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

FORM 10-KSB



| |  |  | [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
| |  |  | ----------------------------------------------------------------------------------------------------------

FOR THE FISCAL YEAR ENDED MARCH 31, 2001
OR



| |  |  | [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
| |  |  | --------------------------------------------------------------------------------------------------------------

COMMISSION FILE NUMBER 0-8164

APERIAN, INC.

(HEREIN REFERRED TO AS REGISTRANT, COMPANY, APERIAN, WE, US, AND OUR)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

|                                                                                |  |                                   
|------------------------------------------------------------------------------- |  | ----------------------------------
|DELAWARE
(STATE OF INCORPORATION OR ORGANIZATION)                               |  | 74-2971167
(IRS EMPLOYER I.D. NO.)
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|3030 N. 3RD ST., 7TH FLOOR PHOENIX, AZ
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) |  | 85012
(ZIP CODE)                  

(ISSUERS TELEPHONE NUMBER, INCLUDING AREA CODE) 602-776-0883

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK,
PAR VALUE $.01

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

Check whether the Issuer: (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 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. (1) Yes [X] No [ ]
(2) Yes [X] No [ ]

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]

State issuers revenues for its most recent fiscal year: $5,816,685.

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.

Based on the closing price for the Companys common stock at June 15, 2000 of
$1.09 per share, the market value of shares held by non-affiliates would be
approximately $15,639,073.

As of June 18, 2001 the Registrant had 16,170,604 shares of common stock issued
and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for 2001 Annual Meeting of Shareholders (Part III)

Transitional Small Business Disclosure Format                      Yes [ ] No [X]



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TABLE OF CONTENTS



|                                                                                             |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|ITEM 1. DESCRIPTION OF BUSINESS                                                             
|ITEM 2. DESCRIPTION OF PROPERTY                                                             
|ITEM 3. LEGAL PROCEEDINGS                                                                   
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                 
|PART II                                                                                     
|                                                                                             | ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS                 
|                                                                                             | ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|RISK FACTORS                                                                                
|Risks Related to Our Business                                                               
|Risks Related to Our Industry                                                               
|ITEM 7. FINANCIAL STATEMENTS                                                                
|ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
|PART III                                                                                    
|ITEM 9. EXECUTIVE OFFICERS AND DIRECTORS                                                    
|ITEM 10. EXECUTIVE COMPENSATION                                                             
|ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                     
|ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                     
|ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K                                                   
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                                  
|REPORT OF INDEPENDENT AUDITORS                                                              
|EX-10.5.4                                                                                   
|EX-10.29                                                                                    
|EX-10.31.3                                                                                  
|EX-10.36.1                                                                                  
|EX-23.1                                                                                     



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PART I




ITEM 1. DESCRIPTION OF BUSINESS

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-KSB contains forward-looking statements
regarding the Company, its business, prospects and results of operations and
views with respect to future events and performance. These forward-looking
statements are subject to risks and uncertainties posed by many factors and
events that could cause the Companys actual business, prospects and results of
operations to differ materially from historical results or those that may be
anticipated by such forward-looking statements. Words used in this Report such
as anticipate, believe, effect, may, should,will and similar
expressions are intended to identify forward-looking statements but are not the
exclusive means of identifying such statements. Factors that might cause such a
difference include, but are not limited to, those discussed herein as well as
those discussed under the caption Managements Discussion and Analysis of
Financial Condition and Results of Operations as well as those discussed
elsewhere in the Report. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
Report. The Company undertakes no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may subsequently
arise. In addition, the disclosures under the caption Managements Discussion
and Analysis of Financial Condition and Results of Operations Risk Factors
that May Affect Future Results consist principally of a brief discussion of
risks that may affect future results and are, in their entirety,
forward-looking in nature. Readers are urged to carefully review and consider
the various disclosures made by the Company in this Report, as well as the
Companys annual, periodic and current reports filed with the SEC, and those
described from time to time in the Companys press releases and other
communications, which attempt to advise interested parties of the risks and
factors that may affect the Companys business.

OVERVIEW

On April 9, 2001
Aperian, Inc. consummated a merger in which Fourthstage
Technologies, Inc. (Fourthstage), a privately held information technology services
company, became a wholly-owned subsidiary of Aperian. Following the merger, management and the board of directors in an
effort to reduce capital expenditures and operating costs, reserve our
remaining cash and increase revenues (i) restructured our business to
focus on providing architectures, infrastructures, professional services and
product integration for enterprises conducting business over the Internet, (ii)
reduced the combined companies staffing and management levels to support the new
business model, and (iii) announced our intention to sell Aperians five
Internet data centers (IDC). Accordingly, we are discontinuing the Companys
businesses of operating IDCs and providing Internet access and co-location
services. As a result of the merger and the subsequent changes surrounding the
merger, the Companys business focus shifted from the construction and
maintenance of Internet infrastructure facilities to the Information Technology
Services (ITS) sector.

The Information Technology Services sector encompasses:



| |  | Information technology outsourcing          
|- |  | --------------------------------------------
| 
| |  | Application and business process outsourcing
| 
| |  | Consulting and professional services        
| 
| |  | Software and product development            

Fourthstage is an eBusiness technology integration and innovation company,
providing advanced eBusiness and data center architectures, infrastructures,
professional services, applications, technology products and managed service
solutions . Our primary focus is servicing mid-sized and large enterprise
eBusiness and data center customers.

Through Fourthstage
we provide leading-edge products and technologies from Sun
Microsystems, Hewlett-Packard, Oracle, Veritas, Network Appliance, StorageTek,
Cisco Systems, and others. We design and implement highly reliable, available
and scalable eBusiness and data center solutions, integrated into our
customers existing core business systems to help them compete in the Internet
economy.

Complementing this enterprise integration business, Fourthstage
is also a technology innovator and has developed several
technology related patents leveraging the use and implementation of next
generation application architecture standards.

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INDUSTRY BACKGROUND

ITS customers generally seek to lower cost,
improve their level of service, and mitigate the risks associated with in-house
technology and maintaining an IT staff. By outsourcing its IT requirements, a customer can
maintain access to leading-edge technology and highly qualified, technical
professionals. The business premise underlying IT outsourcing by enterprise
customers is that outsourcing allows them to keep pace with technology
transitions while avoiding the highly competitive market associated with
recruiting and retaining IT talent.

Information Technology Services companies that seek to compete at the
enterprise level require a broad scale of operations, a strong services
offering, a highly skilled workforce and a wide geographic coverage area.
Increasingly, competitors have positioned to compete on a global scale, as
enterprise customers frequently seek to adopt universal solutions for every
office in their worldwide organizations.

To succeed in delivering revenue and earnings growth, an IT Services firm
must maintain its billing rates over time, ensure utilization of their skilled
professionals and retain a large staff of billable professionals. Increasingly,
competitors have utilized contract labor to address peak load requirements,
rather than recruiting additional staff to meet the needs of their customers.

The total market for IT services has been estimated to be about
$387 billion, growing at 11% per year, according to International Data
Corporation. In general, the U.S. market represents about half the total
worldwide market for IT services. European markets total about half that of the
U.S., and the Japanese market totals about half that of Europe. The worldwide
market is highly fragmented, and no one competitor is estimated to have over
10% share of the total market for IT Services. According to International Data
Corporation, the top-5 worldwide vendors include International Business
Machines (IBM), Electronic Data Systems (EDS), Fujitsu, Accenture and Computer
Sciences Corporation (CSC).

The market for IT outsourcing has been characterized as an $88 billion
industry, growing at 12-14% per year, according to International Data
Corporation. Principal competitors include IBM, EDS and CSC, which collectively
control almost half of the total outsourcing industry. The remaining half of
the industry generally represents a highly fragmented number of smaller, more
regional competitors. Outsourcing contracts tend to represent multi-year
arrangements.

The market for strategic consulting and professional services has been
characterized by IDC as a $154 billion market, growing at 12% per year.
Competitors are highly fragmented, with no firm perceived to control as much as
a 10% share of the total industry. Consulting and services contracts tend to
represent short-term engagements of less than one year.

OUR COMPANY

In August 1999, Aperian began providing Internet infrastructure services
from its Austin-based Internet data center. Throughout the course of calendar year 2000, the
Company completed construction of an additional four Internet data centers,
located in Dallas, Texas; Atlanta, Georgia; Phoenix, Arizona; and Tampa,
Florida.

Although the Companys legal name remained MSI Holdings, Inc., in March
2000, the Company began offering its services under the name of Aperian. On May
31, 2000, the Companys common stock was approved for trading on the Nasdaq
National Market System. Prior to this approval, our common stock traded on the
Over-the-Counter Bulletin Board under the trading symbol MSIA. At the
September 7, 2000 Annual Meeting, shareholders approved the Companys
reincorporation as a Delaware-based company under the name, Aperian, Inc.
Shareholders separately approved a 1-for-3 reverse share combination of MSI
Holdings common stock (Nasdaq: MSIA) into Aperian, Inc. common stock (Nasdaq:
APRN). The share combination was reflected in the Nasdaq opening on Monday,
September 11, 2000.

On April 9, 2001, we consummated our merger with Fourthstage, an Arizona corporation. Fourthstage was
founded in 1999 bringing together a complementary mix of well-established
industry management and technical professionals from Intel, Sun Microsystems,
Oracle and Veritas, which has helped to establish Fourthstage as a leader and
innovator in the Southwest United States. Fourthstage continues to expand its
enterprise product lines, technical support and engineering capabilities, and
technical training capacities. Fourthstage has also recently received the
highest partner designation from Sun Microsystems as a National Systems Partner
(NSP), which allows Fourthstage to expand without geographical limitation in
North America. In addition, our newly formed intellectual property development

3



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teams are resourced to architect, design, develop, patent, license and
market enterprise applications technologies and software for use by our
enterprise and data center customers.

Following the merger, management and the board of directors decided to
restructure our business to focus on providing architectures, infrastructures,
professional services and product integration for enterprises conducting
business over the Internet. Accordingly, we are discontinuing the Companys
businesses of operating Internet data centers and providing Internet access and
co-location services. On May 23, 2001, the board of directors also approved
the changing of our corporate name to Fourthstage Technologies, Inc., subject
to shareholder approval at our 2001 Annual Shareholders Meeting. As a result
our sales force changed to exclusively market and sell our services under the
Fourthstage brand name.

The restructuring will result, and already has resulted, in changes to our
customer base, workforce and board of directors composition. We will focus
primarily on providing large enterprise customers with products and
technologies as well as managed and professional services. We will also
develop and provide enterprise-level managed services offerings via our network
operations control centers. Our workforce is being grouped into individual
profit centers, a model that is aimed at promoting profitability and
accountability.

OUR STRATEGY

Critical technology decisions are foremost to the success of any business.
We are committed to providing our customers with quality
service and leading-edge eBusiness solutions to offer them the competitive
advantage they need to harness the power of the Internet, integrate their
various business applications and processes and effect change. The company is
organized into two division  Enterprise Integration Solutions and Technology
Innovation Solutions.



| |  | Enterprise
Integration SolutionsThis division encompasses several product
lines targeted at our mid- to large sized enterprise customers. We attempt to
provide to our customer a full service partner approach including multiple
lines of products, professional services, managed services, software and
applications, bandwidth solutions and specialized corporate solutions such as
video conferencing. Our ability to address the needs of our enterprise
customers will be represented through: scale (people and resources), the
breadth of our products and services offerings, the skill sets of our employees
and the geographic scope of our operations.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Technology Innovation
SolutionsThis division represents:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|
|
|
|
|
|
|
|
|
|

Presently, we have
developed, patented, and licenses several technology solutions that generate
revenue for the Company. We remain interested in pursuing these opportunities
organically and additional opportunities through merger and acquisition
activities or through strategic partnerships.

PRODUCTS AND SERVICES

We currently offer the following products and services:



| |  | Enterprise Solutions Provide mid- to large-sized enterprise customers with leading
eBusiness and data center infrastructure products from Sun Microsystems,
Hewlett-Packard, Cisco, Oracle, Veritas, Network Appliance, iPlanet and StorageTek. We support these
products by offering a senior professional services staff of certified engineers that
provide advanced levels of services including but not limited to architecture,
engineering, installations, storage area network design and implementation, platform
migration services, content delivery and managed services offerings
for customers who desire to outsource
management of their data centers. Our focus is to design and implement highly reliable,
available and scalable eBusiness and data center solutions, integrated into our
customers existing core business systems to help them compete in the Internet economy.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Network Equipment Solutions Provide mid- to large-sized enterprise customers with
leading eBusiness and data center Network infrastructure products from Cisco. We support
these products by offering a senior professional services staff of certified engineers
that provide advanced levels of services including but not limited to architecture,
engineering, installations, security design and implementation, migration services and
advanced managed services offerings for customer who desire to outsource management our
their networks. Our focus is to design and                                                                                                                                                                                                                                                                                                                     

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|  |  | implement highly reliable, available and secure corporate network solutions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Bandwidth Solutions Provide mid- to large-sized enterprise customers with leading
options from several bandwidth providers including AT&T, ELI and Genuity. We support our
customers by providing definition, estimation and procurement services to attempt to
minimize their communications costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| 
| |  | Software Infrastructure Solutions Provide mid- to large-sized enterprise customers
with leading eBusiness and data center infrastructure products from iPlanet, Oracle,
Veritas, and other leading enterprise applications offerings. We support these products
by offering a senior professional services staff of certified engineers that provide
advanced levels of services including but not limited to architecture, engineering,
installations, programming and implementation, platform migration services and managed
services offerings for customer who desire to outsource management our their data
centers. Our focus is to design and implement highly reliable, available and scalable
eBusiness and data center solutions, integrated into our customers existing core
business systems to help them compete in the Internet economy.
| 
| |  | Managed Services Provide mid- to large-sized enterprise customers with managed
services options ranging from basic systems monitoring, advanced applications level
support and preventative maintenance to full data center management outsourcing while
keeping their equipment housed in their own facilities. We provide these managed services from
a centralized Network Operations Control Center (NOCC) supported by a senior staff of
certified engineers that provide advanced levels of engineering and support. Our focus
is to provide supplementary to full management support for our customers existing IT
infrastructures at a higher quality and reduced cost.                                                                                                                                                                        
| 
| |  | Specialized Services Provide mid- to large-sized enterprise customers with various
other products & services options to better equip their companies with time,
resource and cost saving technologies. Currently, we provide corporate video
conferencing products, services and managed services options for our customers. Our
focus is to provide these supplementary products, services and managed services to our
customers at a high quality and reasonable cost.                                                                                                                                                                                                                                                                                                                                                                                

SALES AND MARKETING

Our sales and marketing objectives seek to position the Company as a
leading provider of Information Technology Services. We distinguish ourselves
by offering proven technology from a number of leading-edge vendors, providing
veteran IT talent, and a fast and flexible approach toward implementation.
Using a consultative approach, our sales team works to understand a customers
needs, their critical business issues and their expectation for the timing of a
remedy.

As of June 18, 2000, we employed 52 persons in sales and marketing at
offices located in Phoenix, Austin, Dallas, Houston, Tampa and Las Vegas.

Direct Sales Force

We primarily market our services through a direct sales force to
enterprise customers and governmental agencies. We intend to build our sales
force in each location in which we operate in order to aggressively compete in
the IT Services market. As we expand, our sales force will be structured along
vertical markets, such as financial services, medical, entertainment, education
and retail markets.

Indirect Channels

Leveraging our close working relationships with our hardware and software
vendors and with third-party application developers, and web design firms, our
sales team is positioned to capture and exchange sales leads that combine the
strength and effectiveness of our offerings.

Marketing

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Our marketing programs are designed to continually enhance the Companys
brand awareness and generate additional sales leads, especially as we expand
the geographic scope of our physical presence. Our marketing strategy
emphasizes co-marketing efforts launched in conjunction with our hardware and
software vendor partners. Through conference and trade show participation,
speaking engagements, networking events, and partnerships, we seek to establish
ourselves as a leader within the Information Technology Services sector.

Designed to focus nationally but execute regionally, each market has a
specific budget with which to create additional lead generation and branding
opportunities. Before an opportunity is considered, it must have the ability
to:



| |  | Directly interface with our target audience              
|- |  | ---------------------------------------------------------
| 
| |  | Track results against quantifiable sales metrics         
| 
| |  | Sustain results through long-term strategic relationships

CUSTOMERS

Our targeted customer base is enterprise-level organizations, often
referred to as Fortune 500 firms. The benefits we provide extend well beyond
this primary focus, including a growing government sector (at the federal,
state and local levels) providing us a broad base of customers in select
vertical markets utilizing common underlying technologies.

Information technology services (IT outsourcing, application and business
process outsourcing, consulting and professional services engagements)
typically represent non-core business activities, although the work we perform
is strategic and highly sensitive to our customers needs. Through our close
working relationships with vendors and other third-party solutions providers,
we tend to provide customers with near-term consulting and systems integration
work that yields long-term benefits, enhanced support, increased efficiency
and lower cost.

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COMPETITION

While many companies compete for various aspects of our Information
Technology Services, the overall market remains fragmented and highly
competitive. IDC has estimated that the top-10 vendors collectively hold less
than a 30% share of the global market for IT services.



| |  | IT Outsourcing.International Data Corporation has estimated the total
market for information technology outsourcing to be $88 billion, growing
12-14% per year. IBM, EDS and CSC collectively hold about half of the
total market share in IT outsourcing. The remaining half is highly
fragmented and intensely competitive.                                                                                                                                                                                                                                                                                     
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Application and Business Process Outsourcing.Application and business
process outsourcing includes software applications  such as
administrative, human resources, finance and sales & marketing  and
supply chain management, credit card and claims processing, and
payroll. We do not presently compete in this sector, but continue to
review software and product introductions and merger and acquisition
opportunities that may serve to provide our entry into this
portion of the overall IT Services sector. Significant competitors in
this sector include ADP, First Data, Ceridian and Administaff.
| 
| |  | Consulting and Professional
Services.International Data Corporation has estimated the total
market for strategic consulting and professional services to be $154
billion,
growing 12% per year. This market is substantially more fragmented
than IT Outsourcing, with no one competitor holding more than 10%
share of the total market. Significant competitors include IBM, KPMG
Consulting, PricewaterhouseCoopers, Cap Gemini Ernst & Young and
Accenture.                                                                                                                                                   

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GOVERNMENT REGULATIONS

We are not currently subject to significant government regulation
applicable to our business. Due to the increasing popularity and use of the
Internet, it is possible that additional laws and regulations may be adopted
with respect to the Internet, covering issues such as content, privacy,
pricing, encryption standards, consumer protection, e-commerce, taxation,
copyright infringement and other intellectual property issues. We cannot
predict the impact, if any, that any future regulatory changes or development
may have on us. Changes in the regulatory environment relating to the Internet
industry, could have a material adverse affect on us.

EMPLOYEES

At June 18, 2001, we had a total of 152 full-time employees. None of our
employees are subject to a collective bargaining agreement, and we believe our
relations with our employees are good. We believe that our future success will
depend in part on our continued ability to attract, hire and retain qualified
personnel. Competition for such personnel is intense, and we may not be able to
identify, attract and retain such personnel in the future.




ITEM 2. DESCRIPTION OF PROPERTY

Our principal offices in Phoenix, Austin, Dallas, and Las Vegas comprise
approximately 60,000 square feet of leased office center space. The Companys
Internet data center facilities in Austin, Dallas, Tampa, Atlanta, and Phoenix,
comprise approximately 100,000 square feet of leased data center capacity.
Other properties in Austin, San Diego, Denver, and Chicago comprise
approximately 85,000 square feet of leased space originally intended to
facilitate the expansion of Aperians discontinued Web-hosting business. The
Company is currently engaged in activities to dispose of its obligations to
lease certain offices and its other properties. The Company formally announced
its decision to sell all of its IDCs on May 10, 2001.




ITEM 3. LEGAL PROCEEDINGS

In February 2001, legal proceedings were commenced in state court in
Travis County, Texas against us by a former officer and two former employees
claiming an entitlement to 80,000 common shares in the case of the officer and
2,333 shares in the case of the employees that had allegedly been orally
promised by Jose Chavez, the chief executive officer of our predecessor company
until April 1999. We believe that these claims are without merit and intend to
vigorously defend the lawsuit. It is neither possible at this time to predict
the outcome of any lawsuit, including whether we will be forced to issue common
shares, or to estimate the amount or range of potential loss, if any. Damages
demanded by the plaintiffs include the value of the shares based on the price
of $135 per share, the high trading price during the year before the suit was
filed, which plaintiffs allege approximates $33 million. We are not aware
of any other material actions pending to which we are a party or to which any
of our properties are subject.




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

No matters were submitted to a vote of security holders of the Company
during the quarter ended March 31, 2001.

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PART II




ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

The Companys common stock is traded on the Nasdaq National Market System
under the symbol APRN. The table below shows the high and low bid prices of
the common stock for the periods indicated. The bid prices reflect inter-dealer
prices, without retail markup, mark-down or commission, and may not represent
actual transactions. The sources of the bid information are FinancialWeb.com.
and Nasdaq-Online.com.

|                                 |  |      |        |     |  |   |       | 
|-------------------------------- |  | ---- | ------ | --- |  | - | ----- | 
|FISCAL YEAR ENDED MARCH 31, 2001 |  | HIGH |        | LOW
|                                 |  |      |        |    
|First Quarter                    |  | $    | 90.00  |     |  | $ | 19.50 | 
|                                
|                                
|                                
|                                
|Second Quarter                   |  | $    | 30.00  |     |  | $ | 5.02  | 
|                                
|                                
|                                
|                                
|Third Quarter                    |  | $    | 6.69   |     |  | $ | .53   | 
|                                
|                                
|                                
|                                
|Fourth Quarter                   |  | $    | 4.50   |     |  | $ | .56   | 
|                                
|                                
|                                
|                                
|FISCAL YEAR ENDED MARCH 31, 2000
|                                
|                                
|                                
|                                
|                                
|First Quarter                    |  | $    | 32.25  |     |  | $ | 12.57 | 
|                                
|                                
|                                
|                                
|Second Quarter                   |  | $    | 21.00  |     |  | $ | 11.25 | 
|                                
|                                
|                                
|                                
|Third Quarter                    |  | $    | 22.32  |     |  | $ | 11.82 | 
|                                
|                                
|                                
|                                
|Fourth Quarter                   |  | $    | 135.00 |     |  | $ | 17.64 | 

HOLDERS

As of March 31, 2001 there were approximately 3,000 stockholders of record
of the common stock.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its common
stock, and the Company currently intends to retain any future earnings to fund
the development of its business and therefore does not anticipate paying any
cash dividends on its common stock in the foreseeable future. Future
declaration and payment of dividends on its common stock, if any, will be
determined in light of the then-current conditions, including the Companys
earnings, operations, capital requirements, financial conditions, restrictions
in financing agreements, and other factors deemed relevant by the board of
directors. As of June 18, 2000, there are 8,396,067 shares of Series A
preferred stock outstanding as a result of the acquisition of Fourthstage
Technologies, Inc. on April 9, 2001. The Series A preferred stock is
senior to all other capital stock of the Company, including specifically the
common stock and any other series or class of stock as may be designated by the
board from time to time, in right of priority to distributions paid as
dividends or otherwise. No dividends or other distribution with respect to any
other series or class of capital stock of the Company shall be declared or paid
prior to the declaration and payment in full of all cumulative dividends
accrued as of the last day of the preceding quarter.

RECENT SALES OF UNREGISTERED SECURITIES

No sales of
unregistered securities occurred during the quarter ended March 31,
2001.




ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements, the notes to our financial statements and the other financial
information contained elsewhere in this document. In addition to the historical
information, this Management Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this document contain forward-looking
information that involves risks and uncertainties. Our actual results could
differ materially from those anticipated by the forward-looking information as
a result of certain factors, including those set forth under Risk Factors and
elsewhere in this document.

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OVERVIEW

As a result of the April 9, 2001 merger between Aperian, Inc. and
Fourthstage Technologies, Inc., a privately held Arizona-based company, the
Company has begun a transition from Aperians web-hosting and co-location
business toward IT services, a business Fourthstage has demonstrated to be profitable
and capable of producing positive cash flows in their fiscal year 2000
performance, which ended December 31, 2000. Much of this business transition
has been completed since the merger.

Going forward, the Company intends to provide IT Services to
enterprise-level customers and governmental agencies. Aspects of Aperians
former stand-alone business will be retained, such as the capabilities of its
Network Operations Control Center, although the Companys business will
increasingly resemble the Fourthstage business. In the process, the Company
will target a different set of customers, offering a different set of products
and services than has formerly characterized its business. The Company will
also establish a broader physical presence in the continental United States.
Together, the Company now operates from offices in Phoenix, Arizona; Austin,
Houston and Dallas, Texas; Atlanta, Georgia; Tampa, Florida; and Las Vegas,
Nevada.

In September 2000, shareholders approved the merger of our predecessor
company, MSI Holdings, Inc., into Aperian, Inc. As part of this process each
three shares of the predecessor companys common stock were combined into one
share of common stock, and the Company changed its state of incorporation from
Utah to Delaware. All amounts below relating to common stock give effect to the
three-to-one share combination.

Over the course of the past 60 days, the Companys board has approved the
relocation of its headquarters to the main office of Fourthstage Technologies,
Inc., in Phoenix. The board has also adopted a calendar-based fiscal year,
which will result in a shortened year (stub year) over the remainder of
calendar year 2001. Adoption of the change in name from Aperian, Inc. to
Fourthstage Technologies, Inc. has been approved by the board and is pending
shareholder approval at the Annual Meeting in August 2001.

RESULTS OF OPERATIONS

Fiscal year 2001 represented the Companys first full year of operations
in the business of Internet connectivity, web-hosting and infrastructure
outsourcing. Throughout most of calendar year 2000 we continued to grow our
base of operations, adding data centers in Dallas, Texas; Atlanta, Georgia; and
Tampa, Florida. This growth phase culminated in the opening of our fifth data
center in Phoenix, Arizona in November 2000. As a result of this growth, there
was a major emphasis in staffing additions at all personnel levels.
Fundamentally, we operated in a capital and people intensive service business
with significant economies of scale, which required that a substantial
investment be made in the physical and human infrastructure of the business
prior to turning cash flow positive.

The nature of our business required us to establish and maintain strong
working relationships with leading technology companies, such as Cisco Systems
and Hewlett-Packard. In addition, we strived to enhance our brand awareness as
we expanded our physical presence across the Southern United States. These
efforts were hampered by our relatively small size and regional positioning
that tended to exclude highly competitive markets, especially Washington, D.C.
and Silicon Valley.

To date, we have had limited revenues and have not shown a profit in our
operations. The Companys pursuit of growth via physical expansion into new
geographic markets positioned us with a relatively high fixed-cost
infrastructure. Once the infrastructure was established, revenues could be
added with relatively small marginal costs. Accordingly, our growth plan
depended on increased recurring revenues over time to compensate for the
investment in the fixed-cost infrastructure. This plan was expected
to result in profits after about eighteen months of operation at each IDC location.

Our revenues approximated $5.8 million in fiscal year 2001, compared to
approximately $1.8 million in fiscal year 2000. While this is a substantial
increase in annual revenues, nearly all of the fiscal 2001 revenues were
recorded during the first three quarters of our fiscal year. The fiscal year
2001 gross margin deficit totaled approximately $7.4 million, largely
reflecting the Companys high fixed costs and limited revenues from recently
opened IDCs. Selling, general and administrative (SG&A) expenses totaled
approximately $43.3 million for the year, as Company expenditures were made to
recruit technical and support staff, and the Company engaged in a marketing
campaign to enhance the brand awareness in the cities in which it engaged its
business.

During the Companys expansion, two acquisitions were completed. OuterNet
Connection Strategies (OuterNet), an

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Austin-based professional services firm, was
acquired in July 2000 for an aggregate purchase price of
approximately $7.1 million, consisting of 333,333 shares of the
Companys common stock. The
OuterNet acquisition was intended to broaden the revenue mix and increase
margins by offering professional consulting and security services. In November
2000, we acquired Infinity Interactive (Infinity), an Austin-based shared
web-hosting and co-location provider for consideration of
approximately $450,000. By purchasing Infinity we expanded our
shared web-hosing business and increased our customer base. The intent was
to increase the margin earned on these shared web-hosting customers by
migrating them over time to a more profitable set of services offered to our
dedicated web-hosting customers. By year end, however, we determined the future
worth of these businesses to be impaired, and the approximate $6.8 million of
unamortized goodwill associated with both acquisitions was written off against earnings in
the fourth quarter.

For the year, we reported a net loss of $50.8 million, reflecting the
combined effects of the Companys negative gross margins, the selling, general
and administrative expenses and the non-operating expenses incurred. On a
per-share basis, we lost $3.96 per share for the year. Compared to the
previous year, SG&A more than doubled showing an increase of approximately
$24.3 million. Of the total, salaries and benefits increased approximately $2.1
million, reflecting the Companys increased headcount due to the additional IDC
locations and increased corporate services infrastructure. Advertising and
marketing expenses increased approximately $4.0 million, largely reflecting the
Companys brand awareness campaign, which ended in the third
quarter, as well as
ongoing local marketing efforts in each of the five cities where its IDCs were
located. Facility related expenses, reflecting occupancy and non-cash
depreciation, increased approximately $3.9 million, again reflecting the
Companys geographic expansion outside of Austin, Texas. The Company recorded
goodwill amortization of approximately $836 thousand for the fiscal year due to
the acquisitions of OuterNet and Infinity. In addition, the Company recorded a
goodwill writeoff of approximately $6.8 million thus expensing the unamortized
goodwill resulting from the OuterNet and Infinity acquisitions. Other expenses,
including travel, training, insurance, bad debt, property and sales taxes, and
other administrative expenses, increased approximately $6.8 million reflecting
both increased personnel-based and IDC-based expenses. The increase also
includes a loss of approximately $750 thousand on the Companys sale/leaseback
agreement with TXU Energy Services. Non-operating expenses, reflecting interest
and other income/expense decreased approximately $2.9 million due to the
reduction in amortization of debt discount recorded in fiscal 2000.

We incurred operating losses for all periods from inception through March
31, 2001. We have recorded a valuation allowance for the full amount of our net
deferred tax assets, as the future realization of the tax benefit is not
currently likely. As of March 31, 2001, we had federal net operating loss
carryforwards of approximately $72.4 million, which can be used to offset
future tax liabilities.

During the Companys fiscal fourth quarter, we experienced a significant
deterioration in our customer base. Our recurring revenues were severely
threatened and many of our receivables were deemed to be uncollectible. This is
attributable to the fact that many of our customers were emerging
Internet-based businesses with limited funding. These Internet-based companies
found outsourcing of their IT infrastructure to be especially attractive
relative to competing to hire a costly IT professional staff, and comprised a
relatively high proportion of our overall customer base. Ultimately these
companies experienced cash flow problems during the depression of the capital
markets over the last year, and many were unable to pay us for the services we
provided. As a result, at the beginning of the fourth quarter we adopted the policy of
not recording revenues on accounts that were 90 or more days past due.

During much of fiscal 2001, we found that given the tight financial
markets, access to additional sources of capital at attractive rates was not
available. In addition, debt or equity financing from strategic vendors or
partners was also extremely limited beginning about May 2000. Our limited
financial resources prevented further expansion of our market presence after
the fifth data center was opened in November 2000. As a result, during the
fourth quarter, in addition to continuing to seek sources of financing, we
began to reduce expenses and sought potential merger partners both inside and
outside the industry. However, most industry participants were in a similar
financial condition as us. Many competitors had used debt financing to build a
broader base of operations and faced the additional cash constraint of
interest, and often principal, payments.

On April 9,
2001, the Company completed a merger with Fourthstage
Technologies, Inc. The merger combined Aperians infrastructure assets and
managed services offerings with Fourthstages IT services business.
Conceptually, Fourthstage provided on-site services to its customers that management
believed would lead to a customers decision to outsource their IT
infrastructure requirements into an Aperian IDC.

During the initial sixty days following the announcement of the merger,
the Company restructured its operations resulting in the termination of
approximately 50% of the employees principally related to Aperians web-hosting
business.

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In addition, Aperians former chief executive officer and chief operating
officer resigned in May 2001, and the Company announced its intention to
discontinue the infrastructure-based business that was Aperians stand-alone
core business.

The decision to divest Aperians business was reached after an assessment
of the additional investments required to expand its limited physical scale to
establish a presence in key markets. Reviewing the decline in revenues and a
diminished expectation for future revenue growth led to the decision to focus
exclusively on Fourthstages stand-alone business, targeting enterprise-level
customers with IT Services. These customers were believed to be less impacted
by disruptions in the overall economy, and long-term contracts are expected to
provide a more predictable revenue base over time.

The Company has incurred substantial losses and negative cash flows from
operations. In addition, the Company has been informed by
Hewlett-Packard (HP), its
primary lender, that HP interprets certain provisions of the note in a manner
that might preclude future borrowings and , if pursued by HP, could result in
HP declaring the note to be in default. In addition, the Company will adopt the
business model of its recent merger partner, Fourthstage Technologies, Inc. As
a result of these factors, the Company will receive a going concern opinion in
its March 31, 2001 Report of Independent Auditors. If the
Company is unable to sell its
IDCs, and thereby satisfy its $20 million obligation to HP, the Company may not
be able to continue its operations.

LIQUIDITY AND CAPITAL RESOURCES

We have experienced significant losses to date,primarily from the Aperian
web-hosting business. Such losses will be significantly reduced with the sale
of our five Internet data centers. Although we have reduced expenses
significantly, we expect the combined Company to experience losses until the
IDC sale is completed. The recently adopted Fourthstage business model has proven to be profitable while providing positive cash flow during
its calendar year 2000 ended December 31. As a result, we anticipate losses
will decrease significantly following the sale of the IDCs and the charges
related to exiting Aperians discontinued business, and we expect to attain
profitability on a monthly basis by September 2001.

At March 31, 2001, our principal source of liquidity was approximately
$12.6 million in cash and cash equivalents. This cash was raised primarily
through a private placement of common stock that raised approximately $56
million during fiscal year 2000 and through the $20 million in borrowings from HP. As of March 31, 2001, our current liabilities were approximately $29.4
million, largely reflecting the Companys $20.0 million note payable to HP. The
Company is presently negotiating to assign the HP debt to the buyer(s) of the
IDCs or the payoff of the debt upon the sale of the IDCs. Additionally current liabilities reflect an approximate $3.5 million
capital lease obligation (current portion), primarily with Cisco Systems and
CMC Corporation. Accounts payable and accrued liabilities totaled approximately
$5.8 million at March 31, 2001.

Management intends for the buyer(s) of its IDCs to assume responsibility
for the obligations associated with the ongoing maintenance and operations of
those facilities. Such an agreement, if consummated, would include the
assumption of the Companys IDC-specific accounts receivable, accounts payable,
notes payable, and capital lease obligations. In essence much of the Companys
debt obligations will be assumed by the buyer with the sale of the IDCs. Such
assumption will require the approval of the buyers credit worthiness by HP and
certain other creditors.

Net cash used in operating activities for the year ended March 31, 2001
was approximately $40.4 million, essentially reflecting the Companys
approximate $50.8 million net loss and a decrease in accounts payable of
approximately $4.0 million. These amounts were offset in part by depreciation
and amortization expense of approximately $4.5 million, a non-cash impairment
charge on goodwill of approximately $6.8 million, loss on sale of equipment of
approximately $1.0 million, and a $1.7 million increase in accrued liabilities.
This compares to net cash used in operating activities for the year ended March
31, 2000 of approximately $5.2 million, which was primarily due to net losses
offset in part by an increase in accounts payable, amortization of debt
discount, common stock and options issued for compensation, and warrants issued
as debt issuance costs.

Net cash used in investing activities for the year ended March 31, 2001
was approximately $15.3 million, representing fixed asset purchases of
approximately $15.3 million for the continued construction of IDCs. This
compares to the net cash used in investing activities for the year ended March
31, 2000 of approximately $9.0 million, primarily due to capital expenditures
for the Companys IDCs in Austin and initial construction expenses for the IDCs
in Dallas and Tampa.

Net cash provided by financing activities for the year ended March 31,
2001 was approximately $19.5 million, primarily due to $20.0 million of
proceeds from the financing arrangement with HP offset by payments
on capital lease

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obligations of approximately $1.2 million. This compares to the net cash
provided by financing activities for the year ended March 31, 2000, which was
approximately $62.9 million, primarily due to approximately $56.5 million of
proceeds from our issuance of common stock, approximately $4.5 million of
proceeds from the exercise of stock options and warrants, approximately $4.1
million of proceeds from the issuance of notes payable, and approximately
$527,000 of proceeds from the private placement of preferred stock. This was
offset in part by approximately $2.4 million in repayments on a bank loan,
notes payable, and capital leases.

As of March 31, 2001 we had commitments under capital leases and under
non-cancelable operating leases of approximately $11.7 million and
approximately $45.3 million, respectively, through 2011.

We intend to generate working capital through profitable operations
subsequent to the IDCs being sold. We will fund all geographical expansion and
any further investments through budgeted use of existing cash reserves
generated from profitable operations. We believe our current estimated working
capital (after the sale of the IDCs) and capital expenditure requirements can
be met with existing cash and cash equivalents, cash from sales of services,
and equipment financing lines of credit. We have been approached by several
strategic investors to supply sources of additional working capital, but have
chosen to delay the use of this avenue of obtaining capital which would result
in dilution to our existing shareholders at this time.

However, we may seek to raise additional funds through public or private
financing, strategic relationships and other arrangements. There can be no
assurance that we will be successful in generating sufficient cash flows to
support our operations or in raising capital in sufficient amounts on terms
acceptable to us.

If the Company is unable to sell its IDCs, and thereby satisfy its $20
million obligation to HP, the Company may not be able to continue its
operations.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) issued Interpretation
No. 44, Accounting for Certain Transactions Involving Stock Compensation, (the
Interpretation). The Interpretation provides guidance related to the
implementation of APB No. 25. The Interpretation is to be applied
prospectively to all new awards, modifications to outstanding awards and
changes in employee status on or after July 1, 2000. For changes made after
December 15, 1998 to awards that affect exercise prices of awards, the Company
must prospectively account for the impact of those changes. Adoption of the
Interpretation did not have a material impact on the Companys financial
condition or results of operations.

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In December 1999, the Securities and Exchange Commission (SEC) staff
released Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in
Financial Statements, which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements. Management believes the
Companys current revenue recognition policies are materially consistent with
this statement.

In June 1999, the
FASB issued SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities  Deferral of the Effective Date of
FASB Statement No. 133, which deferred implementation of
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities until fiscal quarters of fiscal years beginning after
June 15, 2000.

SFAS No. 133 requires all derivatives to be carried
on the balance sheet at fair value. Changes in the fair value of
derivatives must be recognized in the Companys Consolidated
Statement of Operations when they occur; however there is an
exception for derivatives that qualify as hedges as defined by SFAS
No. 133. If a derivative qualifies as a hedge, a company can
elect to use hedge accounting to eliminate or reduce
the income statement volatility that would arise from reporting
changes in a derivatives fair value.

In June 2000, the FASB issued SFAS No. 138,
Accounting for Derivative Instruments and Hedging
Activities  an amendment of FASB Statement
No. 133. SFAS No. 138 adds to the guidance related to
accounting for derivative instruments and hedging activities.

This statement should be adopted concurrently with
SFAS 133. The adoption of both SFAS No. 133 and 138 is not
expected to materially impact the Companys financial results.

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should
carefully consider the following risk factors and all other information
contained in this prospectus before purchasing our common stock. You should
also keep these risk factors in mind when you read the forward-looking
statements. The risks and uncertainties described below are not the only ones
facing us. Additional risks and uncertainties that we are unaware of, or that
we currently deem immaterial, also may become important factors that affect us.

If any of the following risks occur, our business, our quarterly and
annual operating results or our financial condition could be materially and
adversely affected. In that case, the market price of our common stock could
decline or become substantially volatile, and you could lose some or all of
your investment.




Risks Related to Our Business

We are in the process of transitioning to a new business model, which is
developing and may be based on inaccurate assumptions that could cause our
revenues to decline.

Following our merger with Fourthstage Technologies, Inc. (Fourthstage)
on April 9, 2001, we decided to restructure our business to focus on providing
architectures, infrastructures, professional services and product integration
for enterprises conducting business over the Internet. Accordingly, we are
discontinuing our businesses of operating Internet data centers, providing
high-speed Internet access, co-location services and Web site hosting services.
As part of this restructuring, we are in the process of implementing and
integrating the Fourthstage business model, which is less capital intensive and
is based on aligning the timing of costs and revenues, into our operations.
The success of this transition depends on our ability to:



| |  | successfully implement and develop the business model, including in particular our ability to reduce our fixed costs and
obligations by selling our Internet data centers, renegotiating contracts and by other means;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | successfully develop and market new products and services, or differentiate our products and services from those offered by
our competitors;                                                                          
| 
| |  | provide reliable and cost-effective services to new and existing customers;                                                                                                                                           
| 
| |  | respond to technological developments and new products and services offered by our competitors;                                                                                                                       
| 
| |  | adapt to the needs of our customers; and                                                                                                                                                                              
| 
| |  | attract and retain qualified personnel.                                                                                                                                                                               

If we are not able to implement this business model successfully or adapt
it to changes in the market, our business, results of operations and financial
condition could be adversely affected.

We have a limited operating history on which to base an evaluation of our
combined operations with Fourthstage and our prospects for the future.

We consummated the merger with Fourthstage on April 9, 2001. We are
discontinuing our Internet data center business, which we began in late 1999
and which accounted for nearly all our operating revenues during fiscal 2001,
and are transitioning to the Fourthstage business model. Fourthstage commenced
operations in late 1999. Accordingly, we have a limited operating history on
which an evaluation of our combined operations with Fourthstage can be based.
Our prospects must be considered in light of the risks, expenses, difficulties
and uncertainties frequently encountered by companies in the early stages of
integration, such as:



| |  | the difficulty of integrating the operations, technologies, personnel and cultures of our two companies;
|- |  | --------------------------------------------------------------------------------------------------------
| 
| |  | the potential disruption of the ongoing business of our companies;                                      
| 
| |  | the distraction of management of our companies from ongoing business concerns;                          
| 
| |  | potential unknown liabilities associated with the merger of our companies; and                          
| 
| |  | the potential disruption of our employee base.                                                          

We cannot guarantee that any or all of the above risks, expenses,
difficulties and uncertainties will not occur as a result of our merger and
integration with Fourthstage. Nor can we guarantee that our integration with
Fourthstage will be achieved successfully or as rapidly as we would like.

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We have a history of operating losses, and there are a number of uncertainties
that affect whether and when we may become a profitable company.

To date, we have had limited revenues and have not shown a profit in our
operations. During fiscal 2001, our total revenues were $5.8 million of which
a significant amount was attributable to lines of business that we have
decided to discontinue. Fourthstage was profitable during 2000, with net
income of approximately $129,000 and total revenues of approximately $8.2
million. The ability of our combined organization to achieve profitability in
the future will depend on our ability to reduce our expenses related to the
Aperian operations that are being discontinued while continuing and increasing
the Fourthstage operations on a profitable basis. We have taken significant
steps to reduce expenses both before and since our combination with
Fourthstage, including the separation of approximately one half of our
employees. Our ability to further reduce losses and to achieve profitability
will depend on a number of factors including our ability to:



| |  | reduce costs through the sale of our Internet data centers;                                            
|- |  | -------------------------------------------------------------------------------------------------------
| 
| |  | negotiate terminations of leases which we no longer expect to use in connection with our business;     
| 
| |  | obtain a satisfactory resolution of our issues with Hewlett-Packard Company;                           
| 
| |  | reduce our other costs efficiently;                                                                    
| 
| |  | terminate services and write off bad debt attributable to an increasing number of non-paying customers;
| 
| |  | integrate our two companies and transition to a new business model; and                                
| 
| |  | develop and market our Internet-based products and services to enterprise customers.                   

As of March 31, 2001, our accumulated deficit was approximately $96.8
million. Approximately $12.9 million of the accumulated deficit relates to
preferred stock discounts and dividends. Approximately $83.9 million of the
deficit relates to losses from operations. If we fail to achieve significant
increases in our revenues as a result of our transition to a new business
model, the size of our operating losses may be larger than expected. We may
never achieve profitability or generate positive cash flows from operations.
If we do achieve profitability or positive cash flows from operations in any
period, we may not be able to sustain or increase profitability or positive
cash flows on a quarterly or annual basis. If we are unable to achieve
profitability or sustain it, we may have to discontinue operations.

Our relationship with Hewlett-Packard Company is critical to our future growth
and success.

Our ability to raise capital to fund our operations is critical to our
success. A key part of our financing plan has been a financing arrangement we
entered into in August 2000 with Hewlett-Packard Company (HP) under which HP
has agreed, subject to the fulfillment of certain conditions, to lend us up to
$40 million. Under the convertible secured promissory note that we entered
into with HP, we are required to use at least 50% of the proceeds of the
borrowings to purchase HP products, support and services, with the remainder to
be used for other equipment and services. The note is secured by security
interests in the HP equipment as well as the other equipment that we purchase
with the proceeds of the loans. During September and November 2000, we
borrowed $20 million under this financing arrangement. Future borrowings are
subject to conditions relating to our financial performance. We did not
satisfy the conditions for additional borrowings during the quarter ended March
31, 2001. During discussions relating to future borrowings, HP informed us
that it interprets certain provisions of the note in a manner that might
preclude future borrowings and, if pursued by HP, could result in HPs
declaring the note to be in default. We have discussed with HP possible means
by which we can resolve our differences and believe that we have reached an
agreement in principal under which we would not make further borrowings from HP
but which clarify that no defaults exist under the note. We are unable to
assure you that we will, in fact, be able to agree to and execute definitive
documents with HP. If HP were to declare the note to be in default, our
ability to continue operations would be jeopardized. In addition, because any
sale of our Internet data centers would include the sale of collateral that
secures the note, the failure to resolve our differences with HP could
jeopardize our ability to sell our Internet data centers. This in turn would
significantly hinder our ability to reduce costs and continue as a
going concern.

Some of our customers are emerging Internet-based businesses that have not paid
us for our services, which will result in a substantial reduction in our
revenues in the fourth quarter and may have continuing additional effects.

A substantial portion of our monthly recurring revenue during the first
nine months of fiscal year 2001 was derived from customers that we classify as
emerging Internet-based businesses. A number of these customers have failed,
and the unproven business models of other customers and the current
unavailability of capital, makes the continued viability of these customers
uncertain. As a result, revenues since December 31, 2000 have been adversely
affected, and fourth quarter 2001

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revenues reflect a significant reduction from prior quarters. The
financial difficulties of emerging Internet-based businesses primarily affects
our Internet data center business and therefore could adversely affect the
terms on which we are able to sell our Internet data centers. The Fourthstage
business model to which we are transitioning does not target emerging
businesses as prospective customers. However, to the extent that we engage in
business transactions with emerging Internet-based businesses in the future,
either as customers or as suppliers of technologies, our business and financial
results could be harmed if such businesses experience financial or other
difficulties.

We have had recent changes in personnel, including our management team, and
current management may be unable to lead us into profitability.

Our recent merger with Fourthstage and subsequent restructuring has
resulted in significant changes to our management team. This team has not had
the opportunity to work together in the past, and we cannot assure you that it
will work together efficiently. Furthermore, there is no assurance that the
new management team:



| |  | will be able to successfully implement our new and developing business model;
|- |  | -----------------------------------------------------------------------------
| 
| |  | will be able to meet the needs of new and existing customers; or             
| 
| |  | will lead us into profitability.                                             

We would experience significant cash flow difficulties and general financial
harm if our shareholders do not approve the conversion of preferred stock that
we issued to Fourthstage in connection with the merger of our two companies.

Under the terms of our merger agreement with Fourthstage, we issued
8,396,067 shares of our Series A 18% Cumulative Convertible Redeemable
Preferred Stock to shareholders of Fourthstage. Any time after July 15, 2002,
the Fourthstage shareholders may exercise their right to redeem the Series A
Preferred Stock. Upon redemption of the Series A Preferred Stock, the
Fourthstage shareholders are entitled to receive an amount in cash per share
equal to the greater of (a) $1.1703 plus any compounded dividends or (b) the
average of the daily closing prices of our common stock as reported by The
Nasdaq National Market System during the ten (10) trading days preceding the
date of the first annual meeting of shareholders following the issue date of
the Series A Preferred Stock, which meeting is currently scheduled for August
15, 2001, plus all accrued but unpaid dividends up to the date of redemption.
This Series A Preferred Stock will be automatically converted into shares of
our common stock upon approval by our stockholders of such conversion. If our
shareholders approve the conversion of the Series A Preferred Stock, the
Fourthstage shareholders will not be entitled to receive any accrued but unpaid
dividends on the Series A Preferred Stock that would otherwise be payable to
them. Thus, if our stockholders do not approve the conversion of the Series A
Preferred Stock and the Fourthstage shareholders elect to redeem such stock, we
would be forced to make a significant outlay of cash thus resulting in
immediate cash flow difficulties and a significant depletion of our financial
resources.

We have issued a significant number of stock options which, when and if
exercised, would result in a significant increase in the number of shares
outstanding thus resulting in immediate and substantial dilution of your
investment.

As of May 31, 2001 we have approximately 4.3 million stock options
outstanding under our 2000 Stock Incentive Plan and 2000 Stock Option Plan and
commitments to issue approximately 2.6 million to Fourthstage employees and
recent hires. Approximately 2.4 million of these options have exercise prices
of $5 or less and are or will become exercisable by December 31, 2001. Any
shares issued may be sold freely under our registration statements on Form S-8.
As of May 31, 2001, there were approximately 16.2 million shares of our common
stock outstanding. If all of the stock options that vest by December 31, 2001
and have exercise prices of $5 or less were to be exercised, there would be
approximately 18.6 million shares of our common stock outstanding representing
an increase of approximately 15%. If the proposal to convert our preferred
stock is approved, the number of outstanding shares of common stock would be
approximately 24.6 million shares outstanding, and exercise of these options
would increase this number to 27 million, representing an increase of
approximately 10%. As a result, holders of our common stock may experience a
substantial dilution upon exercise of these stock options.

Our operating results have fluctuated widely and we expect this to continue.

We have experienced significant fluctuations in our results of operations
in different periods. We expect these

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fluctuations to continue, especially since sales
under the Fourthstage business model vary widely depending on the timing of significant sales. Because of these
fluctuations, comparisons of our results of operations from period to period
are not necessarily meaningful and should not be relied upon as an indicator of
future performance. We expect to continue to experience significant
fluctuations in our results of operations due to a variety of factors, many of
which are outside of our control. The following factors could affect our
results of operations:



| |  | demand for and market acceptance of our services;                                            
|- |  | ---------------------------------------------------------------------------------------------
| 
| |  | reliable continuity of service and network availability;                                     
| 
| |  | customer retention and satisfaction;                                                         
| 
| |  | the timing, magnitude and integration of acquisitions of complementary businesses and assets;
| 
| |  | the timing of customer installations;                                                        
| 
| |  | the provision of customer discounts and credits;                                             
| 
| |  | the mix of products and services we sell;                                                    
| 
| |  | the timing and success of marketing efforts;                                                 
| 
| |  | new product and service introductions by us and our competitors;                             
| 
| |  | the introduction of new Internet and networking technologies by third parties;               
| 
| |  | changes in our pricing policies and those of our competitors; and                            
| 
| |  | general economic conditions.                                                                 

In addition, a relatively large portion of the expenses related to our
discontinued Internet data center business are fixed, particularly our expenses
for telecommunications capacity, depreciation, interest and personnel.
Therefore, as long as we continue to own this business, our results of
operations will be particularly sensitive to fluctuations in revenues.

If we do not compete effectively, particularly against established participants
with greater financial and other resources than ours, our business will not
grow, which will make our services less attractive to our existing and
prospective customers.

The market for Internet-based business technologies, managed services and
product integration is extremely competitive and subject to rapid change.
Moreover, it is characterized by few barriers to entry. We expect to encounter
increased competition in the future as a result of increased consolidation and
strategic alliances in the industry. In addition, we expect increasing
competition from new market entrants as well as foreign service providers that
are increasingly beginning to compete in the United States. The principal
competitive factors in our market include:



| |  | ability to deliver services when requested by the customer;
|- |  | -----------------------------------------------------------
| 
| |  | Internet system engineering and other expertise;           
| 
| |  | customer service;                                          
| 
| |  | variety of services offered;                               
| 
| |  | broad geographic presence;                                 
| 
| |  | pricing and value;                                         
| 
| |  | ability to maintain and expand distribution channels;      
| 
| |  | brand name recognition;                                    
| 
| |  | timing of introductions of new services; and               
| 
| |  | financial resources.                                       

If we are unable to compete successfully, we would experience a loss in
customers and the revenues that accompany that lost business. Many of our
existing competitors have, and potential competitors may have or have access
to, greater financial and other resources, more customers, a larger installed
network infrastructure, greater market recognition and more established
relationships and alliances in the industry. As a result, these competitors
may be able to develop and expand their product and service offerings more
quickly, adapt more swiftly to new or emerging technologies and changes in
customer demands, devote greater resources to the marketing and sale of their
offerings, pursue acquisitions, strategic alliances and other opportunities
more readily and adopt more aggressive pricing policies. If we are
unsuccessful in marketing our products and services to enterprises and service
providers, or if we fail to expand our capacity to meet increasing demand or to
competitively price or expand our services, we could lose many potential
customers and suffer significant operating losses.

18



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##### Table of Contents



The success of our business depends on the overall demand for information
technology and related services, and Internet-based business technologies and
services in particular.

Our success largely depends on the growth of overall demand for
information technology and related services, particularly in the market for
Internet system and network solutions required by enterprises with
mission-critical Internet operations. Our business is affected by general
economic and business conditions throughout the world. A softening of demand
for Internet-based business technologies and services caused by a weakening of
the global economy in general, and/or the U.S. economy in particular, could
hinder our growth and result in a decrease of our revenues. Furthermore, if
certain new business models or lines of business that depend on the Internet
fail to succeed, our business could be adversely affected.

If we do not respond effectively and on a timely basis to rapid technological
changes, our services may become obsolete and we would probably lose customers
and be unable to attract new ones.

Internet-based business technology is characterized by rapid technological
developments and frequent new product and service introductions and
enhancements. The introduction of new products or technologies could render
our product or service offerings obsolete, thereby requiring us to spend more
than we currently anticipate in future periods in order to train our employees,
remain competitive, retain our existing customers and attract new ones.
Similarly, technological developments could reduce the cost or increase the
supply of services similar to those that we provide or plan to provide, which
could result in lower than expected revenues in future periods. We may not be
able to:



| |  | recruit and retain a highly-skilled workforce;                                                     
|- |  | ---------------------------------------------------------------------------------------------------
| 
| |  | anticipate or adapt to these new products or technologies on a timely and cost-effective basis;    
| 
| |  | obtain the necessary funds to develop or acquire new technologies or products needed to compete; or
| 
| |  | address the increasingly sophisticated and varied needs of our current and prospective customers.  

Our ability to compete could be jeopardized if our products and services do not
properly operate with the existing or future equipment of our customers.

We believe that our ability to compete successfully is dependent upon the
continued compatibility of our product and service offerings with products,
services, infrastructures and architectures offered by others, particularly our
enterprise and service provider customers. Although we often work with our
customers in testing newly developed products, these products may not be
compatible with our Internet-based business technologies. In addition,
although we currently intend to support emerging standards, there can be no
assurance that industry standards will be established or, if they become
established, that we will be able to conform to these new standards in a timely
fashion and maintain a competitive position in the market. Our competitive
position would be adversely affected if we fail to conform to the prevailing
standards, or if common standards fail to emerge.

Competition for qualified personnel is intense and we may not be able to
attract and retain the personnel we need in each of the critical areas of our
business.

Our future success depends on our ability to identify, hire and retain
highly qualified technical, sales, marketing and customer service personnel.
The competition for such personnel throughout our industry is intense. Our
industry is characterized by a high level of employee mobility and aggressive
recruiting of skilled personnel. If we are unable to attract and retain
qualified personnel, our ability to compete will suffer.

If we are unable to maintain our relationships with third party suppliers, we
may have difficulty providing our services and products.

We depend on third party equipment and software vendors and service
providers to supply key components of our advanced e-Business architectures,
infrastructures and services. These vendors include Sun Microsystems,
Hewlett-Packard, Oracle, Veritas, Cisco Systems, Network Appliance and
StorageTek. If we are unable to obtain these key components on a timely basis
and at an acceptable cost, we would be forced to spend time and money selecting
and obtaining new equipment, training our personnel to use different equipment
and deploying alternative components needed to integrate the new equipment. As
a result, we could lose many of our customers and our business would be
jeopardized. Furthermore, if we are unable to maintain or replace our
relationships with these key vendors, we will be unable to provide our current
level of services to our customers. This would cause our revenues and our
earnings to decline.

19



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##### Table of Contents



System failures could disrupt our services causing us to lose customers and
realize significant operating losses.

Our Internet data center operations have depended, and our managed
services business will continue to depend, on our ability to avoid and mitigate
any damages to our customers from natural disasters, power losses, capacity
limitations, physical or electronic breaches of security, software defects,
telecommunications failures and intentional acts of vandalism, including
sabotage and computer viruses. Our target market is particularly sensitive to
such service interruptions and failures. Our failure to avoid and/or mitigate
interruptions in service or performance problems could undermine confidence in
our services and cause us to lose customers or make it more difficult to
attract new ones. Additionally, because many of our services are critical to
the businesses of many of our customers, any significant interruption in our
service could result in lost profits or other loss to our customers. We have
not yet implemented a disaster recovery plan or have any secondary off-site
systems. Thus, even though we do carry business interruption insurance, we
could in turn be exposed to significant financial losses and liability.

We may be liable for defects or errors in the products and services that we
develop or deploy.

We develop and deploy both internally developed and third party products
and services for our customers. Many of these products and services are
critical to the operations of our customers businesses. Any defects or errors
in these technologies or products could result in:



| |  | delayed or lost customer revenues;                 
|- |  | ---------------------------------------------------
| 
| |  | adverse customer reaction toward our business;     
| 
| |  | negative publicity;                                
| 
| |  | additional expenditures to correct the problem; and
| 
| |  | legal claims against us.                           

We attempt to manage these risks by requiring our customers to rely on
third party warranties when applicable. In other cases, we contractually limit
our warranties and available remedies. Claims may nevertheless be made against
us. These claims may not be adequately covered by insurance, may result in
significant losses and, even if defended successfully, may raise our insurance
costs.

Third party infringement claims against our technology suppliers, our customers
or us could result in disruptions of service, the loss of customers or costly
and time-consuming litigation.

We license or lease many of the technologies used in the services that we
offer. Our technology suppliers may become subject to third-party infringement
claims, which could result in their inability or unwillingness to continue to
license their technology to us. We and our customers could be subject to
third-party infringement claims as the number of enterprises conducting
business over the Internet grows along with the number of third-party service
providers for such businesses. We cannot guarantee that third parties will not
assert claims against us in the future or that these claims will not be
successful. Any infringement claim as to our technologies or services,
regardless of its merit, could result in delays in service, installation or
upgrades, and the loss of customers or costly and time-consuming litigation.
In addition, third parties may change the terms of their license agreements in
ways that would prevent us from using technologies licensed from them on
commercially reasonable terms or that would prevent us from using them at all.
We may not be able to replace those technologies with technologies that have
the same features or functionality on commercially reasonable terms or at all.

Our competitive position would be harmed if we are unable to protect our
intellectual property rights.

Our business includes the design, development, licensing and marketing of
enterprise applications technologies and software for use by our customers. We
rely on a combination of copyright, patent, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect proprietary
rights in our products and services. Despite the precautions we take to
protect our intellectual property, we have little patented technology that
would preclude or inhibit competitors from entering our market. Although we
have entered into confidentiality agreements with our employees, contractors,
suppliers, distributors and appropriate customers to limit access to and
disclosure of our proprietary information, it may be possible for a third-party
to copy or otherwise misappropriate and use our technology without
authorization, particularly in foreign countries where the laws may not protect
our proprietary rights to the same extent as do the laws of the United States.
It may also be possible for our competitors to develop substantially equivalent
or superior

20



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##### Table of Contents



technology independently. If competitors are able to use our proprietary
technology or develop similar technology, our ability to compete effectively
could be seriously harmed. We may need to resort to litigation in the future
to enforce our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others. This
litigation could result in substantial costs and diversion of resources.

Our possible exposure to claims alleging violation of trade secrets may cause
unexpected legal expenses and divert management resources.

Members of our current management team previously worked for technology
companies with whom they may have had employment contracts. Such contracts
typically include confidentiality provisions. As a result, our management team
or we could be subject to claims alleging violation of trade secrets, breach of
contract or unfair competition. If brought, such claims could distract our
management and employees from their duties and require reallocation of our
resources. Moreover, if such claims against us are successful, our ability to
use technology we need to conduct our business could be hindered.
Additionally, liability and defense costs that we incur as a result of these
claims could increase our expenses and adversely affect our ability to compete.




Risks Related to Our Industry

Our future growth and success will depend on our ability to obtain access to
capital markets, and we may not successfully obtain this access.

In the technology industry, access to capital markets is limited and is
characterized by intense competition. Our future ability to expand the scope
of the products and services that we offer to our customers and to conduct the
requisite research and development will depend in large part on our ability to
obtain additional financing. If we are unable to obtain such financing, or if
such financing is available only on terms that are not favorable to us, a
significant portion of our cash flow from operations will be dedicated to
servicing our debt obligations and will not be available for other business
purposes. This in turn will make us more vulnerable to economic downturns and
competitive pressures, and our prospects for future success would be
significantly jeopardized. Further, if we are required to raise funds through
the issuance of additional equity securities, the percentage ownership of our
stockholders would be diluted. Any new equity securities may have rights,
preferences or privileges senior to those of our common stock.

Our business will suffer if Internet use does not continue to increase or if
the Internet fails to perform reliably.

Use of the Internet for retrieving, sharing and transferring information
among businesses, consumers, suppliers and partners has increased rapidly in
recent years. Our success depends in part on continued growth in the use of
the Internet, and demand for our services could be reduced if the market for
business-related Internet services fails to develop further. Internet usage
and growth may be inhibited for a number of reasons such as:



| |  | inadequate network infrastructure;                                            
|- |  | ------------------------------------------------------------------------------
| 
| |  | security concerns;                                                            
| 
| |  | uncertainty of legal and regulatory issues concerning the use of the Internet;
| 
| |  | inconsistent quality of service;                                              
| 
| |  | lack of availability of cost-effective, reliable high-speed service; and      
| 
| |  | failure of Internet use to expand internationally.                            

If Internet usage does not grow at the rates that we presently anticipate,
our business, financial condition and results of operations could be materially
and adversely affected.

Internet security concerns may hinder the development of electronic commerce
and demand for our products and services.

A significant barrier to the growth of e-commerce and communications over
the Internet has been the need for secure transmission of confidential
information. We may be required to expend significant capital and other
resources to protect against, or to alleviate problems caused by, security
breaches. Despite our efforts, we may not be successful in maintaining
information as confidential or adequately safeguarding our customers networks.
Someone who is able to circumvent our security measures could misappropriate
proprietary information or cause disruptions in our operations and those of our

21



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##### Table of Contents



customers. Such a compromise of security could result in claims against
us, which could be successful. These claims, regardless of their ultimate
outcome, could result in costly litigation and adversely affect our ability to
attract and retain customers.

The regulation of the Internet is unsettled and future regulations could
adversely affect our operating costs and business.

Our business may be adversely affected by the adoption of laws and
regulations in the United States or abroad that apply generally to commerce and
communication over the Internet, including laws or regulations relating to
intellectual property, telecommunications, privacy, consumer protection,
taxation and dissemination of unlawful or otherwise disfavored content. The
adoption or consideration of additional legislation or regulation affecting the
Internet could inhibit the continued growth of the Internet or decrease its
acceptance as a commercial medium, impose additional operating and other costs
on us, expose us to greater potential liability from regulatory actions or
private legal proceedings or otherwise adversely affect our business operations
or performance. We cannot predict the impact, if any, that future laws and
regulations relating to the Internet or legal or regulatory changes may have on
our business.




ITEM 7. FINANCIAL STATEMENTS

The information for this Item is included beginning on Page F-1 of this
Annual Report on Form 10-KSB.




ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

None.

22



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##### Table of Contents






PART III




ITEM 9. EXECUTIVE OFFICERS AND DIRECTORS




ITEM 10. EXECUTIVE COMPENSATION




ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT




ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by Items 9 through 12 is incorporated by
reference from our definitive Proxy Statement, which involves the election of
directors, in accordance with General Instruction E to the Annual Report on
Form 10-KSB. Such definitive Proxy Statement shall be filed with the Securities
and Exchange Commission not later than July 29, 2001.




ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibit Index

|            |  |                                                                                                                        |  |                                                                                                                                       
|----------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | EXHIBIT DESCRIPTION                                                                                                    |  | LOCATION                                                                                                                              
|            |  |                                                                                                                        |  |                                                                                                                                       
|3.1         |  | Amended and Restated Certificate of
Incorporation (1)                                                                  |  | Incorporated by
reference to
Exhibit 3.1 of
Registrants Form
8-K filed September
11, 2000 (File No.
0-8146)                          
|           
|           
|           
|           
|3.2         |  | Amended and Restated Bylaws of Registrant (1)                                                                          |  | Incorporated by
reference to
Exhibit 3.2 of
Registrants Form
8-K filed April 19,
2001 (File No.
0-1846)                              
|           
|           
|           
|           
|4.0         |  | Specimen of Securities (1)                                                                                             |  | Incorporated by
reference to
Exhibits No. 1 of
Registrants Form
8-A/A Registration
Statement filed
October 10, 2000
(File No. 0-8146)
|           
|           
|           
|           
|4.1         |  | Certificate of Designation of Preferences
and Rights of Series A 18% Cumulative
Convertible Redeemable Preferred Stock |  | Incorporated by
reference to
Exhibit 4.1 of
Registrants Form
8-K filed April 19,
2001 (File No.
0-1846)                              
|           
|           
|           
|           
|            |  |                                                                                                                        |  |                                                                                                                                       
|           
|           
|           
|           
|10.1        |  | MMH Investments, Inc. settlement and release
agreement, dated October 15, 1999 (1)                                     |  | Incorporated by
reference to
Exhibit 10.1 of
Registrants Form
10-QSB filed February 14, 2000
(File No. 0-8164)                       
|           
|           
|           
|           
|10.2        |  | Entrepreneurial Investors, Ltd. and Equity
Services, LTD settlement agreement, dated
February 1, 2000 (1)              |  | Incorporated by
reference to
Exhibit 10.2 of
Registrants Form
10-QSB filed
February 14, 2000
(File No. 0-8164)                       
|           
|           
|           
|           
|10.3        |  | Cisco Systems Capital Corporation master
agreement to lease equipment, dated January
24, 2000 (1)                      |  | Incorporated by
reference to
Exhibit 10.3 of
Registrants Form
10-QSB filed
February 14, 2000
(File No. 0-8164)                       
|           
|           
|           
|           
|10.4        |  | Robert Hersch employment agreement, dated
October 1, 1999 (1)                                                          |  | Incorporated by
reference to
Exhibit 10.4 of
Registrants Form
10-QSB filed
February 14, 2000
(File No. 0-8164)                       
|           
|           
|           
|           
|10.5        |  | Robert Gibbs employment agreement, dated
June 29, 1999 (1)                                                             |  | Incorporated by
reference to
Exhibit 10.5 of
Registrants Form
10-QSB filed
February 14, 2000
(File No. 0-8164)                       
|           
|           
|           
|           
|10.5.1      |  | Robert J. Gibbs Employment Agreement dated
as of October 30, 2000 (1)                                                  |  | Incorporated by
reference to
Exhibit 10.36.1 of
Registrants Form
10-QSB filed
February 14, 2001
(File No. 0-8164)                    
|           
|           
|           
|           
|10.5.2      |  | Robert J. Gibbs Amended and Restated
Restricted Stock Award dated as of October
30, 2000 (1)                           |  | Incorporated by
reference to
Exhibit 10.36.21 of
Registrants Form
10-QSB filed
February 14, 2001
(File No. 0-8164)                   
|           
|           
|           
|           
|10.5.3      |  | Robert J. Gibbs Employment Agreement dated
as of April 6, 2001 (1)                                                     |  | Incorporated by
reference to
Exhibit 10.2 of
Registrants Form
8-K filed April 19,
2001 (File No.
0-8164)                             
|           
|           
|           
|           
|10.5.4      |  | Advisory Agreement dated as of May 1, 2001
between the Company and Robert J. Gibbs (2)                                 |  | Exhibit 10.5.4                                                                                                                        
|           
|           
|           
|           
|10.6        |  | Form of GTE Internetworking Direct Connect
agreement (1)                                                               |  | Incorporated by
reference to
Exhibit 10.6 of
Registrants Form
10-QSB filed
February 14, 2000
(File No. 0-8164)                       
|           
|           
|           
|           
|10.7        |  | Form of bridge financing warrant to purchase
common stock (1)                                                          |  | Incorporated by
reference to
Exhibit 10.8 of
Registrants Form
10-QSB filed
February 14, 2000
(File No. 0-8164)                       
|           
|           
|           
|           
|10.8        |  | Form of private equity unit financing
registration rights agreement (1)                                                |  | Incorporated by
reference to
Exhibit 10.9 of
Registrants Form
10-QSB filed
February 14, 2000
(File No. 0-8164)                       

23



---



##### Table of Contents



|            |  |                                                                                                                                  |  |                                                                                                                                        
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | EXHIBIT DESCRIPTION                                                                                                              |  | LOCATION                                                                                                                               
|            |  |                                                                                                                                  |  |                                                                                                                                        
|10.9        |  | Form of private equity financing warrant
to purchase common stock (1)                                                            |  | Incorporated by
reference to
Exhibit 10.10 of
Registrants Form
10-QSB filed
February 14, 2000
(File No. 0-8164)                       
|           
|           
|           
|           
|10.10       |  | Master Agreement for Internetworking
Services between GTE and Registrant, dated
May 29, 1998 (1)                                 |  | Incorporated by
reference to
Exhibit 10.2 of
Registrants Form
10-QSB/A filed June
14, 1999 (File No.
0-8164)                          
|           
|           
|           
|           
|10.11       |  | Service Schedule Internet Advantage
Connection Services between GTE and
Registrant, dated May 29, 1998 (1)                       |  | Incorporated by
reference to
Exhibit 10.3 of
Registrants Form
10-QSB/A filed June
14, 1999 (File No.
0-8164)                          
|           
|           
|           
|           
|10.12       |  | Service Schedule Consulting Services
between GTE and Registrant, dated October
15, 1998 (1)                                      |  | Incorporated by
reference to
Exhibit 10.4 of
Registrants Form
10-QSB/A filed June
14, 1999 (File No.
0-8164)                          
|           
|           
|           
|           
|10.13       |  | Amendment One to Service Schedule
Consulting Services between GTE and
Registrant, dated November 13, 1998 (1)                    |  | Incorporated by
reference to
Exhibit 10.5 of
Registrants Form
10-QSB/A filed June
14, 1999 (File No.
0-8164)                          
|           
|           
|           
|           
|10.14       |  | Employment Agreement effective as of March
24, 1999, between Roger M. Lane and
Registrant (1)                                    |  | Incorporated by
reference to
Exhibit 10.6 of
Registrants Form
10-QSB/A filed June
14, 1999 (File No.
0-8164)                          
|           
|           
|           
|           
|10.15       |  | Lease Agreement for Facilities, dated
August 12, 1998 (1)                                                                        |  | Incorporated by
reference to
Exhibit 10.1 of
Registrants Form
10-QSB/A filed
November 12, 1998
(File No. 0-8164)                      
|           
|           
|           
|           
|10.16       |  | Sublease dated July 27, 1998 between GTE
Intelligent Network Services, Inc and
Registrant (1)                                    |  | Incorporated by
reference to
Exhibit 10.2 of
Registrants Form
10-QSB/A filed
November 12, 1998
(File No. 0-8164)                      
|           
|           
|           
|           
|10.17       |  | Purchase Order dated May 29,1998 For GTE
Internetworkings Internet Advantage
Version 5.1 (Quote Number 38561.9719.1)
(1)        |  | Incorporated by
reference to
Exhibit 10.3 of
Registrants Form
10-QSB/A filed
November 12, 1998
(File No. 0-8164)                      
|           
|           
|           
|           
|10.18       |  | Purchase Order dated September 30, 1998
for GTE Internetworkings Internet
Advantage
Version 6.0 (Quote Number 76512.9719.1) (1) |  | Incorporated by
reference to
Exhibit 10.4 of
Registrants Form
10-QSB/A filed
November 12, 1998
(File No. 0-8164)                      
|           
|           
|           
|           
|            |  |                                                                                                                                  |  |                                                                                                                                        
|           
|           
|           
|           
|10.19       |  | Master Agreement for Internetworking
Services dated May 29, 1998 between GTE
Internetworking and MSI (1)                         |  | Incorporated by
reference to
Exhibit 10.5 of
Registrants Form 10-QSB/A filed
November 12, 1998
(File No. 0-8164)                      
|           
|           
|           
|           
|10.20       |  | Quotation for GTE Internetworking Dialinx
Service dated October 29, 1998 between GTE
Internetworking and MSI (1)                 |  | Incorporated by
reference to
Exhibit 10.6 of
Registrants Form
10-QSB/A filed
November 12, 1998
(File No. 0-8164)                      
|           
|           
|           
|           
|10.21       |  | Basic Agreement between Siemens Nixdorf
Information Systems, Inc. and MSI (1)                                                    |  | Incorporated by
reference to
Exhibit 10.7 of
Registrants Form
10-QSB/A filed
November 12, 1998
(File No. 0-8164)                      
|           
|           
|           
|           
|10.22       |  | Addendum to Lease Agreement on 501 Waller
Austin, Texas dated June 6, 1998 Between
WBH, Ltd. and MSI (1)                         |  | Incorporated by
reference to
Exhibit 10.8 of
Registrants Form
10-QSB/A filed
November 12, 1998
(File No. 0-8164)                      
|           
|           
|           
|           
|10.23       |  | MCI WorldCom On-Net Voice Agreement, dated
April 19, 2000 (1)                                                                    |  | Incorporated by
reference to
Exhibit 10.34 of
Registrants From
10-KSB filed June
29, 2000 (File No.
0-8164)                           
|           
|           
|           
|           
|10.24       |  | Purchase Agreement between Registrant and
certain investors, dated February 15, 2000
(1)                                         |  | Incorporated by
reference to
Exhibit 10.35 of
Registrants From
10-KSB filed June
29, 2000 (File No.
0-8164)                           
|           
|           
|           
|           
|10.25       |  | Merger Agreement dated as of July 13,
2000, relating to OuterNet Connection
Strategies, Incorporated (1)                         |  | Incorporated by
reference to
Exhibit 2 of
Registrants Form
8-K filed August 3,
2000 (File
No.0-8164)                                  
|           
|           
|           
|           
|10.26       |  | Note Purchase Agreement effective as of
August 3, 2000 between Registrant and
Hewlett-Packard Company (1)                        |  | Incorporated by
reference to
Exhibit 2 of
Registrants Form
8-K filed August 9,
2000 (File
No.0-8164)                                  
|           
|           
|           
|           
|10.27       |  | Convertible Secured U.S. $40,000,000 Note
dated August 3, 2000 (1)                                                               |  | Incorporated by
reference to
Exhibit 3 of
Registrants Form
8-K filed August 9,
2000 (File
No.0-8164)                                  
|           
|           
|           
|           
|10.28       |  | Registration Rights Agreement made as of
August 3, 2000 between Registrant and
Hewlett-Packard Company (1)                       |  | Incorporated by
reference to
Exhibit 4 of
Registrants Form
8-K filed August 9,
2000 (File
No.0-8164)                                  
|           
|           
|           
|           
|10.29       |  | Registrants Amended and Restated 2000
Stock Option Plan (2)                                                                     |  | Exhibit 10.29                                                                                                                          
|           
|           
|           
|           
|10.30       |  | Registrants Amended and Restated 2000
Stock Incentive Plan (1)                                                                  |  | Incorporated by
reference to
Exhibit 4.1 of
Registrants
registration
statement on Form
S-8 filed October
20, 2000 (File No.
333-48386)

24



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##### Table of Contents



|            |  |                                                                                                                                                                                                         |  |                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | EXHIBIT DESCRIPTION                                                                                                                                                                                     |  | LOCATION                                                                                                          
|            |  |                                                                                                                                                                                                         |  |                                                                                                                   
|10.31       |  | Wayne A. Irwin Employment
Agreement dated as of October 30,
2000 (1)                                                                                                                                    |  | Incorporated by
reference to Exhibit
10.37.1 of
Registrants Form
10-QSB filed February
14, 2001 (File No.
0-8164)
|           
|           
|           
|           
|10.31.1     |  | Wayne A. Irwin Amended and
Restated Restricted Stock Award
dated as of October 30, 2000 (1)                                                                                                             |  | Incorporated by
reference to Exhibit
10.37.2 of
Registrants Form
10-QSB filed February
14, 2001 (File No.
0-8164)
|           
|           
|           
|           
|10.31.2     |  | Wayne A. Irwin Employment
Agreement dated as of April 6,
2001 (1)                                                                                                                                       |  | Incorporated by
reference to Exhibit
10.3 of Registrants
Form 8-K filed April
19, 2001 (File No.
0-8164)         
|           
|           
|           
|           
|10.31.3     |  | Advisory Agreement dated as of
May 1, 2001 between the Company
and Wayne A. Irwin (2)                                                                                                                   |  | Exhibit 10.31.3                                                                                                   
|           
|           
|           
|           
|10.32       |  | Form of Amended and Restated
Stock Award dated as of October
30, 2000 between Aperian and
certain officers                                                                                              |  | Incorporated by
reference to Exhibit
10.38 of Registrants
Form 10-QSB filed
February 14, 2001
(File No. 0-8164)  
|           
|           
|           
|           
|10.33       |  | Separation Agreement dated as of
January 16, 2001 between Aperian
and Christopher Brickler                                                                                                              |  | Incorporated by
reference to Exhibit
10.39.1 of
Registrants Form
10-QSB filed February
14, 2001 (File No.
0-8164)
|           
|           
|           
|           
|10.33.1     |  | Advisory Agreement effective
February 1, 2001 between Aperian
and Christopher Brickler                                                                                                                  |  | Incorporated by
reference to Exhibit
10.39.2 of
Registrants Form
10-QSB filed February
14, 2001 (File No.
0-8164)
|           
|           
|           
|           
|10.33       |  | Agreement and Plan of Merger,
dated as of April 6, 2001, among
Fourthstage Technologies, Inc.,
Registrant, Aperian Merger
Corporation, Inc., and the
stockholders of Fourthstage
Technologies, Inc. (1) |  | Incorporated by
reference to Exhibit
2.1 of Registrants
Form 8-K filed April
19, 2001 (File No.
0-8164)          
|           
|           
|           
|           
|10.35       |  | Registration Rights Agreement
dated as of April 6, 2001 between
Registrant and Fourthstage
Technologies, Inc. (1)                                                                                       |  | Incorporated by
reference to Exhibit
4.2 of Registrants
Form 8-K filed April
19, 2001 (File No.
0-8164)          
|           
|           
|           
|           
|10.36       |  | Employment Agreement dated as of
April 6, 2001 between Registrant
and Kevin Craig (1)                                                                                                                   |  | Incorporated by
reference to Exhibit
10.1 of Registrants
Form 8-K filed April
19, 2001 (File No.
0-8164)         
|           
|           
|           
|           
|10.36.1     |  | Termination of Employment
Agreement dated as of April 6,
2001 between Registrant and Kevin
Craig (2)                                                                                                    |  | Exhibit 10.36.1                                                                                                   
|           
|           
|           
|           
|23.1        |  | Consent of Ernst & Young LLP (2)                                                                                                                                                                        |  | Exhibit 23.1                                                                                                      



---

|(1) |  | Previously filed with the Securities and Exchange Commission and
incorporated by reference pursuant to Rule 12b-32 of the Securities
Exchange Act of 1934.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Filed herewith.                                                                                                                                           

b. Reports on Form 8-K

None.

25



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##### Table of Contents



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.

APERIAN, INC.

| |  |  |                     |  |  |  |     |                            |                 |  |  | 
| |  |  | ------------------- |  |  |  | --- | -------------------------- | --------------- |  |  | 
| |  |  | Date: June 28, 2001 |  |  |  | By: |                            | /s/ Kevin
Craig | 
| |  |  |                     |  |  |  |     |                            |                
| |  |  |                     |  |  |  |     | Kevin Craig, President and |                
|
|
|
|
| |  |  |                     |  |  |  |     | Chief Executive 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 this
Registrant and in the capacities and on the dates indicated.

|                                                  |  |                                                  |  |              
|------------------------------------------------- |  | ------------------------------------------------ |  | -------------
|SIGNATURE                                         |  | TITLE                                            |  | DATE         
|                                                  |  |                                                  |  |              
|/s/ Joe Tippens
     Joe Tippens                  |  | Director                                         |  | June 28, 2001
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|/s/ Davinder Sethi
     Davinder Sethi            |  | Director                                         |  | June 28, 2001
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|/s/ Mark Weiss
     Mark Weiss                    |  | Director                                         |  | June 28, 2001
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|/s/ David Ghermezian
     David Ghermezian        |  | Director                                         |  | June 28, 2001
|                                                 
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|/s/ Kevin Craig
     Kevin Craig                  |  | President, Chief Executive
Officer, and Director |  | June 28, 2001
|                                                 
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|                                                 
|/s/ Douglas W. Banister

     Douglas W. Banister |  | Vice President & Chief
Financial Officer         |  | June 28, 2001
|                                                 
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|/s/ Elizabeth Montoya
     Elizabeth Montoya      |  | Vice President & Controller                      |  | June 28, 2001

26



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##### Table of Contents



APERIAN, INC.




INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                            |  |  |     |  |  |  |  | 
|------------------------------------------------------------------------------------------- |  |  | --- |  |  |  |  | 
|Report of Ernst & Young LLP, Independent Auditors                                           |  |  | F-2 | 
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|Consolidated Balance Sheets as of
March 31, 2001 and 2000                                   |  |  | F-3 | 
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|Consolidated Statements of Operations for the years ended March 31, 2001 and 2000           |  |  | F-4 | 
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|Consolidated Statements of Stockholders Equity for the years ended March 31, 2001 and 2000 |  |  | F-5 | 
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|Consolidated Statements of Cash Flows for the years ended March 31, 2001 and 2000           |  |  | F-7 | 
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|Notes to Consolidated Financial Statements                                                  |  |  | F-9 | 

F-1



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##### Table of Contents






REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Aperian, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Aperian,
Inc. (the Company) as of March 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders equity, and cash flows for
the two years in the period ended March 31, 2001. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Aperian, Inc.
at March 31, 2001 and 2000 and the consolidated results of their operations and
their cash flows for each of the two years in the period ended March 31, 2001, in
conformity with accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1,
the Company has incurred recurring operating losses and has a working capital
deficiency. In addition, the Companys primary lender has asserted
that the Company has violated certain covenants of loan agreements. These conditions raise substantial doubt about the
Companys ability to continue as a going concern. Managements plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that may result from the outcome of this uncertainty.

/s/ ERNST & YOUNG LLP

May 25, 2001

F-2



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##### Table of Contents



APERIAN, INC.
Consolidated Balance Sheets

|             |                                            |                                      |                                                     |                                                                                                                                                                         |   |             |            |            |   |             |            | 
|------------ | ------------------------------------------ | ------------------------------------ | --------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------- | ---------- | ---------- | - | ----------- | ---------- | 
|             |                                            |                                      |                                                     |                                                                                                                                                                         |   | March 31   
|             |                                            |                                      |                                                     |                                                                                                                                                                         |   |            
|             |                                            | 2001                                 |                                                     | 2000                                                                                                                                                                   
|             |                                            |                                      |                                                     |                                                                                                                                                                        
|             |                                            |                                      |                                                     | ASSETS                                                                                                                                                                 
|            
|            
|            
|            
|             | Current assets                            
|             |                                            |                                      | Cash                                                |                                                                                                                                                                         | $ | 12,584,949  |            |            | $ | 48,759,109  |           
|            
|            
|            
|            
|             |                                            |                                      | Accounts receivable trade                          |                                                                                                                                                                         |   | 848,777     |            |            |   | 489,074     |           
|            
|            
|            
|            
|             |                                            |                                      | Accounts receivable affiliates                     |                                                                                                                                                                         |   |            |            |            |   | 383,197     |           
|            
|            
|            
|            
|             |                                            |                                      | Other current assets                                |                                                                                                                                                                         |   | 684,508     |            |            |   | 413,647     |           
|             |                                            |                                      |                                                     |                                                                                                                                                                         |   |             |            |           
|             |                                            |                                      |                                                     | Total current assets                                                                                                                                                    |   |             | 14,118,234 |            |   |             | 50,045,027 | 
|            
|            
|            
|            
|             | Property, plant, and equipment, net        |                                      |                                                     | 34,137,917                                                                                                                                                              |   |             |            | 10,930,428 |  
|            
|            
|            
|            
|             | Restricted cash                            |                                      |                                                     | 690,000                                                                                                                                                                 |   |             |            |           |  
|            
|            
|            
|            
|             | Other assets                               |                                      |                                                     | 504,230                                                                                                                                                                 |   |             |            | 196,158    |  
|             |                                            |                                      |                                                     |                                                                                                                                                                         |   |             |            |           
|TOTAL ASSETS |                                            | $                                    | 49,450,381                                          |                                                                                                                                                                         |   | $           | 61,171,613 |           
|             |                                            |                                      |                                                     |                                                                                                                                                                         |   |             |            |           
|             |                                            | LIABILITIES AND STOCKHOLDERS EQUITY
|            
|            
|            
|            
|             | Current liabilities                       
|             |                                            |                                      | Accounts payable trade                             |                                                                                                                                                                         | $ | 2,910,547   |            |            | $ | 6,021,000   |           
|            
|            
|            
|            
|             |                                            |                                      | Other accrued expenses                              |                                                                                                                                                                         |   | 2,914,761   |            |            |   | 584,195     |           
|            
|            
|            
|            
|             |                                            |                                      | Current maturities of notes payable                 |                                                                                                                                                                         |   | 20,025,380  |            |            |   | 504,818     |           
|            
|            
|            
|            
|             |                                            |                                      | Current portion of obligations under
capital leases |                                                                                                                                                                         |   | 3,504,193   |            |            |   | 283,751     |           
|             |                                            |                                      |                                                     |                                                                                                                                                                         |   |             |            |           
|             |                                            |                                      |                                                     | Total current liabilities                                                                                                                                               |   |             | 29,354,881 |            |   |             | 7,393,764  | 
|            
|            
|            
|            
|             | Long-term liabilities                     
|             |                                            |                                      | Notes payable                                       |                                                                                                                                                                         |   | 58,857      |            |            |   |            |           
|            
|            
|            
|            
|             |                                            |                                      | Obligations under capital leases                    |                                                                                                                                                                         |   | 8,181,140   |            |            |   | 826,066     |           
|            
|            
|            
|            
|             |                                            |                                      | Deferred rent                                       |                                                                                                                                                                         |   | 1,414,182   |            |            |   | 709,500     |           
|             |                                            |                                      |                                                     |                                                                                                                                                                         |   |             |            |           
|             |                                            |                                      |                                                     | Total long-term liabilities                                                                                                                                             |   |             | 9,654,179  |            |   |             | 1,535,566  | 
|            
|            
|            
|            
|             | Commitments and Contingencies              |                                      |                                                     |                                                                                                                                                                        |   |             |            |           |  
|             |                                            |                                      |                                                     |                                                                                                                                                                         |   |             |            |           
|             |                                            |                                      | Total liabilities                                   |                                                                                                                                                                         |   | 39,009,060  |            |            |   | 8,929,330   |           
|             |                                            |                                      |                                                     |                                                                                                                                                                         |   |             |            |           
|             | Stockholders equity:                     
|            
|            
|            
|            
|             |                                            |                                      | Convertible preferred stock Series E;              
|             |                                            |                                      |                                                     | $30.00 stated value;
157,500 authorized; 0 shares in
2001 and 1,000 shares
in 2000 issued and outstanding                                                               |   |             |           |            |   |             | 30,000     | 
|            
|            
|            
|            
|             |                                            |                                      | Common stock at $0.01 par value;                   
|             |                                            |                                      |                                                     | 75,000,000 shares
authorized; 13,559,953 shares in
2001 and 12,165,929
shares in 2000 (excluding 1,696
shares in 2001 and
2000 held in treasury) issued and
outstanding |   |             | 135,600    |            |   |             | 121,659    | 
|            
|            
|            
|            
|             |                                            |                                      | Shareholder receivable                              |                                                                                                                                                                         |   |            |            |            |   | (500,000    | )         
|            
|            
|            
|            
|             |                                            |                                      | Deferred compensation                               |                                                                                                                                                                         |   | (2,816,607  | )          |            |   | (238,312    | )         
|            
|            
|            
|            
|             |                                            |                                      | Additional paid-in-capital                          |                                                                                                                                                                         |   | 109,915,809 |            |            |   | 98,816,512  |           
|            
|            
|            
|            
|             |                                            |                                      | Accumulated deficit                                 |                                                                                                                                                                         |   | (96,793,481 | )          |            |   | (45,987,576 | )         
|             |                                            |                                      |                                                     |                                                                                                                                                                         |   |             |            |           
|             |                                            |                                      |                                                     | Total stockholders equity                                                                                                                                              |   |             | 10,441,321 |            |   |             | 52,242,283 | 
|             |                                            |                                      |                                                     |                                                                                                                                                                         |   |             |            |           
|             | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                                      | $                                                   | 49,450,381                                                                                                                                                              |   |             | $          | 61,171,613 |  
|             |                                            |                                      |                                                     |                                                                                                                                                                         |   |             |            |           

See accompanying notes.

F-3



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##### Table of Contents



APERIAN, INC.
Consolidated Statements of Operations

|                                              |                                                       |      |                     |            |  |   |             |            | 
|--------------------------------------------- | ----------------------------------------------------- | ---- | ------------------- | ---------- |  | - | ----------- | ---------- | 
|                                              |                                                       |      | Year Ended March 31
|                                              |                                                       |      |                    
|                                              |                                                       | 2001 |                     | 2000      
|                                              |                                                       |      |                     |           
|Revenues                                      |                                                       | $    | 5,816,685           |            |  | $ | 1,752,012   |           
|                                             
|                                             
|                                             
|                                             
|Cost of goods sold                            |                                                       |      | 13,240,924          |            |  |   | 1,703,414   |           
|                                              |                                                       |      |                     |            |  |   |             |           
|                                              | Gross (deficit) margin                                |      | (7,424,239          | )          |  |   | 48,598      |           
|                                             
|                                             
|                                             
|                                             
|Selling, general and administrative
expenses:
|                                             
|                                             
|                                             
|                                             
|                                              | Sales and marketing                                   |      | 9,281,640           |            |  |   | 4,938,140   |           
|                                             
|                                             
|                                             
|                                             
|                                              | General and administrative                            |      | 26,469,778          |            |  |   | 14,128,039  |           
|                                             
|                                             
|                                             
|                                             
|                                              | Goodwill amortization                                 |      | 836,152             |            |  |   |            |           
|                                             
|                                             
|                                             
|                                             
|                                              | Goodwill impairment and other                         |      | 6,735,494           |            |  |   |            |           
|                                              |                                                       |      |                     |            |  |   |             |           
|                                              | Total selling, general and administrative expenses    |      |                     | 43,323,064 |  |   |             | 19,066,179 | 
|                                              |                                                       |      |                     |            |  |   |             |           
|Operating loss                                |                                                       |      | (50,747,303         | )          |  |   | (19,017,581 | )         
|                                             
|                                             
|                                             
|                                             
|Interest income                               |                                                       |      | 1,677,842           |            |  |   |            |           
|                                             
|                                             
|                                             
|                                             
|Interest expense                              |                                                       |      | (1,736,444          | )          |  |   | (2,990,232  | )         
|                                              |                                                       |      |                     |            |  |   |             |           
|Net loss                                      |                                                       | $    | (50,805,905         | )          |  | $ | (22,007,813 | )         
|                                              |                                                       |      |                     |            |  |   |             |           
|Preferred stock dividends and stock discounts |                                                       |      |                    |            |  |   | (2,025,527  | )         
|                                              |                                                       |      |                     |            |  |   |             |           
|Net loss to common stockholders               |                                                       | $    | (50,805,905         |            |  | $ | (24,033,340 | )         
|                                              |                                                       |      |                     |            |  |   |             |           
|                                              | Basic and diluted net loss per share                  | $    | (3.96               | )          |  | $ | (3.03       | )         
|                                              |                                                       |      |                     |            |  |   |             |           
|                                              | Basic and diluted weighted average shares outstanding |      | 12,831,319          |            |  |   | 7,942,719   |           
|                                              |                                                       |      |                     |            |  |   |             |           

See accompanying notes.

F-4



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##### Table of Contents



APERIAN, INC.
Consolidated Statements of Stockholders Equity

|                                                                                 |  |           |          |           |  |        |            |        |  |  |          |   |  |   |            |  
|-------------------------------------------------------------------------------- |  | --------- | -------- | --------- |  | ------ | ---------- | ------ |  |  | -------- | - |  | - | ---------- | -
|                                                                                 |  | Preferred |          | Preferred
|                                                                                 |  | Series B  |          | Series D 
|                                                                                 |  |           |          |          
|                                                                                 |  | Shares    |          | Amount    |  | Shares |            | Amount
|                                                                                 |  |           |          |           |  |        |            |       
|Balance at March 31, 1999                                                        |  |           | 400,000  |           |  | $      | 2,120,000  |        |  |  | 196,340  |   |  | $ | 2,081,204  |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Preferred stock issuance                                                         |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Preferred stock conversion to common stock                                       |  |           | (400,000 | )         |  |        | (2,120,000 | )      |  |  | (196,340 | ) |  |   | (2,081,204 | )
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Issuance of common stock                                                         |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock issued for convertible debt                                         |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Beneficial conversion discount                                                   |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock issued as preferred
stock dividends                                 |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock and stock options issued as
compensation to employees               |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock, stock options and warrants
issued as compensation to non-employees |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock warrants issued in
connection with debt                             |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock options exercised                                                   |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock warrants exercised                                                  |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Treasury stock                                                                   |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Net loss                                                                         |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                 |  |           |          |           |  |        |            |        |  |  |          |   |  |   |            |  
|Balance at March 31, 2000                                                        |  |           |         |           |  | $      |           |        |  |  |         |   |  | $ |           |  
|                                                                                 |  |           |          |           |  |        |            |        |  |  |          |   |  |   |            |  
|Amortization of deferred compensation                                            |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Preferred stock conversion to common stock                                       |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock options exercised                                                   |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Issuance of restricted common stock                                             
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Issuance of common stock                                                         |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock issued as compensation to
non-employees                             |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock warrants exercised                                                  |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock issued in acquisition of
OuterNet                                   |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Repayment of shareholder receivable                                              |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Purchase of fractional shares                                                    |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Net loss                                                                         |  |           |         |           |  |        |           |        |  |  |         |   |  |   |           |  
|                                                                                 |  |           |          |           |  |        |            |        |  |  |          |   |  |   |            |  
|Balance at March 31, 2001                                                        |  |           |         |           |  | $      |           |        |  |  |         |   |  | $ |           |  
|                                                                                 |  |           |          |           |  |        |            |        |  |  |          |   |  |   |            |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                 |  |           |          |                 |  |        |            |        |  |  |  |         |   |  |  |  |   |          |   | 
|-------------------------------------------------------------------------------- |  | --------- | -------- | --------------- |  | ------ | ---------- | ------ |  |  |  | ------- | - |  |  |  | - | -------- | - | 
|                                                                                 |  | Preferred |          | Preferred Stock
|                                                                                 |  | Series E  |          |                
|                                                                                 |  |           |          | Subscribed     
|                                                                                 |  |           |          |                 |  |        |            |        |  | 
|                                                                                 |  | Shares    |          | Amount          |  | Shares |            | Amount
|                                                                                 |  |           |          |                 |  |        |            |       
|Balance at March 31, 1999                                                        |  |           | 146,252  |                 |  | $      | 4,387,560  |        |  |  |  | (20,000 | ) |  |  |  | $ | (600,000 | )
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Preferred stock issuance                                                         |  |           |         |                 |  |        |           |        |  |  |  | 20,000  |   |  |  |  |   | 600,000  |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Preferred stock conversion to common stock                                       |  |           | (145,252 | )               |  |        | (4,357,560 | )      |  |  |  |        |   |  |  |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Issuance of common stock                                                         |  |           |         |                 |  |        |           |        |  |  |  |        |   |  |  |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock issued for convertible debt                                         |  |           |         |                 |  |        |           |        |  |  |  |        |   |  |  |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Beneficial conversion discount                                                   |  |           |         |                 |  |        |           |        |  |  |  |        |   |  |  |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock issued as preferred
stock dividends                                 |  |           |         |                 |  |        |           |        |  |  |  |        |   |  |  |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock and stock options issued as
compensation to employees               |  |           |         |                 |  |        |           |        |  |  |  |        |   |  |  |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock, stock options and warrants
issued as compensation to non-employees |  |           |         |                 |  |        |           |        |  |  |  |        |   |  |  |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock warrants issued in
connection with debt                             |  |           |         |                 |  |        |           |        |  |  |  |        |   |  |  |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock options exercised                                                   |  |           |         |                 |  |        |           |        |  |  |  |        |   |  |  |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock warrants exercised                                                  |  |           |         |                 |  |        |           |        |  |  |  |        |   |  |  |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Treasury stock                                                                   |  |           |         |                 |  |        |           |        |  |  |  |        |   |  |  |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Net loss                                                                         |  |           |         |                 |  |        |           |        |  |  |  |        |   |  |  |  |   |         |  
|                                                                                 |  |           |          |                 |  |        |            |        |  |  |  |         |   |  |  |  |   |          |  
|Balance at March 31, 2000                                                        |  |           | 1,000    |                 |  | $      | 30,000     |        |  |  |  |        |   |  |  |  | $ |         |  
|                                                                                 |  |           |          |                 |  |        |            |        |  |  |  |         |   |  |  |  |   |          |  
|Amortization of deferred compensation                                            |  |           |         |                 |  |        |           |        |  |  |  |        |   |  |  |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Preferred stock conversion to common stock                                       |  |           | (1,000   | )               |  |        | (30,000    | )      |  |  |  |        |   |  |  |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock options exercised                                                   |  |           |         |                 |  |        |           |        |  |  |  |        |   |  |  |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Issuance of restricted common stock                                             
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Issuance of common stock                                                         |  |           |         |                 |  |        |           |        |  |  |  |        |   |  |  |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock issued as compensation to
non-employees                             |  |           |         |                 |  |        |           |        |  |  |  |        |   |  |  |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock warrants exercised                                                  |  |           |         |                 |  |        |           |        |  |  |  |        |   |  |  |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock issued in acquisition of
OuterNet                                   |  |           |         |                 |  |        |           |        |  |  |  |        |   |  |  |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Repayment of shareholder receivable                                              |  |           |         |                 |  |        |           |        |  |  |  |        |   |  |  |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Purchase of fractional shares                                                    |  |           |         |                 |  |        |           |        |  |  |  |        |   |  |  |  |   |         |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Net loss                                                                         |  |           |         |                 |  |        |           |        |  |  |  |        |   |  |  |  |   |         |  
|                                                                                 |  |           |          |                 |  |        |            |        |  |  |  |         |   |  |  |  |   |          |  
|Balance at March 31, 2001                                                        |  |           |         |                 |  | $      |           |        |  |  |  |        |   |  |  |  | $ |         |  
|                                                                                 |  |           |          |                 |  |        |            |        |  |  |  |         |   |  |  |  |   |          |  

See accompanying notes.

F-5



---



##### Table of Contents



APERIAN, INC.
Consolidated Statements of Stockholders Equity (Continued)

|                                                                                 |  |              |            |          |  |              |         |   |  |   |            |  
|-------------------------------------------------------------------------------- |  | ------------ | ---------- | -------- |  | ------------ | ------- | - |  | - | ---------- | -
|                                                                                 |  | Common Stock |            | Deferred
|                                                                                 |  | Shares       |            | Amount   |  | Compensation
|                                                                                 |  |              |            |          |  |             
|Balance at March 31, 1999                                                        |  |              | 4,872,874  |          |  | $            | 48,728  |   |  | $ |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Preferred stock issuance                                                         |  |              |           |          |  |              |        |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Preferred stock conversion to common stock                                       |  |              | 2,471,973  |          |  |              | 24,720  |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Issuance of common stock                                                         |  |              | 3,570,826  |          |  |              | 35,708  |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock issued for convertible debt                                         |  |              | 112,066    |          |  |              | 1,121   |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Beneficial conversion discount                                                   |  |              |           |          |  |              |        |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock issued as preferred
stock dividends                                 |  |              | 4,600      |          |  |              | 46      |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock and stock options issued as
compensation to employees               |  |              | 5,475      |          |  |              | 55      |   |  |   | (238,312   | )
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock, stock options and warrants
issued as compensation to non-employees |  |              | 75,067     |          |  |              | 751     |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock warrants issued in
connection with debt                             |  |              |           |          |  |              |        |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock options exercised                                                   |  |              | 62,617     |          |  |              | 626     |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock warrants exercised                                                  |  |              | 992,217    |          |  |              | 9,922   |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Treasury stock                                                                   |  |              | (1,696     | )        |  |              | (17     | ) |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Net loss                                                                         |  |              |           |          |  |              |        |   |  |   |           |  
|                                                                                 |  |              |            |          |  |              |         |   |  |   |            |  
|Balance at March 31, 2000                                                        |  |              | 12,165,929 |          |  | $            | 121,659 |   |  | $ | (238,312   | )
|                                                                                 |  |              |            |          |  |              |         |   |  |   |            |  
|Amortization of deferred compensation                                            |  |              |           |          |  |              |        |   |  |   | 238,312    |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Preferred stock conversion to common stock                                       |  |              | 3,333      |          |  |              | 33      |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock options exercised                                                   |  |              | 16,050     |          |  |              | 161     |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Issuance of restricted common stock                                              |  |              | 986,000    |          |  |              | 9,860   |   |  |   | (2,816,607 | )
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Issuance of common stock                                                         |  |              | 14,285     |          |  |              | 143     |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock issued as compensation to
non-employees                             |  |              | 4,055      |          |  |              | 41      |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock warrants exercised                                                  |  |              | 40,000     |          |  |              | 400     |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock issued in acquisition of
OuterNet                                   |  |              | 333,333    |          |  |              | 3,333   |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Repayment of shareholder receivable                                              |  |              |           |          |  |              |        |   |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Purchase of fractional shares                                                    |  |              | (3,032     | )        |  |              | (30     | ) |  |   |           |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Net loss                                                                         |  |              |           |          |  |              |        |   |  |   |           |  
|                                                                                 |  |              |            |          |  |              |         |   |  |   |            |  
|Balance at March 31, 2001                                                        |  |              | 13,559,953 |          |  | $            | 135,600 |   |  | $ | (2,816,607 | )
|                                                                                 |  |              |            |          |  |              |         |   |  |   |            |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                 |  |             |          |         |  |             |             |               |  |   |             |   |  |   |             |  
|-------------------------------------------------------------------------------- |  | ----------- | -------- | ------- |  | ----------- | ----------- | ------------- |  | - | ----------- | - |  | - | ----------- | -
|                                                                                 |  |             |          |         |  | Additional 
|                                                                                 |  | Shareholder |          | Paid-In |  | Accumulated |             | Stockholders'
|                                                                                 |  | Receivable  |          | Capital |  | Deficit     |             | Equity       
|                                                                                 |  |             |          |         |  |             |             |              
|Balance at March 31, 1999                                                        |  | $           |         |         |  | $           | 13,395,431  |               |  | $ | (21,954,236 | ) |  | $ | (521,313    | )
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Preferred stock issuance                                                         |  |             |         |         |  |             | 526,800     |               |  |   | (600,000    | ) |  |   | 526,800     |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Preferred stock conversion to common stock                                       |  |             |         |         |  |             | 8,534,044   |               |  |   |            |   |  |   |            |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Issuance of common stock                                                         |  |             |         |         |  |             | 56,420,857  |               |  |   |            |   |  |   | 56,456,565  |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock issued for convertible debt                                         |  |             |         |         |  |             | 2,016,067   |               |  |   |            |   |  |   | 2,017,188   |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Beneficial conversion discount                                                   |  |             |         |         |  |             | 1,344,188   |               |  |   | (1,344,188  | ) |  |   |            |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock issued as preferred
stock dividends                                 |  |             |         |         |  |             | 81,293      |               |  |   | (81,339     | ) |  |   |            |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock and stock options issued as
compensation to employees               |  |             |         |         |  |             | 5,139,397   |               |  |   |            |   |  |   | 4,901,140   |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock, stock options and warrants
issued as compensation to non-employees |  |             |         |         |  |             | 3,772,159   |               |  |   |            |   |  |   | 3,772,910   |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock warrants issued in
connection with debt                             |  |             |         |         |  |             | 2,847,107   |               |  |   |            |   |  |   | 2,847,107   |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock options exercised                                                   |  |             | (500,000 | )       |  |             | 982,607     |               |  |   |            |   |  |   | 483,233     |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock warrants exercised                                                  |  |             |         |         |  |             | 3,924,943   |               |  |   |            |   |  |   | 3,934,865   |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Treasury stock                                                                   |  |             |         |         |  |             | (168,382    | )             |  |   |            |   |  |   | (168,399    | )
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Net loss                                                                         |  |             |         |         |  |             |            |               |  |   | (22,007,813 | ) |  |   | (22,007,813 | )
|                                                                                 |  |             |          |         |  |             |             |               |  |   |             |   |  |   |             |  
|Balance at March 31, 2000                                                        |  | $           | (500,000 | )       |  | $           | 98,816,512  |               |  | $ | (45,987,576 | ) |  | $ | 52,242,283  |  
|                                                                                 |  |             |          |         |  |             |             |               |  |   |             |   |  |   |             |  
|Amortization of deferred compensation                                            |  |             |         |         |  |             |            |               |  |   |            |   |  |   | 238,312     |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Preferred stock conversion to common stock                                       |  |             |         |         |  |             | 29,967      |               |  |   |            |   |  |   |            |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock options exercised                                                   |  |             |         |         |  |             | 228,686     |               |  |   |            |   |  |   | 228,847     |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Issuance of restricted common stock                                              |  |             |         |         |  |             | 3,106,400   |               |  |   |            |   |  |   | 299,653     |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Issuance of common stock                                                         |  |             |         |         |  |             | 49,857      |               |  |   |            |   |  |   | 50,000      |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock issued as compensation to
non-employees                             |  |             |         |         |  |             | 44,960      |               |  |   |            |   |  |   | 45,001      |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock warrants exercised                                                  |  |             |         |         |  |             | 527,600     |               |  |   |            |   |  |   | 528,000     |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock issued in acquisition of
OuterNet                                   |  |             |         |         |  |             | 7,116,667   |               |  |   |            |   |  |   | 7,120,000   |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Repayment of shareholder receivable                                              |  |             | 500,000  |         |  |             |            |               |  |   |            |   |  |   | 500,000     |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Purchase of fractional shares                                                    |  |             |         |         |  |             | (4,840      | )             |  |   |            |   |  |   | (4,870      | )
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Net loss                                                                         |  |             |         |         |  |             |            |               |  |   | (50,805,905 | ) |  |   | (50,805,905 | )
|                                                                                 |  |             |          |         |  |             |             |               |  |   |             |   |  |   |             |  
|Balance at March 31, 2001                                                        |  | $           |         |         |  | $           | 109,915,809 |               |  | $ | (96,793,481 | ) |  | $ | 10,441,321  |  
|                                                                                 |  |             |          |         |  |             |             |               |  |   |             |   |  |   |             |  

See accompanying notes.

F-6



---



##### Table of Contents



APERIAN, INC.
Consolidated Statements of Cash Flows

|                                                 |                                                                              |                                                                              |            |                                           |             |                     |             |             |            |   |            |  
|------------------------------------------------ | ---------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ---------- | ----------------------------------------- | ----------- | ------------------- | ----------- | ----------- | ---------- | - | ---------- | -
|                                                 |                                                                              |                                                                              |            |                                           |             | Year Ended March 31
|                                                 |                                                                              |                                                                              |            |                                           |             | 2001                | 2000        |            
|                                                 |                                                                              |                                                                              |            |                                           |             |                     |             |            
|Cash flows from operating activities:           
|                                                
|                                                
|                                                
|                                                
|                                                 | Net loss                                                                     |                                                                              | $          | (50,805,905                               | )           |                     | $           | (22,007,813 | )         
|                                                
|                                                
|                                                
|                                                
|                                                 | Adjustments to reconcile net loss to net cash used in operating
activities: 
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Depreciation and amortization expense                                        |            |                                           | 4,448,363   |                     |             |             | 559,425    |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Impairment of goodwill                                                       |            |                                           | 6,790,602   |                     |             |             |           |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Amortization of debt discount                                                |            |                                           | 117,942     |                     |             |             | 2,991,279  |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Common stock and options issued for compensation to employees                |            |                                           | 537,965     |                     |             |             | 4,901,140  |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Common stock, options, and warrants issued for compensation to
non-employees |            |                                           | 45,001      |                     |             |             | 3,772,910  |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Write-down of inventory                                                      |            |                                           | 488,060     |                     |             |             |           |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Common stock issued as interest upon conversion                              |            |                                           |            |                     |             |             | 17,188     |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Loss on disposal of property                                                 |            |                                           | 1,049,742   |                     |             |             | 174,398    |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Changes in operating assets and liabilities, net of effects of
acquisitions:
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Accounts receivable trade                                                   |            |                                           | (199,213    | )                   |             |             | 86,156     |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Accounts receivable affiliates                                              |            |                                           | 383,197     |                     |             |             | (383,197   | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Other current assets                                                         |            |                                           | (675,423    | )                   |             |             | (276,432   | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Restricted cash                                                              |            |                                           | (690,000    | )                   |             |             |           |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Other assets                                                                 |            |                                           | (245,378    | )                   |             |             | (196,158   | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Accounts payable trade                                                      |            |                                           | (4,038,338  | )                   |             |             | 4,247,789  |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Deferred rent                                                                |            |                                           | 704,682     |                     |             |             | 517,216    |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Other accrued expenses                                                       |            |                                           | 1,721,905   |                     |             |             | 440,710    |  
|                                                 |                                                                              |                                                                              |            |                                           |             |                     |             |            
|                                                 |                                                                              |                                                                              |            | Net cash used in operating activities     |             |                     | (40,366,798 | )           |            |   | (5,155,389 | )
|                                                 |                                                                              |                                                                              |            |                                           |             |                     |             |            
|Cash flows from investing activities:           
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Purchase of property, plant, and equipment                                   |            |                                           | (15,278,041 | )                   |             |             | (8,990,685 | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Cash acquired in acquisitions                                                |            |                                           | 752         |                     |             |             |           |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Proceeds from sale of property, plant, and equipment                         |            |                                           | 15,499      |                     |             |             | 23,500     |  
|                                                 |                                                                              |                                                                              |            |                                           |             |                     |             |            
|                                                 |                                                                              |                                                                              |            | Net cash used in investing activities     |             |                     | (15,261,790 | )           |            |   | (8,967,185 | )
|                                                 |                                                                              |                                                                              |            |                                           |             |                     |             |            
|Cash flows from financing activities:           
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Net draws (payments) on bank line of credit                                  |            |                                           |            |                     |             |             | (200,000   | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Payments on notes payable                                                    |            |                                           | (606,500    | )                   |             |             | (1,968,425 | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Repayment of shareholder receivable                                          |            |                                           | 500,000     |                     |             |             |           |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Payments on obligations under capital leases                                 |            |                                           | (1,241,049  | )                   |             |             | (248,757   | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Proceeds private placement of preferred stock, net of
offering costs        |            |                                           |            |                     |             |             | 526,800    |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Proceeds issuance of common stock, net                                      |            |                                           | 50,000      |                     |             |             | 56,456,565 |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Proceeds exercise of stock options                                          |            |                                           | 228,847     |                     |             |             | 483,233    |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Proceeds exercise of warrants                                               |            |                                           | 528,000     |                     |             |             | 3,934,865  |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Proceeds notes payable                                                      |            |                                           | 20,000,000  |                     |             |             | 4,057,330  |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Purchase of fractional shares                                                |            |                                           | (4,870      | )                   |             |             |           |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                              | Repurchase of common stock                                                   |            |                                           |            |                     |             |             | (168,399   | )
|                                                 |                                                                              |                                                                              |            |                                           |             |                     |             |            
|                                                 |                                                                              |                                                                              |            | Net cash provided by financing activities |             |                     | 19,454,428  |             |            |   | 62,873,212 |  
|                                                 |                                                                              |                                                                              |            |                                           |             |                     |             |            
|                                                 |                                                                              |                                                                              |            | Net change in cash and cash equivalents   |             |                     | (36,174,160 | )           |            |   | 48,750,638 |  
|                                                
|                                                
|                                                
|                                                
|Cash and cash equivalents at beginning of period |                                                                              |                                                                              | 48,759,109 |                                           |             |                     | 8,471       |            
|                                                 |                                                                              |                                                                              |            |                                           |             |                     |             |            
|Cash and cash equivalents at end of period       |                                                                              | $                                                                            | 12,584,949 |                                           |             | $                   | 48,759,109  |            
|                                                 |                                                                              |                                                                              |            |                                           |             |                     |             |            

See accompanying notes.

F-7



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##### Table of Contents



APERIAN, INC.
Consolidated Statements of Cash Flows (continued)

|                                                                      |                                             |                           |           |                     |   |      |         |           |        | 
|--------------------------------------------------------------------- | ------------------------------------------- | ------------------------- | --------- | ------------------- | - | ---- | ------- | --------- | ------ | 
|                                                                      |                                             |                           |           | Year Ended March 31 |  
|                                                                      |                                             |                           |           | 2001                |   | 2000 |        
|                                                                      |                                             |                           |           |                     |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Supplemental disclosure:                                             
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Cash paid during the period for:           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Interest                                                              |                                             | $                         | 1,131,642 |                     |   | $    | 339,439 |          
|                                                                      |                                             |                           |           |                     |   |      |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Supplemental schedule of non-cash investing and financing activities:
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Debt issuance fees                          |                           | $         |                    |   |      | $       | 2,847,107 |       
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Common stock issued for:                   
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                             | Preferred stock dividends |           |                     |  |      |         |           | 81,339 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Discount on preferred stock issued          |                           |           |                    |   |      |         | 600,000   |       
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Discount on common stock issued             |                           |           |                    |   |      |         | 1,344,188 |       
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Purchase of equipment with long-term leases |                           |           | 11,557,135          |   |      |         | 541,726   |       

See accompanying notes.

F-8



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##### Table of Contents



APERIAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2001 AND 2000

1. BUSINESS

Aperian, Inc. and Subsidiaries or (the Company) is an Austin, Texas
based technology corporation initially formed to provide technology services to
governmental and commercial entities, primarily in Texas. The Company is a
business solutions technology integrator, offering infrastructure design and
implementation services. The Companys business model has changed to that of a
broadband Internet infrastructure provider including web-hosting and
co-location services.

During September 2000, the Company changed its name from MSI Holdings, Inc.
to Aperian, Inc.

The Company has been successful in completing several rounds of equity
financing with its most recent rounds totaling approximately $56,500,000 during
fiscal year 2000. However, the Company has incurred substantial losses and
negative cash flows from operations, and the Company may not be in compliance
with certain covenants of loan agreements with its financing source.
Management expects operating losses and negative cash flows to continue for the
foreseeable future until it is able to sell its data center
facilities.

These conditions
raise substantial doubt about the Companys ability to continue as a
going concern. As discussed in Note 12, on April 9, 2001, the Company consummanted a merger with
Fourthstage Technologies, Inc. (Fourthstage). Subsequent to the merger the
Company decided to discontinue its current business model and adopt the
equipment sales and professional services model of Fourthstage. On May 10, 2001 the
Company announced its intention to sell its Internet data centers thereby significantly decreasing its cash obligations. In addition,
the Company may seek to raise additional funds through public or
private financing, strategic relationships and other
arrangements.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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

Principles of Consolidation

The consolidated financial statements include the accounts and
transactions of the Company and its wholly owned subsidiaries, from their
respective dates of purchase. All significant intercompany accounts and
transactions have been eliminated.

Cash Equivalents

Cash and cash equivalents consist primarily of cash deposits and funds
invested in short-term interest-bearing accounts. The Company considers all
highly liquid investments purchased with initial maturities of three months or
less to be cash equivalents.

Concentration of Credit Risks and Significant Customers

Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and trade accounts
receivable. Many of the Companys customers are in the technology sector. The
Company generally does not require collateral from its customers. Historically,
the Company has experienced significant losses related to receivables from
groups of customers in the industry labeled dot.coms.

No customers accounted for greater than 10% of the Companys total
revenues for the year ended March 31, 2001, and two customers accounted for 18%
and 13% of the Companys total revenues for the year ended March 31, 2000.

F-9



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##### Table of Contents



Fair Value of
Financial Instruments

The carrying amounts of the Companys financial instruments, including
cash and cash equivalents, trade receivables and payables, accrued expenses and
notes payable, approximate fair values.

Property, Plant and Equipment

Property, plant and equipment, including items acquired under capital
lease arrangements, are recorded at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the related assets,
typically five years. Amortization of leasehold improvements is provided using
the straight-line basis over the shorter of the term of the related lease, or
the useful life of the leasehold improvements, which varies from 5 to 20 years.

The following table details the Companys property, plant and equipment at
March 31, 2001 and 2000, respectively:

|                                               |  |                |            |                |  |   |            |  
|---------------------------------------------- |  | -------------- | ---------- | -------------- |  | - | ---------- | -
|                                               |  | March 31, 2001 |            | March 31, 2000
|                                               |  |                |            |               
|Equipment, furniture and fixtures              |  | $              | 4,540,962  |                |  | $ | 3,855,093  |  
|                                              
|                                              
|                                              
|                                              
|Software                                       |  |                | 4,277,177  |                |  |   | 140,579    |  
|                                              
|                                              
|                                              
|                                              
|Equipment to be leased                         |  |                | 6,215,654  |                |  |   |           |  
|                                              
|                                              
|                                              
|                                              
|POP infrastructure                             |  |                | 3,457,433  |                |  |   |           |  
|                                              
|                                              
|                                              
|                                              
|Vehicles                                       |  |                | 118,648    |                |  |   | 245,747    |  
|                                              
|                                              
|                                              
|                                              
|Leasehold improvements                         |  |                | 19,810,490 |                |  |   | 7,828,173  |  
|                                               |  |                |            |                |  |   |            |  
|                                               |  |                | 38,420,364 |                |  |   | 12,069,592 |  
|                                              
|                                              
|                                              
|                                              
|Less-accumulated depreciation and amortization |  |                | (4,282,447 | )              |  |   | (1,139,164 | )
|                                               |  |                |            |                |  |   |            |  
|Property, plant and equipment, net             |  | $              | 34,137,917 |                |  | $ | 10,930,428 |  
|                                               |  |                |            |                |  |   |            |  

Impairment of Long-Lived Assets

The Company
periodically reviews the carrying amounts of property and equipment,
identifiable intangible assets and excess of cost over fair value of
net assets acquired or liabilities assumed, both purchased in the
normal course of business and acquired through business combinations,
to determine whether current events or circumstances, as defined in
Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, warrant adjustments to such carrying
amounts. In reviewing the carrying values of property and equipment
and identifiable intangible assets, the Company considers, among
other things, the future cash inflows expected to result from the use
of the asset and its eventual disposition less the future cash
outflows expected to be necessary to obtain those inflows.

The Company
periodically performs reviews to evaluate the recoverability of excess
of cost over fair value of net liabilities assumed or assets
acquired and takes into account events or circumstances that warrant
revised estimates of useful lives or that indicate that an impairment
exists. In assessing goodwill at an enterprise level, the Company
employs the market value approach. This approach compares the
Companys consolidated net book value to the then estimated market
capitalization at the period under review. In the event that the
Companys then net book value exceeds the estimated market
capitalization, and this condition is considered to be permanent in
nature, the excess carrying amount of goodwill is charged to
earnings in the current period.

At March 31, 2001,
the Companys net book value exceeded the estimated market
capitalization. Accordingly, the Company recorded an impairment
charge to fully write off goodwill of approximately $6,791,000. Also,
the Company wrote down excess/obsolete inventory of approximately
$488,000 for the year ended March 31, 2001.

Advertising Costs

The Company expenses advertising costs as incurred. These expenses were
$4,437,849 and $474,523 for the years ended March 31, 2001 and 2000,
respectively.

Stock-Based Compensation

SFAS No. 123, Accounting for Stock-Based Compensation,prescribes
accounting and reporting standards for all stock-based compensation plans,
including employee stock options. As allowed by SFAS No. 123, the Company has
elected to continue to account for its employee stock-based compensation in
accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting
for Stock Issued to Employees.

The Financial Accounting Standards Board (FASB) issued Interpretation
No. 44, Accounting for Certain Transactions Involving Stock Compensation, (the
Interpretation). The Interpretation provides guidance related to the
implementation of APB No. 25. The Interpretation is to be applied
prospectively to all new awards, modifications to outstanding awards and
changes in employee status on or after July 1, 2000. For changes made after
December 15, 1998 to awards that affect exercise prices of awards, the Company
must prospectively account for the impact of those changes. Adoption of the
Interpretation did not have a material impact on the Companys financial
condition or results of operations.

F-10



---



##### Table of Contents



Revenue Recognition

The Companys revenues consist of: (i) monthly fees from data center
services, which include networking, storage, content distribution and caching,
security, performance measurement, monitoring and testing, managed and web
hosting, web application management, and related installation services; (ii)
fees for professional consulting services; and (iii) fees from the sale or
rental of equipment.

The Company performs all services or delivers all products prior to
recognizing revenue. Monthly services are considered to be performed ratably
over the term of the arrangement. If it is determined during the arrangement
that collectibility is not reasonably assured, revenue is recognized on a cash
basis. Equipment is considered delivered upon delivery to a customers
designated location.

The Company has determined that professional consulting services represent
a separate earnings process based on the following factors: (i) the services
are not essential to the functionality of other elements of the arrangements,
(ii) the services can and have been sold separately both to existing Aperian
data center customers and non-Aperian data center customers, and (iii) similar
services can and have been performed by the customer or other vendors. Revenue
is allocated to professional consulting services based on reliable, verifiable
and objectively determinable fair value, which is based on fees received when
comparable services are sold separately. Revenue from professional consulting
services is recognized when the services are complete.

The Company has determined that the sale or rental of equipment represents
a separate earnings process based on the following factors: (i) the equipment
can and has been sold or rented separately, (ii) the equipment can be purchased
from other vendors, and (iii) the functionality of the equipment is not
affected by any undelivered element. Revenue is allocated to equipment sale or
rental based on reliable, verifiable and objectively determinable fair value,
which is based on fees received when comparable equipment is sold or rented
separately.

In December 1999, the Securities and Exchange Commission (SEC) staff
released Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in
Financial Statements, which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements. Management believes the
Companys current revenue recognition policies are materially consistent with
this statement.

Income Taxes

The Company accounts for income taxes under the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes. Under the liability
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.

Net Loss Per Share

Basic net loss per share is computed by dividing net loss available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted net loss per share has not been presented as the
effect of the assumed exercise of stock options, warrants and contingently
issued shares is antidilutive.

Recent Issued Accounting Standards

In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities  Deferral of the Effective Date of FASB
Statement No. 133, which deferred implementation of SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activitiesuntil fiscal quarters of
fiscal years beginning after June 15, 2000.

SFAS No. 133 requires all derivatives to be carried on the balance sheet
at fair value. Changes in the fair value of derivatives must be recognized in
the Companys Consolidated Statement of Operations when they occur; however
there is an exception for derivatives that qualify as hedges as defined by SFAS
No. 133. If a derivative qualifies as a hedge, a company can elect to use
hedge accounting to eliminate or reduce the income statement volatility that
would arise from reporting changes in a derivatives fair value.

F-11



---



##### Table of Contents



In June 2000, the FASB issued SFAS No. 138, Accounting for Derivative
Instruments and Hedging Activities  an amendment of FASB Statement No. 133.
SFAS No. 138 adds to the guidance related to accounting for derivative
instruments and hedging activities.

This statement should be adopted concurrently with SFAS 133. The adoption
of both SFAS Nos. 133 and 138 is not expected to materially impact the
Companys financial results.

Reclassifications

Certain reclassifications have been made to the prior year balances in
order to conform to current year presentation.

3. ACQUISITIONS

In July 2000, the Company, through its wholly owned subsidiary Aperian
Acquisition Corporation, purchased all of the outstanding common stock of
OuterNet Connection Strategies, Inc. (OuterNet). OuterNet is a professional
services firm specializing in Internet and network services.

The acquisition was accounted for as a purchase and, accordingly, the
operating results of OuterNet have been included in the consolidated financial
statements from the date of acquisition. The aggregate purchase price was
approximately $7,100,000 consisting of 333,333 shares of the Companys common
stock. The purchase price has been allocated to the assets and liabilities of
OuterNet based on their estimated respective fair values. The excess of the
purchase price over the fair value of the tangible net assets acquired of
approximately $7,152,000 was recorded as goodwill and originally was to be
amortized over five years.

In November 2000, the Company, through its wholly owned subsidiary Aperian
Acquisition Corporation, purchased all of the assets and assumed certain of the
liabilities of Infinity Interactive, Inc. (Infinity). The aggregate purchase
price was approximately $450,000 consisting mainly of the forgiveness of debt.
Under the terms of the agreement, the Company forgave certain amounts owed to
them and agreed to purchase all of the outstanding preferred stock for
$0.222221 per share. Infinitys outstanding common stock was cancelled without
any consideration. The acquired business is engaged in shared Internet web-site
hosting.

The acquisition was accounted for as a purchase and, accordingly, the
operating results of Infinity have been included in the consolidated financial
statements from the date of acquisition. The purchase price has been allocated
to the assets and liabilities of Infinity based on their estimated respective
fair values. The excess of the purchase price over the fair value of the
tangible net assets acquired of approximately $475,000 was recorded as goodwill
and originally was to be amortized over five years.

For the year ended March 31, 2001, the Company recognized approximately
$836,000 in amortization expense related to the aforementioned acquisitions.

During March 2001, the Company, as a result of current economic
conditions, determined that the goodwill associated with the fiscal 2001
acquisitions were impaired under the guidance of SFAS No. 121. Accordingly, the
Company has written off goodwill of approximately $7,627,000 and recorded
$6,791,000, (the remaining unamortized amount) as goodwill impairment in the
Consolidated Statements of Operations for the year ended March 31, 2001.

Unaudited Pro-forma Information

During the year ended
March 31, 2001, the Company completed two purchase acquisitions.
Because the results of these acquisitions were not material on either
an individual or aggregate basis, the pro-forma results of operations
have not been presented.

F-12



---



##### Table of Contents



Table of Contents

4. SALE LEASEBACK AGREEMENT WITH TXU ENERGY SERVICES

On January 26, 2001, the Company entered into a sale-leaseback
agreement with TXU Energy Services (TXU) whereby the Company sold TXU all of
the electrical equipment at the Companys five data centers at a price of
$4,950,000. Concurrent with the sales, the Company agreed to lease the
electrical equipment back from TXU for approximately $72,000 per month for ten
years. The equipment leased back from TXU has been accounted for as a capital
lease. In addition to the sale leaseback transaction, the Company has agreed to
outsource the maintenance requirements of the data centers to TXU for ten years
at a monthly cost of approximately $87,000. As a result of the transaction, the
Company has recognized a loss of approximately $750,000 which is included in
the caption general and administrative expenses in the accompanying
Consolidated Statements of Operations.

5. NOTES PAYABLE

On August 3, 2000, the Company entered into a debt agreement with
Hewlett-Packard Company (HP), whereby the Company had the ability to borrow
up to $40,000,000 from HP in a form of a convertible preferred note in
increments of $10,000,000 based on certain milestones achieved by the Company.
The conditions for each increment of funding are as follows:



| |  | The Company can borrow the initial $10,000,000 upon the
condition that the Company has both obtained a listing and has
commenced trading on the NASDAQ market,                                                        
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | The second $10,000,000 increment is available upon the
conditions that the Company has opened its fourth data center, a firm
schedule for its fifth data center and $4,000,000 in orders for HP
products and services,
| 
| |  | The third increment is due upon the Company meeting the
condition that the Company has at least $5,000,000 in quarterly sales
revenue for at least one calendar quarter,                                              
| 
| |  | The last $10,000,000 increment is available upon the condition
that the Company has at least $10,000,000 in quarterly sales revenue
for one calendar quarter and have reached a positive gross margin.                

HP has the right at any time to convert the outstanding principal and
unpaid accrued interest into shares of common stock at $25 per share. This
right terminates upon a merger or consolidation of the Company with another
person or entity in which the Company is not the surviving entity. Upon a
change of control, HP has the ability to call the loan within 45 days written
notice to the Company. As of March 31, 2001, the Company had met the first two
milestones in the debt agreement and has borrowed $20,000,000 at an interest
rate of 10.5% per annum. The Company has the following covenants under the
agreement; the Company will allow at least one representative from HP to attend
all meetings of the Board of Directors, 50% of the proceeds from the note must
be used to purchase HP products, the Company shall file all tax returns when
due, and the Company is to make HP its preferred provider of computer product,
peripherals, storage, support, and network management software. Under the
agreement, the Company only has to pay interest on the loan until the loan
matures on August 3, 2004 at which time the full amount of the principal
borrowed is due. The note is secured by the purchased HP equipment and other
equipment acquired from any other source with the proceeds of the HP note payable.

The Company did not satisfy the conditions for additional borrowings
during the quarter ended March 31, 2001. During discussions relating to future
borrowings, HP informed the Company that it interprets certain provisions of
the note in a manner that might preclude future borrowings and, if pursued by
HP, could result in HPs declaring the note to be in default.

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##### Table of Contents



The Company has discussed with HP possible means by which the parties can
resolve their differences and believe that the parties have reached an agreement
in principal under which the Company would not make further borrowings from HP
but which clarify that no defaults exist under the note. The Company is not
sure that it will, in fact, be able to agree to and execute definitive
documents with HP. If HP were to declare the note to be in default, the
Companys ability to continue operations would be jeopardized. Because of the
uncertainty as to whether the HP debt is, in fact, in default, it is shown as a
current liability in the accompanying balance sheet.

Notes payable consisted of the following amounts at March 31, 2001:

|                                                                                                                                  |  |   |            |  |  |  |  | 
|--------------------------------------------------------------------------------------------------------------------------------- |  | - | ---------- |  |  |  |  | 
|Convertible note for $20,000,000 with interest at 10.5%,
principal and all
     unpaid interest due in 2004, secured by
equipment |  | $ | 20,000,000 | 
|                                                                                                                                 
|                                                                                                                                 
|                                                                                                                                 
|                                                                                                                                 
|Promissory note for $84,237 with interest at 8.5%, principal
and interest
     due at November 17, 2004                           |  |   | 84,237     | 
|                                                                                                                                  |  |   |            | 
|                                                                                                                                 
|                                                                                                                                 
|                                                                                                                                 
|                                                                                                                                 
|Total                                                                                                                             |  |   | 20,084,237 | 
|                                                                                                                                 
|                                                                                                                                 
|                                                                                                                                 
|                                                                                                                                 
|Less current portion                                                                                                              |  |   | 20,025,380 | 
|                                                                                                                                  |  |   |            | 
|Total Long-term notes payable                                                                                                     |  | $ | 58,857     | 
|                                                                                                                                  |  |   |            | 

Following are maturities of long-term notes payable for each of the next
five years:

|     |  |  |       |  |  |                      |            | 
|---- |  |  | ----- |  |  | -------------------- | ---------- | 
|     |  |  |       |  |  | YEAR ENDING MARCH 31
|     |  |  |       |  |  |                     
|2002 |  |  |       |  |  | $                    | 20,025,380 | 
|    
|    
|    
|    
|2003 |  |  |       |  |  |                      | 25,380     | 
|    
|    
|    
|    
|2004 |  |  |       |  |  |                      | 25,380     | 
|    
|    
|    
|    
|2005 |  |  |       |  |  |                      | 8,097      | 
|     |  |  |       |  |  |                      |            | 
|     |  |  | Total |  |  | $                    | 20,084,237 | 
|     |  |  |       |  |  |                      |            | 

6. OBLIGATIONS UNDER CAPITAL LEASES

The Company leases transportation, communication and electronic equipment
under capital leases expiring in various years through fiscal year 2006. The
assets and liabilities under capital leases are recorded at the lower of the
present value of the minimum lease payments or the fair value of the assets.
The assets are depreciated over the shorter of their related lease terms or
estimated productive lives. Depreciation of assets under capital leases is
included in depreciation expense.

Following is a summary of property included in property and equipment,
which is held under capital leases as of March 31, 2001:

|                                  |  |   |            |  |  |  |  |  | 
|--------------------------------- |  | - | ---------- |  |  |  |  |  | 
|Equipment, furniture and fixtures |  | $ | 5,230,996  | 
|                                 
|                                 
|                                 
|                                 
|Vehicles                          |  |   | 51,812     | 
|                                 
|                                 
|                                 
|                                 
|Leashold improvements             |  |   | 6,402,525  | 
|                                  |  |   |            |  | 
|Total                             |  | $ | 11,685,333 | 
|                                  |  |   |            |  | 

F-14



---



##### Table of Contents



| |                                                                                                                            |  |  |  |  |  |  |  | 
| | -------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|
|
|
|
| | Minimum future lease payments under capital leases as of March 31, 2001,
for the next five years and in the aggregate are:

|                                           |  |   |            |   |  |  |  | 
|------------------------------------------ |  | - | ---------- | - |  |  |  | 
|2002                                       |  | $ | 3,889,662  |  
|                                          
|                                          
|                                          
|                                          
|2003                                       |  |   | 3,452,999  |  
|                                          
|                                          
|                                          
|                                          
|2004                                       |  |   | 2,524,851  |  
|                                          
|                                          
|                                          
|                                          
|2004                                       |  |   | 1,285,081  |  
|                                          
|                                          
|                                          
|                                          
|2005                                       |  |   | 1,2043,011 |  
|                                          
|                                          
|                                          
|                                          
|Thereafter                                 |  |   | 776,166    |  
|                                           |  |   |            |  
|Total minimum lease payments               |  |   | 13,171,770 |  
|                                          
|                                          
|                                          
|                                          
|Less amount representing interest          |  |   | (1,486,437 | )
|                                           |  |   |            |  
|                                           |  |   | 11,685,333 |  
|                                          
|                                          
|                                          
|                                          
|Less current portion                       |  |   | (3,504,193 | )
|                                           |  |   |            |  
|Long-term obligations under capital leases |  | $ | 8,181,140  |  
|                                           |  |   |            |  

7. FEDERAL INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary difference
between the carrying amounts of assets and liabilities for financial statement
purposes and the amounts used for income tax purposes. Significant components
of the Companys deferred taxes are as follows:

|                                 |  |                |             |                |  |   |             |  
|-------------------------------- |  | -------------- | ----------- | -------------- |  | - | ----------- | -
|                                 |  | MARCH 31, 2001 |             | MARCH 31, 2000
|                                 |  |                |             |               
|Deferred tax liability:         
|                                
|                                
|                                
|                                
|Depreciable assets               |  | $              | (210,825    | )              |  | $ | (54,412     | )
|                                
|                                
|                                
|                                
|Deferred tax assets:            
|                                
|                                
|                                
|                                
|Net operating loss carryforwards |  |                | 26,785,458  |                |  |   | 11,196,441  |  
|                                
|                                
|                                
|                                
|Accrued expenses and other       |  |                | 611,312     |                |  |   | 41,353      |  
|                                
|                                
|                                
|                                
|Nonqualified stock options       |  |                | 475,430     |                |  |   | 509,027     |  
|                                
|                                
|                                
|                                
|Intangible assets                |  |                | 170,675     |                |  |   |            |  
|                                 |  |                |             |                |  |   |             |  
|Deferred tax assets total        |  |                | 28,042,875  |                |  |   | 11,746,821  |  
|                                
|                                
|                                
|                                
|Valuation allowance              |  |                | (27,832,050 | )              |  |   | (11,692,409 | )
|                                
|                                
|                                
|                                
|Net deferred tax asset           |  |                | 27,832,050  |                |  |   | 11,692,409  |  
|                                 |  |                |             |                |  |   |             |  
|Net deferred taxes               |  | $              | 0           |                |  | $ | 0           |  
|                                 |  |                |             |                |  |   |             |  

The valuation allowance increased by approximately $16,140,000 during the
year ended March 31, 2001 due to losses from operations.

As of March 31, 2001, the Company had federal net operating loss
carryforwards of approximately $72,393,000 which will expire beginning in 2011,
if not utilized. Utilization of the net operating losses may be subject to a
substantial limitation due to the change in ownership provisions of the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses before utilization.

The Companys expense (benefit) for income taxes attributable to
continuing operations differs from the expected tax benefit amount by applying
the statutory federal income tax rate of 34% to income before taxes as a result
of the following:

|                                    |                         |   |                |   |                |  |            |     |          |   |            |   |  |  |       |     |  
|----------------------------------- | ----------------------- | - | -------------- | - | -------------- |  | ---------- | --- | -------- | - | ---------- | - |  |  | ----- | --- | -
|                                    |                         |   | MARCH 31, 2001 |   | MARCH 31, 2000
|                                    |                         |   |                |   |               
|                                    |                         |   | TAX AMOUNT     |   | TAX RATE       |  | TAX AMOUNT |     | TAX RATE
|                                    |                         |   |                |   |                |  |            |     |         
|Losses from continuing operations   |                         | $ | (17,274,008    | ) |                |  | 34.0       | %   |          | $ | (7,508,879 | ) |  |  | 34.0  | %  
|                                   
|                                   
|                                   
|                                   
|State taxes, net of federal
benefit |                         |   | (1,308,636     | ) |                |  | 2.6        | %   |          |   | (606,785   | ) |  |  | 2.7   | %  
|                                   
|                                   
|                                   
|                                   
|Goodwill                            |                         |   | 2,431,690      |   |                |  | (4.7       | )%  |          |   |           |   |  |  |      |    
|                                   
|                                   
|                                   
|                                   
|Permanent differences               |                         |   |               |   |                |  |           |     |          |   | 631,986    |   |  |  | (2.9  | %) 
|                                   
|                                   
|                                   
|                                   
|Valuation allowance                 |                         |   | 16,139,644     |   |                |  | (31.8      | %)  |          |   | 7,824,926  |   |  |  | (35.4 | %) 
|                                   
|                                   
|                                   
|                                   
|Other                               |                         |   | 11,310         |   |                |  | (0.1       | %)  |          |   | (341,248   | ) |  |  | 1.6   | %  
|                                    |                         |   |                |   |                |  |            |     |          |   |            |   |  |  |       |    
|                                   
|                                   
|                                   
|                                   
|                                    | Total expense (benefit) |   | $              | 0 |                |  |            | 0.0 | %        |   | $          | 0 |  |  |       | 0.0 | %
|                                    |                         |   |                |   |                |  |            |     |          |   |            |   |  |  |       |    

F-15



---



##### Table of Contents



8. COMMITMENTS AND CONTINGENCIES

The Company leases its principal general offices, software, phone system
and warehouse facilities. The Company also has a monthly maintenance agreement
paid to TXU for the Companys data centers. Future minimum lease payments
(excluding property taxes) are as follows:

|                     |  |   |            | 
|-------------------- |  | - | ---------- | 
|YEAR ENDING MARCH 31
|                    
|2002                 |  | $ | 6,568,238  | 
|                    
|                    
|                    
|                    
|2003                 |  |   | 5,733,083  | 
|                    
|                    
|                    
|                    
|2004                 |  |   | 4,927,545  | 
|                    
|                    
|                    
|                    
|2005                 |  |   | 4,942,594  | 
|                    
|                    
|                    
|                    
|2006                 |  |   | 4,697,602  | 
|                    
|                    
|                    
|                    
|Thereafter           |  |   | 18,420,298 | 
|                     |  |   |            | 
|Total                |  | $ | 45,289,360 | 
|                     |  |   |            | 

Total rental expense for the years ended March 31, 2001 and 2000 was
$3,164,108 and $976,491, respectively.

In connection with several leases, the Company has been required to issue
a stand-by letter of credit or provided certificates of deposits to the lessor.
Accordingly, the Company has reflected these amounts as restricted cash in the
Consolidated Balance Sheets.

Legal Proceedings

In February 2001, legal proceedings were commenced in the state court in
Travis County, Texas against us by a former officer and two former employees
claiming entitlement to 80,000 common shares in the case of the officer and
2,333 shares in the case of the two employees. The Company believes these
claims to be without merit and intends to vigorously defend the lawsuit. It is
not possible at this time to predict the outcome of the lawsuit but potential
damages could be as high as approximately $33,000,000.

9. COMMON STOCK

Share Combination

On September 11, 2000, the Company completed a one-for-three share
combination. All share and per share amounts in the accompanying consolidated
financial statements reflect the split retroactively.

Reserved Shares

As of March 31, 2001, the Company had reserved shares of common stock for
future issuance as follows:

|                      |  |  |           | 
|--------------------- |  |  | --------- | 
|Stock options         |  |  | 4,667,024 | 
|                     
|                     
|                     
|                     
|Common stock warrants |  |  | 394,167   | 

There are no restrictions on the payment of dividends.

Restricted Stock

In the third quarter of the fiscal year 2001, the Company granted
restricted stock to certain employees. The restricted stock was granted at a
range of prices from $0.81  $3.31 as measured by the closing trading price on
the date of the grants. Under the terms of the plan, the restricted stock
vested ratably over 48 months, but the vesting period could be accelerated if
the Company achieved certain performance criteria. As a result of the grant,
the Company recognized a deferred compensation charge of approximately
$3,120,000. In January 2001, the Company modified the restricted stock grants.
Under the modification, the Company reduced the vesting period of the grants
to 24 months and changed the performance criteria for which the vesting period
could be accelerated as defined under the original grants. On the date of the
amendment, the Companys stock price was $0.88.

F-16



---



##### Table of Contents



Prior to the year ended March 31, 2001, a number of the employees granted
the restricted stock were terminated. Under the terms of the agreement, upon
termination from the Company without cause, each employee granted restricted
stock would automatically vest in the remaining unvested portion of the grant.
Because this was part of the original agreement, no additional compensation
expense was recorded for the accelerated vesting.

For the year ended March 31, 2001, the Company has recognized
approximately $300,000 of compensation expense which results in a deferred
compensation balance of approximately $2,817,000 at March 31, 2001.

During the third quarter of fiscal year 2000, the Company completed a
private sale of 133,750 shares of common stock, at a price of $10.05 per share.
Each purchaser also received warrants to purchase two-thirds of a share of
common stock at an exercise of $13.20 per share, for each one share of common
stock purchased in the equity offering. The warrants expire in four years and
remain outstanding at March 31, 2001. These warrants were valued at $1,731,075
using the Black-Scholes model, and the beneficial conversion discount, limited
to the net proceeds received of $1,344,188, was recorded as an in-substance
dividend on the accompanying Consolidated Statements of Operations.

During the fourth quarter of fiscal year 2000, the Company completed a
private placement of its common stock. The Company raised approximately
$55,000,000 in gross proceeds and issued 3,055,556 shares of common stock in
the offering. The Company used the net proceeds of the offering to build out
additional data centers, implement a sales and marketing campaign, hire
additional sales and marketing personnel, repay indebtedness and for general
corporate purposes.

10. CONVERTIBLE PREFERRED STOCK

As of March 31, 2001, all outstanding preferred stock had been converted
to common stock. All preferred stock dividends have been paid through the
issuance of common stock.

11. STOCK OPTIONS AND WARRANTS

The Company has granted stock options to employees, outside consultants,
and placement agents. Each stock option granted can be exercised for one share
of common stock. Options are generally awarded at the discretion of the Board
of Directors, expire after 1.5 to 10 years, and vest over periods ranging from
immediately to 3 years.

The current 2000
Stock Option Plan (SOP) was authorized by shareholders
at the Annual Meeting on September 7, 2000, which after the Companys 1-for-3
share combination resulted in a post-split 4,000,000 authorized limit. In
addition, the Board of Directors authorized a separate Stock Incentive Plan
(SIP) on August 1, 2000, for employees other than Company officers and
directors. The SIP was authorized at 2,000,000 shares, representing 666,666
post-split shares following the 1-for-3 share combination.

Prior to the current SOP and SIP, the Companys stock options were granted
under an amendment to the 1998 Stock Option Plan (the 1998 Plan) that
stockholders approved on August 9, 1999. On August 9, 1999, the stockholders
also approved the Non-Employee Directors Stock Option Plan (the Directors
Plan). The Directors Plan provided for the grant of nonqualified options to
directors, as defined by the Internal Revenue Code.

On February 22, 2000, the Board of Directors terminated both the 1998 Plan
and the Directors Plan, and adopted the 2000 Stock Option Plan. Options
previously issued under the 1998 Plan or the Directors Plan were substituted
with options under the 2000 Stock Option Plan with identical terms. On March
24, 2000, the Board of Directors amended the 2000 Stock Option Plan to increase
the number of authorized shares from 5,500,000 to 10,000,000 shares of common
stock.

F-17



---



##### Table of Contents



A summary of the status of the Companys stock options as of March 31,
2001, is presented below:

|                                                               |                   |  |                   |           |                  |   |       |       | 
|-------------------------------------------------------------- | ----------------- |  | ----------------- | --------- | ---------------- | - | ----- | ----- | 
|                                                               |                   |  | Number of Options |           | Weighted Average
|                                                               |                   |  |                   |           | Exercise Price  
|                                                               |                   |  |                   |           |                  |   |      
|Options outstanding at March 31, 1999                          |                   |  | 679,545           |           |                  | $ | 10.75 |      
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Options granted   |  |                   | 1,109,683 |                  |   |       | 16.99 | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Options exercised |  |                   | (62,618   | )                |   |       | 14.70 | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Options forfeited |  |                   | (315,002  | )                |   |       | 16.12 | 
|                                                               |                   |  |                   |           |                  |   |       |      
|Options outstanding at March 31, 2000                          |                   |  | 1,411,608         |           |                  |   | 14.54 |      
|                                                               |                   |  |                   |           |                  |   |       |      
|                                                               | Options granted   |  |                   | 4,552,160 |                  |   |       | 8.12  | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Options exercised |  |                   | (16,050   | )                |   |       | 14.26 | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Options forfeited |  |                   | (899,166  | )                |   |       | 17.64 | 
|                                                               |                   |  |                   |           |                  |   |       |      
|Options Outstanding at March 31, 2001                          |                   |  | 5,048,552         |           |                  | $ | 8.20  |      
|                                                               |                   |  |                   |           |                  |   |       |      
|Options Vested at March 31, 2001                               |                   |  | 2,338,745         |          
|                                                               |                   |  |                   |          
|Weighted average life of options outstanding at March 31, 2001 |                   |  | 9.20              |          
|                                                               |                   |  |                   |          

The following table summarizes outstanding stock options as of March 31,
2001:

|               |              |                   |  |                     |  |                  |  |                   |  |                   |   |       |  |  |  |           |  |  |   |       |  | 
|-------------- | ------------ | ----------------- |  | ------------------- |  | ---------------- |  | ----------------- |  | ----------------- | - | ----- |  |  |  | --------- |  |  | - | ----- |  | 
|               |              |                   |  |                     |  |                  |  |                  
|               |              |                   |  |                     |  |                  |  | Weighted Average 
|Range of       |              | Options           |  | Remaining           |  |                  |  | Options           |  |                  
|Exercise Price |              | Outstanding       |  | Contractual Life in |  | Weighted Average |  | Exercisable       |  | Weighted Average 
|Price          |              | at March 31, 2001 |  | Years               |  | Exercise Price   |  | at March 31, 2001 |  | Exercisable Price
|               |              |                   |  |                     |  |                  |  |                   |  |                  
|               | $0.66-$1.75  |                   |  | 1,491,655           |  |                  |  | 9.78              |  |                   | $ | 0.89  |  |  |  | 50,000    |  |  | $ | 0.81  | 
|              
|              
|              
|              
|               | 2.00-4.00    |                   |  | 1,399,544           |  |                  |  | 9.62              |  |                   |   | 3.16  |  |  |  | 996,000   |  |  |   | 3.21  | 
|              
|              
|              
|              
|               | 4.31-8.25    |                   |  | 440,789             |  |                  |  | 7.87              |  |                   |   | 4.89  |  |  |  | 311,952   |  |  |   | 4.55  | 
|              
|              
|              
|              
|               | 11.25-13.89  |                   |  | 524,655             |  |                  |  | 8.93              |  |                   |   | 13.08 |  |  |  | 249,759   |  |  |   | 13.26 | 
|              
|              
|              
|              
|               | 14.07-19.89  |                   |  | 746,586             |  |                  |  | 8.34              |  |                   |   | 16.57 |  |  |  | 597,968   |  |  |   | 16.56 | 
|              
|              
|              
|              
|               | 20.25-48.75  |                   |  | 445,323             |  |                  |  | 9.00              |  |                   |   | 31.98 |  |  |  | 133,066   |  |  |   | 34.17 | 
|               |              |                   |  |                     |  |                  |  |                   |  |                   |   |       |  |  |  |          
|               | $0.66-$48.75 |                   |  | 5,048,552           |  |                  |  | 9.20              |  |                   | $ | 8.20  |  |  |  | 2,338,745 | 

The pro forma compensation expense as defined by SFAS No. 123 for stock
options granted to employees included in the pro forma information below is
determined based on the fair value of the options at the grant date using the
Black-Scholes option-pricing model and the following assumptions: risk-free
interest rates of 6.16% to 8.10%; no dividend yield; volatility of 74%; and
expected option lives of 2.23 years.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. Pro forma net
loss and net loss per share information is as follows:

|                                      |             |  |   |            |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|------------------------------------- | ----------- |  | - | ---------- | - |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|Net loss to common stockholders:     
|                                     
|                                     
|                                     
|                                     
|                                      | As reported |  | $ | 50,805,905 |  
|                                     
|                                     
|                                     
|                                     
|                                      | Pro forma   |  | $ | 63,956,962 |  
|                                     
|                                     
|                                     
|                                     
|Basic and diluted net loss per share:
|                                     
|                                     
|                                     
|                                     
|                                      | As reported |  | $ | (3.96      | )
|                                     
|                                     
|                                     
|                                     
|                                      | Pro forma   |  | $ | (4.98      | )

In addition, the Company has 394,147 warrants outstanding and exercisable
as of March 31, 2001, which have exercise prices ranging from $12.00 to $36.00
and expire on various dates from January 2002 to October 2003.

12. SUBSEQUENT EVENTS

On April 9, 2001, the Company consummated a merger with Fourthstage
Technologies, Inc. (FourthStage), pursuant to an Agreement and Plan of Merger
whereby Fourthstage was merged with and into Aperian.. The transaction was
treated as a purchase business combination with Aperian being the acquiring
company. Under the terms of the Merger Agreement, each

F-18



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##### Table of Contents



outstanding share of common stock of Fourthstage was converted into the
right to receive a pro rata share of: (i) cash equal to three million dollars
($3,000,000), half of which was paid at closing; (ii) 2,698,423 shares of
Aperian common stock; and (iii) 8,396,067 shares of Aperian Series A Preferred
Stock with the rights and preferences set forth on the Certificate of
Designation for the Series A Preferred Stock. The holders of the Series A
Preferred Stock enjoy dividend, liquidation and redemption rights and
preferences senior to those rights and preferences enjoyed by holders of our
common stock. Dividends accrue at a rate of 18% per annum and are payable
quarterly subject to availability of funds and declaration of payment by the
board of directors. Accrued unpaid dividends are cumulative and are payable
upon redemption of the Preferred Stock and before any dividends are paid on
common stock.

If our shareholders approve the Conversion, then each share of Series A
Preferred Stock will convert automatically into one share of our common stock,
and the former Fourthstage shareholders will not be entitled to receive any
accrued but unpaid dividends on the Series A Preferred Stock that would
otherwise be payable to them. Pursuant to the Certificate of Designation, any
time after July 15, 2002, the former Fourthstage shareholders may exercise
their right to redeem the Series A Preferred Stock. Upon redemption of the
Series A Preferred Stock, the former Fourthstage shareholders are entitled to
receive an amount in cash per share equal to the greater of (a) $1.1703 plus
any compounded dividends or (b) the average of the daily closing prices of the
Companys common stock as reported by The Nasdaq National Market System during
the ten (10) trading days preceding the date of the first annual meeting of
shareholders following the issue date of the Series A Preferred Stock, plus all
accrued but unpaid dividends up to the date of redemption.

Subsequent to the merger transaction being completed, the combined Company
has restructured the former Aperian organization into profit centers designed
to enhance profitability and increase accountability. The restructuring has
resulted in the separation of over half of Aperians former employees,
including the departure of Aperians chief executive officer and Aperians
chief operating officer on May 3, 2001. Fourthstages chief executive officer,
now serves as chairman and chief executive officer of the combined Company.

During the course of the consolidation of the two companies, management
recognized the erosion in Aperians business, especially in its customer base.
Aperian had primarily targeted small and medium-sized businesses with its
managed Internet infrastructure services offerings, and these firms were
especially vulnerable to the deteriorating financial markets witnessed in the
second half of calendar year 2000. As a result, during May 2001, the decision
was made to discontinue Aperians business rather than invest additional
resources to further expand Aperians regional presence.

On May 10, 2001 the Company announced its intention to sell its five
Internet data centers and to build exclusively on Fourthstages business model.
The sale of Aperians Internet data centers remains pending at the time of this
filing. In the sale, Aperian seeks to include certain data center related
debts, including the obligation to HP, capital lease obligations, account
payable and accounts receivable. In essence, the buyer, with the sale of the
Internet data centers, will assume much of the Companys current debt
obligations.

Certain creditors, including HP, have rights regarding the assignment of
the Companys debt and capital lease obligations. As such, the closure of any
sale transaction is dependent on the Company securing approval for such
assignments. The Company will announce the closure of any such transaction in a
press release and subsequent SEC Form 8-K filing.

On May 23, 2001 the Company changed its fiscal year-end to December 31,
and changed its name to Fourthstage Technologies, Inc., subject to shareholder
approval.

F-19



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##### Table of Contents



Exhibit Index

|            |  |                                                                                                                                  |  |                                                                                                                                        
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | EXHIBIT DESCRIPTION                                                                                                              |  | LOCATION                                                                                                                               
|            |  |                                                                                                                                  |  |                                                                                                                                        
|3.1         |  | Amended and Restated Certificate of
Incorporation (1)                                                                            |  | Incorporated by
reference to
Exhibit 3.1 of
Registrants Form
8-K filed September
11, 2000 (File No.
0-8146)                           
|           
|           
|           
|           
|3.2         |  | Amended and Restated Bylaws of Registrant (1)                                                                                    |  | Incorporated by
reference to
Exhibit 3.2 of
Registrants Form
8-K filed April 19,
2001 (File No.
0-1846)                               
|           
|           
|           
|           
|4.0         |  | Specimen of Securities (1)                                                                                                       |  | Incorporated by
reference to
Exhibits No. 1 of
Registrants Form
8-A/A Registration
Statement filed
October 10, 2000
(File No. 0-8146) 
|           
|           
|           
|           
|4.1         |  | Certificate of Designation of Preferences
and Rights of Series A 18% Cumulative
Convertible Redeemable Preferred Stock           |  | Incorporated by
reference to
Exhibit 4.1 of
Registrants Form
8-K filed April 19,
2001 (File No.
0-1846)                               
|           
|           
|           
|           
|            |  |                                                                                                                                  |  |                                                                                                                                        
|           
|           
|           
|           
|10.1        |  | MMH Investments, Inc. settlement and release
agreement, dated October 15, 1999 (1)                                               |  | Incorporated by
reference to
Exhibit 10.1 of
Registrants Form
10-QSB filed February 14, 2000
(File No. 0-8164)                        
|           
|           
|           
|           
|10.2        |  | Entrepreneurial Investors, Ltd. and Equity
Services, LTD settlement agreement, dated
February 1, 2000 (1)                        |  | Incorporated by
reference to
Exhibit 10.2 of
Registrants Form
10-QSB filed
February 14, 2000
(File No. 0-8164)                        
|           
|           
|           
|           
|10.3        |  | Cisco Systems Capital Corporation master
agreement to lease equipment, dated January
24, 2000 (1)                                |  | Incorporated by
reference to
Exhibit 10.3 of
Registrants Form
10-QSB filed
February 14, 2000
(File No. 0-8164)                        
|           
|           
|           
|           
|10.4        |  | Robert Hersch employment agreement, dated
October 1, 1999 (1)                                                                    |  | Incorporated by
reference to
Exhibit 10.4 of
Registrants Form
10-QSB filed
February 14, 2000
(File No. 0-8164)                        
|           
|           
|           
|           
|10.5        |  | Robert Gibbs employment agreement, dated
June 29, 1999 (1)                                                                       |  | Incorporated by
reference to
Exhibit 10.5 of
Registrants Form
10-QSB filed
February 14, 2000
(File No. 0-8164)                        
|           
|           
|           
|           
|10.5.1      |  | Robert J. Gibbs Employment Agreement dated
as of October 30, 2000 (1)                                                            |  | Incorporated by
reference to
Exhibit 10.36.1 of
Registrants Form
10-QSB filed
February 14, 2001
(File No. 0-8164)                     
|           
|           
|           
|           
|10.5.2      |  | Robert J. Gibbs Amended and Restated
Restricted Stock Award dated as of October
30, 2000 (1)                                     |  | Incorporated by
reference to
Exhibit 10.36.21 of
Registrants Form
10-QSB filed
February 14, 2001
(File No. 0-8164)                    
|           
|           
|           
|           
|10.5.3      |  | Robert J. Gibbs Employment Agreement dated
as of April 6, 2001 (1)                                                               |  | Incorporated by
reference to
Exhibit 10.2 of
Registrants Form
8-K filed April 19,
2001 (File No.
0-8164)                              
|           
|           
|           
|           
|10.5.4      |  | Advisory Agreement dated as of May 1, 2001
between the Company and Robert J. Gibbs (2)                                           |  | Exhibit 10.5.4                                                                                                                         
|           
|           
|           
|           
|10.6        |  | Form of GTE Internetworking Direct Connect
agreement (1)                                                                         |  | Incorporated by
reference to
Exhibit 10.6 of
Registrants Form
10-QSB filed
February 14, 2000
(File No. 0-8164)                        
|           
|           
|           
|           
|10.7        |  | Form of bridge financing warrant to purchase
common stock (1)                                                                    |  | Incorporated by
reference to
Exhibit 10.8 of
Registrants Form
10-QSB filed
February 14, 2000
(File No. 0-8164)                        
|           
|           
|           
|           
|10.8        |  | Form of private equity unit financing
registration rights agreement (1)                                                          |  | Incorporated by
reference to
Exhibit 10.9 of
Registrants Form
10-QSB filed
February 14, 2000
(File No. 0-8164)                        
|10.9        |  | Form of private equity financing warrant
to purchase common stock (1)                                                            |  | Incorporated by
reference to
Exhibit 10.10 of
Registrants Form
10-QSB filed
February 14, 2000
(File No. 0-8164)                       
|           
|           
|           
|           
|10.10       |  | Master Agreement for Internetworking
Services between GTE and Registrant, dated
May 29, 1998 (1)                                 |  | Incorporated by
reference to
Exhibit 10.2 of
Registrants Form
10-QSB/A filed June
14, 1999 (File No.
0-8164)                          
|           
|           
|           
|           
|10.11       |  | Service Schedule Internet Advantage
Connection Services between GTE and
Registrant, dated May 29, 1998 (1)                       |  | Incorporated by
reference to
Exhibit 10.3 of
Registrants Form
10-QSB/A filed June
14, 1999 (File No.
0-8164)                          
|           
|           
|           
|           
|10.12       |  | Service Schedule Consulting Services
between GTE and Registrant, dated October
15, 1998 (1)                                      |  | Incorporated by
reference to
Exhibit 10.4 of
Registrants Form
10-QSB/A filed June
14, 1999 (File No.
0-8164)                          
|           
|           
|           
|           
|10.13       |  | Amendment One to Service Schedule
Consulting Services between GTE and
Registrant, dated November 13, 1998 (1)                    |  | Incorporated by
reference to
Exhibit 10.5 of
Registrants Form
10-QSB/A filed June
14, 1999 (File No.
0-8164)                          
|           
|           
|           
|           
|10.14       |  | Employment Agreement effective as of March
24, 1999, between Roger M. Lane and
Registrant (1)                                    |  | Incorporated by
reference to
Exhibit 10.6 of
Registrants Form
10-QSB/A filed June
14, 1999 (File No.
0-8164)                          
|           
|           
|           
|           
|10.15       |  | Lease Agreement for Facilities, dated
August 12, 1998 (1)                                                                        |  | Incorporated by
reference to
Exhibit 10.1 of
Registrants Form
10-QSB/A filed
November 12, 1998
(File No. 0-8164)                      
|           
|           
|           
|           
|10.16       |  | Sublease dated July 27, 1998 between GTE
Intelligent Network Services, Inc and
Registrant (1)                                    |  | Incorporated by
reference to
Exhibit 10.2 of
Registrants Form
10-QSB/A filed
November 12, 1998
(File No. 0-8164)                      
|           
|           
|           
|           
|10.17       |  | Purchase Order dated May 29,1998 For GTE
Internetworkings Internet Advantage
Version 5.1 (Quote Number 38561.9719.1)
(1)        |  | Incorporated by
reference to
Exhibit 10.3 of
Registrants Form
10-QSB/A filed
November 12, 1998
(File No. 0-8164)                      
|           
|           
|           
|           
|10.18       |  | Purchase Order dated September 30, 1998
for GTE Internetworkings Internet
Advantage
Version 6.0 (Quote Number 76512.9719.1) (1) |  | Incorporated by
reference to
Exhibit 10.4 of
Registrants Form
10-QSB/A filed
November 12, 1998
(File No. 0-8164)                      
|           
|           
|           
|           
|            |  |                                                                                                                                  |  |                                                                                                                                        
|           
|           
|           
|           
|10.19       |  | Master Agreement for Internetworking
Services dated May 29, 1998 between GTE
Internetworking and MSI (1)                         |  | Incorporated by
reference to
Exhibit 10.5 of
Registrants Form 10-QSB/A filed
November 12, 1998 (File No. 0-8164)                      
|           
|           
|           
|           
|10.20       |  | Quotation for GTE Internetworking Dialinx
Service dated October 29, 1998 between GTE
Internetworking and MSI (1)                 |  | Incorporated by
reference to
Exhibit 10.6 of
Registrants Form
10-QSB/A filed
November 12, 1998
(File No. 0-8164)                      
|           
|           
|           
|           
|10.21       |  | Basic Agreement between Siemens Nixdorf
Information Systems, Inc. and MSI (1)                                                    |  | Incorporated by
reference to
Exhibit 10.7 of
Registrants Form
10-QSB/A filed
November 12, 1998
(File No. 0-8164)                      
|           
|           
|           
|           
|10.22       |  | Addendum to Lease Agreement on 501 Waller
Austin, Texas dated June 6, 1998 Between
WBH, Ltd. and MSI (1)                         |  | Incorporated by
reference to
Exhibit 10.8 of
Registrants Form
10-QSB/A filed
November 12, 1998
(File No. 0-8164)                      
|           
|           
|           
|           
|10.23       |  | MCI WorldCom On-Net Voice Agreement, dated
April 19, 2000 (1)                                                                    |  | Incorporated by
reference to
Exhibit 10.34 of
Registrants From
10-KSB filed June
29, 2000 (File No.
0-8164)                           
|           
|           
|           
|           
|10.24       |  | Purchase Agreement between Registrant and
certain investors, dated February 15, 2000
(1)                                         |  | Incorporated by
reference to
Exhibit 10.35 of
Registrants From
10-KSB filed June
29, 2000 (File No.
0-8164)                           
|           
|           
|           
|           
|10.25       |  | Merger Agreement dated as of July 13,
2000, relating to OuterNet Connection
Strategies, Incorporated (1)                         |  | Incorporated by
reference to
Exhibit 2 of
Registrants Form
8-K filed August 3,
2000 (File
No.0-8164)                                  
|           
|           
|           
|           
|10.26       |  | Note Purchase Agreement effective as of
August 3, 2000 between Registrant and
Hewlett-Packard Company (1)                        |  | Incorporated by
reference to
Exhibit 2 of
Registrants Form
8-K filed August 9,
2000 (File
No.0-8164)                                  
|           
|           
|           
|           
|10.27       |  | Convertible Secured U.S. $40,000,000 Note
dated August 3, 2000 (1)                                                               |  | Incorporated by
reference to
Exhibit 3 of
Registrants Form
8-K filed August 9,
2000 (File
No.0-8164)                                  
|           
|           
|           
|           
|10.28       |  | Registration Rights Agreement made as of
August 3, 2000 between Registrant and
Hewlett-Packard Company (1)                       |  | Incorporated by
reference to
Exhibit 4 of
Registrants Form
8-K filed August 9,
2000 (File
No.0-8164)                                  
|           
|           
|           
|           
|10.29       |  | Registrants Amended and Restated 2000
Stock Option Plan (2)                                                                     |  | Exhibit 10.29                                                                                                                          
|           
|           
|           
|           
|10.30       |  | Registrants Amended and Restated 2000
Stock Incentive Plan (1)                                                                  |  | Incorporated by
reference to
Exhibit 4.1 of
Registrants
registration
statement on Form
S-8 filed October
20, 2000 (File No.
333-48386)





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##### Table of Contents



|            |  |                                                                                                                                                                                                         |  |                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | EXHIBIT DESCRIPTION                                                                                                                                                                                     |  | LOCATION                                                                                                          
|            |  |                                                                                                                                                                                                         |  |                                                                                                                   
|10.31       |  | Wayne A. Irwin Employment
Agreement dated as of October 30,
2000 (1)                                                                                                                                    |  | Incorporated by
reference to Exhibit
10.37.1 of
Registrants Form
10-QSB filed February
14, 2001 (File No.
0-8164)
|           
|           
|           
|           
|10.31.1     |  | Wayne A. Irwin Amended and
Restated Restricted Stock Award
dated as of October 30, 2000 (1)                                                                                                             |  | Incorporated by
reference to Exhibit
10.37.2 of
Registrants Form
10-QSB filed February
14, 2001 (File No.
0-8164)
|           
|           
|           
|           
|10.31.2     |  | Wayne A. Irwin Employment
Agreement dated as of April 6,
2001 (1)                                                                                                                                       |  | Incorporated by
reference to Exhibit
10.3 of Registrants
Form 8-K filed April
19, 2001 (File No.
0-8164)         
|           
|           
|           
|           
|10.31.3     |  | Advisory Agreement dated as of
May 1, 2001 between the Company
and Wayne A. Irwin (2)                                                                                                                   |  | Exhibit 10.31.3                                                                                                   
|           
|           
|           
|           
|10.32       |  | Form of Amended and Restated
Stock Award dated as of October
30, 2000 between Aperian and
certain officers                                                                                              |  | Incorporated by
reference to Exhibit
10.38 of Registrants
Form 10-QSB filed
February 14, 2001
(File No. 0-8164)  
|           
|           
|           
|           
|10.33       |  | Separation Agreement dated as of
January 16, 2001 between Aperian
and Christopher Brickler                                                                                                              |  | Incorporated by
reference to Exhibit
10.39.1 of
Registrants Form
10-QSB filed February
14, 2001 (File No.
0-8164)
|           
|           
|           
|           
|10.33.1     |  | Advisory Agreement effective
February 1, 2001 between Aperian
and Christopher Brickler                                                                                                                  |  | Incorporated by
reference to Exhibit
10.39.2 of
Registrants Form
10-QSB filed February
14, 2001 (File No.
0-8164)
|           
|           
|           
|           
|10.33       |  | Agreement and Plan of Merger,
dated as of April 6, 2001, among
Fourthstage Technologies, Inc.,
Registrant, Aperian Merger
Corporation, Inc., and the
stockholders of Fourthstage
Technologies, Inc. (1) |  | Incorporated by
reference to Exhibit
2.1 of Registrants
Form 8-K filed April
19, 2001 (File No.
0-8164)          
|           
|           
|           
|           
|10.35       |  | Registration Rights Agreement
dated as of April 6, 2001 between
Registrant and Fourthstage
Technologies, Inc. (1)                                                                                       |  | Incorporated by
reference to Exhibit
4.2 of Registrants
Form 8-K filed April
19, 2001 (File No.
0-8164)          
|           
|           
|           
|           
|10.36       |  | Employment Agreement dated as of
April 6, 2001 between Registrant
and Kevin Craig (1)                                                                                                                   |  | Incorporated by
reference to Exhibit
10.1 of Registrants
Form 8-K filed April
19, 2001 (File No.
0-8164)         
|           
|           
|           
|           
|10.36.1     |  | Termination of Employment
Agreement dated as of April 6,
2001 between Registrant and Kevin
Craig (2)                                                                                                    |  | Exhibit 10.36.1                                                                                                   
|           
|           
|           
|           
|23.1        |  | Consent of Ernst & Young LLP (2)                                                                                                                                                                        |  | Exhibit 23.1                                                                                                      



---

|(1) |  | Previously filed with the Securities and Exchange Commission and
incorporated by reference pursuant to Rule 12b-32 of the Securities
Exchange Act of 1934.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Filed herewith.