or
involve  such  amounts,  as would not have a  material  effect on the  financial
position or results of operations of the Company if disposed of unfavorably.

        On November 11, 1999, Robert Harvey filed suit against AppNet,  Inc. and
Ken Bajaj (our Chief Executive Officer) in state court in Michigan. The case has
been removed to the United  States  District  Court for the Eastern  District of
Michigan.  The  plaintiff  alleges a breach of contract and fraud in  connection
with his employment  agreement with AppNet,  and improper  interference with his
efforts  to sell  shares of our common  stock.  Mr.  Harvey is seeking  monetary
damages in connection with these claims.  On March 21, 2000, the court dismissed
some of Mr. Harvey's  claims,  and tentatively  dismissed the fraud claims while
allowing Mr.  Harvey to replead.  The court  indicated  that Mr.  Harvey will be
permitted to pursue his claim for interference with his effort to sell shares of
our common stock. We intend to contest the claims  vigorously.  At this time, we
are not able to  reasonably  estimate the amount of loss,  if any,  that will be
incurred as a consequence of this lawsuit.

        On February 4, 2000, Counsel Corporation (US) and  JewelryOnly.com,  LLC
filed suit against AppNet Inc., one of its  subsidiaries,  Drew Rayman (a former
employee) and David Levin (a current employee) in the Supreme Court of the State
of New York,  County of New York.  The  plaintiffs  in the suit allege breach of
contract and misrepresentation related to services performed by AppNet. They are
seeking  direct  damages,  plus punitive  damages,  costs and fees. We intend to
vigorously  contest  these  claims  and have  filed  counterclaims  against  the
defendants  alleging  monies  due for  services  performed.  We are not  able to
reasonably  estimate  the amount of loss,  if any,  that will be  incurred  as a
consequence of this lawsuit.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted to a stockholder vote in the fourth quarter of
1999.



                                       17
<PAGE>
                                     PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        Our  common  stock is traded on the  Nasdaq  National  Market  under the
symbol  "APNT."  We have set forth in the  following  table the high and low bid
prices of our common  stock from June 18, 1999,  the date of our initial  public
offering, through December 31, 1999, as reported by the Nasdaq National Market.

                                                             High        Low
Fiscal 1999
  Second Quarter ended June 30 (beginning June 18, 1999)   $13.75      $ 8.63
  Third Quarter ended September 30                          40.00       10.00
  Fourth Quarter ended December 31, 1999                    67.25       25.75

        These quotations reflect  inter-dealer  prices,  without retail mark-up,
mark-down or commission and may not necessarily  represent actual  transactions.
On December  31,  1999,  the last  reported  sale price of our common  stock was
$43.75,  and as of March 24,  2000 we believe  there were  approximately  18,000
beneficial owners of our common stock.

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

        On June 23,  1999,  we issued  4,936,808  shares of our common  stock in
exchange for 45,430  shares of our Class A Preferred  Stock and 11,576 shares of
our 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)
of the Securities Act.

        On June 23, 1999,  we issued  75,129 shares of our 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) of the Securities Act.

        On July 16, 1999,  we issued  14,620 shares of our common stock upon the
exercise  of  warrants to  purchase  our common  stock at an  exercise  price of
$0.3007 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) of the Securities Act.

        On August 16, 1999, we issued 62,214 shares of our common stock upon the
conversion  of  promissory  notes of  approximately  $0.5  million  plus accrued
interest at a conversion price of $8.55 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) of the Securities Act.

        On October 12, 1999,  we issued  60,082  shares of our common stock upon
the conversion of promissory  notes of  approximately  $0.5 million plus accrued
interest at a conversion price of $8.55 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) of the Securities Act.


                                       18
<PAGE>

        On December 15, 1999, we issued  810,132 shares of our common stock upon
the conversion of promissory  notes of  approximately  $8.8 million plus accrued
interest at a conversion price of $11.40 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) of the Securities Act.

        We used the net proceeds from our June 1999 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 affiliate of our Chief Executive Officer,  none of
the net proceeds were used to make direct or indirect  payments to our directors
or officers,  their associates or to others, or to persons owning ten percent or
more of any class of equity securities of AppNet, or to our affiliates.

Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

                                                   Year ended December 31,
                                                    1999             1998
                                             --------------- ------------------
                                                      (In thousands)

   Statement of Operations Data:
      Revenues                                     $109,707          $  17,674
      Cost of revenues                               61.604             11,699
                                             --------------- ------------------
      Gross profit                                   48,103              5,975
      Total operating expenses                      120,390             18,779
                                             --------------- ------------------
      Loss from operations                         (72,287)           (12,804)
      Interest and other expense, net               (4,287)            (1,775)
      Income tax provision (benefit)                    827              (200)
      Dividends on and accretion of
      preferred stock                                 2,139                873
                                             =============== ==================
      Net loss attributable to common
      stockholders                                $(79,540)          $(15,252)
                                             =============== ==================


                                                     As of December 31,
                                                   1999             1998
                                              --------------- ------------------
                                                            (In thousands)

      Balance Sheet Data
         Cash and cash equivalents                $ 66,549           $  2,447
         Total assets                              207,826            118,370
         Total debt                                  4,579             43,792
         Stockholders' equity                      164,842             23,608


                                       19
<PAGE>

Item 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

        The following  discussion and analysis  compares the year ended December
31, 1999 to the  corresponding  period ended December 31, 1998 for AppNet,  Inc.
(formerly AppNet Systems,  Inc.) and its subsidiaries  ("AppNet," the "Company,"
"we,"  "us" or "our")  and  should  be read in  conjunction  with the  Company's
consolidated  financial  statements and notes thereto and the other  information
regarding AppNet appearing  elsewhere in this Report. You are also encouraged to
review  the   information   contained  in  the   Cautionary   Notice   Regarding
Forward-Looking Statements on the Table of Contents page of this report.

Overview

        AppNet  provides  end-to-end   e-business   professional   services  and
solutions to Global 1000 and dot.com companies. We develop end-to-end e-business
solutions that improve  communication and commerce between  businesses and their
trading  partners as well as among  businesses and consumers.  Through  internal
growth and strategic  acquisitions,  we have built a company with the ability to
design, develop, implement and manage end-to-end e-business 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  that are  required to provide
clients with  end-to-end  e-business  solutions.  We then  identified a group of
companies  that  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 e-business 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, we completed an initial public  offering of securities
and issued  6,000,000  shares of common stock at a price to the public of $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 for general corporate purposes, including working capital expenditures.

        On November  17, 1999,  we  completed a follow-on  offering of 4,590,500
shares of common stock,  of which existing  shareholders  sold 3,090,500  shares
which  include  290,500  shares  purchased  by  the   underwriters   through  an
over-allotment,  and we sold 1,500,000  shares of common stock at a price to the
public of $50.00 per share. The follow-on  offering  generated  proceeds for the
Company,  net of issuance costs, of approximately $70.5 million. The proceeds of
the  offering  were  used to  repay  outstanding  borrowings  under  our  credit
facility,  as well as for general corporate purposes,  including working capital
expenditures.

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


                                       20
<PAGE>
        In general,  we bill our  professional  services on a time and materials
basis;  however,  a portion of our  services is billed on a  fixed-price  basis.
AppNet recognizes revenue from time and materials projects based on fixed hourly
rates for direct labor hours  expended and revenues  from  fixed-price  projects
based on the  percentage-of-completion  method  of  accounting,  with  costs and
estimated profits recorded as work is performed. Provisions for estimated losses
on  uncompleted  contracts  are made in the  period  in  which  the  losses  are
determined.  Changes in contract  scope and estimated  profitability,  including
final contract settlements,  may result in adjustments to costs and revenues and
are recognized in the period in which the adjustments are determined.

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

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

        AppNet's general and  administrative  costs include salaries and related
employee  benefits  for  finance,  legal,  human  resources  and  administrative
personnel.  The general and  administrative  expenses  also  include  facilities
costs,  recruiting,   training  and  other  corporate  costs.  As  a  result  of
anticipated  additional  hiring costs  associated  with the  integration  of the
businesses we acquired in 1998 and 1999, our general and administrative expenses
will  increase  in  2000,  although  they may  decline  as a  percentage  of our
revenues.

        Stock-based and other acquisition-related compensation includes expenses
related to the cash and  stock-based  contingent  payments  paid and  payable to
former owners of four  businesses we acquired if agreed-upon  operating  targets
are achieved  and these former  stockholders  remain  employed by AppNet.  These
contingent  payments are accounted for as operating  expenses in accordance with
Emerging Issues Task Force 95-08,  "Accounting for Contingent Consideration Paid
to the Shareholders of an Acquired Company in a Purchase Business  Combination,"
instead of as additional  purchase  consideration at the time of the acquisition
because  many of the former  owners to whom  payments  are  payable  must remain
employed by AppNet in order for them to receive  these  payments.  The amount of
this  compensation  expense  recorded  periodically  will fluctuate based on the
probability  of  achievement  of the  operating  targets by each of the acquired
businesses and the market price of our common stock at the end of each reporting
period.  This expense is  recognized  over the period  during which these former
stockholders must remain employed by us to be eligible to receive the contingent
payments.  The remaining portion of these contingent payments that is payable to
former  stockholders who are not our employees or who are not required to remain
employed  by us  during  the  contingent  payment  period  will be  recorded  as
additional goodwill when such targets are met.

Results of Operations

Year ended December 31, 1999 compared to the year ended December 31, 1998

        Revenues.  Revenues for the year ended December 31, 1999 increased $92.0
million to $109.7  million  from $17.7  million for the year ended  December 31,
1998,  primarily due to the inclusion of operations of the companies we acquired
during the first  quarter of 1999 and the inclusion of a full year of operations
of the  companies  we acquired  in the second half of 1998,  as well as internal
growth.

        Cost of revenues.  Cost of revenues for the year ended December 31, 1999
increased  $49.9  million to $61.6 million from $11.7 million for the year ended
December 31, 1998.  The increase in cost of revenues was primarily  driven by an
increase in billable  headcount  resulting from the  acquisitions  that occurred
during 1999 and 1998, as well as internally generated headcount. As a percentage
of revenues,  cost of revenues for the year ended December 31, 1999 decreased to
56% from 66% for the year ended December 31, 1998. Cost of revenues decreased as
a percentage of revenues due to an increase in utilization and hourly bill rates
in 1999 compared to 1998.



                                       21
<PAGE>

        Operating  expenses.  Operating expenses for the year ended December 31,
1999 increased  $101.6 million to $120.4 million from $18.8 million for the year
ended December 31, 1998.  The increase in operating  expenses for the year ended
December  31,  1999 was  attributable  primarily  to  increases  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 year ended
December 31, 1999  increased  $7.8 million to $8.8 million from $1.0 million for
the year ended  December 31,  1998.  As a  percentage  of revenues,  selling and
marketing  expenses for the year ended December 31, 1999 increased to 8% from 6%
for the year ended  December  31, 1998.  The  increase in selling and  marketing
expenses is due to the  inclusion of  operations of the companies we acquired in
the first  quarter of 1999 and the inclusion of a full year of operations of the
companies we acquired in the second half of 1998.  Further, we incurred expenses
in 1999 related to the development of our corporate  sales and marketing  staff,
the expansion of our marketing strategy and the promotion of our brand identity.

        General and administrative.  General and administrative expenses for the
year ended December 31, 1999 increased  $27.4 million to $33.9 million from $6.5
million  for the year ended  December  31,  1998.  The  increase  in general and
administrative  expenses resulted from the build up of corporate  infrastructure
through 1998 and into 1999 to support the growth of the Company.  As a result of
anticipated  additional  hiring costs  associated  with the continued  growth in
business,  our general and  administrative  expenses are expected to continue to
increase in 2000, although they may decline as a percentage of our revenues.  As
a percentage of revenue,  general and administrative expenses for the year ended
December  31, 1999  decreased  to 31% from 37% for the year ended  December  31,
1998.

        Stock-based and other acquisition-related compensation.  Stock-based and
other acquisition-related  compensation expenses for the year ended December 31,
1999  increased  $18.5  million to $19.7  million from $1.2 million for the year
ended  December 31, 1998.  Approximately  $16.1 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.  In addition,  we
recognized  a  compensation  charge of $2.5  million  during  1999,  recorded as
stock-based and acquisition-related compensation expense, upon completion of the
initial  public  offering in  connection  with the  termination  of our right to
repurchase  shares of our common stock from one of our  officers.  The amount of
the compensation charge was determined based on the number of common shares that
we could have repurchased  from the officer and the difference  between $0.3007,
the repurchase price, and the initial public offering price of $12.00 per share.
An additional $0.6 million in 1999 relates to stock-based  compensation  expense
related to shares repurchased from former employees under employment agreements.

        Depreciation and amortization. Depreciation and amortization expense for
the year ended December 31, 1999  increased  $47.9 million to $58.0 million from
$10.2  million for the year ended  December 31, 1998.  The increase is primarily
due to the  amortization of intangible  assets  resulting from the  acquisitions
made during the second half of 1998 and the first quarter of 1999.  Our goodwill
and related amortization may increase in future periods if AppNet is required to
pay additional  consideration  for its  acquisitions  based on the attainment of
certain operating targets.

        Interest  income.  Interest  income for the year ended December 31, 1999
increased  $0.6 million to $0.6 million from $17,000 for the year ended December
31, 1998 due to higher cash balances during 1999 as a result of our public stock
offerings in June and November 1999.

        Interest expense.  Interest expense for the year ended December 31, 1999
increased  $3.2  million to $4.3  million  from $1.1  million for the year ended
December 31, 1998 due to additional  borrowings under our credit  facilities and
issuance of notes  payable to former owners of  businesses  acquired  during the
second  half of 1998 and the  first  quarter  of 1999.  In  connection  with our
initial public  offering,  we recorded an interest charge of $1.1 million during
the year ended  December 31, 1999  related to  beneficial  conversion  rights of
notes which contained  conversion features at a discount from the initial public
offering price of the common stock.



                                       22
<PAGE>

        Other  expense,  net.  Other  expense of $0.6 million for the year ended
December  31,  1999  includes  the  write-off  of  deferred  financing  costs in
connection with the refinancing of our credit facilities during 1999. During the
year ended  December  31,  1998,  other  expense of $0.7  million  included  the
write-off of  approximately  $0.3 million  related to an  investment  in a joint
venture  that was deemed to have no value due to the  failure of the  venture to
generate a customer base and to generate  sufficient revenues to cover operating
expenses,  which resulted in the  abandonment  of operations of the venture.  An
additional  $0.3 million in 1998 relates to the write-off of deferred  financing
costs in connection with the refinancing of our credit facilities during 1998.

        Income tax  provision.  The  provision for income taxes was $0.8 million
for the year ended  December 31, 1999 and is related to state income taxes.  The
income tax  benefit of $0.2  million  for the year ended  December  31,  1998 is
related to federal  income tax refunds of $0.4  million  offset by state  income
taxes of $0.2 million.

Liquidity and Capital Resources

        At December 31, 1999,  we had  approximately  $66.5  million in cash and
cash equivalents.  AppNet has financed its operations and acquisitions primarily
through the issuance of common stock, borrowings under credit facilities and the
issuance of preferred  stock. For the year ended December 31, 1999, cash used in
operations  and in  investing  activities  was $6.3  million and $35.1  million,
respectively as compared to $2.6 million and $71.7 million, respectively for the
year ended December 31, 1998. The principal use of cash in investing  activities
during 1999 and 1998 was to finance  acquisitions and make purchases of property
and  equipment.  As  AppNet  continues  to  grow  its  business  and  build  the
infrastructure to support its growth, AppNet expects to use cash from operations
to fund the  continued  growth of its business and to fund selling and marketing
activities.

        Net cash provided by financing  activities  was $105.5 million and $76.7
million during the years ended December 31, 1999 and 1998, respectively.  During
1998, we received  proceeds from net borrowings  under our credit  facilities of
$37.5  million.  In  addition,  we received  $36.3  million and $3.0  million as
consideration for the issuance of our preferred and common stock,  respectively,
during 1998. During 1999,  financing  activities  included net proceeds from our
initial and  secondary  public  offerings  of $64.1  million and $70.5  million,
respectively,  proceeds  from  issuance of  preferred  stock,  common  stock and
exercise of stock options of $8.5 million,  and additional  borrowings under our
credit  facilities of $75.8  million,  offset,  in part,  by debt  repayments of
$113.5 million.

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

        In connection with certain acquisitions,  we issued notes to the selling
stockholders  some of which were  convertible  into shares of our common  stock.
Certain  promissory  notes  automatically  converted  at the time of the initial
public offering and certain promissory notes were converted at the option of the
promissory note holders, as mentioned above. During 1999,  additional promissory
notes of approximately $2.0 million plus accrued interest to former owners of an
acquired  business were  converted  into 245,511 shares of our common stock at a
conversion  price of $8.55 per share.  During December 1999, other certain notes
to former owners of other acquired businesses totaling $8.8 million, convertible
at the option of the holders for common  stock at $11.40 per share plus  accrued
interest, were converted into 810,132 shares of our common stock. The balance of
the promissory notes issued in connection with certain  acquisitions at December
31, 1999 was  approximately  $4.5 million.  None of these notes are  convertible
into shares of our common stock.


                                       23
<PAGE>
        One of our acquisitions  provided for additional  contingent payments of
up to $14.0  million,  of which $8.4 million is payable in cash and $5.6 million
is payable in stock based on $8.55 per share, the agreed to price for our common
stock at the time of the  acquisition.  The contingent  payments were payable to
the former  owners of the acquired  business if it reached  certain  revenue and
earnings before interest, taxes, depreciation,  and amortization targets for the
period from October 1, 1998 to September 30, 1999. The amount of this contingent
payment  varied  based  on a  sliding  scale of  revenues  and  earnings  before
interest,  taxes,  depreciation  and  amortization.  A portion of the contingent
payment will be paid only if the targets are reached and certain  former  owners
remain employed by AppNet.  During 1999, AppNet and the acquired business agreed
to provide a portion of the  contingent  payment  to  certain  employees  of the
acquired  business  contingent on their employment at time of payment.  Based on
the results of the acquired business's  operating  performance during the period
of measurement and the resolution of certain employment contingencies, a portion
of the contingent  consideration  payable to the former stockholders was paid in
January  2000.  Of this  portion,  $5.1  million  in cash was paid to the former
shareholders  and employees,  a note payable of  approximately  $800,000,  which
accrues interest at 9% and is due January 2001 was issued for the remaining cash
portion payable to a former shareholder, 334,762 shares of our common stock were
issued to the former shareholders,  and options to purchase 88,523 shares of our
common stock at $11.70 per share were issued to certain employees. Approximately
$9.6  million  of the  contingent  consideration  was  reflected  as  additional
purchase  consideration and is recorded as goodwill as of December 31, 1999. The
goodwill will be amortized over its remaining  amortization period of two years.
Approximately   $10.2  million  is  recorded  in  accrued  liabilities  for  the
contingent  payments as of December 31, 1999. The remaining portion,  payable in
cash ($3.3 million) and stock, will be paid in January 2001 if certain employees
of the acquired  business  remain  employed by AppNet until  October  2000.  The
Company expects to incur  approximately  $5.0 million in additional  stock-based
compensation  expense  during 2000 for the amount that remains to be paid to the
former  shareholders  due to the  employment  contingencies  that exist  through
September 2000.

        Another one of our acquisitions  provided for contingent  payments of up
to $2.8  million in the form of cash and Company  common stock to be made to the
former  owners of the  acquired  business  if it  reached  certain  revenue  and
earnings  targets for the period  ended  December  31,  1999.  The amount of the
contingent payment varied based on a sliding scale of revenues and earnings,  as
defined in the acquisition  agreement.  Based on the acquired business's results
for the period of measurement,  100% of the  performance  criteria were met. The
contingent  payment,  $1.4  million in cash and $1.4  million in Company  common
stock  will be made in April  2000.  The  number of shares to be issued  will be
based on the  closing  price of the  Company's  common  stock on the day  before
payment is made. Further, certain employees of the acquired business must remain
employed  by AppNet  through  March  2000 in order to receive  their  contingent
payment.  We expect to record an  additional  $0.6  million in  stock-based  and
acquisition-related compensation expense related to this contingent payment.

        We may be required to make contingent  payments through November 2000 to
two other businesses we acquired.  These contingent payments are payable in cash
and common  stock,  in one case at the option of the  former  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
$7.3 million, of which $3.7 million is deemed likely.

        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  revolving  credit  facility.  The  amended
unguaranteed  revolving  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 remaining  credit  facility is
secured by all of our assets and contains  various  restrictive  covenants that,
among  other  things,  require us to  maintain  specified  financial  ratios and
restrict us from paying  dividends to our common  stockholders.  At December 31,
1999,  $20.0  million was available  for  borrowing  under our remaining  credit
facility,  based on the  availability  calculations  provided  for in the credit
facility.


                                       24
<PAGE>
        AppNet's capital  expenditures for 1999 and 1998 were approximately $7.4
million and $1.2 million, respectively.  Historically, capital expenditures have
been used to make leasehold  improvements to AppNet's leased office space and to
purchase computer hardware and software and furniture and fixtures.  AppNet does
not have any material  commitments for capital  expenditures for the foreseeable
future.  However,  AppNet  does  plan to make  capital  expenditures,  which may
include office space, computer equipment, software and furniture and fixtures.

        Based upon current expectations, we believe our available cash balances,
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
our available cash balances,  cash flows and existing  credit facility 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, although additional financing may not be available.

Recent Accounting Pronouncements

        In June 1998, the Financial  Accounting  Standards Board issued SFAS No.
133, "Accounting for Derivatives and Hedging Activities" ("SFAS No. 133"), which
establishes  accounting  and  reporting  standards for  derivative  instruments,
including   certain   derivative   instruments   embedded  in  other   contracts
(collectively referred to as derivatives),  and for hedging activities. SFAS No.
133, as amended,  is effective for all fiscal quarters of fiscal years beginning
after  June 15,  2000 and  management  believes  this  standard  will not have a
significant  impact on its  results of  operations,  financial  position or cash
flows.

Year 2000

        Prior to December 31, 1999,  we completed an assessment of our Year 2000
readiness and ensured our systems were Year 2000 compliant. To date, we have not
experienced any material  adverse affects to our computer systems from Year 2000
problems  and to our  knowledge,  no  third  parties,  including  suppliers  and
clients, that we conduct business with have been adversely affected by Year 2000
problems.

        Some experts believe potential Year 2000 issues may occur on October 10,
2000 (first  ten-digit date) and December 31, 2000 (366th day of the year).  Our
systems  have been tested and we believe  they will not be affected by either of
these  dates.  However,  if these or other Year 2000 related  issues  degrade or
interrupt our computer systems,  those of our clients or the Internet generally,
it could have a  materially  adverse  effect on business,  financial  condition,
results of operations and prospects for growth.

        Our costs in connection  with Year 2000  compliance  were  approximately
$0.6 million, which includes the cost to replace hardware and software,  outside
consulting  services  and  internal  labor  costs.  We  do  not  anticipate  any
additional costs related to Year 2000 compliance to be significant.  However, we
may incur  significant  costs if  unanticipated  Year 2000  compliance  problems
arise.  These  unanticipated  costs, or our failure to correct any unanticipated
Year 2000 problems in a timely manner, could have a materially adverse effect on
our  business,  financial  condition,  results of  operations  and prospects for
growth.



                                       25
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        AppNet is exposed to market risk related to changes in interest rates on
its long-term credit  facility.  AppNet is able to manage its interest rate risk
to some  degree  through  management's  option  to  select  the  factor  used to
determine its interest rate.  AppNet's credit facility is a variable rate credit
facility.  The credit  facility bears interest,  at our option,  at LIBOR or the
lenders'   prime  rate  plus  an  applicable   margin  based  on  our  operating
performance.  The balance outstanding as of December 31, 1998 was $37.5 million,
of which $19.7  million bore  interest at a rate of 8.25% and $17.7 million bore
interest  at a rate of  7.75%.  There  were no  amounts  outstanding  under  the
existing credit facility at December 31, 1999.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The information required by this item are set forth on pages F-1 to F-26
of this report.

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

        No changes in or disagreements with our accountants have occurred.


                                       26
<PAGE>

                                    PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) Directors of the registrant

        The information  required by this item is incorporated by reference from
the  information  included  under the  captions,  "Election  of  Directors"  and
"Section 16(a)  Beneficial  Ownership  Compliance,"  set forth in our definitive
proxy statement for our 2000 annual meeting of stockholders.

(b) Executive officers of the registrant

        Information regarding our executive officers as of March 27, 2000 is set
forth  below.  Each  officer's  term of office will expire at the first Board of
Directors  meeting held after our next annual meeting of stockholders.  There is
no arrangement  or  understanding  between any of the executive  officers or any
other  person  pursuant to which such  executive  officer was  selected  for the
office held. No family relationship of any kind exists between the officers.

   Name                   Age    Position
   Ken S. Bajaj           58     Chairman of the Board, President and
                                  Chief Executive Officer
   Jack Pearlstein        36     Senior Vice President, Chief Financial Officer
                                  and Treasurer
   John Cross             57     Executive Vice President
   Sherry Rhodes          44     Vice President, General Counsel and Secretary

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

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

        John Cross. Mr. Cross has been on our Board of Directors since June 1998
and our Executive Vice President  since March 1999. Mr. Cross was the Group Vice
President of  Information  Technology for BP Amoco  Corporation  from 1998 until
1999.  Mr.  Cross was the Chief  Information  Officer for the British  Petroleum
Group  from  1993  until  1998.  Prior  to  1993,  he was  General  Manager  for
information  technology in the  Exploration  and  Production  Company of British
Petroleum.  Mr. Cross has a B.S. in economics and business  management  from the
University of Natal, South Africa.

        Sherry Rhodes. Ms. Rhodes became our Vice President, General Counsel and
Secretary in March 2000. Ms. Rhodes was the Vice President,  General Counsel and
Secretary of  BioReliance  Corporation  from  December  1997 to March 2000.  Ms.
Rhodes was the Vice  President  and General  Counsel of I-NET,  Inc.,  which was
acquired by Wang  Laboratories,  Inc. in 1996, from 1994 to 1997. Before joining
I-NET in 1994,  Ms.  Rhodes was a partner in the law firm of Reed Smith Shaw and
McClay.  Ms. Rhodes holds a J.D. from the  University of Maryland  School of Law
and is admitted to the Bar in Maryland and the District of Columbia.


                                       27
<PAGE>

Item 11. EXECUTIVE COMPENSATION

        The information  required by this item is incorporated by reference from
the information included under the caption,  "Executive Compensation," set forth
in our definitive proxy statement for our 2000 annual meeting of stockholders.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

(a) Security ownership of certain beneficial owners

        The information  required by this item is incorporated by reference from
the information  included under the caption,  "Stock Ownership of Management and
Others," set forth in our definitive proxy statement for our 2000 annual meeting
of stockholders.

(b) Security ownership of management

        The information  required by this item is incorporated by reference from
the information  included under the caption,  "Stock Ownership of Management and
Others," set forth in our definitive proxy statement for our 2000 annual meeting
of stockholders.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information  required by this item is incorporated by reference from
the  information  included  under  the  caption,   "Certain   Relationships  and
Transactions,"  set forth in our definitive  proxy statement for our 2000 annual
meeting of stockholders.


                                       28
<PAGE>


                                     PART IV

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

(a)(1) List of financial statements:

        The  following is a list of the  consolidated  financial  statements  of
AppNet,  Inc.  together  with the  report  of  independent  public  accountants,
included in this report:

                                                                            Page
 Report of Independent Public Accountants                                   F-1
 Consolidated balance sheets, December 31, 1999 and 1998                    F-2
 Consolidated statements of operations for the years ended December 31,
      1999 and 1998                                                         F-3
 Consolidated statements of stockholders' equity for the years ended
      December 31, 1999 and 1998                                            F-4
 Consolidated statements of cash flows for the years ended December 31,
      1999 and 1998                                                         F-5
 Notes to consolidated financial statements                                 F-6

(a)(2) List of financial schedules:

The following is a list of data submitted herewith:

                                                                           Page
 Report of Independent Public Accountants                                  F-25
 Schedule II (Valuation and Qualifying Accounts) for the years ended
      December 31, 1998 and 1999                                           F-26

(b) (3) Exhibits:

  Exhibit    Description

      3.1   Restated Certificate of Incorporation of AppNet, Inc.  (Incorporated
            by  reference to Exhibit 3.1 to AppNet's  Registration  Statement on
            Form S-1, File No. 333-89877, filed October 28, 1999)

      3.2   Form of Amended and Restated Bylaws of AppNet, Inc. (Incorporated by
            reference to Exhibit 3.2 to Amendment No. 2 to AppNet's Registration
            Statement on Form S-1, File No. 333-75205, filed May 25, 1999)

      4.1   Form  of  certificate  of  common  stock  of  AppNet  Systems,  Inc.
            (Incorporated  by  reference  to  Amendment  No. 2 to Exhibit 4.1 to
            AppNet's  Registration  Statement on Form S-1,  File No.  333-75205,
            filed May 25, 1999)

      4.2   Registration  Agreement,  dated as of June 29,  1998,  by and  among
            AppNet Systems, Inc., GTCR Golder Rauner, L.L.C., Fairfax Management
            Company  II,   L.L.C.,   Smart   Technology,   L.L.C.   and  certain
            stockholders of AppNet,  Inc.  (Incorporated by reference to Exhibit
            4.2 to  AppNet's  Registration  Statement  on  Form  S-1,  File  No.
            333-75205, filed March 29, 1999)

      10.1  Purchase  Agreement,  dated as of June 29, 1998, as amended,  by and
            among AppNet, Inc., Smart Technology, L.L.C. and GTCR Golder Rauner,
            L.L.C. (Incorporated by reference to Exhibit 10.1 to Amendment No. 5
            to AppNet's Registration  Statement on Form S-1, File No. 333-75205,
            filed June 15, 1999)



                                       29
<PAGE>

      10.2  Agreement of Purchase and Sale of Assets,  dated March 12, 1998,  by
            and between AppNet, Inc., Arbor Intelligent Systems, Inc., AppNet of
            Michigan,  Inc. and Ronald Suarez, Robert Simms and Robert Royce for
            purchase  and  sale of  substantially  all of the  assets  of  Arbor
            Intelligent Systems, Inc. (Incorporated by reference to Exhibit 10.2
            to Amendment No. 1 to AppNet's  Registration  Statement on Form S-1,
            File No. 333-75205, filed May 13, 1999)

      10.3  Merger  Agreement,  dated June 31, 1998, by and among AppNet,  Inc.,
            SSC Acquisition Sub #1, Inc., Software Services  Corporation and its
            stockholders  for the purchase of all of the issued and  outstanding
            capital  stock of Software  Services  Corporation  (Incorporated  by
            reference  to  Exhibit   10.3  to   Amendment   No.  1  to  AppNet's
            Registration  Statement on Form S-1, File No.  333-75205,  filed May
            13, 1999)

      10.4  Merger Agreement,  dated October 2, 1998, by and among AppNet, Inc.,
            NMP  Acquisition  Sub #1, Inc., New Media  Publishing,  Inc. and its
            stockholders  for the purchase of all of the issued and  outstanding
            capital  stock  of  New  Media  Publishing,  Inc.  (Incorporated  by
            reference  to  Exhibit   10.4  to   Amendment   No.  1  to  AppNet's
            Registration  Statement on Form S-1, File No.  333-75205,  filed May
            13, 1999)

      10.5  Agreement and Plan of Merger, dated September 17, 1998, by and among
            AppNet, Inc., AppNet/Century,  Inc., Century Computing, Incorporated
            and its  stockholders  for the  purchase  of all of the  issued  and
            outstanding   capital  stock  of  Century  Computing,   Incorporated
            (Incorporated  by reference  to Exhibit  10.5 to Amendment  No. 1 to
            AppNet's  Registration  Statement on Form S-1,  File No.  333-75205,
            filed May 13, 1999)

      10.6  Stock  Purchase  Agreement,  dated  October 20,  1998,  by and among
            AppNet, Inc., Research & Planning,  Inc., Thomas H. Rauh and William
            Rosenfeld  for the  purchase  of all of the issued  and  outstanding
            capital  stock  of  Research  &  Planning,   Inc.  (Incorporated  by
            reference  to  Exhibit   10.6  to   amendment   No.  1  to  AppNet's
            Registration  Statement on Form S-1, File No.  333-75205,  filed May
            13, 1999)

      10.7  Stock  Purchase  Agreement,  dated as of November 25,  1998,  by and
            among AppNet,  Inc., The Kodiak Group, Inc. and its stockholders for
            the purchase of all of the issued and  outstanding  capital stock of
            The Kodiak Group, Inc. (Incorporated by reference to Exhibit 10.7 to
            Amendment No. 1 to AppNet's Registration Statement on Form S-1, File
            No. 333-75205, filed May 13, 1999)

      10.8  Stock  Purchase  Agreement,  dated  December 23, 1998,  by and among
            AppNet,  Inc.,  i33  communications  corp.,  Drew  Rayman  and  Enno
            Vandermeer  for the  purchase  of all of the issued and  outstanding
            capital stock of i33 communications corp. (Incorporated by reference
            to  Exhibit  10.8  to  Amendment  No.  1  to  AppNet's  Registration
            Statement on Form S-1, File No. 333-75205, filed May 13, 1999)

      10.9  Merger Agreement,  dated as of February 25, 1999, as amended, by and
            among  AppNet,  Inc.,  AppNet  Sigma6,  Inc.,  Sigma6,  Inc. and the
            stockholders of Sigma6, Inc., for the purchase of all the issued and
            outstanding capital stock of Sigma6, Inc. (Incorporated by reference
            to  Exhibit  10.9  to  Amendment  No.  3  to  AppNet's  Registration
            Statement on Form S-1, File No. 333-75205, filed May 28, 1999)



                                       30
<PAGE>

      10.10 Asset  Purchase  Agreement,  dated as of March 1, 1999, by and among
            AppNet,  Inc.,  Salzinger  Acquisition Corp.,  ,Salzinger & Company,
            Inc. and Steven Salzinger for the purchase of  substantially  all of
            the assets of Salzinger & Company,  Inc.  (Incorporated by reference
            to  Exhibit  10.10  to  Amendment  No.  1 to  AppNet's  Registration
            Statement on Form S-1, File No. 333-75205, filed May 13, 1999)

      10.11 Stock Purchase  Agreement,  dated as of March 22, 1999, by and among
            AppNet, Inc., Internet Outfitters, Inc. and its stockholders for the
            purchase  of all of the  issued  and  outstanding  capital  stock of
            Internet  Outfitters,  Inc.  (Incorporated  by  reference to Exhibit
            10.11 to Amendment No. 1 to AppNet's Registration  Statement on Form
            S-1, File No. 333-75205, filed May 13, 1999)

      10.12 Asset Purchase  Agreement,  dated as of March 29, 1999, by and among
            AppNet,   Inc.,   Transform   Acquisition   Corp.,   TransForm   IT,
            Incorporated  and John C. King,  Thomas E. Hunt and Roy A.  Chandler
            for the purchase of substantially all of the assets of TransForm IT,
            Incorporated   (Incorporated   by  reference  to  Exhibit  10.12  to
            Amendment No. 1 to AppNet's Registration Statement on Form S-1, File
            No. 333-75205, filed May 13, 1999)

      10.13 Recapitalization  Agreement, dated as of June 16, 1999, by and among
            AppNet, Inc. and owners of AppNet's preferred stock (Incorporated by
            reference to Exhibit 10.1 to AppNet's  Quarterly Report on Form 10-Q
            for the quarter ended September 30, 1999)

      10.14 Revolving  Credit  Agreement,  dated as of January  8, 1999,  by and
            among AppNet, Inc., BankBoston, N.A. and Antares Capital Corporation
            (Incorporated  by reference to Exhibit  10.14 to Amendment  No. 1 to
            AppNet's  Registration  Statement on  Form S-1, File  No. 333-75205,
            filed May 13, 1999)

      10.15 Limited  Consent  Letter  Agreement,   dated  August  16,  1999,  by
            BankBoston,  N.A. and Antares Capital Corporation,  and AppNet, Inc.
            and certain of its  subsidiaries,  relating to the Revolving  Credit
            Agreement, dated as of January 8, 1999 (Incorporated by reference to
            Exhibit  10.3 to  AppNet's  Quarterly  Report  on Form  10-Q for the
            quarter ended September 30, 1999)

      10.16 First Amendment to Revolving Credit Agreement, dated as of March 10,
            1999,  by and among  AppNet,  Inc.,  BankBoston,  N.A.  and  Antares
            Capital  Corporation  (Incorporated by reference to Exhibit 10.16 to
            Amendment No. 1 to AppNet's Registration Statement on Form S-1, File
            No. 333-75205, filed May 13, 1999)

      10.17 Second Amendment to Revolving Credit Agreement,  dated as of May 24,
            1999,  by and among  AppNet,  Inc.,  Bank  Boston,  N.A. and Antares
            Capital  Corporation  (Incorporated by reference to Exhibit 10.15 to
            Amendment No. 3 to AppNet's Registration Statement on Form S-1, File
            No. 333-75205, filed May 28, 1999)

      10.18 Century  Computing,  Incorporated  Incentive  Stock Plan, as amended
            (Incorporated  by reference to Exhibit  10.18 to Amendment  No. 1 to
            AppNet's  Registration  Statement on Form S-1,  File No.  333-75205,
            filed May 13, 1999)

      10.19 AppNet,  Inc. 1998 Stock Option and  Incentive  Plan (as amended and
            restated)  (Incorporated  by reference to Exhibit 10.19 to Amendment
            No. 2 to  AppNet's  Registration  Statement  on Form  S-1,  File No.
            333-75205, filed May 25, 1999)



                                       31
<PAGE>

      10.20 AppNet, Inc. 1999 Stock Incentive Plan (Incorporated by reference to
            Exhibit 10.2 to 10.20 AppNet's Quarterly Report on Form 10-Q for the
            quarter ended September 30, 1999)

      10.21 Internet  Outfitters,  Inc.  1996  Incentive  Stock Option Plan,  as
            amended (Incorporated by reference to Exhibit 10.21 to Amendment No.
            1  to  AppNet's  Registration   Statement  on  Form  S-1,  File  No.
            333-75205, filed May 13, 1999)

      10.22 Form of Senior  Management  Agreement,  as amended  (Incorporated by
            reference  to  Exhibit   10.22  to  Amendment   No.  3  to  AppNet's
            Registration  Statement on Form S-1, File No.  333-75205,  filed May
            28, 1999)

      10.23 Senior  Management  Agreement,  dated  as of June 29,  1998,  by and
            between AppNet,  Inc. and Ken S. Bajaj (Incorporated by reference to
            Exhibit 10.23 to Amendment No. 2 to AppNet's Registration  Statement
            on Form S-1, File No. 333-75205, filed May 25, 1999)

      10.24 Letter  Agreement,  dated as of May 28, 1999,  by and among  AppNet,
            Inc., BankBoston, N.A. and Antares Capital Corporation (Incorporated
            by  reference  to  Exhibit  10.24 to  Amendment  No.  3 to  AppNet's
            Registration  Statement on Form S-1, File No.  333-75205,  filed May
            28, 1999)

      21.1  Subsidiaries of AppNet,  Inc.  (Incorporated by reference to Exhibit
            21.1 to Amendment No. 4 to AppNet's  Registration  Statement on Form
            S-1, File No. 333-75205, filed June 10, 1999)

      23.1  Consent of Arthur Andersen LLP

      27.1  Financial Data Schedule (EDGAR version only)

      (99)  Definitive   Proxy   Statement  for  the  2000  Annual   Meeting  of
            Stockholders  (to be filed with the Commission  under Regulation 14A
            and incorporated by reference herein to the extent indicated in this
            report)

(b) (4) Reports on Form 8-K:

        No reports on Form 8-K were filed during the fourth quarter of 1999.


                                       32
<PAGE>

                                   SIGNATURES

        Pursuant to the  requirements  of Section 13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of March 30, 2000.

                             APPNET, INC.



                             By: /s/ Ken S. Bajaj
                                 Ken S. Bajaj
                             Chairman of the Board of Directors,
                             President and Chief Executive Officer
                             (Principal Executive Officer)


                             By: /s/ Jack Pearlstein
                                 Jack Pearlstein
                             Senior Vice President, Chief Financial Officer
                              and Treasurer (Principal Accounting Officer)

        Pursuant to the  requirements  of the  Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacity indicated as of March 30, 2000.


  /s/ Ken S. Bajaj
Ken S. Bajaj, Director


  /s/ Philip A. Canfield
Philip A. Canfield, Director


  /s/ John Cross
John Cross, Director


  /s/ Richard N. Perle
Richard N. Perle, Director



Bruce V. Rauner, Director


                                       33
<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To AppNet, Inc.:

        We have audited the accompanying  consolidated balance sheets of AppNet,
Inc. (formerly AppNet Systems,  Inc.) (a Delaware  corporation) and subsidiaries
as of December 31, 1999 and 1998,  and the related  consolidated  statements  of
operations, stockholders' equity, and cash flows for the years then ended. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

        In our opinion, the consolidated  financial statements referred to above
present fairly, in all material respects, the financial position of AppNet, Inc.
and  subsidiaries  as of December  31,  1999 and 1998,  and the results of their
operations  and their cash flows for the years  then  ended in  conformity  with
accounting principles generally accepted in the United States.


                                           ARTHUR ANDERSEN LLP

Vienna, Virginia
February 9, 2000


                                      F-1
<PAGE>

                                  APPNET, INC.
                           CONSOLIDATED BALANCE SHEETS
                 (in thousands, except share and per share data)

                                                          1999           1998
                                                       ----------    -----------
ASSETS
Current assets:
   Cash and cash equivalents                           $  66,549      $   2,447
   Accounts receivable, net                               31,661         11,238

   Other current assets                                    1,300          1,118
                                                       ---------      ---------
        Total current assets                              99,510         14,803
Property and equipment, net                                8,958          3,012
Intangible assets, net                                    97,247         99,380

Other assets                                               2,111          1,175
                                                       ---------      ---------

Total assets                                           $ 207,826      $ 118,370
                                                       =========      =========

LIABILITIES, REDEEMABLE STOCK
 AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                    $   4,830      $   2,737
   Accrued liabilities                                    32,311          6,911

   Current portion of convertible notes
     and long-term debt                                    1,063          2,426
                                                       ---------      ---------
        Total current liabilities                         38,204         12,074

Credit facilities                                           --           37,461
Convertible notes, net of current portion                   --            2,706
Other long-term debt, net of current portion               3,516          1,199

Other long-term liabilities                                1,264          3,398
                                                       ---------      ---------

        Total liabilities                                 42,984         56,838
                                                       ---------      ---------


Commitments and contingencies (Note 15)

Class A Preferred Stock, $.01 par value,
  96,621 shares authorized, zero and 38,093
  shares issued and outstanding as of
  December 31, 1999 and December 31, 1998,
  respectively, liquidation value $1,000                    --           37,646

Common stock subject to put rights, $.0005
 par value; zero and 48,771 shares issued and
 outstanding as of December 31, 1999 and
 December 31, 1998, respectively                            --              278

Stockholders' equity:

Class B Preferred Stock, $.01 par value,
 20,000 shares authorized, zero and 11,576
 shares issued and outstanding as of
 December 31, 1999 and December 31, 1998,
 respectively, liquidation value $1,000                     --           11,576

Common stock, $.0005 par value; 75,000,000
 shares authorized, 33,625,175 shares issued
 and 33,454,474 shares outstanding as of
 December 31, 1999, and 19,504,173 issued
 and outstanding as of December 31, 1998                      17             10

Additional paid-in capital                               257,542         27,222
Treasury stock                                               (51)          --
Notes receivable from management                            (503)          (821)
Deferred compensation                                       (383)          --
Accumulated deficit                                      (91,780)       (14,379)
                                                       ---------      ---------
Total stockholders' equity                               164,842         23,608
                                                       ---------      ---------
Total liabilities, redeemable stock
 and stockholders' equity                              $ 207,826      $ 118,370
                                                       =========      =========


        The accompanying notes are an integral part of these statements.


                                      F-2
<PAGE>

                                  APPNET, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (in thousands, except share and per share data)


                                                      Year ended December 31,
                                                      1999             1998
                                                  -------------    -------------

Revenues                                           $    109,707    $     17,674

Cost of revenues                                         61,604          11,699
                                                   ------------    ------------

        Gross profit                                     48,103           5,975

Operating expenses:
        Selling and marketing                             8,797             964
        General and administrative                       33,918           6,507
        Stock-based and other
          acquisition-related
          compensation                                   19,651           1,157

        Depreciation and amortization                    58,024          10,151
                                                   ------------    ------------

               Total operating expenses                 120,390          18,779
                                                   ------------    ------------


Loss from operations                                    (72,287)        (12,804)
Interest income                                             585              17
Interest expense                                         (4,313)         (1,052)

Other expense, net                                         (559)           (740)
                                                   ------------    ------------
Loss before income taxes                                (76,574)        (14,579)

Income tax (benefit) provision                              827            (200)
                                                   ------------    ------------

Net loss                                                (77,401)        (14,379)

Dividends on and accretion of preferred stock            (2,139)           (873)
                                                   ------------    ------------

Net loss attributable to common stockholders       $    (79,540)   $    (15,252)
                                                   ============    ============

Basic and diluted net loss per common share        $      (3.03)   $      (1.41)
                                                   ============    ============

Weighted average common shares outstanding           26,233,764      10,785,424
                                                   ============    ============

        The accompanying notes are an integral part of these statements.



                                      F-3
<PAGE>
<TABLE>
                                                            APPNET, INC.
                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                (amounts in '000s, except share data)
<CAPTION>
                                                                          Redeemable Equity Securities
                                              ----------------------------------------------------------------------------------
                                                  Common Stock
                                                   Subject to                    Class A                       Series A-1
                                                   Put Rights                Preferred Stock                Preferred Stock
                                              ------------------------  ---------------------------  ---------------------------
                                               Shares        Amount        Shares         Amount         Shares        Amount
                                              ----------    ----------  ------------  -------------  ------------  -------------
<S>                                           <C>        <C>              <C>          <C>               <C>        <C>
Initial capitalization                           --      $      --             --      $      --             --     $      --
  Issuance of Series
   A-1 Preferred Stock in
   connection with acquisition                   --             --             --             --          266,796         1,067
  GTCR Investment                              48,771            278           --             --         (266,796)       (1,067)
  Repurchase and cancellation
   of shares in exchange for
   note payable                                  --             --             --             --             --            --
  Repurchase and cancellation
   of common stock shares                        --             --             --             --             --            --
  Issuance of Class A
   Preferred Stock                               --             --           37,676         37,045           --            --
  Conversion of common stock
   into Class A Preferred Stock                  --             --              417            417           --            --
  Dividends on and accretion of
   Class A Preferred Stock                       --             --             --              184           --            --
  Issuance of stock in connection
   with the 1998 acquired
   businesses                                    --             --             --             --             --            --
  Repurchase and cancellation of
   shares sold to management                     --             --             --             --             --            --
  Purchase of shares by management               --             --             --             --             --            --
  Stock options exercised                        --             --             --             --             --            --
  Net loss                                       --             --             --             --             --            --
                                          -----------    -----------    -----------    -----------    -----------   -----------
Total, December 31, 1998                       48,771    $       278         38,093    $    37,646           --     $      --
                                          -----------    -----------    -----------    -----------    -----------   -----------
  Issuance of Class A Preferred
   Stock                                         --             --            7,337          7,191           --            --
  Dividends on and accretion of
   Class A Preferred Stock                       --             --             --              593           --            --
  Issuance of stock in connection
   with the 1999 acquired
   businesses                                    --             --             --             --             --            --
  Contingent purchase price earned,
   payable in stock                              --             --             --             --             --            --
  Exercise and expiration of
   put rights                                 (48,771)          (278)          --             --             --            --
  Conversion of notes payable                    --             --             --             --             --            --
  Issuance of common stock in
   initial public offering, net
   of expenses                                   --             --             --             --             --            --
  Exchange of Class A and Class
   B Preferred Stock in the
   initial public offering                       --             --          (45,430)       (45,430)          --            --
  Charges associated with the
   initial public offering                       --             --             --             --             --            --
  Repurchase and cancellation of
   shares sold to management                     --             --             --             --             --            --
  Common stock sold for cash                     --             --             --             --             --            --
  Issuance of common stock in
   secondary public offering, net
   of expenses                                   --             --             --             --             --            --
  Repurchase of common stock                     --             --             --             --             --            --
  Stock options and warrants exercised           --             --             --             --             --            --
  Deferred compensation pursuant to
   issuance of stock
   options                                       --             --             --             --             --            --
  Amortization of deferred compensation          --             --             --             --             --            --
  Other                                          --             --             --             --             --            --
  Net loss                                       --             --             --             --             --            --
                                          -----------    -----------    -----------    -----------    -----------   -----------
Total, December 31, 1999                         --      $      --             --      $      --             --     $      --
                                          ===========    ===========    ===========    ===========    ===========   ===========

<PAGE>
<CAPTION>
                                                     Class B                      Common
                                                  Preferred Stock                  Stock                Additional
                                          ---------------------------- -----------------------------     Paid-In       Treasury
                                              Shares         Amount         Shares        Amount         Capital        Stock
                                          -------------  ------------- --------------  -------------  -------------  -------------
<S>                                        <C>           <C>             <C>           <C>            <C>            <C>
Initial capitalization                           --      $      --        5,343,860    $         3    $       132    $      --
  Issuance of Series
   A-1 Preferred Stock in
   connection with acquisition                   --             --             --             --             --             --
  GTCR Investment                                --             --       13,342,145              7          4,108           --
  Repurchase and cancellation
   of shares in exchange for
   note payable                                  --             --       (1,350,877)            (1)          (405)          --
  Repurchase and cancellation
   of common stock shares                        --             --         (138,455)          --             (789)          --
  Issuance of Class A
   Preferred Stock                               --             --             --             --             --             --
  Conversion of common stock
   into Class A Preferred Stock                  --             --       (1,387,097)            (1)          (416)          --
  Dividends on and accretion of
   Class A Preferred Stock                       --             --             --             --             (873)          --
  Issuance of stock in connection
   with the 1998 acquired
   businesses                                  11,576         11,576      3,397,329              2         24,811           --
  Repurchase and cancellation of
   shares sold to management                     --             --         (681,053)          --             (228)          --
  Purchase of shares by management               --             --          552,982           --              572           --
  Stock options exercised                        --             --          425,339           --              310           --
  Net loss                                       --             --             --             --             --             --
                                          -----------    -----------    -----------    -----------    -----------    -----------
Total, December 31, 1998                       11,576    $    11,576     19,504,173    $        10    $    27,222    $      --
                                          -----------    -----------    -----------    -----------    -----------    -----------
  Issuance of Class A Preferred
   Stock                                         --             --             --             --             --             --
  Dividends on and accretion of
   Class A Preferred Stock                       --             --             --             --           (2,139)          --
  Issuance of stock in connection
   with the 1999 acquired
   businesses                                    --             --          595,711           --            9,399           --
  Contingent purchase price earned,
   payable in stock                              --             --             --             --           10,460           --
  Exercise and expiration of
   put rights                                    --             --           44,882           --              256           --
  Conversion of notes payable                    --             --        1,130,558           --           12,056         12,056
  Issuance of common stock in
   initial public offering, net
   of expenses                                   --             --        6,000,000              3         64,116           --
  Exchange of Class A and Class
   B Preferred Stock in the
   initial public offering                    (11,576)       (11,576)     4,936,808              3         59,239           --
  Charges associated with the
   initial public offering                       --             --             --             --            3,506           --
  Repurchase and cancellation of
   shares sold to management                     --             --         (467,074)          --             (142)          --
  Common stock sold for cash                     --             --           29,240           --              375           --
  Issuance of common stock in
   secondary public offering, net
   of expenses                                   --             --        1,500,000              1         71,098           --
  Repurchase of common stock                     --             --         (170,701)          --             --              (51)
  Stock options and warrants exercised           --             --          350,877           --            1,034           --
  Deferred compensation pursuant to
   issuance of stock
   options                                       --             --             --             --              481           --
  Amortization of deferred compensation          --             --             --             --             --             --
  Other                                          --             --             --             --              581           --
  Net loss                                       --             --             --             --             --             --
                                          -----------    -----------    -----------    -----------    -----------    -----------
Total, December 31, 1999                         --      $      --       33,454,474    $        17    $   257,542    $       (51)
                                          ===========    ===========    ===========    ===========    ===========    ===========


<PAGE>
<CAPTION>
                                                             Stockholders' Equity
                                         ---------------------------------------------------------------
                                               Notes                                         Total
                                         Receivable from     Deferred     Accumulated    Stockholder's
                                            Management     Compensation     Deficit         Equity
                                         ----------------  ------------  -------------  ----------------
<S>                                        <C>             <C>           <C>            <C>
Initial capitalization                     $      --       $     --      $      --      $       135
  Issuance of Series
   A-1 Preferred Stock in
   connection with acquisition                    --             --             --             --
  GTCR Investment                                 (447)          --             --            3,668
  Repurchase and cancellation
   of shares in exchange for
   note payable                                   --             --             --             (406)
  Repurchase and cancellation
   of common stock shares                         --             --             --             (789)
  Issuance of Class A
   Preferred Stock                                --             --             --             --
  Conversion of common stock
   into Class A Preferred Stock                   --             --             --             (417)
  Dividends on and accretion of
   Class A Preferred Stock                        --             --             --             (873)
  Issuance of stock in connection
   with the 1998 acquired
   businesses                                     --             --             --           36,389
  Repurchase and cancellation of
   shares sold to management                       197           --             --              (31)
  Purchase of shares by management                (571)          --             --                1
  Stock options exercised                         --             --             --              310
  Net loss                                        --             --          (14,379)       (14,379)
                                           -----------    -----------    -----------    -----------
Total, December 31, 1998                   $      (821)   $      --      $   (14,379)   $    23,608
                                           -----------    -----------    -----------    -----------
  Issuance of Class A Preferred
   Stock                                          --             --             --             --
  Dividends on and accretion of
   Class A Preferred Stock                        --             --             --           (2,139)
  Issuance of stock in connection
   with the 1999 acquired
   businesses                                     --             --             --            9,399
  Contingent purchase price earned,
   payable in stock                               --             --             --           10,460
  Exercise and expiration of
   put rights                                     --             --             --              256
  Conversion of notes payable
  Issuance of common stock in
   initial public offering, net
   of expenses                                    --             --             --           64,119
  Exchange of Class A and Class
   B Preferred Stock in the
   initial public offering                        --             --             --           47,666
  Charges associated with the
   initial public offering                        --             --             --            3,506
  Repurchase and cancellation of
   shares sold to management                       142           --             --             --
  Common stock sold for cash                      --             --             --              375
  Issuance of common stock in
   secondary public offering, net
   of expenses                                    --             --             --           71,099
  Repurchase of common stock                      --             --             --              (51)
  Stock options and warrants exercised            --             --             --            1,034
  Deferred compensation pursuant to
   issuance of stock
   options                                        --             (481)          --             --
  Amortization of deferred compensation           --               98           --               98
  Other                                            176           --             --              757
  Net loss                                        --             --          (77,401)       (77,401)
                                           -----------    -----------    -----------    -----------
Total, December 31, 1999                   $      (503)   $      (383)   $   (91,780)   $   164,842
                                           ===========    ===========    ===========    ===========


                                  The accompanying notes are an integral part of these statements.
</TABLE>

                                                                 F-4
<PAGE>
                                  APPNET, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

                                                               Year ended
                                                              December 31,
                                                         -----------------------
                                                            1999         1998
                                                         ----------   ----------
Cash flows from operating activities:
   Net loss                                              $ (77,401)   $ (14,379)
   Adjustments to reconcile net
       loss to net cash used in
       operating activities:
      Amortization                                          55,271        9,867
      Depreciation                                           2,753          284
      Stock-based and other acquisition-related
        compensation                                        19,651        1,157
      Write-off of deferred financing costs                    559          291
      Deferred tax benefit                                    --            (50)
      Beneficial conversion charge                           1,052         --
      Change in assets and liabilities:
        Accounts receivable, net                           (17,794)      (1,762)
        Other current assets                                   412          399
        Accounts payable                                       744        1,012
        Accrued liabilities                                  8,450          547
                                                         ---------    ---------
          Net cash used in operating activities             (6,303)      (2,634)
                                                         ---------    ---------
Cash flows from investing activities:
   Purchase of property and equipment                       (7,353)      (1,196)
   Cash paid for acquired businesses,
      net of cash acquired                                 (26,381)     (69,562)
   Other assets                                             (1,340)        (904)
                                                         ---------    ---------
          Net cash used in investing activities            (35,074)     (71,662)
                                                         ---------    ---------
Cash flows from financing activities:
   Proceeds from long-term debt                               --          1,104
   Repayments of long-term debt                               (203)        (268)
   Borrowings under credit facilities                       75,800       47,261
   Repayments of credit facilities                        (113,261)      (9,800)
   Debt issue costs                                           (621)        (351)
   Proceeds from issuance of common stock                      375        3,015
   Net proceeds from initial public offering                64,119         --
   Net proceeds from secondary public offering              70,463         --
   Repurchase of common stock subject to
     put rights                                                (22)        --
   Proceeds from issuance of preferred stock                 7,046       36,292
   Proceeds from issuance (repurchase) of
    shares sold to management                                  164          (31)
   Repurchase of common stock                                  (51)        (789)
   Proceeds from exercise of stock options                   1,034          310
   Other                                                       636         --
                                                         ---------    ---------
          Net cash provided by financing activities        105,479       76,743
                                                         ---------    ---------
Net increase in cash                                        64,102        2,447
Cash and cash equivalents, beginning of period               2,447         --
Cash and cash equivalents, end of period                 $  66,549    $   2,447
                                                         =========    =========
Supplementary information:
   Cash paid for income taxes                            $     437    $    --
                                                         =========    =========
   Cash paid for interest                                $   2,332    $     775
                                                         =========    =========

         The accompanying notes are an integral part of these statements.



                                      F-5
<PAGE>

                                  APPNET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

1.  Business Description:

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

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

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

2.  Summary of Significant Accounting Policies:

Principles of Consolidation

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

Use of Estimates

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

Cash and Cash Equivalents

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

Property and Equipment

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

        Computers and equipment.....................three to five years
        Furniture and fixtures......................five to seven years



                                      F-6
<PAGE>

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

Impairment of Long-Lived Assets

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

Internal Use Computer Software

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

Fair Value of Financial Instruments

        The Company's  financial  instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, credit facilities, long-term
debt and convertible  notes. In management's  opinion,  the carrying  amounts of
these financial  instruments  approximate their fair values at December 31, 1999
and 1998.  Due to the related  party nature of the  Company's  Class A Preferred
Stock, it is impracticable to estimate its fair value at December 31, 1998.

Stock-Based Compensation

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

Revenue Recognition

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

        Cost of revenues includes all direct material and labor costs related to
contract  performance  and does not include any  related  depreciation  expense.
Provisions for estimated losses on uncompleted  contracts are made in the period
in which  such  losses  are  determined.  Changes in  contract  performance  and
estimated  profitability,  including final contract  settlements,  may result in
revisions to costs and revenues  and are  recognized  in the period in which the
revisions are  determined.  Unbilled  receivables  on contracts are comprised of
costs, plus earnings on certain  contracts in excess of contractual  billings on
such  contracts.  Cash  received in excess of costs  incurred is  classified  as
deferred revenue.



                                      F-7
<PAGE>

Business Concentration and Credit Risk

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

<TABLE>
<CAPTION>
               Revenues for      Accounts Receivable     Revenues for      Accounts Receivable
              the year ended            as of           the year ended            as of
             December 31, 1999    December 31, 1999    December 31, 1998    December 31, 1998
            ------------------------------------------------------------------------------------
<S>                  <C>                 <C>                  <C>                  <C>
Customer A           *                    *                   15%                  12%
Customer B           *                   10%                  12%                  13%

* Represents less than 10% of total.
</TABLE>

Income Taxes

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

Earnings Per Share

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

Recent Accounting Pronouncements

        In June 1998, the Financial  Accounting  Standards Board issued SFAS No.
133, "Accounting for Derivatives and Hedging Activities" ("SFAS No. 133"), which
establishes  accounting  and  reporting  standards for  derivative  instruments,
including   certain   derivative   instruments   embedded  in  other   contracts
(collectively referred to as derivatives),  and for hedging activities. SFAS No.
133, as amended,  is effective for all fiscal quarters of fiscal years beginning
after  June 15,  2000 and  management  believes  this  standard  will not have a
significant  impact on its  results of  operations,  financial  position or cash
flows.

Segment Reporting

        During  1998,  the  Company  adopted  SFAS No. 131,  "Disclosures  about
Segments of an Enterprise and Related  Information"  ("SFAS No. 131").  SFAS No.
131  requires  a  business  enterprise,  based upon a  management  approach,  to
disclose  financial and descriptive  information  about its operating  segments.
Operating  segments  are  components  of  an  enterprise  about  which  separate
financial  information  is  available  and  regularly  evaluated  by  the  chief
operating decision maker(s) of an enterprise. Under this definition, the Company
operated as a single segment for all years and periods presented.

Reclassifications

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



                                      F-8
<PAGE>

3.  Acquisitions:

1998 Acquisitions

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

        On March 12, 1998, the Company acquired the assets of Arbor  Intelligent
Systems,  Inc. ("Arbor"),  for an aggregate purchase price of approximately $3.1
million, including transaction costs, of which $1.1 million was paid in the form
of the Company's  Series A-1 Convertible  Preferred Stock (266,796 shares valued
at $4.00 per share), and $2.0 million was paid in cash.

        On  April  30,   1998,   the  Company   acquired  the  assets  of  LOGEX
International,  L.L.C. ("LOGEX"), in exchange for approximately $300,000 in cash
and a five-year  convertible  note in the principal amount of $300,000 (Note 8.)
The former  shareholders  of LOGEX were  entitled to a contingent  consideration
payment in the event that certain  performance  criteria  were achieved by LOGEX
during the year ending April 30, 1999. Accordingly,  the Company made a $200,000
contingent  payment to the former  shareholders of LOGEX during 1999,  which was
reflected as additional purchase price consideration and recorded as goodwill as
of December 31, 1999.

        On August 25, 1998, the Company  acquired all the  outstanding  stock of
Software Services  Corporation,  Inc. ("SSC") for an aggregate purchase price of
approximately $23.0 million, including transaction costs, of which $12.0 million
was paid in the form of Company  common  stock,  and $11.0  million  was paid in
cash. In connection with the SSC  acquisition,  the Company issued 11,576 shares
of its  Class B  Preferred  Stock at a price of $1,000  per share and  1,387,095
shares of Company common stock at a price of $0.3007 per share to the former SSC
shareholders.

        On October 2, 1998, the Company  acquired all the  outstanding  stock of
New  Media  Publishing,   Inc.  ("NMP")  for  an  aggregate  purchase  price  of
approximately $19.5 million,  including transaction costs, of which $8.8 million
was paid in cash,  $9.5  million  was paid in the form of Company  common  stock
(1,111,111  shares  valued at $8.55 per  share)  and the  remainder  was paid in
options to purchase 145,518 shares of Company common stock,  valued using a fair
value pricing model, at approximately $1.2 million. These options were issued in
exchange for previously outstanding options of NMP, have exercise prices ranging
from $0.06 to $8.69 and have vesting  schedules  ranging from three months to 32
months.  The  value  associated  with  these  options  has  been  classified  as
additional paid-in capital on the accompanying  consolidated balance sheets. The
acquisition  of NMP  provided  for an  additional  $14.0  million in  contingent
payments  potentially  payable to the former  owners of NMP in cash and  Company
common stock based upon NMP meeting  certain revenue and  profitability  targets
for the  twelve-month  period ended  September  30, 1999 and, for their pro rata
share of the payment,  certain NMP  executives  remain  employed by the Company.
During the  period of  measurement,  NMP met 100% of the  operating  targets.  A
portion  of the  contingent  payments  was  made  in  January  2000.  Employment
contingencies  still  exist  which must be met before the  remaining  contingent
consideration is payable to the former owners of NMP (Note 15).

        On October 12, 1998, the Company  acquired all the outstanding  stock of
Century Computing,  Incorporated  ("Century").  The aggregate purchase price was
approximately $29.2 million,  including transaction costs, of which $2.0 million
was provided in the form of a convertible  note which was converted  during 1999
(Note 8), $21.6  million was paid in cash and the  remainder was paid in options
to purchase  704,127 shares of Company  common stock valued,  using a fair value
pricing  model,  at  approximately  $5.6  million.  These options were issued in
exchange for previously  outstanding  options of Century,  have exercise  prices
ranging from $0.71 to $1.00 and were fully  vested at the time of issuance.  The
value  associated  with these options has been  classified as additional paid in
capital on the accompanying consolidated balance sheets.



                                      F-9
<PAGE>

        On October 20, 1998, the Company  acquired all the outstanding  stock of
Research  and  Planning,  Inc.  ("R&P")  for  an  aggregate  purchase  price  of
approximately $22.1 million, including transaction costs, of which $15.1 million
was paid in cash,  $6.0  million  was paid in the form of Company  common  stock
(701,754 shares valued at $8.55 per share), and $1.0 million was provided in the
form of notes to the  previous R&P  shareholders  (Note 8), which were repaid in
January 2000.

        On December 14, 1998, the Company acquired all the outstanding  stock of
The  Kodiak  Group,  Inc.   ("Kodiak")  for  an  aggregate   purchase  price  of
approximately $16.4 million, including transaction costs, of which $12.1 million
was paid in cash,  approximately  $2.3  million  was paid in the form of Company
common stock  (197,368  shares  valued at $11.40 per share) and $2.0 million was
provided in the form of notes to the previous  Kodiak  shareholders of which all
were  converted  in  December  1999 (Note 8). In  addition,  the  former  Kodiak
shareholders are entitled to a potential  contingent  payment payable in cash of
up to $4.0 million in the event that Kodiak sells or licenses certain technology
during the three-year period ending December 14, 2001.

1999 Acquisitions

        During 1999, the Company  acquired an additional  five businesses in the
Internet and electronic commerce professional services industries. Collectively,
these entities are referred to as the "1999 Acquired Businesses".

        On January 8, 1999, the Company  acquired all the  outstanding  stock of
i33 communications corp. ("i33"). 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,  of which  $6.8  million  was  converted  in  December  1999.  The
remaining  $4.5 million is  outstanding  as of December 31, 1999,  of which $3.5
million is  included  in  long-term  debt  (Note 8), and the other $1.0  million
relates to a trust that eliminates upon consolidation (Note 14).

        On March 4, 1999, the Company acquired all of the issued and outstanding
stock of Sigma6, Inc. ("Sigma6"). 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 (97,465  shares valued
at $12.83 per share).  The acquisition of Sigma6 provided for an additional $2.8
million contingent payment payable to the former  stockholders of Sigma6 in cash
and Company common stock based upon Sigma6 meeting certain performance  criteria
during the  twelve-month  period  ended  December  31,  1999.  Based on Sigma6's
results for the period of measurement, 100% of the performance criteria were met
and the contingent payment will be made in April 2000 (Note 15).

        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 (245,614 shares valued at $14.25 per share).  If
certain performance  criteria are met during any consecutive twelve month period
during the  period  from  April 1, 1999 to  September  30,  2000,  Salzinger  is
entitled  to a  contingent  payment  of up to $5.0  million  in cash or,  at the
seller's option, cash and Company common stock (Note 15).

        On  March  26,  1999,  the  Company  acquired  all  of  the  issued  and
outstanding stock of Internet  Outfitters,  Inc.  ("Internet  Outfitters").  The
aggregate purchase price was approximately $9.5 million, plus transaction costs,
consisting of cash,  $2.7 million in Company common stock (157,895 shares valued
at $17.10 per share),  and the  issuance of 22,300  options to purchase  Company
common stock. If certain  performance  criteria were met during the twelve-month
period  ending  December 31, 1999,  the former  stockholders  were entitled to a
contingent payment of up to $3.5 million in cash and Company common stock. Based
on Internet  Outfitters'  results for the period of  performance,  no contingent
payment will be made.

                                      F-10
<PAGE>
        On March 29, 1999, the Company  acquired certain assets of Transform IT,
Incorporated  ("Transform  IT"). 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 (94,737 shares valued at $17.10 per share).
If certain  performance  criteria are met during the twelve-month  period ending
March 31,  2000,  the seller is entitled to a  contingent  payment of up to $3.5
million in cash (Note 15).

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  estimates  of  fair  value,  to  the  tangible  assets  acquired  and
liabilities  assumed and, with the advice of independent  valuation experts,  to
the identifiable  intangible  assets, on the acquisition  dates. The Company has
recorded identifiable  intangibles on the 1999 and 1998 Acquired Businesses,  as
follows (amounts in thousands):

                                               Fair Value        Useful Life
                                              --------------    ---------------
        Customer lists                           $4,160          7-24 months
        Non-competition agreements                2,800           36 months
        Assembled workforce                       7,678          12-48 months
        Proprietary technology                    4,325          12-24 months

        As of  December  31,  1999 and  1998,  the  purchase  price in excess of
identified  tangible and intangible assets and liabilities assumed in the amount
of $143.4 million and $93.2 million, respectively, was allocated to goodwill. As
a result  of the early  stage of  development  of the  Internet  and  electronic
business,  the dynamics of this rapidly evolving industry and the expectation of
increasing   competition,   the  recorded  goodwill  is  being  amortized  on  a
straight-line basis over three years, the estimated period of its benefit.

        The following  unaudited pro forma  consolidated  amounts give effect to
the 1999 and 1998  acquisitions  as if they had  occurred  on January 1, 1998 by
consolidating the results of operations of the 1999 and 1998 Acquired Businesses
with the results of AppNet for the years ended  December 31, 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 in effect as of the
beginning of 1999 and 1998 and should not be  construed as being  representative
of future results of operations.

                                                     Year ended December 31,
                                                       1999             1998
                                                   --------------    -----------
                                                    (in thousands, except per
                                                           share data)
   Revenues                                          $112,335         $ 54,493
   Net loss attributable to common stockholders      $(80,432)        $(50,217)
   Basic and diluted net loss per share               $ (3.05)         $ (2.81)


4.  Accounts Receivable:

        Accounts  receivable  consists  of the  following  as of December 31 (in
thousands):

                                                      1999             1998
                                                  --------------    -----------
  Accounts receivable                                 $24,777           $9,571
  Unbilled accounts receivable                          8,831            2,791
  Allowance for doubtful accounts                      (1,947)          (1,124)
                                                      -------          -------
  Accounts receivable, net                            $31,661          $11,238
                                                      =======          =======


                                      F-11
<PAGE>

5.  Property and Equipment:

        Property and  equipment  consists of the following as of December 31 (in
thousands):

                                                            1999         1998
                                                          ---------    ---------
    Computers and equipment                                 $ 8,860    $ 2,797
    Furniture and fixtures                                    1,572        288
    Leasehold improvements                                      922        211
                                                            -------    -------
                                                             11,354      3,296
    Accumulated depreciation                                 (2,396)      (284)
                                                            -------    -------
    Property and equipment, net                             $ 8,958    $ 3,012
                                                            =======    =======

6.  Intangible Assets:

        Intangible  assets  consists  of the  following  as of  December  31 (in
thousands):

                                                    1999            1998
                                                ------------     -----------
        Customer lists                             $ 4,160          $4,160
        Non-competition agreements                   2,800           2,800
        Assembled workforce                          7,678           4,803
        Proprietary technology                       4,325           4,325
        Goodwill                                   143,409          93,159
                                                   -------        --------
                                                   162,372         109,247
        Accumulated amortization                   (65,125)         (9,867)
                                                   -------        --------
        Intangible assets, net                     $97,247        $ 99,380
                                                  ========        ========

7.  Accrued Liabilities:

        Accrued  liabilities  consists  of the  following  as of December 31 (in
thousands):

                                                            1999        1998
                                                       -----------  ------------
        Accrued compensation and benefits                 $ 4,851       $2,590
        Accrued dividends on Class A
           Preferred Stock and
           Class B Preferred Stock                              -          689
        Payments due to former shareholders of
           Acquired Businesses                              1,600        1,500
        Accrued acquisition-related
          compensation                                     16,816            -
        Other accrued liabilities                           9,044        2,132
                                                          -------      -------
          Accrued liabilities                             $32,311      $ 6,911
                                                          =======      =======


                                      F-12
<PAGE>

8.  Debt:

        Debt consists of the following as of December 31 (in thousands):

                                                            1999         1998
                                                         ----------   ---------
Credit facilities:
Credit facility, bears interest at the lender's prime
   rate plus .5% (8.25% at December 31, 1998),
   interest due monthly                                    $   --      $ 19,730
Credit facility, bears interest at the lender's prime
   rate (7.75% at December 31, 1998), interest due
   monthly                                                     --        17,731
                                                           --------    --------
                                                               --        37,461
                                                           --------    --------
Convertible notes:
Note payable, principal and interest due October 13,
   1999, bears interest at 7%, convertible at the
   option of the holder for common stock at $8.55 per
   share                                                       --         2,000
Note payable, principal and interest due June 29,
   2003, bears interest at 5%, convertible at 80% of
   common stock price upon a sale of Company or an
   initial public offering                                     --           406
Notes payable, principal and interest due December 14,
   2001, bear interest at 8%, convertible at the
   option of the holder for common stock at $11.40 per
   share                                                       --         2,000
Note payable, principal and interest due April 30,
   2003, bears interest at the prime rate (7.75% at
   December 31, 1998), interest payable quarterly at
   July 31, October 31, January 31 and April 30,
   convertible at the option of the holder at 80% of
   common stock price on a sale of Company or an
   initial public offering                                     --           300
                                                           --------    --------
                                                               --         4,706
                                                           --------    --------
Other long-term debt:
Notes payable, principal and interest due January 8,
   2002, bearing interest at 6%                               3,500        --
Notes payable, principal and interest due January 1,
   2000, bearing interest at 6%                               1,000       1,000
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
Other notes payable                                              79         425
Note payable to a member of Company management, due at
   earlier of an initial public offering or December
   31, 1999                                                    --            50
                                                           --------    --------
                                                              4,579       1,625
                                                           --------    --------
Total debt                                                    4,579      43,792
Less current portion                                         (1,063)     (2,426)
                                                           --------    --------
Long-term debt, net of current portion                     $  3,516    $ 41,366
                                                           ========    ========


                                      F-13
<PAGE>

        The future minimum  principal  payments of debt  outstanding at December
31, 1999, are as follows (in thousands):

           2000........................................  $1,063
           2001........................................      16
           2002........................................   3,500
             Total ....................................  $4,579

1999 Credit Facilities

        On  January  8, 1999,  the  Company  replaced  its two  existing  credit
agreements ("the 1998 Credit  Facilities") with two credit agreements  (together
the "1999 Credit Facilities") entered into with a syndicate of lenders providing
for up to $55.0 million in  borrowings.  The 1999 Credit  Facilities  consist of
$40.0 million in credit loans (the "Guaranteed Loans"), which were guaranteed by
a significant  stockholder  and up to $15.0  million of additional  credit loans
(the "Unguaranteed Loans"). The Guaranteed Loans bore interest, at the Company's
option,  at various  LIBOR rates plus 2.5 percent or the lenders' base rate plus
0.5 percent.  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.  On March 10,  1999,  the
Company amended the Unguaranteed Loans increasing  available  borrowings from up
to $15.0 million to up to $26.0  million.  During June 1999, in connection  with
the initial public  offering,  the Company  terminated the Guaranteed  Loans and
amended the Unguaranteed Loans decreasing  available borrowings from up to $26.0
million to up to $20.0 million (the "Amended 1999 Credit Facility"). The Amended
1999  Credit  Facility  matures  on August 24,  2001.  In  conjunction  with the
modification of the credit facilities during June 1999, a charge of $559,000 was
recorded to write-off financing costs related to the facilities.

        The  Amended  1999  Credit  Facility is secured by all of our assets and
contains various restrictive  covenants that, among other things,  require us to
maintain specified financial ratios and restrict us from paying dividends to our
common  stockholders.  As of  December  31,  1999,  the  Company  had  available
borrowings under the Amended 1999 Credit Facility of $20.0 million.

1998 Credit Facilities

        In August 1998, the Company entered into a $15.0 million credit facility
with a commercial  lender,  which bore interest at the lender's base rate plus a
defined  percentage or at various LIBOR rates, and was due on demand. In October
1998,  the Company  modified  the $15.0  million  facility by entering  into two
credit agreements (the "1998 Credit  Facilities")  with two commercial  lenders.
Under the 1998 Credit  Facilities,  each lender provided a $20.0 million line of
credit which was payable upon demand,  guaranteed by a  significant  stockholder
and bore  interest at the option of the Company at the lenders' base rate plus a
defined percentage or at various LIBOR options plus 2.5 percent.  As a result of
the 1999  Credit  Facilities,  which  replaced  the 1998 Credit  Facilities  and
qualify for non-current  classification,  the amounts outstanding under the 1998
Credit  Facilities as of December 31, 1998 have been  classified as long-term in
the  accompanying  consolidated  balance  sheets.  In  connection  with the debt
refinancing  during 1998,  the Company  charged to other  expense  approximately
$291,000 of previously deferred financing fees.

Letter of Credit

        In August 1999, the Company entered into a letter of credit agreement in
the amount of  approximately  $248,000 with a commercial  lender.  The letter of
credit expires in August 2000, at which time it automatically renews. The letter
automatically renews annually thereafter, and expires in June 2003.



                                      F-14
<PAGE>

Convertible Notes

        In  conjunction  with  certain of the Acquired  Businesses,  the Company
issued convertible notes, certain of which, at the option of the holders,  allow
the holders to convert the notes to Company  common stock upon  certain  defined
events at either a stated price or a discount to the then  current  market price
for the Company common stock.

        Certain  promissory  notes  automatically  converted  at the time of the
initial  public  offering  and certain  promissory  notes were  converted at the
option of the promissory note holders.  The notes that converted had a principal
balance of  approximately  $700,000  plus accrued  interest and  converted  into
75,129 shares of the Company's  common stock at a conversion price at 80% of the
$12.00 initial public offering price. The Company  recognized an interest charge
of approximately $1.1 million related to the beneficial  conversion  features of
certain convertible notes that allowed the holders to convert at a discount from
the initial public offering price of the common stock.

        During 1999, the Company  converted  promissory  notes of  approximately
$2.0 million plus accrued interest to former owners of an acquired business into
245,511 shares of the Company's  common stock at a conversion price of $8.55 per
share.  During  December 1999,  certain notes to former owners of other acquired
businesses  totaling $8.8 million,  convertible at the option of the holders for
common  stock at $11.40 per share plus accrued  interest,  were  converted  into
810,132 shares of the Company's common stock.

9.  Capital Stock:

        In June 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.
In connection with the initial public  offering,  the Company  exchanged  45,430
shares of Class A Preferred Stock and 11,576 Class B Preferred Stock,  including
accrued  dividends,  for 4,936,808  shares of the  Company's  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 the Company's  common stock exchanged,  3,813,864 shares
were issued to affiliates of GTCR Golder Rauner, L.L.C. ("GTCR").

        During  November  1999,  the Company  completed a follow-on  offering of
4,300,000 shares of common stock, of which existing  shareholders sold 2,800,000
shares and the  Company  issued  and sold  1,500,000  shares of common  stock at
$50.00 per share. The follow-on offering generated proceeds to the Company,  net
of issuance costs, of approximately $70.4 million.

Common Stock Splits

        In June 1998, upon adoption of the Company's Second Restated Certificate
of  Incorporation,  a  two-for-one  stock split of the Company  common stock was
effected.  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  financial  statements  to
reflect the 1998 stock split and the 1999 reverse stock split.

Treasury Stock

        During  1999,  in  connection  with  rights  under  certain   employment
agreements, the Company repurchased 170,701 shares of the Company's common stock
at their original issuance cost.

GTCR Investment

        In June 1998, the Company completed an investment  transaction with GTCR
and  certain  related  investment  funds and Smart  Technology,  L.L.C.  ("Smart
Technology"),  a party  related to the Company's  President and Chief  Executive
Officer (the "GTCR Investment").  Prior to the GTCR Investment,  the Company


                                      F-15
<PAGE>

had 5,343,860  shares of issued and  outstanding  common stock all of which were
owned by the Company's initial investors (the "Initial Investors").  Pursuant to
the GTCR  Investment,  the Company made a net redemption of 1,350,887  shares of
Company common stock from certain of the Initial Investors for $0.3007 per share
or $406,000 and sold an aggregate 11,559,144 shares to GTCR and Smart Technology
for  $0.3007  per share or  approximately  $3.5  million  before  deduction  for
expenses and fees.  The Company  also sold  1,251,228  shares of Company  common
stock to the Company's  President  and Chief  Executive  Officer (the  "Reserved
Stock") and 531,773  shares to other certain  parties  affiliated  with the GTCR
Investment. These shares were sold for $0.3007 per share.

        GTCR and Smart Technology committed to provide up to an additional $96.5
million in capital to the Company to fund  acquisitions as well as other general
corporate  purposes.  Upon the request of the Board and the approval of GTCR and
Smart  Technology,  shares of Class A Preferred  Stock were to be issued to GTCR
and Smart Technology in the ratio of 98 percent to 2 percent,  respectively,  in
exchange for $1,000 per share.  No shares of Class A Preferred Stock were issued
at the time of the GTCR  Investment.  In connection with the issuance of Class B
Preferred Stock as part of the SSC transaction, the capital commitment from GTCR
and Smart Technology was decreased to $84.9 million.

        In  connection  with the GTCR  Investment,  the Company  entered  into a
management  services agreement with GTCR for $200,000 per year, which terminated
upon completion of the Company's initial public offering in June 1999.

Common Stock subject to Put Rights

        In conjunction with its acquisition of Arbor, the Company issued 266,796
shares of Series A-1  Convertible  Preferred  Stock with a liquidation  value of
$1.1 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 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. During 1999, the Company repurchased 3,889 shares prior to the expiration
of such rights.  The  remaining  common stock shares  subject to put rights were
converted into 44,882 shares of Company common stock at $5.70 per share.

Class A Preferred Stock

        Holders of the  Company's  Class A Preferred  Stock  ("Class A Preferred
Stock") are  entitled  to a 6 percent  cumulative  dividend,  which is paid when
declared by the Company's Board of Directors.  The Company can redeem the shares
at any time for their  liquidation  value of $1,000 per share plus  accrued  but
unpaid  dividends.  The shares  have no voting or  conversion  rights.  Upon the
earliest  of the  liquidation  of the  Company,  a change in the  control of the
Company,  an initial public offering ("IPO") or other fundamental  change in the
Company,  as defined,  a majority of the holders of the Class A Preferred  Stock
can require the Company to redeem their shares for their liquidation value, plus
accrued but unpaid  dividends.  In the case of an IPO, the redemption is limited
to the net funds available from the IPO. GTCR held  approximately  97 percent of
the  outstanding  Class A Preferred Stock as of December 31, 1998. In connection
with the  Company's  June 1999 initial  public  offering,  all Class A Preferred
Stock shares were exchanged for shares of the Company's common stock.

        The Company  incurred  certain fees  associated with the issuance of the
Class A Preferred  Stock.  Through  December  31,  1998,  the Company paid a one
percent fee of $369,000 to GTCR based on the issuance of the  Company's  Class A
Preferred  Stock to GTCR.  The Company also incurred a commission of $262,000 to
one of the Company's directors in connection with purchases of Class A Preferred
Stock.  These  costs were  deducted  from the  proceeds of the Class A Preferred
Stock  shown  in the  accompanying  consolidated  balance  sheets.  The  Class A
Preferred Stock was being accreted to its  liquidation  value over the period to
its estimated  redemption


                                      F-16
<PAGE>

date,  which  occurred in 1999. The accretion of the costs  associated  with the
Class A Preferred  Stock was $593,000 and $184,000 for the years ended  December
31, 1999 and 1998,  respectively and is classified as dividends on and accretion
of preferred stock in the accompanying consolidated statements of operations and
stockholders' equity.

Class B Preferred Stock

        Holders of the  Company's  Class B Preferred  Stock are  entitled to a 6
percent cumulative dividend,  which is paid when declared by the Company's Board
of Directors.  The shares have no voting rights. The Company had the contractual
ability to redeem or convert all  outstanding  shares of Class B Preferred Stock
upon an initial public offering. In connection with the initial public offering,
all shares of Class B Preferred Stock were exchanged for shares of the Company's
common stock.

Stock Warrants

        During 1998,  the Company issued  warrants to purchase  84,795 shares of
Company  common  stock at $0.3007  per share,  of which Smart  Technology  holds
70,715,  and are  exercisable for ten years.  During 1999,  warrants to purchase
14,620 share of common  stock were  exercised.  As of December  31, 1999,  Smart
Technology  continues to hold 70,175 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.  The Company
has also issued  warrants to purchase  121 shares of Class A Preferred  Stock at
$1,000 per share. Reserved Stock

        The Reserved Stock, described above under "GTCR Investment",  is subject
to a Senior Management  Agreement dated June 29, 1998 (the "Agreement") with the
Company's  President  and  Chief  Executive  Officer.  At the  time of the  GTCR
Investment,  1,251,228  shares of Reserved  Stock were  purchased  at a price of
$0.3007 per share in exchange for cash equal to the par value of the stock and a
promissory note equal to the remaining balance.  Pursuant to the Agreement,  the
Company may, at its discretion,  repurchase any or all of the Reserved Stock for
the $0.3007 per share paid by the  executive  in order to issue a  corresponding
number of shares and  options to  purchase  shares to certain  employees.  As of
December 31, 1998,  the  Company's  President  and Chief  Executive  Officer had
659,649 shares of Reserved Stock remaining.  Additional  shares were repurchased
during the first  quarter  of 1999  reducing  the total  shares  outstanding  to
210,119.

        Upon completion of the Company's June 1999 initial public offering,  the
Company's right to repurchase the Reversed Stock terminated.  Consequently,  the
Company recognized a compensation charge of approximately $2.5 million, recorded
as stock-based and  acquisition-related  compensation expense. The amount of the
compensation  charge was calculated as the difference between the initial public
offering  price of $12.00 per share and  $0.3007,  multiplied  by  210,119,  the
number of Reserved Shares retained by the executive.

Sales to Management

        Shortly after the GTCR  Investment,  the Company sold 503,860  shares of
Company common stock to management for $0.3007 per share, the fair value at that
time.  In November  1998,  the Company  sold 49,123  shares of common stock to a
member of management for $8.55 per share, the fair value at that time.

10.  Retirement Plan:

        During  1998,  the  Company  maintained  various  401(k)  plans  for its
employees.  These plans had been  established  by the 1998  Acquired  Businesses
prior to  acquisition.  Effective  February 1, 1999,  the  employees of the 1998
Acquired Businesses began making  contributions to the AppNet plan. During 1998,
the Company's expense under these plans totaled $281,000.



                                      F-17
<PAGE>

        Effective February 1, 1999, the Company  established a 401(k) retirement
plan for the benefit of all eligible  employees.  Participants may contribute up
to 15  percent  of  their  annual  compensation  to  the  plan,  subject  to IRS
limitations.  Employee contributions are fully vested. The Company will match 50
percent of each  employees'  contributions  up to six percent of each employees'
salary.  The  Company  may also elect to make a  discretionary  contribution  as
determined  by its Board of Directors on an annual basis.  Employees  will fully
vest in the Company's matching and any discretionary  contributions ratably over
three years.  During 1999,  the  Company's  expense under this plan totaled $1.2
million.

11.  Employee Stock Plans:

Employee Stock Option Plans

        The Company had four stock option  plans as of December 31, 1999,  which
were the 1998 Stock Option and Incentive  Plan,  an incentive  stock option plan
assumed in connection with the acquisition of Century (the "Century  Plan"),  an
incentive  stock  option plan  assumed in  connection  with the  acquisition  of
Internet  Outfitters (the "Internet  Outfitters Plan") and the 1999 Stock Option
and Incentive Plan (collectively the "Plans"). The majority of the options under
the  Plans  expire no later  than ten  years  from the date of the grant or when
employment  ceases,  whichever  comes  first and  generally  become  exercisable
ratably over 4 years. The maximum number of shares of common stock, which may be
issued  pursuant to the Plans,  is 3,306,310 at December 31, 1999 and 913,039 at
December 31, 1998.

        Options  granted under the Plans are accounted for under APB Opinion No.
25,  and  accordingly,  the  Company  recognizes  compensation  expense  for the
difference  between the fair value of the underlying  common stock and the grant
price of option at the date of the grant. The effect of applying SFAS No. 123 on
1999 and 1998 pro forma net loss  attributable to common  stockholders and basic
and diluted net loss per share is not necessarily  representative of the effects
on reported net loss  attributable to common  stockholders  for future years due
to, among other things,  (1) the vesting period of the stock options and (2) the
fair value of additional stock options in future years.  Had  compensation  cost
for the Plans been  determined  based on the estimated fair value of the options
at the grant dates  consistent  with the method of SFAS No.  123,  pro forma net
loss attributable to common  stockholders  would have been  approximately  $92.0
million and $15.4 million or a basic and diluted net loss per share of $3.51 and
$1.43 for 1999 and 1998,  respectively.  The weighted  average fair value of the
options  granted  by the  Company  during  1999  and  1998  using  a fair  value
option-pricing  model is estimated to be $15.29 per option and $3.85 per option,
respectively assuming the following:  no dividend yield, risk-free interest rate
of 5.875  percent  for 1999 and 5 percent  for  1998,  an  expected  term of the
options  of five  years  for  1999  and four  years  for  1998  and an  expected
volatility of 90 percent for 1999 and 45 percent for 1998.

        The following summarizes option activity:

                                                               Weighted-
                                            Number of           Average
                                              Shares         Exercise Price
                                         ----------------- -------------------
Balance at January 1, 1998                           -         $        -
Granted in 1998                                500,351               7.67
Options converted from 1998
   Acquired Businesses                         849,641               0.91
Exercised in 1998                             (425,339)              0.74
Cancelled in 1998                              (11,614)              1.08
                                         ---------------   ---------------
Balance at December 31, 1998                   913,039          $   4.67
Granted in 1999                              2,939,373              20.98
Exercised in 1999                             (336,257)              3.22
Cancelled in 1999                             (209,845)             12.53
                                         ---------------   ---------------
Balance at December 31, 1999                 3,306,310           $  18.92
                                         ===============   ===============
Options exercisable,
  December 31, 1998                            296,736           $   1.37
                                         ===============   ===============
Options exercisable,
  December 31, 1999                            291,310           $   8.20
                                         ===============   ===============

                                      F-18
<PAGE>
<TABLE>
<CAPTION>

                           Options Outstanding                          Options Exercisable
  ---------------------------------------------------------------   ---------------------------
                                        Weighted-
                                         average        Weighted-                      Weighted-
                          Number        remaining        average       Number          average
       Range of        outstanding     contractual      exercise    exercisable as     exercise
    exercise price    as of 12/31/99  life (in years)      price     of 12/31/99        price
  -----------------   --------------  ---------------   --------    --------------    ---------
<S>                     <C>                <C>           <C>           <C>            <C>
   $0.01 to $ 9.95        427,041          8.7           $ 3.79        145,816        $  2.76
   $9.951 to $19.90     2,165,512          8.8            14.26        144,670          13.48
  $19.901 to $29.85       184,500          9.7            27.24             -            -
  $29.851 to $49.75       529,257          9.7            47.25            824          43.56
                       ----------          ---           ------       --------        -------
                        3,306,310          9.0           $18.82        291,310        $  8.20
                        =========          ===           ======       ========        =======
</TABLE>

        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
four  years.  As  a  result  of  this  grant,  the  Company  recorded   deferred
compensation of $481,000.  The amount of deferred  compensation was based on the
difference  between the estimated  fair market value of the Company common stock
at the date of  grant,  as  determined  by the most  recent  third  party  stock
transaction,  and the stated exercise price. The Company amortized approximately
$98,000 of the deferred compensation for the year ended December 31, 1999.

        In January 2000,  the Company  increased the number of shares  available
under the  Company's  1999 Stock  Option and  Incentive  Plan from  2,000,000 to
3,945,000 shares.

Employee Stock Purchase Plan

        On September  30, 1999,  the  stockholders  of the Company  approved the
adoption of the 1999 Employee Stock  Purchase Plan ("ESPP").  The purpose of the
Plan is to enhance  stockholder  value and promote the attainment of significant
business  objectives  of the  Company by  allowing  employees  to  purchase  the
Company's  common  stock at a  discount  of 15%,  thereby  giving  employees  an
interest in common with that of the stockholders. The number of shares available
for purchase  under the ESPP is 250,000.  The purchase price of shares under the
plan is the lower of 85% of the share price on the first day of the plan quarter
or the share price on the plan  quarter  close.  All  employees  are eligible to
participate  except  (i) those  employed  for less than 20 hours per week;  (ii)
employees who, as a result of participation in the ESPP, would own stock or hold
options to purchase stock  possessing five percent or more of the total combined
voting power or value of all classes of stock of the Company;  and (iii) if such
right would permit the  employee to purchase  stock under the Plan and any other
stock purchase plans of the Company and its  subsidiaries in effect from time to
time with a fair market value in excess of $25,000  (determined  as of the first
day of each plan quarter) for each calendar  year.  Participants  can contribute
from 1% to 10% of their annual salary.  The plan became  effective on October 1,
1999. On December 31, 1999, the Company issued approximately 15,000 shares under
the plan to participating employees at $22.31 per share.

12. Earnings Per Share:

        Potentially  dilutive  securities  have not been included in the diluted
earnings per share  calculated,  as they would have been antidilutive due to the
net loss  reported by the Company.  Included in the weighted  average  number of
common shares  outstanding  are certain  shares  contingently  payable to former
shareholders  of acquired  businesses,  which will be issued in 2000 because all
necessary   conditions   to  issue  the  shares  have  been   satisfied  and  no
circumstances are known in which the shares will not be issued.  However,  other
certain 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 periods  presented,  as  circumstances  may arise in
which the shares would not be issued.



                                      F-19
<PAGE>

        Potentially  dilutive securities consist of the following as of December
31:

                                                 1999              1998
                                             --------------    -------------
      Stock options                             1,041,402         539,312
      Warrants                                     76,790          84,010
      Convertible notes                           895,593         413,554

13.  Income Taxes:

        The Company  follows the  provisions  of SFAS No. 109,  "Accounting  for
Income  Taxes,"  for  financial  reporting  purposes.  Deferred  tax  assets  or
liabilities at the end of each period are determined using the currently enacted
tax rates to apply to  taxable  income in the period in which the  deferred  tax
asset or liability is expected to be settled or realized.

        The sources of and differences between the financial  accounting and tax
basis of the  Company's  assets  and  liabilities,  which  give  rise to the net
deferred tax liability are as follows as of December 31 (in thousands):

                                                           1999          1998
                                                       ------------   ----------
Deferred tax liabilities:
     Intangible assets                                    $   744       $ 2,241
Deferred tax assets:
     Allowance for doubtful accounts                          760           434
     Net operating loss carryforward                        3,367         1,624
     Cumulative amortization differences on
     intangibles                                            2,883           994
     Accrued expenses                                         798           506
     Valuation allowance                                   (7,064)       (1,317)
                                                          -------       -------
         Net deferred tax liability                       $  --         $  --
                                                          =======       =======

        The  components  of the  provision  (benefit)  for  income  taxes are as
follows during the years ended December 31 (in thousands):

                                                            1999         1998
                                                         ----------   ----------
Current:
     Federal                                              $   --        $  (400)
     State                                                    348           250
                                                            -----         -----
         Total                                                348          (150)
Deferred:
     Federal                                                  --            (50)
     State                                                    479           --
                                                            -----         -----
         Income tax provision (benefit)                     $ 827         $(200)
                                                            =====         =====



                                      F-20
<PAGE>

        The income tax provision (benefit) differed from the amounts computed at
the statutory rate as follows for the years ended December 31 (in thousands):

                                                         1999           1998
                                                      ---------      -----------
Income tax benefit computed at
 federal statutory rates                               $(26,316)       $ (4,957)
Nondeductible intangible amortization                    14,090           2,402
Nondeductible portion of stock-based
 and other acquisition-related
 compensation, net                                        6,681             497
State income taxes, net of federal
 income tax benefit                                         554             165
Changes in valuation allowance                            5,747           1,317
Other, net                                                   71             376
                                                       --------        --------
    Total                                              $    827        $   (200)
                                                       ========        ========

        As of December  31, 1999 and 1998,  the Company had  approximately  $8.6
million and $4.2  million,  respectively,  of net operating  loss  carryforwards
which begin to expire in 2018.  The Company has  recorded a valuation  allowance
for deferred  tax assets as of December  31, 1999 and 1998,  of $7.1 million and
$1.3  million,  respectively.  In assessing  the  realizability  of deferred tax
assets,  management  considers  whether  it is more  likely  than not that  some
portion or all of the  deferred  tax assets will not be  realized.  The ultimate
realization  of deferred tax assets is dependent  upon the  generation of future
taxable income during the periods in which those  temporary  differences  become
deductible.   Management  considers  the  scheduled  reversal  of  deferred  tax
liabilities,  projected  future taxable income,  and tax planning  strategies in
making this assessment.

        As of December  31,  1998,  approximately  $800,000 of state  income tax
receivables is included in other current assets on the accompanying consolidated
balance sheets.

14.  Related Parties:

        At  December  31,  1999 and 1998,  the  Company  was owed  $503,000  and
$821,000 from members of management, respectively. These amounts are recorded as
notes receivable from management in the accompanying consolidated balance sheets
and  stockholders'  equity.  These  borrowings  are due at varying dates through
November 2008.

        At December 31, 1998, the Company had outstanding borrowings of $150,000
from Smart  Technology,  $50,000 from a member of management,  and $406,000 from
one of the Company's  Initial  Investors.  The convertible notes of $4.3 million
and the notes  payable for $1.0 million as of December 31, 1998,  as well as the
notes  payable  for $4.5  million  as of  December  31,  1999 are due to  former
shareholders of the Acquired  Businesses,  the majority of whom are employees of
the Company as of December 31, 1999.  During  January 1999, the Company issued a
note of $1.0  million to a trust  established  for  employees of one of the 1999
Acquired  Businesses.  Since the trust is available to the Company's  creditors,
the trust's  assets are  included  in the  accompanying  consolidated  financial
statements.  As such, the trust's note receivable and the Company's  convertible
note payable held by the trust have been eliminated in consolidation.

        In  December  1997,  the Company  entered  into an  agreement  which was
consummated  in 1998 to  purchase  a 50  percent  ownership  interest  in AppNet
Commerce  Services,  Inc.  ("ACS").  In 1998,  the Company  determined  that its
investment in ACS was impaired and recorded a charge of approximately  $300,000,
which is included in the accompanying  consolidated  statements of operations as
other  expense.  As of December 31, 1999 and 1998,  the  investment in ACS has a
value of zero.

        During 1998, the Company was party to a professional  services agreement
with one of its directors. The agreement provided for the payment of $17,000 per
month. The Company incurred  approximately $200,000 related to this agreement in
1998. In addition,  the Director  received a fee of $350,000 in association with
the


                                      F-21
<PAGE>

GTCR Investment in 1998. The professional services agreement also provides for a
one percent  commission  on certain  issuances of Class A Preferred  Stock.  The
Company  also  paid  approximately  $336,000  related  to  certain  fees  and  a
professional services agreement with one of its initial investors during 1998.

15.  Commitments and Contingencies:

Leases

        As of  December  31,  1999,  the Company  has  noncancellable  operating
leases,  primarily  for real estate,  that expire over the next 7 years.  Rental
expense during 1999 and 1998 was $2.7 million and $512,000, respectively.

        Future minimum lease payments under noncancellable  operating leases are
as follows as of December 31, 1999 (in thousands):

        2000..................................................  $ 3,608
        2001..................................................    3,007
        2002..................................................    2,191
        2003..................................................    1,531
        2004..................................................    1,074
        Thereafter............................................    2,649
                                                               --------
        Total minimum lease payments..........................  $14,060
                                                                =======

Litigation and Claims

        The Company is subject to lawsuits,  investigations  and claims  arising
out of the ordinary  course of business,  including  those related to commercial
transactions,  contracts,  government regulation and employment matters. Certain
claims, suits and complaints have been filed or are pending against the Company.
In the opinion of management,  based on all known facts, all matters are without
merit, and except as related to the claims mentioned below, are of such kind, or
involve  such  amounts,  as would not have a  material  effect on the  financial
position or results of operations of the Company if disposed of unfavorably.

        In connection with the acquisition of Internet Outfitters, approximately
$1.45  million of the  purchase  price in the form of shares of  Company  common
stock, based upon the fair value of $17.10 per share at the date of acquisition,
was pledged to the Company and escrowed to be available to satisfy any potential
liability  in  connection  with a license  dispute.  The Company  also held back
$750,000  of the cash  purchase  price to be used to satisfy  this and any other
indemnification claims. Subsequent to December 31, 1999, the license dispute was
settled with no  financial  consequences  to the Company.  The shares of Company
common  stock  pledged and  escrowed  and the cash  purchase  price held back in
connection  with the license dispute are no longer escrowed and will be released
in March 2000.

        In November  1999, a former  employee filed suit against the Company and
its  Chief  Executive  Officer  in state  court in  Michigan.  The case has been
removed  to the  United  States  District  Court  for the  Eastern  District  of
Michigan.  The  plaintiff  alleges a breach of contract and fraud in  connection
with the former employee's  employment  agreement with the Company, and improper
interference with the former employee's  efforts to sell shares of the Company's
common stock. The former employee is seeking monetary damages in connection with
these  claims.  On March  21,  2000,  the  court  dismissed  some of the  former
employee's claims and tentatively  dismissed the fraud claims while allowing the
former employee to replead. The court indicated that the former employee will be
permitted to pursue the claim for interference with the effort to sell shares of
the  Company's   common  stock.  The  Company  intends  to  contest  the  claims
vigorously.  At this time,  the Company is not able to  reasonably  estimate the
amount of loss, if any, that will be incurred as a consequence of this lawsuit.


                                      F-22
<PAGE>
        In February  2000, a former  customer of the Company  filed suit against
the Company,  one of its  subsidiaries  and a former and current employee of the
Company in the Supreme Court of the State of New York,  County of New York.  The
plaintiff in the suit alleges breach of contract and  misrepresentation  related
to services  performed by the  Company.  The former  customer is seeking  direct
damages,  plus  punitive  damages,  costs  and  fees.  The  Company  intends  to
vigorously  contest  these  claims  and  has  filed  counterclaims  against  the
defendants alleging monies due for services  performed.  The Company is not able
to  reasonably  estimate the amount of loss,  if any, that will be incurred as a
consequence of this lawsuit.

Contingent Payments

        The  Company's  acquisition  of NMP provided for  additional  contingent
payments of up to $14.0  million as of December 31, 1998,  of which $8.4 million
is payable in cash and $5.6 million or 654,971 shares of common stock is payable
in stock based on $8.55 per share,  the agreed to price for the Company's common
stock  at the time of the  acquisition.  The fair  value  of the  stock  portion
totaled  approximately  $28.7  million as of December 31, 1999.  The  contingent
payments are payable to the former owners of NMP if NMP reached  certain revenue
and earnings before interest, taxes, depreciation,  and amortization targets for
the  period  from  October 1, 1998 to  September  30,  1999.  The amount of this
contingent  payment  varies  based on a sliding  scale of revenues  and earnings
before  interest,  taxes,  depreciation  and  amortization.  A  portion  of  the
contingent  payment  will be paid only if the  targets  are  reached and certain
former owners remain  employed by the Company.  During 1999, the Company and NMP
agreed to provide a portion of the  contingent  payment to certain  employees of
NMP contingent on their employment at time of payment.

        Pursuant to the  consensus  reached in Emerging  Issues Task Force Issue
95-08,  "Accounting for Contingent  Consideration Paid to the Shareholders of an
Acquired Company in a Purchase Business Combination," ("EITF 95-08") an estimate
of the amount expected to be paid to those who remain employed will be reflected
as stock-based and other  acquisition-related  compensation expense ratably over
the period  which  these  employees  must  remain  employed.  Revisions  to this
estimate will be reflected on a prospective  basis each  reporting  period until
paid. The accompanying consolidated statements of operations reflect a charge of
$10.9  million and $1.2 million for the years ended  December 31, 1999 and 1998,
respectively, of stock-based and other acquisition related compensation for this
contingent payment.

        Based on the results of NMP's operating performance during the period of
measurement and the resolution of certain employment contingencies, a portion of
the  contingent  consideration  was paid in January 2000. Of this portion,  $5.1
million  in cash was  paid to the  former  shareholders  and  employees,  a note
payable of  approximately  $800,000,  which  accrues  interest  at 9% and is due
January  2001 was  issued for the  remaining  cash  portion  payable to a former
shareholder,  334,762  shares of the  Company's  common stock were issued to the
former  shareholders,  and options to purchase  88,523  shares of the  Company's
common stock at $11.70 per share were issued to certain employees. Approximately
$9.6  million  of the  contingent  consideration  was  reflected  as  additional
purchase  consideration and is recorded as goodwill as of December 31, 1999. The
goodwill will be amortized over its remaining  amortization period of two years.
Approximately  $10.5  million  related to the stock  portion  of the  contingent
consideration paid in January 2000 was recorded as additional paid-in capital as
of  December  31,  1999.  Approximately  $10.2  million is  recorded  in accrued
liabilities  for the cash and stock  portion of the  contingent  payments  as of
December 31, 1999. The remaining  portion payable in cash and stock will be paid
in January 2001 if certain NMP employees  remain employed by the Company through
September  2000.  The Company  expects to incur  approximately  $5.0  million in
additional  stock-based  compensation  expense  during  2000 for the amount that
remains  to  be  paid  to  the  former   shareholders   due  to  the  employment
contingencies that exist through September 2000.

        The  Company's  acquisitions  of  Sigma6,  Salzinger  and  Transform  IT
provided for contingent  payments of up to $14.8 million in the form of cash and
Company common stock to be made to the former owners of these companies if these
entities reach certain  revenue and earnings  targets for periods ranging from 9
to 18 months from the date of their acquisition.  The amount of these contingent
payments varies based on a sliding scale of revenues and earnings, as defined in
the  acquisition  agreements.  Based  on  Sigma6's  results  for the  period  of
measurement,  100% of the  performance  criteria  were  met  and the  contingent
payment will be made in 2000. The contingent  payment,  $1.4 million in cash and
$1.4 million in Company  common stock will be made in April 2000.  The number of
shares to be issued will be based on the closing price of the  Company's  common
stock on the day


                                      F-23
<PAGE>

before payment is made. Further, certain employees of the acquired business must
remain  employed  by  AppNet  through  March  2000 in  order  to  receive  their
contingent payment.

        If the goals are reached for Salzinger,  the amount will be paid only if
the targets are reached and certain  Salzinger  employees remain employed by the
Company.  Further,  certain Sigma6 employees must remain employed by the Company
through March 2000 in order to receive their  contingent  payment.  Accordingly,
pursuant to EITF 95-08,  an estimate of the amount to be paid to these employees
is reflected as stock-based and other  acquisition-related  compensation expense
ratably over the period, which the employees must remain employed to receive the
contingent  consideration.  Revisions  to  this  estimate  are  reflected  on  a
prospective  basis each reporting  period until paid. A charge of  approximately
$5.2 million is included for the year ended December 31, 1999 as stock-based and
other  acquisition-related  compensation  for these  contingent  payments in the
accompanying consolidated statements of operations.

        If the goals are reached for Transform IT,  approximately  33 percent of
the  contingent   payment  will  be  reflected  as  additional   purchase  price
consideration  if and when paid.  The remaining  contingent  amount will be paid
only if the  targets  are reached and  certain  Transform  IT  employees  remain
employed by the Company. Accordingly, pursuant to EITF 95-08, an estimate of the
amount to be paid to these  employees will be reflected as stock-based and other
acquisition-related  compensation  expense  ratably  over the  period  which the
employees  must  remain  employed  to  receive  the  contingent   consideration.
Revisions  to this  estimate  will be  reflected  on a  prospective  basis  each
reporting  period until paid. The Company has not recorded a charge during 1999,
as it is not expected that Transform IT will meet the certain operating targets.


16.  Quarterly Information (unaudited):

        The table  below  sets  forth  certain  unaudited  quarterly  results of
operations  of AppNet  for 1999 and 1998.  In the  opinion of  management,  this
information  has been  prepared  on the same basis as the  audited  Consolidated
Financial  Statements and all necessary  adjustments,  consisting only of normal
recurring adjustments, have been included in the amounts stated below to present
fairly,  in  accordance  with  generally  accepted  accounting  principles,  the
quarterly  information  when read in conjunction  with the audited  Consolidated
Financial  Statements and Notes thereto included elsewhere in this Annual Report
on Form 10-K. The quarterly operating results are not necessarily  indicative of
future results of operations.

<TABLE>
<CAPTION>
                                                      Quarter Ended
                 -----------------------------------------------------------------------------------------
                                   1998                                           1999
                 -----------------------------------------     -------------------------------------------
                 March 31    June 30    Sept 30     Dec 31     March 31    June 30     Sept 30      Dec 31
                 --------    -------    -------     ------     --------    -------     -------      ------
                                       (in thousands, except per share data)

<S>            <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
Revenues       $    197    $    823    $  2,488    $ 14,166    $ 19,643    $ 25,063    $ 30,096    $ 34,905

Gross Profit         52         (63)        267       5,719       8,186      10,843      13,568      15,506

Net Loss           (279)     (1,213)     (3,094)     (9,793)    (16,342)    (22,363)    (21,298)    (17,397)

Net Loss
attributable
to common
stockholders       (279)     (1,213)     (3,204)    (10,556)    (17,381)    (23,463)    (21,298)    (17,397)

Basic and
diluted net
loss per
common share   $  (0.23)   $  (0.22)   $  (0.19)   $  (0.66)   $  (0.88)   $  (1.09)   $  (0.68)   $  (0.54)

</TABLE>

                                      F-24
<PAGE>

                    Report of Independent Public Accountants

To AppNet, Inc.:

        We  have  audited,  in  accordance  with  auditing  standards  generally
accepted in the United States, the consolidated  financial statements of AppNet,
Inc. (formerly AppNet Systems,  Inc.) (a Delaware  corporation) and subsidiaries
included in this Form 10-K and have issued our report  thereon dated February 9,
2000.  Our audits  were made for the  purpose of forming an opinion on the basic
financial  statements  taken as a whole.  The schedule  listed in Item 14 is the
responsibility  of the  Company's  management  and is presented  for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures  applied in the audits of the basic financial  statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relation to the basic  financial  statements  taken as a
whole.


                               ARTHUR ANDERSEN LLP

Vienna, Virginia
February 9, 2000



                                      F-25
<PAGE>


Schedule II - Valuation  and  Qualifying  Accounts  and  Reserves  for the years
ending December 31, 1998 and 1999

<TABLE>
                                  APPNET, INC.

                        VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
                                                                    Additions
                                                              ----------------------
                                    Beginning                 Charged to               Ending
                                     Balance     Deductions     Expense    Other(1)    Balance
                                     -------     ----------     -------    --------    -------

<S>                                <C>            <C>          <C>         <C>       <C>
Period Ending December 31, 1998
Allowance for Doubtful Accounts    $    -         $ 166,000    $ 539,000   $751,000  $1,124,000

Period Ending December 31, 1999
Allowance for Doubtful Accounts    $1,124,000    $2,029,000   $1,583,000   $377,000  $1,947,000


-----------------------
(1)  Amounts  reflected  in opening  balance  sheets of  acquired  companies  in
accordance with the purchase method of accounting

</TABLE>

                                      F-26
<PAGE>

                                  APPNET, INC.

                           Exhibit Index to Form 10-K
                   For the Fiscal Year Ended December 31, 2000


    Exhibit           Description

       3.1    Restated    Certificate   of   Incorporation   of   AppNet,   Inc.
              (Incorporated by reference to Exhibit 3.1 to AppNet's Registration
              Statement on Form S-1, File No. 333-89877, filed October 28, 1999)

       3.2    Form of Amended and Restated Bylaws of AppNet, Inc.  (Incorporated
              by  reference  to  Exhibit  3.2 to  Amendment  No.  2 to  AppNet's
              Registration Statement on Form S-1, File No. 333-75205,  filed May
              25, 1999)

       4.1    Form of  certificate  of  common  stock of  AppNet  Systems,  Inc.
              (Incorporated  by reference  to Amendment  No. 2 to Exhibit 4.1 to
              AppNet's  Registration  Statement on Form S-1, File No. 333-75205,
              filed May 25, 1999)

       4.2    Registration  Agreement,  dated as of June 29, 1998,  by and among
              AppNet  Systems,   Inc.,  GTCR  Golder  Rauner,   L.L.C.,  Fairfax
              Management  Company  II,  L.L.C.,  Smart  Technology,  L.L.C.  and
              certain stockholders of AppNet, Inc. (Incorporated by reference to
              Exhibit 4.2 to AppNet's  Registration  Statement on Form S-1, File
              No. 333-75205, filed March 29, 1999)

       10.1   Purchase Agreement,  dated as of June 29, 1998, as amended, by and
              among  AppNet,  Inc.,  Smart  Technology,  L.L.C.  and GTCR Golder
              Rauner,  L.L.C.  (Incorporated  by  reference  to Exhibit  10.1 to
              Amendment  No. 5 to AppNet's  Registration  Statement on Form S-1,
              File No. 333-75205, filed June 15, 1999)

       10.2   Agreement of Purchase and Sale of Assets, dated March 12, 1998, by
              and between AppNet, Inc., Arbor Intelligent Systems,  Inc., AppNet
              of Michigan, Inc. and Ronald Suarez, Robert Simms and Robert Royce
              for purchase and sale of substantially  all of the assets of Arbor
              Intelligent  Systems,  Inc.  (Incorporated by reference to Exhibit
              10.2 to Amendment No. 1 to AppNet's Registration Statement on Form
              S-1, File No. 333-75205, filed May 13, 1999)

       10.3   Merger Agreement,  dated June 31, 1998, by and among AppNet, Inc.,
              SSC Acquisition Sub #1, Inc.,  Software  Services  Corporation and
              its  stockholders  for  the  purchase  of all of  the  issued  and
              outstanding   capital  stock  of  Software  Services   Corporation
              (Incorporated  by reference to Exhibit 10.3 to Amendment  No. 1 to
              AppNet's  Registration  Statement on Form S-1, File No. 333-75205,
              filed May 13, 1999)

       10.4   Merger  Agreement,  dated  October 2, 1998,  by and among  AppNet,
              Inc., NMP Acquisition Sub #1, Inc., New Media Publishing, Inc. and
              its  stockholders  for  the  purchase  of all of  the  issued  and
              outstanding   capital   stock  of  New  Media   Publishing,   Inc.
              (Incorporated  by reference to Exhibit 10.4 to Amendment  No. 1 to
              AppNet's  Registration  Statement on Form S-1, File No. 333-75205,
              filed May 13, 1999)

       10.5   Agreement  and Plan of Merger,  dated  September  17, 1998, by and
              among  AppNet,  Inc.,  AppNet/Century,  Inc.,  Century  Computing,
              Incorporated  and its  stockholders for the purchase of all of the
              issued  and  outstanding   capital  stock  of  Century  Computing,
              Incorporated   (Incorporated  by  reference  to  Exhibit  10.5  to
              Amendment  No. 1 to AppNet's  Registration  Statement on Form S-1,
              File No. 333-75205, filed May 13, 1999)


<PAGE>

       10.6   Stock  Purchase  Agreement,  dated  October 20, 1998, by and among
              AppNet,  Inc.,  Research  &  Planning,  Inc.,  Thomas  H. Rauh and
              William  Rosenfeld  for  the  purchase  of all of the  issued  and
              outstanding   capital   stock  of   Research  &   Planning,   Inc.
              (Incorporated  by reference to Exhibit 10.6 to amendment  No. 1 to
              AppNet's  Registration  Statement on Form S-1, File No. 333-75205,
              filed May 13, 1999)

       10.7   Stock  Purchase  Agreement,  dated as of November 25, 1998, by and
              among AppNet,  Inc., The Kodiak Group,  Inc. and its  stockholders
              for the  purchase  of all of the  issued and  outstanding  capital
              stock of The Kodiak  Group,  Inc.  (Incorporated  by  reference to
              Exhibit 10.7 to Amendment No. 1 to AppNet's Registration Statement
              on Form S-1, File No. 333-75205, filed May 13, 1999)

       10.8   Stock  Purchase  Agreement,  dated December 23, 1998, by and among
              AppNet,  Inc.,  i33  communications  corp.,  Drew  Rayman and Enno
              Vandermeer  for the purchase of all of the issued and  outstanding
              capital  stock  of  i33  communications  corp.   (Incorporated  by
              reference  to  Exhibit  10.8  to  Amendment   No.  1  to  AppNet's
              Registration Statement on Form S-1, File No. 333-75205,  filed May
              13, 1999)

       10.9   Merger  Agreement,  dated as of February 25, 1999, as amended,  by
              and among AppNet,  Inc., AppNet Sigma6, Inc., Sigma6, Inc. and the
              stockholders  of Sigma6,  Inc., for the purchase of all the issued
              and outstanding  capital stock of Sigma6,  Inc.  (Incorporated  by
              reference  to  Exhibit  10.9  to  Amendment   No.  3  to  AppNet's
              Registration Statement on Form S-1, File No. 333-75205,  filed May
              28, 1999)

       10.10  Asset Purchase Agreement,  dated as of March 1, 1999, by and among
              AppNet, Inc., Salzinger  Acquisition Corp.,  ,Salzinger & Company,
              Inc. and Steven Salzinger for the purchase of substantially all of
              the assets of Salzinger & Company, Inc. (Incorporated by reference
              to  Exhibit  10.10 to  Amendment  No. 1 to  AppNet's  Registration
              Statement on Form S-1, File No. 333-75205, filed May 13, 1999)

       10.11  Stock Purchase Agreement, dated as of March 22, 1999, by and among
              AppNet, Inc., Internet  Outfitters,  Inc. and its stockholders for
              the purchase of all of the issued and outstanding capital stock of
              Internet  Outfitters,  Inc.  (Incorporated by reference to Exhibit
              10.11 to  Amendment  No. 1 to AppNet's  Registration  Statement on
              Form S-1, File No. 333-75205, filed May 13, 1999)

       10.12  Asset Purchase Agreement, dated as of March 29, 1999, by and among
              AppNet,   Inc.,   Transform   Acquisition  Corp.,   TransForm  IT,
              Incorporated and John C. King,  Thomas E. Hunt and Roy A. Chandler
              for the purchase of  substantially  all of the assets of TransForm
              IT,  Incorporated  (Incorporated  by reference to Exhibit 10.12 to
              Amendment  No. 1 to AppNet's  Registration  Statement on Form S-1,
              File No. 333-75205, filed May 13, 1999)

       10.13  Recapitalization  Agreement,  dated  as of June 16,  1999,  by and
              among  AppNet,   Inc.  and  owners  of  AppNet's  preferred  stock
              (Incorporated  by reference to Exhibit 10.1 to AppNet's  Quarterly
              Report on Form 10-Q for the quarter ended September 30, 1999)

       10.14  Revolving  Credit  Agreement,  dated as of January 8, 1999, by and
              among  AppNet,   Inc.,   BankBoston,   N.A.  and  Antares  Capital
              Corporation   (Incorporated  by  reference  to  Exhibit  10.14  to
              Amendment  No. 1 to AppNet's  Registration  Statement on Form S-1,
              File No. 333-75205, filed May 13, 1999)

       10.15  Limited  Consent  Letter  Agreement,  dated  August 16,  1999,  by
              BankBoston, N.A. and Antares Capital Corporation, and AppNet, Inc.
              and certain of its subsidiaries,  relating to the Revolving Credit
              Agreement,  dated as of January 8, 1999 (Incorporated by reference
              to Exhibit 10.3 to AppNet's  Quarterly Report on Form 10-Q for the
              quarter ended September 30, 1999)


<PAGE>

       10.16  First Amendment to Revolving Credit  Agreement,  dated as of March
              10, 1999, by and among AppNet, Inc., BankBoston,  N.A. and Antares
              Capital Corporation (Incorporated by reference to Exhibit 10.16 to
              Amendment  No. 1 to AppNet's  Registration  Statement on Form S-1,
              File No. 333-75205, filed May 13, 1999)

       10.17  Second  Amendment to Revolving Credit  Agreement,  dated as of May
              24, 1999, by and among AppNet, Inc., Bank Boston, N.A. and Antares
              Capital Corporation (Incorporated by reference to Exhibit 10.15 to
              Amendment  No. 3 to AppNet's  Registration  Statement on Form S-1,
              File No. 333-75205, filed May 28, 1999)

       10.18  Century Computing,  Incorporated  Incentive Stock Plan, as amended
              (Incorporated  by reference to Exhibit 10.18 to Amendment No. 1 to
              AppNet's  Registration  Statement on Form S-1, File No. 333-75205,
              filed May 13, 1999)

       10.19  AppNet,  Inc. 1998 Stock Option and Incentive Plan (as amended and
              restated) (Incorporated by reference to Exhibit 10.19 to Amendment
              No. 2 to AppNet's  Registration  Statement  on Form S-1,  File No.
              333-75205, filed May 25, 1999)

       10.20  AppNet,  Inc. 1999 Stock Incentive Plan (Incorporated by reference
              to Exhibit 10.2 to AppNet's  Quarterly Report on Form 10-Q for the
              quarter ended September 30, 1999)

       10.21  Internet  Outfitters,  Inc. 1996  Incentive  Stock Option Plan, as
              amended  (Incorporated  by reference to Exhibit 10.21 to Amendment
              No. 1 to AppNet's  Registration  Statement  on Form S-1,  File No.
              333-75205, filed May 13, 1999)

       10.22  Form of Senior Management  Agreement,  as amended (Incorporated by
              reference  to  Exhibit  10.22  to  Amendment  No.  3  to  AppNet's
              Registration Statement on Form S-1, File No. 333-75205,  filed May
              28, 1999)

       10.23  Senior  Management  Agreement,  dated as of June 29, 1998,  by and
              between AppNet,  Inc. and Ken S. Bajaj  (Incorporated by reference
              to  Exhibit  10.23 to  Amendment  No. 2 to  AppNet's  Registration
              Statement on Form S-1, File No. 333-75205, filed May 25, 1999)

       10.24  Letter  Agreement,  dated as of May 28, 1999, by and among AppNet,
              Inc.,   BankBoston,   N.A.   and   Antares   Capital   Corporation
              (Incorporated  by reference to Exhibit 10.24 to Amendment No. 3 to
              AppNet's  Registration  Statement on Form S-1, File No. 333-75205,
              filed May 28, 1999)

       21.1   Subsidiaries of AppNet, Inc. (Incorporated by reference to Exhibit
              21.1 to Amendment No. 4 to AppNet's Registration Statement on Form
              S-1, File No. 333-75205, filed June 10, 1999)

       23.1   Consent of Arthur Andersen LLP

       27.1   Financial Data Schedule (EDGAR version only)

       (99)   Definitive   Proxy  Statement  for  the  2000  Annual  Meeting  of
              Stockholders (to be filed with the Commission under Regulation 14A
              and  incorporated by reference  herein to the extent  indicated in
              this report)