Edgar Filing: APPIANT TECHNOLOGIES INC

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------

FORM 10-K

{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended SEPTEMBER 30, 2002

{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to ___________

COMMISSION FILE NUMBER 0-21999
------------------------------

APPIANT TECHNOLOGIES INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 84-1360852
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

6663 OWENS DRIVE
PLEASANTON, CALIFORNIA 94588
(Address of principal executive offices)
(925) 251-3200
(Registrant's telephone number)
-------------------------------

Securities registered pursuant to Section 12(b) of the Act:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------

Common Stock, $.01 par value OTCBB

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

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

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

As of February 14, 2003, there were 17,194,841 shares of Common Stock
outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the Issuer (based on the closing price for the Common Stock on
the OTCBB Market on February 14, 2003 was approximately $1.7 million.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated by reference in this
report: Registrant's Proxy Statement for its 2002 Annual Meeting of
Shareholders

This Form 10-K was the subject of a Form 12b-25, which was timely filed.

TABLE OF CONTENTS

PART I.........................................................................3
Item 1. BUSINESS...........................................................3
Item 2. PROPERTIES.........................................................8
Item 3. LEGAL PROCEEDINGS..................................................9
Item 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS..............10

Part II.......................................................................10
Item 5. MARKET FOR ISSUER'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS...........................................................10
Item 6. SELECTED FINANCIAL DATA...........................................14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................14
Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.........30
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................30

PART III......................................................................31
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE ISSUER....................31
Item 11. EXECUTIVE COMPENSATION............................................32
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....34
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................35

PART IV.......................................................................35
Item 14. EXHIBITIS, FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS ON
FORM 8-K..........................................................35

PART I

ITEM 1. BUSINESS

GENERAL

NEW BUSINESS MODEL

Our new business model and main goal is to become a leading provider of internet
protocol-based (IP-based) unified communications and unified information
applications designed to allow users access to communications and information in
a highly-personalized format as set by the individual user from private, public
and enterprise sources anytime, anywhere from any type of communications device
such as a cell phone, computer, personal digital assistant ("PDA"), etc., in a
hosted, service model. We have created an IP-based portal that we named
inUnison-TM- in which we have incorporated or will incorporate both our
proprietary UC/UI applications including, but not limited to, our own speech
recognition technologies, data mining, data analysis, navigation, channel
management, recommendation engines and client relationship management ("CRM")
applications, as well as various third party applications and integrations.

Our inUnison-TM- portal is an open system incorporating or integrating third
party applications and programs. Our customers offer their subscribers inUnison
applications in a web-based portal that can be custom-branded for each customer.
As a company that has legacy telephony experience, we understand that many
service providers such as wireless service providers (WSPs"), Internet service
providers ("ISPs'), and Competitive Local Exchange Carriers ("CLECs") have made
extensive capital investments over the years in legacy systems, and that it
would be difficult and expensive for these customers to suddenly abandon these
legacy systems. Therefore, as we built our inUnison-TM- portal, we purposely
have allowed for service provider customers to maintain their legacy systems and
legacy interfaces should they desire to do so. Our customers who have unique
interfaces e.g., WSPs who maintain unique dialing commands for their users to
send, receive or save voice mails, can continue to maintain their interfaces
with our portal so that their customers need not learn a new set of commands to
use our applications. We believe that our customers' use of our applications
will be seamless, and that allowing our customers the ability to maintain legacy
interfaces while offering their customers our inUnison-TM- applications will
greatly reduce difficulties in adopting our applications.

Our hosted service-based inUnison-TM- unified communications and unified
information business model was built recognizing that users of information
demand the benefits of non-real time messaging services such as email, fax and
voicemail, calendar, contact database, and corporate or enterprise information,
with real time features such as connectivity, call delivery, and live call
management. Our technology is essentially a disrupter: today the sender of a
communication, e.g., a phone call, email or voicemail, is generally in control
of when the communication is received by the receiver (for example, the time of
day), and how the communication is received (by phone, voicemail, or email). But
by using our applications, the receiver of the communication takes control of
the communication process. The receiver can, for example, determine which phone
calls follow the receiver and will get connected real-time, which ones get sent
to voicemail, or which emails notify the receiver (either over the phone,
computer or PDA), that an email message has been received. And if an email or
voicemail has been received, the receiver can either listen to or read the
e-mail or voicemail with our speech-to-text and text-to-speech technologies.

We are offering our inUnison-TM- UC/UI applications in a hosted, recurring
service-based revenue model to targeted markets and industry segments. Our goal
is to be the "service provider's service provider", offering our inUnison-TM-
applications in a resale model where we will price our applications separately
and/or in packages to our service provider customers for resale to their
subscribers. We also enter into revenue sharing arrangements with certain
customers where we will share revenues from our applications and, in some cases,
minutes from outbound calls made from and in-bound calls made to the portal. In
the future we also plan to license our proprietary technology or portions of it
to third parties. We intend to develop continuously new applications and to
integrate third party applications into our portal. Our customers will be able
to offer these applications in a portal that we maintain, but which can be
custom-branded.

We believe that increased competition, shorter time to market trends and the
reduced importance of geographical borders make it imperative that customers
achieve and maintain state-of-the-art communication and information systems that
unify information from any internet-accessible source with communication devices
and communication channels.

OUR INUNISON-TM- PROPRIETARY TECHNOLOGIES

Our inUnison-TM- portal contains or will contain a number of our proprietary
technologies. Our portal includes or will include a Navigation engine that is
designed to allow for the continuous, simultaneous search of multiple databases,
both public such as the internet, and enterprise, to search for important
information to be brought into the portal that the user has determined is
important and to perform data mining for computing profitability models. Our
Recommendation engine is designed to make intelligent, specific, targeted
recommendations to users based on information brought into the portal. For
example, sales professionals who use our inUnison-TM- applications to track
their customers' order histories will be prompted by the portal (for example, by
phone call, email, etc.) to offer new products or services based on the
customers' needs, previous purchases or new products or services that are likely
to appeal to the customer. Our Notification engine in the portal can notify a
user (by calling the user's cell phone or sending a voicemail or email message)
that his or her scheduled flight has been delayed or cancelled and can query the
user whether alternative flight arrangements should be made. Should the user
desire to book an alternative flight, he or she will be able to do so directly
through the portal without ever hanging up and having to dial directly. Instead,
the user can place the call to the airline through the portal either by dialing
or through voice commands, make alternative flight arrangements, and then return
to the portal. We also will feature a web phone and a web collaboration engine.

Our proprietary speech recognition technologies are exciting, and will provide
for distributed interaction with the inUnison-TM- portal that cannot be realized
with existing third party voice recognition products on the market today. Our
feature extraction technology is expected to reduce by 100 times or more the
amount of data required to travel from a phone to a data center over that of
conventional speech recognition products on the market today, thereby making our
speech recognition faster. We have also developed proprietary filtering
technology to eliminate noise and cross talk that often operate to limit the
effectiveness of voice recognition products. Our speech recognition applications
are speaker and dialect-independent.

OUR TARGETED MARKETS

We are marketing our inUnison-TM- UC/UI products initially to several target
markets:

- Affinity Groups
- Multilevel Marketing Organizations
- Internet Service Providers ("ISPs")
- Application Service Providers ("ASPs")
- Enterprises with moble or geographically dispersed workforces

We believe that there are compelling value propositions to our targeted
customers to sell our inUnison-TM- applications. ISPs and ASPs, for example, are
intensely competitive, and are continuously fighting to offer new applications
to their customers to increase "sticky" minutes over their networks to generate
additional revenues and to reduce churn. CLECs, for example, need to offer new
value-added applications to drive new revenues and generate higher margins. Our
applications may result in additional revenue sources for these targeted
customers. Current financial spending constraints in most of these market
sectors make inUnison-TM- even more attractive, as only minor cash outlays are
required for these service providers to offer our advanced applications.

Affinity groups and multilevel marketing organizations can utilize the features
of inUnison-TM- to provide the infrastructure they require to do business,

Enterprises with distributed, mobile employees may want to offer our
inUnison-TM- applications to help increase productivity. The value proposition
to such large enterprises is a more efficient work force that can translate into
additional revenues and reduced cost of operations.

Through our direct sales force, we have developed formal selling tools,
techniques and methods to assist our customers in selling our applications to
their customers. We also provide cooperative marketing and advertising support
to our customers.

OUR STRATEGIC PARTNER RELATIONSHIPS

We have built significant, valuable, strategic relationships with a number of
partners including Cisco Systems ("CISCO") and these partnering relationships
are important to our success. Although, Cisco decided to exit the software
business, which had substantial negative effects to the Company we remain a
CISCO Powered Network member and a New World Ecosystem partner ("Ecosystem
partner"). As a CISCO Ecosystem partner, we are part of a technology community
where we can partner with CISCO and its Ecosystem partners; tap into CISCO's
sales channel, customer base and technical experience; participate in technology
sharing, joint marketing and customer support; enjoy preferential pricing on
products and services; and receive other benefits. As an Ecosystem partner,
CISCO has committed to introducing customers to us.

In Fiscal 2001, we also discontinued our relationship with our major data center
hosting partner and now perform these duties internally within the Company. As a
consequence of this change our product rollout was delayed. During fiscal 2002,
this partner forgave approximately $4.5 million of lease financing. The Company
successfully implemented its own data center during fiscal 2001.

OUR COMPANY NAME CHANGED TO REFLECT NEW BUSINESS MODEL

Appiant Technologies, Inc., has been trademarked upon receiving shareholder
approval at our Fiscal 2000 shareholder meeting.

We have filed and received U.S. Trademark applications for the name "inUnison"
that we use for our unified communications and unified information software
applications.

While we have begun to market our new, hosted unified communications and unified
information applications business model, our results for fiscal year ended
September 2002 reflect generally the results of the legacy business of our
Infotel Subsidiary in Singapore.

LEGACY BUSINESS

We were incorporated in October 1996 to pursue a business combination
opportunity with Nhancement Technologies North America ("APPIANT NA") (then
named Voice Plus). APPIANT NA was then engaged in the business of integrating
voice-processing systems with telecommunications equipment. Appiant Technologies
Inc. acquired APPIANT NA on February 3, 1997, along with a development stage
company whose operations were later merged with those of APPIANT NA. On February
4, 1997, we completed an initial public offering of shares of our Common Stock.

We acquired Infotel on June 22, 1998. Infotel is an integrator of infrastructure
communications equipment products, providing radar system integration, turnkey
project management services and test instrumentation, as well as a portfolio of
communications equipment in Asia. Infotel is headquartered in Singapore.

On February 4, 2000, we completed our acquisition of the assets of SVG Software
Services, Inc., a California corporation ("SVG"), pursuant to the Plan and
Agreement of Reorganization (the "Agreement"), dated February 4, 2000, between
Appiant and SVG.

On February 4, 2000, we acquired all the shares of Nhancement Technologies
(India) Pte. Ltd. ("NHAN India") a company incorporated in Chennai, India that
engages in the business of web design and software products development. NHAN
India conducts substantial software development activities for the inUnison-TM-
portal. NHAN India was also focusing on call center solutions and outsourcing
for enterprises seeking to establish call centers in India. NHAN India and is
call center business was sold in fiscal 2001, a number of the members of the
engineering team remained with Appiant.

Both acquisitions were consummated with a view of gaining access to important
technologies and engineering skills critical to developing our software
applications, both of which remain within the Company.

On January 21, 2000, we acquired Trimark, Inc., headquartered in San Diego,
California and doing business as Triad Marketing ("Triad"). The Triad
acquisition provided us with recommendation engine software tools for inclusion
with our inUnison-TM- unified communications and unified information
applications. The market profile selling services were discontinued in fiscal
2001 and most of the related employees were laid-off.

On February 4, 2000, we acquired all the shares of Appiant Technologies (India)
Pte. Ltd. ("APPIANT India") a company incorporated in Chennai, India that
engages in the business of web design and software products development.

In fiscal year 2001, we sold our Appiant India subsidiary to a related party.
The disposition did not have a significant impact on our financial position or
results of operations.

On May 23, 2001, Appiant Technologies Inc. ("Appiant") acquired all of the
outstanding stock of Quaartz, Inc. ("Quaartz"). Quaartz is a pioneering
Internet affinity marketing company that provides Internet-hosted applications
enabling companies and organizations to deliver event announcements,
communication tools and e-commerce directly to their online communities. The
acquisition was consummated with a view of gaining access to important
technologies and engineering skills critical to developing our software
applications.

During fiscal 2002, we sold certain assets of the legacy North America and
ceased the legacy business in North America. The legacy business in North
America had decline substantially and its discontinuance is not expected to
materially impact the financial operations of the Company. Our remaining legacy
businesses in Singapore include infrastructure communications equipment, turnkey
system products and test measurement equipment.

LEGACY PRODUCTS AND SERVICES

NT-BASED COMMUNICATION SERVERS

Legacy communications have included NT-based communication server solutions from
Enterprise Information Center ("EIC") that are manufactured by Interactive
Intelligence, Inc. ("I3"). These EIC servers allow multiple integrated forms of
communications through a single system. The forms of communications supported by
the EIC system include voice, data, email, facsimile, voicemail interactive
voice response. All are web capable. The Company discontinued these operations
in fiscal 2001 to focus on our own new inUnison services and applications.

VOICE PROCESSING AND MULTIMEDIA MESSAGING

The legacy voice messaging, text messaging, LAN messaging and interactive voice
response or self-inquiry systems have been delivered through third party
manufacturers such as NEC and ADC which acquired Centigram Communications in
2000 was discontinued in fiscal 2002.

INFOTEL

INFRASTRUCTURE COMMUNICATIONS EQUIPMENT

Infotel has offered a wide range of infrastructure communications equipment
products and system integration services that have satisfied the most demanding
communications projects. With over a decade of experience, Infotel has completed
numerous projects, both in complex radio and networking systems. Infotel
supports products manufactured by Motorola, Ericsson, Raytheon, Newbridge and
Shiva Corp., Rohde & Schwarz Gmbh, and Siemens. Infotel has focused principally
on large projects in the government, institutional and commercial sectors, and
has targeted opportunities for regionalization and Internetworking.

TURNKEY SYSTEMS PROJECTS

Our customers that have awarded turnkey projects have done so only to vendors or
systems integrators that have had full capabilities in design, installation,
commissioning, project management and documentation. In such projects, our
emphasis and competitive edge lies in the practice of sourcing the best product
that meets the customer's requirements. Emphasis is placed on design and project
management in which we maintain strong technical competency. Other
communications activities include the supply and installation of various voice
and data communications equipment on a tender basis.

TEST MEASURING SYSTEMS

Infotel also has an established test measuring instrumentation and testing
business that grew out of a communications relationship with German conglomerate
Rohde & Schwarz Gmbh that ultimately evolved into Infotel servicing other Rohde
& Schwarz Gmbh products such as test instruments. Infotel is now the regional
distributor and test and repair center for Rohde & Schwarz Gmbh test
instruments. Infotel has since expanded its repair capability to include Alcatel
mobile telephones.

SALES AND MARKETING

We have been marketing our products and services primarily through focused
telemarketing and calls to prospective customers in specific markets,
participation in trade shows, acquisition of databases and inclusion of our
products and services on bidders' lists. We focus on pre-sale analysis of our
customers' needs and the rate-of-return potential of specific sales
opportunities to determine whether we believe they justify the investment of
time and effort of our sales and marketing organization. Typically, we focus on
sales opportunities where we believe the value added from our products and
services provides significant benefits for the customer. We also participate in
competitive bidding for government agency work. In evaluating a prospective
sales situation, we also consider the lead-time to revenue, the complexities of
the customer's requirements and our ability to satisfy the customer and provide
it with the necessary support.

RESEARCH AND DEVELOPMENT

CUSTOMERS, BACKLOG

Our five largest customers, Japan Radio Company, LTD., Defence Science &
Technology Agency of Singapore, Motorola Electronics PTE. Ltd. and Siemens
Medical Instruments, Pte. Ltd., accounted for approximately 24.3%, 7.9%,6.6%,
6.4% and 5.2% respectively of total net revenues during the fiscal year ended
September 30, 2002. Backlog at September 30, 2002 was $3.3 million as compared
to $5.5 million at September 30, 2001. On a stand-alone basis, backlog for our
new inUnison service was $1.2 and $2.1 million for Infotel at September 30,
2002.

GOVERNMENTAL REGULATION

The Telecommunications Act of 1996 eliminated government mandated barriers
between local and long distance calling, cable television, broadcasting and
wireless service. As a result, CLECs, traditional long distance carriers and
cable television companies have entered these markets to provide both local
telephone and long distance service as well as television programming. Such
increased competition likely will change the infrastructure for implementing
communications applications, such as voice and electronic messaging. We
anticipate that this increased competition -particularly by CLECs - will drive
demand for our new, hosted inUnison-TM-applications as CLECs generally
understand these technologies and will be aggressive in offering their customers
unique applications to reduce churn and drive revenues from minutes from their
voice over internet protocol ("VOIP") networks.

EMPLOYEES

As of September 30, 2002, we employed a total of 80 employees worldwide: 28 in
the United States and 52 in Singapore employed by Infotel. Our employees are
not covered by a collective bargaining agreement. We believe that our relations
with our employees worldwide are good.

COMPETITION

NEW BUSINESS MODEL - UNIFIED COMMUNICATIONS AND UNIFIED INFORMATION

We are executing a new business model to provide unified communications and
unified information applications to our customers in a hosted, carrier-grade,
recurring revenue model that we believe will be both dynamic and competitive.
For a number of years, we have competed in providing non-hosted unified
messaging solutions with a number of companies including legacy voicemail
providers. The unified messaging market, which we see as generally consisting of
bringing together non-real time voice mail, e-mail and fax communications into
one "box", is, in our view, fragmented and filled with many competitors. In the
unified messaging sector, we may generally compete with companies such as
uReach, Call Sciences, Webbley, and Tornado Development Corporation.

In the unified communications sector, which we generally define to include the
non-real time communications that are brought together with real time
communications such as call delivery and connectivity, we anticipate competing
with much larger competitors such as Lucent Technologies ("Lucent") and Nortel.
We may also face competition from some of our legacy business vendors such as
ADC (which in 2000 acquired Centigram Communications, one of our legacy business
vendors), and Interactive Intelligence. Other competition in the unified
communications space may include AirTrac Chicago, Inc., CentreCom, HotVoice and
uReach. To compete with these companies, we plan to work closely with our
current and future strategic partners.

At the present time, we are one of the first companies in unified information
which, as we define it, incorporates or will incorporate into our inUnison-TM-
portal all of the unified communications solutions and unifies information from
private, public and enterprise sources and, through our various proprietary
engines, allows individuals to access this information anytime and anywhere in
any format from any communications device. We anticipate that with our success,
we may indeed begin to face additional competition in this space.

Our proprietary technologies will be key to the success of our new
inUnison-TM-portal and applications. Our speech recognition technologies are
speaker and dialect-independent, and are expected to augment future versions of
our inUnison-TM- portal working in conjunction with existing third party voice
recognition products. Our speech recognition vocabulary at present is among the
largest, consisting of approximately 300,000 words. We anticipate increased
competition from other speech recognition vendors such as Speechworks, IBM,
Lernout & Hauspie and Nuance.

LEGACY BUSINESSES

INFOTEL

Infrastructure Communications Equipment

Through Infotel, we sell infrastructure communications equipment products and
system integration services. Generally Infotel does not compete for business
with small companies, competing instead with larger system integrators and
distribution companies.

In the data-communications market, our key competitors have been Datacraft Asia
Ltd, Teledata Ltd, National Computer Systems Pte Ltd and ST Computer Systems
Ltd. These competitors distribute products manufactured by Cisco Systems, Ascend
Communications, Marconi Communications and others.

In the radio communications market, which largely serves the Singapore
government, there are fewer competitors, most of which have ties to the
government. CET Technologies Pte Ltd and Keppel Communications Pte Ltd. are
Infotel's main competitors. In some instances, Infotel works together with
these competitors in fulfilling government contracts.

In the test instrumentation market, Infotel has only one major competitor, which
is Agilent Technologies, a large electronic test equipment manufacturer.

ITEM 2. PROPERTIES

FACILITIES

Our corporate offices occupy approximately 15,110 square feet of office space in
premises shared with North American operations. This facility is leased
pursuant to a lease agreement expiring April 3, 2007. The lease provides for
approximately 3% rent escalations during each year of the lease. Rental payments
average U.S. $21,100 per month over the term of the lease. We have received a
decrease in our monthly rent and are currently negotiating an overall
modification of our lease.

Quaartz offices had occupied approximately 6,600 square feet of office space in
premises in Santa Clara, California. This facility was leased pursuant to a
lease agreement expiring July 14, 2002, which was not renewed, and employees
from that facility now work at our corporate office. Infotel has recently
renewed its office lease, which will now expire September 30, 2004, the lease is
for approximately 11,000 square feet. The monthly rent expense for Infotel's
office space is US $14,000. We believe that leased office space at market rates
is readily available at all locations.

In addition, we maintain small sales offices in various states.

ITEM 3. LEGAL PROCEEDINGS

In October 2001, a software vendor filed suit against the Company for breach of
contract totaling approximately $703,000 plus interest and attorney's fees. On
December 28, 2001, Appiant filed an answer denying this general demand, and is
preparing a counter-suit for return of over $600,000 paid to this vendor. In
August 2002, the parties entered into a mutual settlement agreement and release
of claims wherein the Company has agreed to make cash payments totaling $200,000
between February 2003 and May 2003, and will issue warrants to purchase 50,000
shares of Appiant common stock at an exercise price of $0.37, the Company has
accrued $200,000 as of September 30, 2002.

In January 2002, a default judgment was issued against the Company in favor of
an equipment vendor in the amount of $123,000. The Company was successful in
having that default judgment set-aside on February 6, 2002. The Company
subsequently entered into a mutual settlement agreement and release of claims in
July 2002 wherein the Company has agreed to make payments totaling $69,000,
which is accrued at September 30, 2002.

In January 2002, a services and equipment provider filed suit in Texas for
breach of contract totaling $117,000. The Company is currently in negotiations
to resolve this claim, but has fully accrued this potential liability at
September 30, 2002.

In February 2002, the Company resolved an arbitration matter and litigation
action involving a dispute over employment contract terms for two former Company
management employees. The settlement provides for payment of $88,000 to one
claimant over six months, and payment of $147,000 to the second claimant over a
total of twelve months. The company has accrued $235,000 for this matter. Also
in February 2002, these same claimants filed suit against the Company regarding
the Company's calculation of additional common stock due to the claimants under
an unrelated agreement. The Company is in settlement negotiations with the
claimant to resolve matters.

In May 2002, a customer requested indemnification of its internal defense costs
and expenses arising from its defense of a lawsuit involving claims of
infringement of certain patents which Appiant has licensed and which are
included in Appiant's legacy voice mail product. In lieu of seeking
reimbursement from Company of future defense fees, the customer offered to
accept a subrogated assignment of the Company's indemnification rights form the
patent owner. The Company agreed to tender the indemnification claim on to the
patent owner and assign that claim to the customer to directly seek
indemnification. The Company believes that this assignment to the customer is a
final resolution of this matter.

In May 2002, a former note holder tendered notice of the Company's default on a
settlement agreement and release relating to a $2.75 million indebtedness
arising out of the cancelled notes, the entire $2.75 million is recorded on the
company's books at September 30, 2002. The Company is currently in negotiations
toward an agreement to cure the default and amend the payment plan called for in
the settlement agreement.

In June 2002, the Company's former trademark counsel tendered notice of its
claim for $51,260 in unpaid fees and indicated that it would file suit to
collect these fees. The Company disputes some of these fees, but intends to
work with counsel towards a mutually agreed resolution of the matter.

In June and July 2002, several holders of debentures issued in April 2002
provided formal notices of default by the company for failing to register the
shares underlying the debentures or receive shareholder approval of the issuance
of all underlying shares. The Company and the debenture holders are currently
in discussions regarding options for curing these defaults and/or otherwise
resolving the matter.

In July 2002, a former vendor tendered notice of a demand for payment of
approximately $200,000 alleging breach of contract and open book account. The
Company disputes the claims as stated, and intends to work with the vendor
towards a mutually agreed resolution of the matter. The Company has not accrued
for this potential liability as it believes we will prevail.

In July 2002, counsel claiming to represent holders of certain Promissory Notes
due in June 2003 wrote the Company claiming that material information was
withheld from certain unidentified note holders by the Company when the Notes
were issued in June 2001. The Company is investigating this claim and has
requested information from the note holders, and intends to continue to
vigorously defend the matter.

In July 2002, a former supplier of equipment filed suit against the Company for
breach of contract and breach of guarantee totaling $419,581 plus interest
and attorney's fees. The Company has negotiated a settlement to a payment
schedule totaling $400,000.

In September 2002, a former vendor filed suit in Texas for breach of contractual
obligation totaling $107,956. The Company disputes a portion of the total but
intends to negotiate with counsel to settle the claim. The amount of the claim
is accrued at September 30, 2002.

While management intends to defend these matters vigorously, there can be no
assurance that any of these complaints or other third party assertions will be
resolved without costly litigation, or in a manner that is not adverse to our
financial position, results of operations or cash flow. No estimate can be made
of the possible loss or possible range of loss associated with the resolution of
these matters in excess of amounts accrued.

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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 2002.

PART II

ITEM 5. MARKET FOR ISSUER'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Our Common Stock is traded on the OTCBB Market under the symbol "APPS". As of
February 14, 2003, there were 17,194,841 shares of Common Stock outstanding held
by approximately 3,600 beneficial holders of record. The following table sets
forth, for the periods indicated, the high and low sales prices for the Common
Stock on the OTCBB Market. These over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, markdown or commission and may not
represent actual transactions. The trading market in our securities may at
times be relatively illiquid due to low trading volume.

COMMON STOCK
HIGH LOW
---- ---

2000
January................................. $ 9.563 $ 4.563
February................................ 14.875 8.313
March................................... 19.500 11.625
April................................... 20.750 11.500
May..................................... 24.750 15.938
June.................................... 18.250 10.000
July.................................... 13.875 6.938
August.................................. 15.500 8.313
September............................... 17.438 13.313
October................................. 25.250 15.000
November................................ 24.875 12.8125
December................................ 15.1875 4.000
2001
January................................. $ 6.750 $ 4.880
February................................ 6.250 4.813
March................................... 5.500 3.109
April................................... 3.550 2.400
May..................................... 2.850 1.570
June.................................... 4.900 1.540
July.................................... 2.830 1.800
August.................................. 2.190 1.800
September............................... 2.180 1.380
October................................. 2.190 1.520
November................................ 1.660 1.290
December................................ 3.050 1.140
2002
January................................. $ 3.280 1.660
February................................ 1.900 1.400
March................................... 1.540 1.170
April................................... 1.420 1.180
May..................................... 1.287 0.800

June.................................... 0.820 0.280
July.................................... 0.290 0.171
August.................................. 0.610 0.210
September............................... 0.700 0.380
October................................. 0.550 0.240
November................................ 0.390 0.170
December................................ 0.300 0.190

On February 14, 2003, the last reported sales price for the Common Stock as
reported on the OTCBB Market was $0.10.

DIVIDEND POLICY

We have never paid cash dividends on our Common Stock. Our board of directors
does not anticipate paying cash dividends in the foreseeable future as it
intends to retain future earnings to finance the expansion of our business and
for general corporate purposes. The payment of future cash dividends will
depend on such factors as our earnings levels, anticipated capital requirements,
operating and financial condition, consent from any lender, if applicable, and
other factors deemed relevant by our board of directors.

UNREGISTERED SALES OF SECURITIES

Effective April 19, 2002, Appiant commenced a secured financing of up to
$4,025,000 with certain accredited investors ("Investors") pursuant to a
Debenture and Warrant Purchase Agreement (the "Agreement"), dated April 19,
2002. As of May 28, 2002, $3,525,000 of Convertible Debentures including
$105,750 of Debentures issued as a finder's fee had closed. Under the terms of
the Agreement, Appiant agreed to issue to the Investors Convertible Debentures
bearing an interest rate of 8%. The Convertible Debentures may be converted into
unregistered, restricted shares of Appiant Common Stock for a purchase price per
share equal to the lower of (a) $1.21, which was the deemed closing price and
was determined based on the closing bid prices of the Common Stock for the five
trading days immediately prior to the closing date of the initial sale of the
Debentures, or (b) the average of the two lowest closing bid prices of Appiant
shares for the 20-day period immediately preceding any conversion. The
Convertible Debenture can be converted, at the option of the holder, at any time
until one year after the Closing Date. In the event the Convertible Debentures
are not converted, Appiant has the option to repay the indebtedness. Appiant
also has the right to redeem the Convertible Debentures prior to maturity for an
amount per share equal to 110% to 125% of the principal amount of the
Convertible Debentures being redeemed, as determined by the date of redemption.

In addition, Appiant issued to Investors warrants to purchase up to an aggregate
of 1,456,612 shares of unregistered, restricted Appiant Common Stock on the
total financing of $3,525,000. Appiant has also agreed to issue warrants for
100,000 shares of unregistered, restricted Appiant Common Stock as part of the
finders fee for this financing. The warrants have a term of five years and are
exercisable at a warrant price equal to 110% of the closing price or $1.33 per
share. The estimated value of the warrants of $1,846,000 was determined using
the Black-Scholes option pricing model and the following assumptions:
contractual term of 5 years, a risk free interest rate of 4.52%, a dividend
yield of 0% and volatility of 145%. The allocation of the Convertible Notes
proceeds to the fair value of the warrants of $2,052,000 was recorded as a
discount on the Convertible Notes and as additional paid-in capital. In
addition, as a result of the beneficial conversion feature described above for
the Convertible Notes, the Company recorded $2,052,000 additional paid-in
capital, and a discount on the notes payable, which is accreted over the note
maturity period to interest expense. As a result, these discounts are accreted
over the note maturity period and $1,193,000 was recorded as non-cash interest
expense for the year ended September 30, 2002.

Terms of the financing also provide that the Investors may nominate up to two
additional members to the Appiant Board of Directors, and provide the Investors
certain rights and options regarding possible future equity based financings by
Appiant. Appiant paid a cash finder's fee of 7% and Convertible Debentures of 3%
and warrants to purchase 100,000 shares of Common Stock, and other related
expenses. No underwriters were involved in this private placement.

The sale of the debentures and the warrants to the investors was exempt from the
registration provisions of the Securities Act, under Sections 4(2) and 4(6) of
the Securities Act, and the rules and regulations there under, because of the
nature of the offerees and Investors and the manner in which the offering was
conducted. The investors have acknowledged that the securities cannot be resold
unless registered or exempt from registration under the securities laws. Appiant
has agreed to register for resale on Form S-3 up to 12,000,000 shares of the
Common Stock (the "Registrable Shares") issued to the Shareholders as soon as
practicable following the Effective Date. Moreover, Appiant has agreed to seek
shareholder approval of the issuance of the Registrable Shares in excess of
19.99% of issued and outstanding Appiant Common Stock.

In addition, the Company entered into several Convertible Promissory Notes
Payable (the "Convertible Notes") in the aggregate principal amount of $125,000
with a related party. The Notes accrue interest at 10% per annum, which is
payable in common stock at the time of conversion and are collateralized by the
Company's legacy business accounts receivables, and the assets of the Infotel
subsidiary, and matured on various dates from April 30, 2002 through June 22,
2002. The conversion price is equal to the lower of 90% of the closing price of
the Company's common stock on the trading day immediately preceding the maturity
date, or 90% of any subsequent interim financing that occurs between the
issuance date of the notes and the maturity date. Upon conversion, the
Convertible Notes have no specific registration rights. As of September 30,
2002, the aggregate amount of $90,000 of these Convertible Notes had been
redeemed.

In connection with these Convertible Notes, the Company issued warrants to
purchase 123,174 shares of the Company's common stock at an exercise price of
ranging from $0.90 per share to $1.26 per share. The estimated value of the
warrants of $112,000 was determined using the Black-Scholes option pricing model
and the following assumptions: contractual term of 5 years, a risk free interest
rate ranging from 4.34% to 4.81%, a dividend yield of 0% and volatility ranging
from 144% to 145%. The allocation of the Convertible Notes proceeds to the fair
value of the warrants of $ 59,000 was recorded as a discount on the Convertible
Notes and as additional paid-in capital. Upon exercise of the warrants, the
holder has no specific registration rights. In addition, as a result of the
beneficial conversion feature described above for the Convertible Notes, the
Company recorded $66,000 additional paid-in capital, and a discount on the notes
payable, which is accreted over the note maturity period to interest expense. As
a result, these discounts are accreted over the note maturity period and $26,000
was recorded as non-cash interest expense for the year ended September 30, 2002.

During the three months ended March 31, 2002, the Company entered into several
Convertible Promissory Notes Payable (the "Convertible Notes") with certain
investors in the aggregate principal amount of $2,025,000, of which $1,550,000
was with members of the board of directors or shareholders. The Notes accrue
interest at 10% per annum, which is payable in common stock at the time of
conversion and are collateralized by the Company's legacy business accounts
receivables, and the assets of the Infotel subsidiary, and mature on various
dates from April 30, 2002 through October 15, 2002. The conversion price is
equal to the lower of 90% of the closing price of the Company's common stock on
the trading day immediately preceding the maturity date, or 90% of any
subsequent interim financing that occurs between the issuance date of the notes
and the maturity date. Upon conversion, the Convertible Notes have no specific
registration rights.

In connection with these Convertible Notes, the Company issued warrants to
purchase 1,315,000 shares of the Company's common stock at an exercise price of
ranging from $1.32 per share to $1.80 per share. The estimated value of the
warrants of $1,878,000 was determined using the Black-Scholes option pricing
model and the following assumptions: contractual term of 5 years, a risk free
interest rate of 3.375%, a dividend yield of 0% and volatility of 145%. The
allocation of the Convertible Notes proceeds to the fair value of the warrants
of $974,000 was recorded as a discount on the Convertible Notes and as
additional paid-in capital. Upon exercise of the warrants, the holder has no
specific registration rights. In addition, as a result of the beneficial
conversion feature described above for the Convertible Notes, the Company
recorded $1,051,000 additional paid-in capital, and a discount on the notes
payable, which is accreted over the note maturity period to interest expense.

receivables, and the assets of the Infotel subsidiary, and mature on various
dates from December 27, 2001 to November 16, 2003. The conversion price is equal
to the lower of 90% of the closing price of the Company's common stock on the
trading day immediately preceding the maturity date, or 90% of any subsequent
interim financing that occurs between the issuance date of the notes and the
maturity date. Upon conversion, the Convertible Notes have no specific
registration rights.

In connection with these Convertible Notes, the Company issued warrants to
purchase 945,000 shares of the Company's common stock at an exercise price of
ranging from $1.20 per share to $1.77 per share. The estimated value of the
warrants of $1,269,000 was determined using the Black-Scholes option pricing
model and the following assumptions: contractual term of 5 years, a risk free
interest rate of 3.92%, a dividend yield of 0% and volatility of 148%. The
allocation of the Convertible Notes proceeds to the fair value of the warrants
of $663,000 was recorded as a discount on the Convertible Notes and as
additional paid in capital. Upon exercise of the warrants, the holder has no
specific registration rights. In addition, as a result of the beneficial
conversion feature described above for the Convertible Notes, the Company
recorded $726,000 additional paid-in capital, and a discount on the notes
payable. These discounts are accreted over the note maturity period.

Under the June 8, 2001 Convertible Notes Payable purchase agreement, the common
stock issuable pursuant to the conversion of the notes and exercise of the
related warrants were to be registered within 30 days after the next round of
financing. Due to the registration requirement, the warrants were classified as
liabilities and re-measured at each reporting date. On December 1, 2001,
certain of the warrant agreements were amended to remove the requirement to
register the common stock under these warrants. Accordingly, the liability
related to these warrants on December 1, 2001 of $670,000 was reclassified to
stockholders' equity, additional paid-in capital.

Under the April 19, 2002, Debenture and Warrant Purchase Agreement, the
conversion price is not fixed. Due to this uncertainty in price, EITF Issue No.
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock" applies. In accordance with the
provisions of EITF 00-19, the Company estimated the fair value of all
outstanding warrants as of June 30, 2002, using the Black-Scholes option-pricing
model with the following assumptions: Volatility of 133%; dividend yield of 0%;
risk-free interest rate of 4.080%; and expected lives of 5 years. The value of
all warrants as of June 30, 2002, was estimated at $1,496,000, which was
recorded as a reclassification from additional paid-in capital to notes payable.
For future quarters, the value of these warrants will be re-calculated based on
their market value at quarter end.

In connection with Convertible Notes issued on the September 26 and 28, 2002 ,
the Company issued warrants to purchase 572,727 shares of the Company's common
stock at an exercise price of ranging from $0.45 per share to $0.50 per share.
The estimated value of the warrants of $143,000 was determined using the
Black-Scholes option pricing model and the following assumptions: contractual
term of 5 years, a risk free interest rate of 2.82%, a dividend yield of 0% and
volatility of 144%. The allocation of the Convertible Notes proceeds to the fair
value of the warrants of $143,000 was recorded as a discount on the Convertible
Notes and as additional paid in capital. Upon exercise of the warrants, the
holder has no specific registration rights. In addition, as a result of the
beneficial conversion feature described above for the Convertible Notes, the
Company recorded $157,000 additional paid-in capital, and a discount on the
notes payable. These discounts are accreted over the note maturity period and
$9,873 was recorded as non-cash interest expense for the three months ended
September 30, 2002.

ITEM 6. SELECTED FINANCIAL DATA

YEARS ENDED SEPTEMBER 30,2002,2001, 2000, 1999 and 1998
-------------------------------------------------------

2002 2001 2000 1999 1998
--------- --------- --------- -------- --------
(IN THOUSANDS)

Total net revenues. . . . . . . . . . $ 11,812 $ 21,748 $ 25,529 $23,340 $ 9,442
Loss from continuing operations . . . (11,202) (21,009) (10,174) (512) (1,430)
Net loss from continuing operations. (15,771) (26,479) (12,844) (717) (1,523)
Loss from discontinued operations . . - - - - (581)
Loss on disposal of discontinued
operations. . . . . . . . . . . . . - - - - (369)
Net loss per share -- basic and
diluted continuing operations . . . $ (0.97) $ (2.32) $ (1.25) $ (0.23) $ (0.41)
Net loss per share -- basic and
diluted discontinuing operations. . $ - $ - $ - $ - $ (0.20)
Shares used in net loss per
share -- basic and diluted. . . . . 16,296 14,687 10,303 6,249 4,802
Total assets. . . . . . . . . . . . . $ 30,233 $ 40,880 $ 38,785 $16,021 $12,871
Long-term obligations . . . . . . . . $ 419 $ 511 $ 4,717 $ 62 $ 68

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

The statements contained in this Report on Form 10-K that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding our
expectations, hopes, intentions or strategies regarding the future.

Forward-looking statements include statements regarding: future product or
product development; future research and development spending and our product
development strategies; the levels of international sales; future expansion or
utilization of manufacturing capacity; future expenditures; and statements
regarding current or future acquisitions, and are generally identifiable by he
use of the words "may", "should", "expect", "anticipate", "estimates",
"believe", "intend", or "project" or the negative thereof or other variations
thereon or comparable terminology.

Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, performance or achievements or
industry results, performance or achievements) expressed or implied by these
forward-looking statements to be substantially different from those predicted.
The factors that could affect our actual results include, but are not limited
to, the following:

- general economic and business conditions, both nationally and in the
regions in which we operate;

- adoption of our new recurring revenue service model;

- competition;

- changes in business strategy or development plans;

- delays in the development or testing of our products;

- technological, manufacturing, quality control or other problems that
could delay the sale of our products; our inability to obtain
appropriate licenses from third parties, protect our trade secrets,
operate without infringing upon the proprietary rights of others, or
prevent others from infringing on our proprietary rights;

- our inability to retain key employees;

- our inability to obtain sufficient financing to continue to expand
operations; and

- changes in demand for products by our customers.

Certain of these factors are discussed in more detail elsewhere in this report,
including under the caption "Risk Factors; Factors That May Affect Operating
Results".

We do not undertake any obligation to publicly update or revise any
forward-looking statements contained in this Report or incorporated by
reference, whether as a result of new information, future events or otherwise.
Because of these risks and uncertainties, the forward-looking events and
circumstances discussed in this Report might not transpire.

CRITICAL ACCOUNTING POLICY AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an on-going
basis, management evaluates its estimates and judgments, including those related
to revenue recognition, accrued expenses, financing operations, and
contingencies and litigation. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The most significant
accounting estimates inherent in the preparation of the Company's financial
statements include estimates as to the appropriate carrying value of certain
assets and liabilities which are not readily apparent from other sources,
primarily allowance for doubtful accounts receivables, accruals for other costs,
and the classification of net operating loss and tax credit carry forwards
between current and long-term assets. These accounting policies are described at
relevant sections in this discussion and analysis and in the notes to them
consolidated financial statements included in our Annual Report on Form 10-K for
the fiscal year ended September 30, 2002.

OVERVIEW

Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with the consolidated
financial statements included herein. In addition, you are urged to read this
report in conjunction with the risk factors described herein. The discussion of
financial condition includes changes taking place or believed to be taking place
in connection with: our execution of our new, unified communications and unified
information hosted business model; the software, voice processing, data
processing and communications industry in general and how we expect these
changes to influence future results of operations; and liquidity and capital
resources, including discussions of capital financing activities and
uncertainties that could affect future results.

We are a software applications and services company that is transitioning our
business model to specialize in unified communications and unified information
(UC/UI) solutions. We are transitioning our business model to provide our
hosted, IP-based unified communications and unified information portal and
applications branded under the name "inUnison-TM-" in an ASP recurring revenue
model.

Our inUnison-TM- portal and applications incorporate or will incorporate both
our proprietary UC/UI applications including, but not limited to, our own speech
recognition technologies, data mining, data analysis, navigation, web
collaboration, recommendation engines, web phone, and client relationship
management ("CRM") applications, as well as various third party applications.
Our inUnison-TM- portal serves as a single means of accessing information from
multiple sources.

Our consolidated financial statements include our results as well as the results
of our significant operating subsidiary: Infotel Technologies (Pte) Ltd
("Infotel. The legacy business of Appiant NA and Trimark were discontinued and
Enhancement India call center business was sold, these businesses are not
expected to have a materially adverse effect on the Company's financial
condition. On February 5, 2001, Appiant acquired certain assets of Quaartz,
Inc., the results of the operations of Quaartz from February 1, 2001 to
September 30, 2001 and for all of fiscal 2002 are included in our consolidated
financial statements.

For our legacy operations, the Company derives its revenue primarily from
Infotel. The revenue derived from Infotel primarily relates to the distribution
and integration of telecommunications and other electronic products and
providing services primarily for radar system integration, turnkey project
management and test instrumentation. Equipment sales and related integration
services revenue is recognized upon acceptance and delivery if a signed contract
exists, the fee is fixed or determinable, collection of the resulting receivable
is reasonably assured, and product returns are reasonably estimable. Provisions
for estimated warranty costs and returns are made when the related revenue is
recognized. Revenue from maintenance services related to ongoing customer
support is recognized ratably over the period of the maintenance contact.
Maintenance service fees are generally received in advance and are
non-refundable. Service revenue is recognized as the related services are
performed. Revenues from projects undertaken for customers under fixed price
contracts are recognized under the percentage-of-completion method of accounting
for which the estimated revenue is based on the ratio of cost incurred to costs
incurred plus estimated costs to complete. When the Company's current estimates
of total contract revenue and cost indicate a loss, the Company records a
provision for estimated loss on the contract.

While we have been and are in the process of launching our new, hosted unified
communications and unified information applications business model, our results
for fiscal year ended September 30, 2002 reflect generally the results of our
legacy business in Singapore from our Infotel subsidiary. Our revenues for

fiscal year 2002 were derived substantially from our legacy businesses. Revenues
related to our offering of the inUnison-TM- UC/UI applications in a hosted,
recurring ASP revenue model were less than $1 million in fiscal 2002. Revenues
from legacy systems have steadily decline in North America and the Company
discontinued its legacy business in fiscal 2002, due to declining market demand
for legacy voicemail systems and to the introduction of inUnison-TM-. Due to
economic conditions and as a result of discontinued operations, we have
decreased significantly our headcount in the United States (sales, sales
engineering, operations, and engineering).

Currently our new business model for providing unified communications and
unified information in a hosted, recurring revenue service model makes us one of
the first companies in this new market. We anticipate competition in this
relatively new market space to increase significantly. We will continue to
invest heavily in software development and in the operations personnel necessary
to deploy and operate our applications to provide our customers with carrier
grade or "99.95%" reliability.

In fiscal year 2002, we entered into a number of financing transactions designed
to provide us with funding for our new, hosted unified communications and
unified information business model. We successfully closed on a $7.1 million
convertible debentures with warrants.

We continued to invest heavily in research and development, and acquired various
technologies. We acquired certain assets of Quaartz, Inc. including the
intellectual property related to the calendar applications that we have
incorporated into our inUnison-TM- portal.

RESULTS OF OPERATIONS

Management's discussions address audited financial data for the years ended
September 30, 2002, 2001 and 2000. The following table shows audited results of
operations, as a percentage of net sales, for the fiscal years ended September
30, 2002, 2001 and 2000:

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

Years Ended September 30,
----------------------------------- -------------------------
2002 2001 2000
----------------------------------- -------- ------- ------
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 119.6% 80.7% 72.4%
Gross Profit (19.6)% 19.3% 27.6%
Restructuring, selling, general and
administrative expenses 67.7% 90.0% 64.8%
Impairment charges (24.0)% 17,0% --%
Amortization of goodwill 31.6% 9.0% 2.2%
Loss from operations (94.8)% (96.7)% (39.9)%
Other expenses 37.9% 24.6% 9,4%
Income Loss before taxes (132.7)% (120.5)% (49.3)%
Income tax 0.8% 1.3% 1.0%
Net loss (133.5)% (121.8)% (50.3)%
----------------------------------- -------- ------- ------

Net Revenues

For the fiscal year ended September 30, 2002, our net revenues were $11.8
million as compared to $21.7 million for the same period ending September 30,
2001 and $25.5 million for the same period in 2000, representing a decrease of
$9.9 million or 45.6% compared to fiscal 2001 and $3.8 million or a 14.9%
decrease for the same period in 2000. Our net revenues for fiscal year 2002 were
adversely affected by the transition to our new business model of providing
unified communications and unified information applications in our inUnison-TM-
portal in a hosted service, recurring revenue model. The decline also represents
a decline in our legacy revenues in North America and a decision by management
to de-emphasis several legacy products such as call centers and proprietary
voice messaging products.

On a full year basis, APPIANT NA's net revenues were $2.2 million for the fiscal
year ended September 30, 2002 as compared to $8.7 million for the period ending
September 30, 2001 and $14.0 million for the same period in 2000. The 2002

year-to-date decrease in APPIANT NA net revenues came from reduced legacy
products, which were discontinued and slower than expected revenues from our
inUnison-TM- product offering.

Net revenues for our Infotel subsidiary were $9.6 million for the fiscal year
ended September 30, 2002 as compared to $13.1 million for our fiscal year ended
September 30, 2001 and $11.6 million for the same period in 2000. The decrease
in such net revenues in fiscal year 2002 occurred within the all product
segments due to an overall weak Singapore economy.

Our legacy business backlog decreased to $2.1 million at September 30, 2002 as
compared to $5.5 million as of September 30, 2001 and $9.5 million for the same
period in 2000. APPIANT NA's order backlog decreased to zero from $1.0 million
at September 30, 2001 and from $2.9 million at September 30, 2000. Infotel's
backlog decreased at September 30, 2002 to $2.1 million from $2.3 million at
September 30, 2001 and from $6.6 million at September 30, 2000. Orders for our
inUnison product total approximately $1.2 million as of September 30, 20002.

Gross Margin

Our gross margin for fiscal year 2002 was $(2.3) million or (19.6)% of net
revenues, as compared to $4.2 million or 19.3% for fiscal year 2001 and $7.1
million or 27.6% for the same period in 2000. The decrease principally relates
to reductions in our legacy business revenues both in the US and Singapore,
coupled with the fixed nature of operating costs in our APPIANT NA operation
associated with the delivery of inUnison services. APPIANT NA's gross margin on
a stand-alone basis for the fiscal year 2002 was $(5.1) million or (237.0)%, as
compared to $1.0 million or 8.0% for the fiscal year ended September 30, 2001
and $3.0 million or 23.0% for the same period in 2000. The decrease in gross
margin in APPIANT NA was due to reduced revenue levels and the continuing
unabsorbed cost of operations that are part of cost of delivery of inUnison
services. Infotel's gross margin percentage on a stand-alone basis increases
from 29.2% for the fiscal year ended September 30, 2002 to 27.4% for the fiscal
year ended September 30, 2001. This increase in Infotel's gross margin
percentage is due to a decrease in spending and cost controls implemented during
fiscal 2002 in anticipation of a downward trend in the Singapore economy.

Research and Development

Our industry is characterized by rapid technological change and product
innovation. Our early "beta" customers have also requested numerous changes to
our original product release and management expects new customers will also
request product changes and innovations. We believe that continued timely
development of products for both existing and new markets is necessary to remain
competitive. Therefore, we devote significant resources to programs directed at
developing new and enhanced products, as well as new applications for existing
products. Our capitalized research and development expenditures were $1.8
million in fiscal year 2002 excluding $1.6 million of internal engineering costs
that were capitalized during fiscal 2002, reflecting our continued investment in
research and development. We have adopted AICPA Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed and Obtained for
Internal Use," ("SOP 98-1") and capitalize our research and development costs
related to software development, and we will begin amortizing these costs when
the capitalized software is substantially complete and ready for its intended
use.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses ("SG&A") excluding research and
development, but including goodwill amortization, restructuring charge,
impairment loss, and non-cash charges related to options and warrants, as a
percentage of net revenues, increased to 59.5% for the fiscal year ended
September 30, 2002, as compared to 102.2% for fiscal year 2001 and 67.5% for
fiscal year 2000. The non-cash expenses included in fiscal 2002 were $0.1
million associated with cashless exercise options included in warrants issued to
officers and board of director members, which are accounted for using variable
accounting. This means that the difference between the exercise price of the
warrant and the current market value of our common stock is charged to expense
as the warrant vests until such warrants are exercised, canceled or expire. The
non-cash expenses included in fiscal 2001 were $3.7 million of impairment costs,
amortization charges of $1.9 million associated with acquisitions and a benefit
of $1.7 million of non-cash compensation associated with cashless exercise
options included in warrants issued to officers and board of director members.
Non-cash compensation associated with such cashless exercise options of $4.4
million was recorded in fiscal 2000. The Company recorded amortization charges
of $0.7 million during 2000.

SG&A expenses for Appiant NA and Infotel on a stand-alone basis was as follows:

YEARS ENDED SEPTEMBER 30
-------------------------
2002 2001 2000
------ -------- -------
(In thousands)
Appiant North American
Operations:
Non-cash Compensation $ 113 $(1,700) $ 4,400
Other 4,533 16,239 9,465
------ -------- -------
4,646 14,539 13,865

Infotel 2,387 2,139 2,500
------ -------- -------
Total SG&A Expense $7,033 $16,678 $16,365
====== ======== =======

SG&A, excluding non-cash charges totaled $6.9 million for fiscal 2002, $18.4
million for 2001 and $12.2 million for 2000. The decrease in fiscal 2002 is
primarily due to substantial reductions in headcounts and spending implemented
by management during the year. The increase in fiscal 2001 as a percentage of
revenue is primarily due to the reduction in revenues for fiscal 2001 and
increased costs as we accelerated our transition to our new business model.

SG&A, excluding non-cash charges for Appiant's North American operations on a
stand-alone basis decreased to $4.5 million or 70.9% for fiscal year 2002 due to
a substantial reduction in headcount and spending implemented by management
during the year. SG&A, excluding non-cash charges increased to $16.2 million or
187.4% of Appiant NA revenues in fiscal year 2001 from $9.7 million or 69.1% in
fiscal year 2000 mainly because of the significant decrease in North American
revenues during fiscal year 2001 and expenditures in Sales and Marketing related
to the service offering. On a stand-alone basis, Infotel's SG&A increased to
$2.4 million during fiscal 2002 representing an increase of $0.2 million over
the same period a year earlier. Infotel's SG&A decreased to $2.1 million in
fiscal 2001 compared to $2.5 million in fiscal 2000. On a stand-alone basis,
Infotel's SG&A increased as a percentage of revenues to 24.7% for fiscal year
2002 from 16.3% for fiscal year 2001 and 21.6% in fiscal year 2000. Infotel's
SG&A expenses increased as a percentage of revenues mainly because of the
decrease in Infotel's revenues and slightly higher expenditures during fiscal
year 2002.

Unusual or Infrequent Events or Transactions that Materially Affected Income
--------------------------------------------------------------------------------
From Continuing Operations
----------------------------
Impairment of Equipment and Capitalized Software and Release of Lease Liability:
-------------------------------------------------------------------------------
The Company had capitalized $1.2 million of purchased software related to
software obtained for billing and provisioning. In June 2001, the Company
concluded that the software would not be placed in service and recorded an
impairment charge of $1.2 million in fiscal year 2001. In fiscal year 2002, the
Company and its billing and provisioning vendor negotiated a settlement whereby
the related account payable was written-off.

In connection with the above transaction, the Company entered into lease
financing arrangements with a hardware vendor, under which approximately $2.1
million related to hardware and related product costs and $2.5 million related
to consulting services acquired for its first data center in Atlanta, Georgia.
On June 29, 2001, the Company returned $1.6 million of computer and related
equipment at the Atlanta data center to the vendor. The vendor reduced the lease
payments due by $1.6 million and as a result the Company reduced equipment and
the related capital lease obligations by an equal amount. The Company relocated
its data center to Sunnyvale, California in June 2001 and relocated the hardware
of $500,000 to this location in September 2001. The remaining $2.5 million of
consulting services were charged to operating expenses, which related to the
installation of the hardware in the Atlanta data center, as such costs had no
future value following the relocation. During fiscal year 2002, the Company and
its hardware vendor agreed that the balances due under the leases, were forgiven
and the Company wrote-off the lease obligations.

Non-Cash Compensation Charges included in SG&A: Included in selling, general
-------------------------------------------------
and administrative expenses ("SG&A") are non-cash compensation charges
associated with cashless exercise options included in warrants issued to
officers and board of director members, which are accounted for using variable
accounting. Thus the difference between the exercise price of the warrant and
the current market value of our common stock is charged to expense as the
warrant vests until such warrants are exercised, canceled or expire. Non-cash
compensation charges recorded amounted to a $0.1 million charge in fiscal 2002,
a benefit of $1.7 million during 2001 and an expense of $4.4 million in fiscal
2000.

Goodwill arising on the acquisition of the Infotel subsidiary was $2.4 million.
Further, we advise the amortization periods for the Company's acquisitions are
as follows:

AMORTIZATION
------------
PERIOD
------

Infotel 10 years
SVG Software Services 5 years
Triad 5 years
Quaartz 3 years

We determined the useful life of the goodwill at the date of acquisition as the
period over which the acquired business was expected to contribute directly or
indirectly to our future cash flows. The estimate of the useful life was based
on an analysis of all pertinent factors, in particular, our expected use of the
acquired business and our best estimate of the effects of obsolescence, demand,
competition, and other economic factors (such as the stability of the industry
and known technological advances).

Interest and Other Income, Net

Our net interest expense decreased to $6.4 million or 25.6% in fiscal year 2002
from $8.6 million or 39.4% in fiscal year 2002 and from $2.3 million during
fiscal 2000. The decrease in net interest expense in fiscal year 2002 results
primarily from non-cash charges related to a beneficial conversion feature
associated with debentures that we issued in fiscal years 2000, 2001 and 2002.

Non-cash Charges Included in Interest Expense: Included in interest expense are
---------------------------------------------
certain non-cash charges relating to warrants issued and associated beneficial
conversion features in connection with various notes payable. Interest expense
for the years ended September 30, 2002, 2001 and 2000 is summarized as follows:

YEARS ENDED SEPTEMBER 30,
2002 2001 2000
----------- ----------- -----------
(In thousands)
Non-cash charges relating to
warrants issued $ 822 $ 4,007 $ -
Revaluation of Warrant
Liability (5,624) (3,864) -
Non-cash charges relating to
amortization of non-cash
beneficial conversion features
arising on issuance of various
convertible notes payable 7,417 3,572 1,595
Accrued interest on notes
payable and convertible notes
payable 1,174 641 188
Interest on capital leases,
lines of credit and other loans 156 317 524

----------- ----------- -----------
Total interest expense $ 3,945 $ 4,673 $ 2,307
=========== =========== ===========

Income taxes

We currently have approximately $56 million in US federal net operating loss
carry-forwards. The use of approximately 8 million of these net-operating losses
are subject to an annual limitation of $250,000. At September 30, 2002, we
provided a 100% valuation allowance against our deferred tax asset. We believe
that since sufficient uncertainty exists regarding the realization of the
deferred tax asset, a full valuation allowance is required. Income tax of
$91,000 relates to accrued income tax liabilities for Infotel, our subsidiary
in Singapore.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our capital requirements through a combination
of sales of equity securities, convertible and other debt offerings, bank
borrowings, asset-based secured financings, structured financing and cash
generated from operations.

During our fiscal year ended September 30, 2002 net cash used in operating
activities was $7.3 million. Although we incurred a loss of $14.3 million for
the fiscal year, $9.6 million of this loss was attributed to various non-cash
charges. Further, our cash loss was increased by substantial increases in
accounts receivables and deferred revenue and substantial decreases in accounts
payable and other current liabilities. Net cash provided by investing and
financing activities totaled $4.5 million consisting of proceeds from issuance
of convertible debentures and warrants which were offset by payments on capital
lease obligations and purchases of software, property and equipment.

During our fiscal year ended September 30, 2002 net cash used in operating
activities was $9.9 million. Although we incurred a loss of $24.6 million for
the fiscal year, $12.2 million of this loss was attributed to various non-cash
charges. Further, our loss was offset by a substantial decrease in accounts
receivables. Net cash provided by investing and financing activities totaled
$7.7 million consisting of proceeds from issuance of convertible debentures, the
issuance of Common and Preferred Stock, the exercise of options and warrants,
the proceeds of a note from a vendor which were offset by purchase of software
and property and equipment.

Our principal sources of liquidity at September 30, 2001 were as follows:

In addition, Appiant issued to Investors warrants to purchase up to an aggregate
of 1,456,612 shares of unregistered, restricted Appiant Common Stock on the
total financing of $3,525,000. Appiant has also agreed to issue warrants for
100,000 shares of unregistered, restricted Appiant Common Stock as part of the
finders fee for this financing. The warrants have a term of five years and are
exercisable at a warrant price equal to 110% of the closing price or $1.33 per
share. The estimated value of the warrants of $1,635,000 was determined using
the Black-Scholes option pricing model and the following assumptions:
contractual term of 5 years, a risk free interest rate of 3.375%, a dividend
yield of 0% and volatility of 133%. The allocation of the Convertible Notes
proceeds to the fair value of the warrants of $1,109,000 was recorded as a
discount on the Convertible Notes and as additional paid-in capital. In
addition, as a result of the beneficial conversion feature described above for
the Convertible Notes, the Company recorded $1,982,000 additional paid-in
capital, and a discount on the notes payable, which is accreted over the note
maturity period to interest expense. As a result, these discounts are accreted
over the note maturity period and $727,000 was recorded as non-cash interest
expense for the three months ended June 30, 2002.

In addition, the Company entered into several Convertible Promissory Notes
Payable (the "Convertible Notes") in the aggregate principal amount of $125,000
with a related party. The Notes accrue interest at 10% per annum, which is
payable in common stock at the time of conversion and are collateralized by the
Company's legacy business accounts receivables, and the assets of the Infotel
subsidiary, and matured on various dates from April 30, 2002 through June 22,
2002. The conversion price is equal to the lower of 90% of the closing price of
the Company's common stock on the trading day immediately preceding the maturity
date, or 90% of any subsequent interim financing that occurs between the
issuance date of the notes and the maturity date. Upon conversion, the
Convertible Notes have no specific registration rights. As of June 30, 2002, the
aggregate amount of $90,000 of these Convertible Notes had been redeemed.

In connection with these Convertible Notes, the Company issued warrants to
purchase 123,174 shares of the Company's common stock at an exercise price of
ranging from $0.90 per share to $1.26 per share. The estimated value of the
warrants of $40,000 was determined using the Black-Scholes option pricing model
and the following assumptions: contractual term of 5 years, a risk free interest
rate of 3.375%, a dividend yield of 0% and volatility of 133%. The allocation of
the Convertible Notes proceeds to the fair value of the warrants of $ 39,000 was
recorded as a discount on the Convertible Notes and as additional paid-in
capital. Upon exercise of the warrants, the holder has no specific registration
rights. In addition, as a result of the beneficial conversion feature described
above for the Convertible Notes, the Company recorded $70,000 additional paid-in
capital, and a discount on the notes payable, which is accreted over the note
maturity period to interest expense. As a result, these discounts are accreted
over the note maturity period and $26,000 was recorded as non-cash interest
expense for the three months ended June 30, 2002.

Between October 31, 2001 and December 20, 2001, the Company entered into several
Convertible Promissory Notes Payable (the "Convertible Notes") with certain
investors in the aggregate principal amount of $1,390,000, of which $400,000 was
with members of the board of directors or shareholders. The Notes accrue
interest at 8% per annum, which is payable in common stock at the time of
conversion and are collateralized by the Company's legacy business accounts
receivables, and the assets of the Infotel subsidiary, and mature on various
dates from December 27, 2001 to November 16, 2003. The conversion price is equal
to the lower of 90% of the closing price of the Company's common stock on the
trading day immediately preceding the maturity date, or 90% of any subsequent
interim financing that occurs between the issuance date of the notes and the
maturity date. Upon conversion, the Convertible Notes have no specific
registration rights.

In connection with Convertible Notes issued on the September 26 and 28, 2002 ,
the Company issued warrants to purchase 271,700 shares of the Company's common
stock at an exercise price of ranging from $0.45 per share to $0.50 per share.
The estimated value of the warrants of $271,700 was determined using the
Black-Scholes option pricing model and the following assumptions: contractual
term of 5 years, a risk free interest rate of 2.82%, a dividend yield of 0% and
volatility of 144%. The allocation of the Convertible Notes proceeds to the fair
value of the warrants of $142,600 was recorded as a discount on the Convertible
Notes and as additional paid in capital. Upon exercise of the warrants, the
holder has no specific registration rights. In addition, as a result of the
beneficial conversion feature described above for the Convertible Notes, the
Company recorded $157,400 additional paid-in capital, and a discount on the
notes payable. These discounts are accreted over the note maturity period and
$9,873 was recorded as non-cash interest expense for the three months ended
September 30, 2002.

RISK FACTORS; FACTORS THAT MAY AFFECT OPERATING RESULTS

The following risk factors may cause actual results to differ materially from
those in any forward-looking statements contained in the MD&A or elsewhere in
this report or made in the future by us or our representatives. Such
forward-looking statements involve known risks, unknown risks and uncertainties
and other factors which may cause the actual results, performance or
achievements expressed or implied by such forward-looking statements to differ
significantly from such forward-looking statements.

WE CURRENTLY HAVE A GOING CONCERN OPINION FROM OUR OUTSIDE AUDITORS

The Company received a going concern opinion on its financial statements for
both fiscal 2001 and 2002. A going concern opinion means that the Company does
not have sufficient cash and liquid assets to cover its operating capital
requirements for the preceding twelve-month period and if sufficient cash cannot
be obtained the Company would have to substantially alter its operations or may
not be forced to discontinue operations. The fact that the Company was able to
continue operating for more than twelve-months since receiving a going concern
opinion on its fiscal 2001 financial statements is not an indication that it
will be able to do so in the future. To the contrary the Company's cash
position has worsen since fiscal 2001 and its ability to continue its current
operations is less likely.

WE HAVE CURRENTLY RECORDED A NET LOSS, WE HAVE A HISTORY OF NET LOSSES AND WE
CANNOT BE CERTAIN OF FUTURE PROFITABILITY.

We recorded a net loss of $15.8 million on net revenues of $11.8 million our
fiscal year ended September 30, 2002 and a net loss of $29.9 million on net
revenues of $21.7 million during fiscal 2001. We also sustained significant
losses for the fiscal years ended September 30, 1999 and 2000.

We anticipate continuing to incur significant sales and marketing, product
development and general and administrative expenses and, as a result, we will
need to generate significantly higher revenue to sustain profitability as we
build our organization for our new inUnison-TM- business model. In addition, we
anticipate significant amortization of capitalized software and other assets
that we have purchased or developed for our new inUnison-TM- business model in
our fiscal year 2003. We cannot be certain that we will continue to realize
sufficient revenue to return to or sustain profitability.

Our financial condition and results of operations may be adversely affected if
we fail to produce positive operating results. This could also:

- adversely affect the value of our common stock;

- adversely affect our ability to obtain debt or equity financing on
acceptable terms to finance our operations; and

- impair our ability to continue in business.

OUR EQUITY AND DEBT FUNDING SOURCES MAY BE INADEQUATE TO FINANCE FUTURE
ACQUISITIONS.

The acquisition of complementary businesses, technologies and products has been
and may continue to be key to our business strategy. Our ability to engage in
acquisition activities depends on us obtaining debt or equity financing, neither
of which may be available or, if available, may not be on terms acceptable to
us. Our inability to obtain this financing may prevent us from executing
successfully our acquisition strategy.

Further, both debt and equity financing involve risks. Debt financing may
require us to pay significant amounts of interest and principal payments,
reducing our cash resources we need to expand or transform our existing
businesses. Equity financing may be dilutive to our stockholders' interest in
our assets and earnings.

A NUMBER OF FACTORS COULD CAUSE OUR FINANCIAL RESULTS TO BE WORSE THAN EXPECTED,
RESULTING IN A FURTHER DECLINE IN OUR STOCK PRICE.

We have significantly decreased our operating expenses to including our sales
and marketing activities, our customer support capabilities, development of new
distribution channels, research and development, and our operational
infrastructure. We base our operating expenses on anticipated revenue trends and

a high percentage of our expenses are fixed in the short term. As a result, any
delay in generating or recognizing revenue could cause our quarterly operating
results to be below the expectations of public market analysts or investors, if
any, which could cause the price of our common stock to fall further.

We may experience a delay in generating or recognizing revenue because of a
number of reasons. We are dependent on our business partners and vendors to
supply us with hardware, software, consulting services, hosting, and other
support to launch and operate our new business.

Our quarterly revenue and operating results have varied significantly in the
past and may vary significantly in the future due to a number of factors,
including:

- Fluctuations in demand for our products and services;

- Unexpected product returns or the cancellation or rescheduling of
significant orders;

- Our ability to develop, introduce, ship and support new products and
product enhancements, and to project manage orders and installations;

- Announcement and new product introductions by our competitors;

- Our ability to develop and support customer relationships with service
providers and other potential large customers;

- Our ability to achieve required cost reductions;

- Our ability to obtain sufficient supplies of sole or limited sourced
third party products;

- Unfavorable changes in the prices of the products and components we
purchase;

- Our ability to attain and maintain production volumes and quality
levels for our products;

- Our ability to retain key employees;

- The mix of products and services sold;

- Costs relating to possible acquisitions and integration of
technologies or businesses; and

- The effect of amortization of goodwill and purchased intangibles
resulting from existing or future acquisitions.

Due to the foregoing factors, we believe that period-to-period comparisons of
our operating results should not be relied upon as an indicator of our future
performance.

OUR NEW PRODUCTS AND STRATEGIC PARTNERING RELATIONSHIPS MAY NOT BE SUCCESSFUL.

We have launched our inUnison-TM- UC/UI product applications that are designed
to provide our customers with hosted unifying communications and unifying
information solutions. While we believe that our inUnison-TM- applications will
provide our customers with scaled, carrier grade IP-based solutions, we cannot
assure you that our customers will accept or adopt them on a large scale, in
fact early indications are that adoption of unified communication services in
general and inUnison-TM- in particular has been slower than expected. Our
integration efforts with other third party software has and could continue to
result in product delays and cost overruns. We cannot assure you that other
software vendors whose software products we license or incorporate into our
inUnison-TM- portal will continue to support their products. If these vendors
discontinue their support, our business would be adversely affected.

Further, we expect to continue incur substantial expenditures for equipment,
systems, research and development, consultants and personnel to implement this
new business model. As a result, our operating results and cash flows may be
adversely affected. Significant working capital will be needed by the Company to
meet its business plan. Although we believe that this new product offering will
ultimately result in profitable operations, there can be no assurance that the
implementation of our new business model will be successful or that we can
attract the funds necessary to reach cash flow breakeven.

RAPID GROWTH WILL STRAIN OUR OPERATIONS AND REQUIRE US TO INCUR COSTS TO UPGRADE
OUR INFRASTRUCTURE.

Concerning the development and launch of our new hosted inUnison-TM- business
model, if we were to experience periods of rapid growth, it would significant
strain on our resources. Unless we manage such growth effectively, we may make
mistakes in operating our business such as inaccurate sales forecasting,
incorrect production planning, managing headcount, or inaccurate financial
reporting, either or all of which may result in unanticipated fluctuations in
our operating results and adverse cash flow and financing requirements. Rapid
growth and expansion would strain our management, operational and financial
resources. Our management team has had limited experience managing such rapidly
growing companies on a public or private basis. To accommodate such growth, we
will be required among other things to:

- Improve existing and implement new operations, information and
financial systems, procedures and controls;

- Recruit, train, manage, and retain additional qualified personnel
including sales, marketing, research and development personnel;

- Manage multiple relationships with our customers, our customers'
customers, our strategic partners, suppliers and other third parties;
and

- Acquire additional office space and remote offices in numerous
locations within and without the United States that will require space
planning and infrastructure to support these additional locations.

We may not be able to install adequate control systems in an efficient and
timely manner, and our current or planned financial, operational and personnel
systems, procedures and controls may not be adequate to support our future
operations. We would need to install various new management information system
tools, processes and procedures, continue to modify and improve our existing
information technology infrastructure, and invest in training our people to meet
the increasing needs associated with our growth. The difficulties associated
with installing and implementing these new systems, procedures and controls may
place a significant burden on our management and our internal resources. In
addition, as we grow internationally, we will have to expand our worldwide
operations and enhance our communications infrastructure. Any delay in the
implementation of such new or enhanced systems, procedures or controls, or any
disruption in the transition to such new or enhanced systems, procedures or
controls, could adversely affect our ability to accurately forecast sales
demand, manage our hosted applications, and record and report financial and
management information on a timely and accurate basis.

THE UC/UI MARKET IS YOUNG AND UNTESTED. WE HAVE JUST COMMENCED PROVIDING UC/UI
SERVICES IN A HOSTED SERVICE MODEL TO OUR CUSTOMERS UNDER OUR NEW BUSINESS
MODEL.

The UC/UI market is in its infancy, and indeed we are one of the first companies
in unified information. Despite very positive and upbeat forecasts by a number
of leading industry analysts of the market potential for unified communications
and unified information applications, we have yet commenced providing our
applications to our customers in a hosted service model. There is no assurance
that our UC/UI applications will be adopted or, if adopted, that they will be
successful in the marketplace. There is no assurance that our business model of
offering our applications in a hosted, recurring revenue model will be
successful. We are implementing a new business plan, and to the extent that we
fail to execute it successfully, compete with new entrants to this market space,
or otherwise are unable to build the complex network infrastructure necessary to
provide such services to our customers, our results and cash flows will be
negatively impacted and we could face serious needs for additional financing
which may not be available.

WE PRESENTLY RELY UPON LEGACY SYSTEMS REVENUES.

For our fiscal year ended September 30, 2002, legacy systems revenues (which
includes customer premises equipment revenues) accounted for approximately 16.1%
of Company's total revenues and 81.7% of our North American revenues. The
projected decline in our legacy business will have an adverse effect on our
revenues and financial performance. Management believes that future revenues
from legacy voicemail systems will decline in the short term due to current
economic conditions. The Company discontinued its legacy business in North
America during fiscal year 2002. Our ability to transition our product sales
to our UC/UI hosted, recurring revenue model will be critical to our future
growth.

THE SALES CYCLE FOR OUR NEW HOSTED APPLICATIONS MAY BE LONG, AND WE MAY INCUR
SUBSTANTIAL NON-RECOVERABLE EXPENSES OR DEVOTE SIGNIFICANT RESOURCES TO SALES
THAT DO NOT OCCUR OR OCCUR WHEN ANTICIPATED.

Although, we have over 12,000 subscribers on our hosted inUnison service, the
timing of significant recurring revenues from our hosted inUnison-TM- unified
communications and unified information applications is difficult to predict
because the unified communications and unified information market is relatively
new. Our success will depend in large measure on market demand and acceptance of
these applications and technologies, our ability to create a brand for our
applications and technologies, our ability to target and sell customers and to
drive demand for our applications to their customers, our ability to develop
pricing models and to set pricing for our applications, and our ability to build
market share. We plan initially to provide our hosted applications to service
providers such as internet service providers (ISPs), application service
providers (ASPs), affinity groups, multilevel marketing organization and certain
corporations. We will need to create sales tools, service provider subscriber
use models, methodologies and programs to work with our service provider
customers to help devise cooperative advertising and sales campaigns to market
and sell our inUnison-TM- applications to their customer. The sales process and
sale cycle may vary substantially from customer to customer, and our ability to
forecast accurately the sale opportunity for any customer, or to drive adoption
of our inUnison-TM- applications in our customers' subscribers may be limited.
There is no assurance that we will be successful in selling our applications or
achieving targeted subscriber adoption, and our operating and cash flow
requirements will be negatively impacted should we fail to achieve our targets
within the time frames that we forecast.

Our customers may require various testing and test markets of our hosted
applications before they decide to contract with us to provide our hosted
inUnison-TM- applications to their subscribers. We may incur substantial sales
and marketing and operational expenses and expend significant management effort
to carry out these tests. Consequently, if sales forecasted from a specific
customer for a particular quarter are not realized within the time frames that
we have forecasted, we may be unable to compensate for the shortfall, which
could harm our operating and cash flow results.

WE RELY UPON OUR DISTRIBUTOR AND SUPPLIER RELATIONSHIPS.

Our current Singapore legacy operations rely significantly on products
manufactured and services provided key third parties. Any disruption in our
relationships with these suppliers would have a significant adverse effect on
our business for an indeterminate period of time until new supplier
relationships could be established.

Any potential competition from our suppliers could have a material negative
impact on our business and financial performance.

WE ARE DEPENDENT UPON SIGNIFICANT CUSTOMERS.

Revenues from our five largest customers accounted for approximately 24.3%,
7.9%, 6.6%, 6.4% and 5.2% of total revenues during our fiscal year ended
September 30, 2002. No other customer accounted for over 5% of total revenues
during this period. This concentration of revenue has resulted in additional
risk to our operations, and any disruption of orders from our largest customers
would adversely affect on our results of operations and financial condition.

Our Singapore subsidiary, Infotel Technologies (Pte) Ltd., offers a wide range
of infrastructure communications equipment products. It has an established
business providing test measuring instrumentation and testing environments, and
is the regional distributor and test and repair center for Rohde & Schwarz test
instruments. Infotel is also a networking service provider, and manages data
networks for various customers. Infotel's financial performance depends in part
on a steady stream of revenues relating to the services performed for Rohde &
Schwarz test instruments. Infotel's revenues constituted approximately 81.7% of
our total revenues for the fiscal year ended September 30, 2002. Any material
change in our relationship with our manufacturers, including but not limited to
Rohde & Schwarz, would materially adversely affect our results of operations and
financial condition.

OUR MARKET IS HIGHLY COMPETITIVE, AND IF WE DO NOT COMPETE EFFECTIVELY, WE MAY
SUFFER PRICE REDUCTIONS, REDUCED GROSS MARGINS AND LOSS OF MARKET SHARE.

The markets for our legacy businesses are highly competitive, and competition in
this industry is expected to further intensify with the introduction of new
product enhancements and new competitors. With such competition may come more
aggressive pricing and reduced margins. We currently compete with a number of
larger integrated companies that provide competitive voice-processing products
and services as subsets of larger product offerings. Our existing and potential
competitors include many large domestic and international companies that have
better name and product recognition in the market for our products and services
and related software, a larger installed base of customers, and substantially
greater financial, marketing and technical resources than ourselves.

With the launch of our inUnison-TM- UC/UI hosted applications, we have
discontinued our legacy business revenues and its related gross margins as we
focus on our UC/UI business. Any delays in the anticipated launch of our
inUnison-TM- business plan, coupled with a decline in our legacy business, would
have a significant adverse impact on our financial performance and financing
requirements.

Infotel competes against several large companies in Singapore that are better
capitalized. Although Infotel has in the past managed to compete successfully
against these larger companies on the basis of its engineering, systems and
product management expertise, no assurances can be given that this expertise
will allow Infotel to compete effectively with these larger companies in the
future. Further, various large manufacturers headquartered outside of Singapore
have established their own branch offices in Singapore and also compete with
Infotel.

WE RELY HEAVILY ON OUR STRATEGIC PARTNERS IN OUR NEW BUSINESS MODEL, AND WITHOUT
SUPPORT FROM OUR PARTNERS OUR BUSINESS COULD SUFFER.

We have built significant, valuable strategic partnering relationships with a
number of partners including Cisco Systems, and these partnering relationships
are important to our success. In the case of CISCO, they have committed to
introducing customers to us. Hewlett-Packard also was an important strategic
partner that was to assist us in designing, implementing and operating our
backend solution to provide our UC/UI applications in a hosted, carrier grade
environment. Hewlett-Packard was to provide consulting services in the design,
build out and operation of our backend architecture. We were to host our
applications in their data centers and to provide various levels of customer
support. The deterioration of our relationships with Hewlett-Packard during
fiscal 2001 had a material adverse affect on our UC/UI business and financial
performance. While we believe that our partnering relationships with CISCO and
other third parties are strong, we cannot assure you that these relationships
will continue or that they will have a positive impact on our success.

OUR REVENUES WILL LIKELY DECLINE IF WE DO NOT DEVELOP AND INTEGRATE THE
COMPANIES WE ACQUIRE.

We have in the past pursued, and may continue to pursue, acquisition
opportunities. Acquisitions involve a number of special risks, including, but
not limited to:

- adverse short-term effects on our operating results;

- the disruption of our ongoing business;

- the risk of reduced management attention to existing operations;

- our dependence on the retention, hiring and training of key personnel
and the potential risk of loss of such personnel;

- our potential inability to integrate successfully the personnel,
operations, technology and products of acquired companies;

- unanticipated problems or unknown legal liabilities; and

- adverse tax or financial consequences.

Two of our prior acquisitions, namely the acquisition of Voice Plus (now known
as Appiant Technologies North America, Inc.) and Advantis Network & Systems Sdn
Bhd, a Malaysian company, in the past yielded operating results that were
significantly lower than expected. In fact, the poor performance of Advantis led
to its divestiture less than one year after we acquired the company.

The legacy business of Triad Marketing was discontinued as we have focused the
people and technologies of the Triad business on our new inUnison-TM- UC/UI
business.

Accordingly, no assurances can be given that the future performance of our
subsidiaries will be commensurate with the consideration paid to acquire these
companies. If we fail to establish the needed controls to manage growth
effectively, our operating results, cash flows and overall financial condition
will be adversely affected.

OUR INTERNATIONAL OPERATIONS INVOLVE RISKS THAT MAY ADVERSELY AFFECT OUR
OPERATING RESULTS.

Infotel, our Singapore subsidiary, accounted for approximately 81.7% of our
revenues for the fiscal year ended September 30, 2002, and approximately 60.4%
of our revenues for the fiscal year ended September 30, 2001. There are risks
associated with our international operations, including, but not limited to:

- our dependence on members of management of Infotel and the risk of
loss of customers in the event of the departure of key personnel;

- unexpected changes in or impositions of legislative or regulatory
requirements;

- potentially adverse taxes and tax consequences;

- the burdens of complying with a variety of foreign laws;

- political, social and economic instability;

- changes in diplomatic and trade relationships; and

- foreign exchange and translation risks.

Any one or more of these factors could negatively affect the performance of
Infotel and result in a material adverse change in our business, results of
operations and financial condition.

We anticipate that the market for our inUnison-TM- UC/UI business is global. We
anticipate that we will be expanding our business operations for our UC/UI
applications outside the United States, and project that we will launch our
UC/UI business in Asia from our existing Singapore operations. However, we do
not yet have established operations for our UC/UI applications outside of the
United States, and our business could suffer material adverse results if we
cannot build an international organization to launch our UC/UI applications
outside of the United States in time to meet market demand or alternative
solutions or standards.

OUR STOCK PRICE COULD EXPERIENCE FURTHER PRICE AND VOLUME FLUCTUATIONS.

The markets for securities such as our common stock historically have
experienced extreme price and volume fluctuations. Factors that may adversely
affect the market price of our common stock include, but are not limited to, the
following:

- new product developments and our ability to innovate, develop and
deliver on schedule our inUnison-TM- UC/UI applications;

- technological and other changes in the voice-messaging, unified
communications, and unified information;

- fluctuations in the financial markets;

- general economic conditions;

- competition; and

- quarterly variations in our results of operations.

OUR MANAGEMENT TEAM IS CRUCIAL TO OUR SUCCESS.

Our business depends heavily upon the services of its executives and certain key
personnel, including Douglas S. Zorn, our President and Chief Executive Officer.
Management changes often have a disruptive impact on businesses and can lead to
the loss of key employees because of the uncertainty inherent in change. Within
the last several years, we had significant changes in our key personnel. We

cannot be certain that we will be successful in attracting and retaining key
personnel worldwide - particularly in the Silicon Valley, greater San Francisco
Bay where we operate - as the employment markets there are intensely
competitive. The loss of the services of any one or more of such key personnel,
if not replaced, or the inability to attract such key personnel, could harm our
business. While hiring efforts are underway to fill the vacancies created by the
departure of other key employees, there is no assurance that these posts will be
filled in the near future. The loss of these or other key employees could have a
material adverse impact on our operations. Furthermore, the recent changes in
management may not be adequate to sustain our profitability or to meet our
future growth targets.

FAILURE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS WILL HARM OUR
ABILITY TO COMPETE.

We have a number patents and copyrights, and while we are in the process of
filing for trademark and patent protection on selected product names,
technologies and processes which we have developed, we currently rely and have
relied on general common law and confidentiality and non-disclosure agreements
with our key employees to protect our trade secrets. We also have received
trademark protection for the names Appiant Technologies and inUnison. Our
success depends on our ability to protect our intellectual property rights. Our
efforts to protect our intellectual property may not be sufficient against
unauthorized third-party copying or use or the application of reverse
engineering, and existing laws afford only limited protection. In addition,
existing laws may change in a manner that adversely affects our proprietary
rights. Furthermore, policing the unauthorized use of our product is difficult,
and expensive litigation may be necessary in the future to enforce our
intellectual property rights.

OUR PRODUCTS COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS,
RESULTING IN COSTLY LITIGATION AND THE LOSS OF SIGNIFICANT RIGHTS.

We may be subject to legal proceedings and claims for alleged infringement of
proprietary rights of others, particularly as the number of products and
competitors in our industry grow and functionalities of products overlap. This
risk may be higher in a new market in which a large number of patent
applications have been filed but are not yet publicly disclosed. We have limited
ability to determine which patents our products may infringe and to take
measures to avoid infringement. Any litigation could result in substantial costs
and diversion of management's attention and resources. Further, parties making
infringement claims against us may be able to obtain injunctive or other
equitable relief, which could prevent us from selling our products or require us
to enter into royalty or license agreements which are not advantageous to us.

IF WE FAIL TO ADEQUATELY RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR EXISTING
PRODUCTS WILL BECOME OBSOLETE OR UNMARKETABLE.

Advances in technology could render our products and applications obsolete and
unmarketable. We believe that to succeed we must enhance our existing software
products and underlying technologies, develop new products and technologies on a
timely basis, and satisfy the increasingly sophisticated requirements of our
customers. We may not respond successfully to technological change, evolving
industry standards or customer requirements. If we are unable to respond
adequately to these changes, our revenues could decline. In connection with the
introduction of new products and enhancements, we have in the past experienced
development delays and unfavorable development cost variances that are not
unusual in the software industry. To date, these delays have not had a material
impact on our revenues. If new releases or products are delayed or do not
achieve broad market acceptance, we could experience a delay or loss of revenues
and customer dissatisfaction.

IF OUR SOFTWARE CONTAINS DEFECTS, WE COULD LOSE CUSTOMERS AND REVENUES.

Software applications that are as complex as ours often contain unknown and
undetected errors or performance problems. Many defects are frequently found
during the period immediately following the introduction of new software or
enhancements to existing software. Furthermore, software which we may license
from third parties for inclusion in our inUnison-TM- portal may also have
undetected errors or may require significant integration, testing or
re-engineering work to operate properly and as represented to our customers.

Although we attempt to resolve all errors that we believe would be considered
serious by our customers, both our software and any third party software that we
license may not be error-free. Undetected errors or performance problems may be
discovered in the future, and errors that were considered minor by us may be
considered serious by our customers. This could result in lost revenues or
delays in customer acceptance, and would be detrimental to our reputation, which
could harm our business.

FLUCTUATIONS IN OPERATING RESULTS COULD CONTINUE IN THE FUTURE.

Our operating results may vary from period to period as a result of the length
of our sales cycle, purchasing patterns of potential customers, the timing of
the introduction of new products, software applications and product enhancements
by us and our competitors, technological factors, variations in sales by
distribution channels, timing of stocking orders by resellers, competitive
pricing, and generally nonrecurring system sales. For our legacy business, sales
order cycles range generally from one to twelve months, depending on the
customer, the type of solution being sold, and whether we will perform
installation, integration and customization services. The period from the
execution of a purchase order until delivery of system components to us,
assembly, configuration, testing and shipment, may range from approximately one
to several months. These factors may cause significant fluctuations in operating
results in the future. The sales order cycle for our inUnison-TM- UC/UI
applications in a hosted services model can only be projected at this time as we
have little experience with customers for our inUnison-TM- services. To the
extent that we do not sign up customers to our inUnison-TM- UC/UI applications
according to our plan, our financial performance and results from operations
will suffer.

WE NEED SIGNIFICANT CAPITAL TO OPERATE OUR BUSINESS AND MAY REQUIRE ADDITIONAL
FINANCING. IF WE CANNOT OBTAIN SUCH ADDITIONAL FINANCING, WE MAY NOT BE ABLE TO
CONTINUE OUR OPERATIONS.

We need significant capital to design, develop and commercialize our products.
Currently available funds may be insufficient to fund operations. We may be
required to seek additional financing sooner than currently anticipated or may
be required to curtail our activities. Based on our past financial performance,
coupled with our return to incurring operating losses with our transition to our
new business model, our ability to obtain conventional credit has been
substantially limited. Our ability to raise capital may also be limited or, if
available, be very costly and possibly dilutive to our shareholders.

CERTAIN PROVISIONS OF OUR CHARTER AND DELAWARE LAW MAY HAVE ANTI-TAKEOVER
EFFECTS.

The terms of our Certificate of Incorporation, as amended, and our ability to
issue up to 2,000,000 shares of "blank check" preferred stock may have the
effect of discouraging proposals by third parties to acquire a controlling
interest in us, which could deprive stockholders and of the opportunity to
consider an offer to acquire their shares at a premium. In addition, under
certain conditions, Section 203 of the Delaware General Corporate Law would
impose a three-year moratorium on certain business combinations between us and
an "interested stockholder" (in general, a stockholder owning 15% or more of our
outstanding voting stock). The existence of such provisions may have a
depressive effect on the market price of our common stock in certain situations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We develop products in the United States and market our products in both the US
and Asian markets. As a result, our financial results could be affected by
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. Substantially all of our Appiant NA revenues are currently
denominated in U.S. dollars. Our Infotel subsidiary also purchases a significant
amount of goods from overseas suppliers. These purchase commitments are often
denominated in foreign currencies. We often use forward exchange contracts to
hedge these unrecognized firm purchase commitments although this also exposes us
to risk as a result of fluctuations in foreign currency exchange rates. We do
not have any such exposure at September 30, 2002 but may continue to use these
instruments in the future. Our interest expense is sensitive to changes in the
general level of interest rates because some of our borrowings are subject to
interest rates that vary with the prime rate. Due to the nature of our
investments, we believe that there is not a material risk exposure.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this item is included in Item 13 of this Form 10-K.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE ISSUER

Directors and Executive Officers:

Name Title Age
--------------------- --------------------------------- ---
Douglas S. Zorn Chairman of the Board, Chief
Executive Officer and President 53
L. Thomas Baldwin III Director 47
Allen F. Jacobson Director 76
Robert J. Schmier Director 54
N. Bruce Walko Director 62
Robert Landis Director 36
Fred E. Tannous Director 42
Tom Ku Chief Technology & Marketing
Officer 42
Joachim Zippel Sr. Vice President, Engineering and
Operations 48
Sandra W. Smith General Counsel and Corporate
Secretary 39
Siravara Vijayendra Former Vice President Engineering
and Operations 45
Christopher J. Borders Former Corporate Counsel and
Corporate Secretary 39
Jennifer L. Pratt Vice President of Human Resources 42

DOUGLAS S. ZORN. Mr. Zorn has been our Chairman of the Board, Chief Executive
Officer and President since May 2000. Mr. Zorn served as Executive Vice
President, Chief Financial Officer, Secretary and a Director of the Company
since our incorporation in October 1996 until May 2000. Mr. Zorn served as
Executive Vice President, Secretary and Treasurer, and Chief Financial and
Operating Officer of BioFactors, Inc. from December 1993 until February 1997 and
as a Director from June 1994 until February 1997.

L. THOMAS BALDWIN III. Mr. Baldwin has been a Director of the Company from
December 2000 to February 2003. Mr. Baldwin is a prominent bond trader and
investor. For more than the past five years, he has been Chairman of Baldwin
Group Ltd., a parent company of various investment and financial services
businesses. He has been a member of the Chicago Board of Trade, serving on its
Executive Committee; as Chairman of the Advisory Subcommittee of the CPO/CTA
Committee; and as Chairman of the Regulatory Compliance Subcommittee for Reg.
320.15 and 320.16 of the Exchange Relations Group. Mr. Baldwin also served as
Vice Chairman of the T-Bond Pit Committee.

ALLEN F. JACOBSON. Mr. Jacobson has been a Director of our Company since August
2000. Mr. Jacobson is a former Chairman and Chief Executive Officer of 3M
Corporation, where he had a distinguished career that spanned over 40 years. Mr.
Jacobson has also served on the board of directors of Mobil Corporation, Silicon
Graphics, Sara Lee Corporation, Potlatch Corporation, Alliant Techsystems, Inc.,
and US West. Mr. Jacobson resigned in June 2002.

ROBERT J. SCHMIER. Mr. Schmier has been a Director of our Company since January
1999. Mr. Schmier has been the President of Schmier & Feurring Properties, Inc.
since 1981, and the President of Schmier & Feurring Realty, Inc. since 1985.
These companies are involved in real estate development, leasing and property
management of shopping centers and office buildings in Palm Beach County,
Florida. Mr. Schmier resigned in July 2002.

N. BRUCE WALKO. Mr. Walko has been a Director of our Company since January 1999.
Mr. Walko has been the President of Cyberfast Systems, Inc., a company involved
in international voice over internet protocol, since November 1999. Previously,
Mr. Walko served as Southeast Regional General Manager for NextWave Telecom Inc.
from 1994 until 1997. Mr. Walko was instrumental in the development of new
technology telecommunication for NextWave and also for McCaw Cellular Inc. (now
AT&T Wireless).

ROBERT LANDIS. Mr. Landis was a Director of the Company from August 2002 to
January 2003. He serves as Chairman and Chief Financial Officer of
Comprehensive Care Corporation, a publicly traded, managed behavioral healthcare
company. Mr. Landis earned a Bachelor of Science degree in Accounting from the
University of Southern California and a Masters of Business Administration from
the California State University at Northridge. Mr. Landis resigned in January
2003.

FRED E. TANNOUS. Mr. Tannous was a Director of the Company from August 2002 to
February 2003. He is Co-Chairman and Chief Executive Officer of Health Sciences
Group, a publicly traded healthcare company committed to vertically integrating
a collaborative network of profitable nutraceutical and pharmaceutical
companies. Mr. Tannous received an MBA in Finance and Accounting from the
University of Chicago Graduate School of Business, and holds a Masters and
Bachelors degree in Electrical Engineering from the University of Southern
California.

TOM KU was employed as an officer of the Company from May 2001 through December
2001. As the Chief Technology Officer and Chief Marketing Officer of Appiant
Technologies, Inc. Tom founded Quaartz, Inc., a web based application company,
in 1999 where he served as the Chief Executive Officer. He also led the
professional services division of BEA Systems, Inc., the world leader in
e-commerce transaction server software.

JOACHIM ZIPPEL was employed as the Senior Vice President of Engineering and
Operations of Appiant Technologies, Inc. from May 2001 to January 2002. Prior to
joining Appiant, Joachim was the Executive Vice President of Operations and
Services and co-founder of Quaartz, Inc., a web based application company.
Joachim brings to the Company a wealth of experience in software development and
data center operations from his 12-year tenure at Sun Microsystems.
Communications, Corp.

SANDRA SMITH was employed as the General Counsel and Corporate Secretary of
Appiant Technologies, Inc. from February 2001 to February 2002. Sandra was most
recently with Simpson Grierson Law. Prior to Simpson Grierson, Sandra was
Managing Director of a Legal Consulting firm based in Singapore, advising on IT
transactions throughout Asia. Sandra was also in-house counsel at EDS and AT&T
for several years, as communications and regulatory counsel.

SIRAVARA VIJAYENDRA. Mr. Vijayendra was Vice President of Engineering and
Operations from January 2002 through December 2002. Siravara has over 15 years
of experience in voice and unified messaging, voice and data encryption, and
text-to-speech and speech recognition technologies. Prior to joining Appiant,
Siravara was the Vice President of Engineering at Baypoint Innovations, a
division of Mitel, Inc., Director of Engineering at Sensory Circuits, Inc., and
Senior Manager at Centigram Communications. Additionally, Siravara has spent
several years conducting research on seismic, radar and acoustic signal
processing at Cylink and Omnitel Corp. Siravara holds Bachelor's of Science in
Electrical Engineering from Bangalore University, India and a Masters in
Electrical Engineering from Kansas State University.

CHRISTOPHER J. BORDERS. Mr. Borders was General Counsel and Corporate Secretary
of Appiant Technologies, Inc. from January 2002 through October 2002. He has
over 13 years experience serving software, Internet and other technology
companies, both as in-house counsel and in private practice. Chris was most
recently General Counsel for MobShop, Inc., and was previously a business and
litigation partner for Rivkin Radler LLP. Borders is an active member of the
American Corporate Counsel Association and its Intellectual Property Committee,
and a member of the Business Law Section of the California State Bar. He earned
his juris doctor degree from the University of California, Davis, School of Law,
and graduated from the University of California, Berkeley with a bachelor's
degree in political science.

JENNIFER L. PRATT. Ms. Pratt is the Vice President of Human Resources of
Appiant Technologies, Inc. She has worldwide responsibility for all HR
activities including compensation, benefits, stock administration, recruitment,
and immigration and is a liaison with legal on all employment law issues.
Jennifer has over 16 years human resource experience and brings strategic
expertise in all aspects of human resource management, including partnering with
the executive team on the design and implementation of strategic change. Prior
to Appiant, Jennifer has held senior management positions with a variety of
companies including technology, manufacturing and healthcare industries.
Jennifer holds a B.S in Business Administration from Morningside College, Sioux
City, Iowa.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth certain information concerning compensation paid
during the last three (3) fiscal years to (i) our Chief Executive Officer, (ii)
our other most highly compensated executive officers at September 30, 2001,
whose aggregate cash compensation exceeded $100,000 during the fiscal year ended
September 30, 2002 and (iii) two (2) executive individuals for whom disclosure
would have been provided but for the fact that the individual was not serving as
an executive officer of the company at the end of the last completed fiscal year
(collectively, the "Named Executive Officers").

Annual Compensation Long Term compensation
Awards
Other Annual Restricted Securities
Name and principal Compen- stock Under-lying
position Year Salary Bonus sation awards options

Douglas S. Zorn, 2002 $115,385 $ -- $ 13,637 (1) --
Chairman of the 2001 $172,500 $ -- $ 2,797 (1) 50,000 (3)
Board, Chief 2000 $172,500 $180,000 $ 13,163 (2) 200,000 (4)
Executive Officer
and President
Officer
Siravara Vijayendra 2002 $124,377 $ -- $ 4,231 (1) 150,000 (5)
---------------------------------------------------------------------------------------

1. Automobile Allowance and Life Insurance paid for by the Company.
2. Automobile Lease paid for by the company for Mr. Zorn.
3. Options granted on March 16, 2001 with an exercise price of $4.50 per share.
4. Options granted July 27, 2000 with an exercise price of $8.75 per share
5. Options granted January 12, 2002 with an exercise price of $2.93 per share.

Option Grants in Last Fiscal Year

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

Individual Grants
-----------------
Percent of
Total Potential Realizable
Number of Options Value at Assumed Annual
Securities Granted to Exercise Rate of Stock
Underlying Employees in Price Appreciation for Option
Options Fiscal ($/SHR) Expiration Terms (3)
Name Granted Year (1) (2) Date 5% ($) 10%($)

Siravara Vijayendra 50,000 17.7% $ 2.93 1/12/2012 $ 276,300 $ 700,350

1. Based on 846,000 options granted during the fiscal year ended September
30,2002.
2. The exercise price was deemed to be equal to be $1.00 over the fair
market value on the date of the grant date as determined by the closing price as
reported on the NASDAQ SmallCap Market.
3. The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately prior to
the expiration of their terms, assuming the specified compounded rates of
appreciation on the Company's common stock over the term of the options. Actual
gains, if any, on stock option exercise are dependent upon a number of factors,
including the future performance of the common stock, overall stock market
conditions, and the timing of option exercises, if any. There can be no
assurances that amounts reflected in this table will be achieved.

Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

The following table sets forth certain information concerning exercises of stock
options during the fiscal year ended September 30, 2002 by each of our Named
Executive Officers and the number and value of unexercised options held by each
of our Named Executive Officers on September 30, 2002.

Number of Unexercised Securities Value of Unexercised in-the-money
Underlying Options at September 30,2002 (#) options at September 30, 2002 (1)($)
Name Exercisable Unexercisable Exercisable Unexercisable

Douglas S. Zorn 466,833 (2) 91,667 (3) $ -- $ --
Siravara Vijayendra 10,000 (4) 140,000 (5) $ -- $ --

1. Value of "in-the-money" stock options represents the positive spread
between the exercise price of stock options and the fair market value for our
common stock on September 30, 2002 based on a closing price of $0.45 per share.
2. Represents 308,500 options at $1.125 per share and 108,333 options at $8.75
per share and 50,000 options at $4.50 per share.
3. Represents 91,667 options at $8.75 per share.
4. Represents 10,000 at $2.93 per share.
5. Represents 140,000 at $2.93 per share.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants or issuable upon
conversion of preferred stock held by that person that are currently exercisable
or exercisable (or convertible) within 60 days of February 14, 2003 are deemed
outstanding. Percentage of beneficial ownership of common stock as of February
14, 2003 is based upon 17,194,841 outstanding shares of common stock. Percentage
of beneficial ownership of preferred stock as of February 14, 2003 is based upon
45,000 outstanding shares of preferred stock.

To our knowledge, except as set forth in the footnotes to this table and subject
to applicable community property laws, each person named in the table has sole
voting and investment power with respect to the shares set forth opposite such
person's name.

The Company is not aware of any beneficial owner of more than 5% of the
outstanding common stock other than as set forth in the following table.

NUMBER OF SHARES
BENEFICIALLY OWNED PERCENT OF CLASS
------------------------ -------------------
OFFICERS AND DIRECTORS (1) COMMON PREFERRED COMMON PREFERRED
------------------------------------------ ------------- --------- ------- ----------

Douglas S. Zorn 1,520,850(2) -- 6.1% --%
Chairman of the Board, Chief Executive
Officer and President

L. Thomas Baldwin III 10,230,848(3) -- 41.0% --%
Director

N. Bruce Walko 61,000(4) -- 0.2% --%
Director

Fred E. Tannous -- -- --% --%
Director

Siravara Vijayendra 10,000(5) -- --% --%
Vice President Engineering and Operations

All officers, directors and proposed 11,822,698(6) -- 47.4% --%
directors as a group (5 persons)

(1) Each beneficial owner for whom an address is not listed has an address
c/o Appiant Technologies Inc., 6663 Owens Drive, Pleasanton, California 94588.

(2) Represents 151,937 shares of common stock, vested options to purchase
466,833 shares of common stock, immediately exercisable warrants to purchase
514,073 shares of common stock and notes immediately convertible into 388,007
shares of common stock.

(3) Represents 3,191,334 shares of common stock, immediately exercisable
warrants to purchase 3,443,819 shares of common stock, notes immediately
convertible into 3,595,695 shares of Common Stock.

(4) Represents immediately exercisable warrants to purchase 50,000 shares of
common stock and vested options to purchase 11,000 shares of common stock.

(5) Represents vested options to purchase 10,000 shares of common stock.(6)
Represents 3,343,271 shares of common stock, vested options to purchase 487,833
shares of common stock, immediately exercisable warrants to purchase 4,007,892
shares of common stock and notes immediately convertible into 3,983,702 shares
of common stock.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company has an employment agreement with Douglas S. Zorn, as Chairman of the
board of directors, President and Chief Executive Officer of the Company. By
its terms, the agreement has an Initial Term of three years with a provision
that the Term will be extended for successive one-year periods beginning on the
first day after the final day of the Initial Term, except in the event Mr. Zorn
or the Company provides written notice to the other at least 180 days before the
beginning of such one-year period, of the intention not to extend the Term. Mr.
Zorn's base salary may be adjusted from time to time by mutual agreement between
Mr. Zorn and the board of directors. Mr. Zorn's base salary for calendar years
2001 and 2002 was $300,000, however Mr. Zorn's salary has been accrued but not
paid since early May 2002. Mr. Zorn's base salary for calendar year 2003 is
$300,000 which is also being accrued but not paid.

The employment agreement provides, subject to its terms, for an annual bonus to
be paid to Mr. Zorn pursuant to a written bonus plan to be approved by our board
of directors. The employment agreement provides that Mr. Zorn is entitled to
reasonable expense reimbursements, four weeks paid vacation per year and
participation in any of the Company's benefit and deferred compensation plans.

The employment agreement also provides for payments in the event of termination
prior to the end of the term, as follows: if Mr. Zorn is terminated without
cause, then his base salary will be paid for the greater of two (2) years or the
balance of the term and he will receive a bonus for each such year equal to his
average bonus for the two (2) preceding years. If Mr. Zorn is terminated upon a
change of control, then compensation equal to two (2) times the sum of the base
salary plus average bonus will be paid to him for one (1) year. In the event of
termination (except termination without cause), Mr. Zorn is subject to two-year
non-competition agreements.

On February 1, 2002, the Company acquired all the outstanding shares of Ximnet
Corporation in exchange for 500,000 shares of the Company's Common stock. Two
hundred and fifty thousand of the shares were placed in escrow until Ximnet
management met certain objectives, these objectives were not met and the shares
were retired.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS ON FORM 8-K

The following documents are filed as part of the Annual Report on Form 10-K:

1. Financial Statements

2. Financial Statement Schedule

3. Exhibits

(a) This is the financial statement index:

EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- -----------------------------------------------------
2.3 Plan and Agreement of Reorganization, dated
December 10, 1999, by and among Trimark Inc.,
d.b.a. Triad Marketing, Greg Darling, Richard
Glover and the Company. (17)
--------------------------------------------------------------------
2.4 Agreement of Merger, by and between Nhancement
Acquisition Corp. and Trimark, filed with the
Secretary of State of the State of California
effective January 21, 2000. (17)
--------------------------------------------------------------------

2.5 Plan and Agreement of Reorganization between the
Company and SVG Software Services, Inc., a
California corporation, dated February 4, 2000.
(18)
--------------------------------------------------------------------
2.6 Stock Purchase Agreement between the Company and
Vijay and Vinita Gulechha dated February 4, 2000.
(18)
--------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation,
as filed with the Delaware Secretary of State
on January 27, 1997, as amended by Certificate
of Designations, as filed with the Delaware
Secretary of State on April 9, 1998, as further
amended by Amended Certificate of Designations,
as filed with the Delaware Secretary of State
on April 13, 1998, as further amended by
Amended Certificate of Designations, as filed
with the Delaware Secretary of State on June
11, 1999. (1)
--------------------------------------------------------------------
3.2 Amended and Restated Bylaws. (2)
--------------------------------------------------------------------
4.1 Form of Common Stock Certificate. (3)
--------------------------------------------------------------------
4.2 Form of Underwriter Warrant. (4)
--------------------------------------------------------------------
4.3 Registration Rights Agreement, dated September 1,
1996, between BioFactors, Inc. ("BFI") and (i) a
majority of the holders of securities pursuant to
the Secured Note and Warrant Purchase Agreement
dated December 1, 1994, as amended; (ii) a
majority of the holders of securities issued
pursuant to the Secured Note and Stock Purchase
Agreement, dated December 1, 1995, as amended;
iii) a majority of the holders of securities
issued pursuant to the Unsecured Note and Stock
Purchase Agreement, dated February 1, 1996, as
amended; (iv) a majority of the holders of
securities issued pursuant to the Unit
Subscription Agreement, dated May 17, 1996,
as amended; (v) the purchasers of securities
issued pursuant to the Unit Subscription Agreement
dated October 3, 1996; and (vi) the former holders
of BFI's Series A Preferred Stock. (4)
--------------------------------------------------------------------
4.4 Registration Rights Agreement, dated October 25,
1996, between the Company and James S. Gillespie.
(3)
--------------------------------------------------------------------
4.5 Form of Series A Preferred Stock Certificate. (5)
----------------------------------------------------------------
4.6 Registration Rights Agreement, dated as of April
13, 1998, among the Company, The Endeavour Capital
Fund S.A. and AMRO International S.A. ("AMRO")(5)
--------------------------------------------------------------------
4.7 Warrant Agreement dated February 2, 1999 between
the Company and JWGenesis Capital Markets LLC.(6)
--------------------------------------------------------------------
4.8 Warrant Agreement dated February 2, 1999 between
the Company and Kenneth L. Greenberg. (6)
--------------------------------------------------------------------
4.9 Warrant Agreement dated February 2, 1999 between
the Company and Mark Goldberg. (6)
--------------------------------------------------------------------
4.10 Form of Warrant dated June 15, 1999 delivered to
purchasers of Series A Convertible Preferred
Stock. (7)
--------------------------------------------------------------------
4.11 Form of Warrant dated June 15, 1999 delivered to
purchasers of Series A Convertible Preferred Stock
(exercise contingent on redemption of Preferred
Stock). (7)
--------------------------------------------------------------------
4.12 Warrant Agreement dated June 7, 1999 between the
Company and James S. Gillespie. (7)
--------------------------------------------------------------------
4.13 Warrant Agreement dated June 15, 1999 between the
Company and Grady & Hatch and Company, Inc. (7)
--------------------------------------------------------------------
4.14 Warrant, dated January 21, 2000, delivered to
Richard Glover. (17)
--------------------------------------------------------------------
4.15 Warrant, dated January 21, 2000, delivered to Greg
Darling. (17)
--------------------------------------------------------------------

4.16 Warrant dated December 10, 1999, issued to Douglas
S. Zorn. (18)
--------------------------------------------------------------------
4.17 Warrant dated December 10, 1999, issued to James
S. Gillespie. (18)
--------------------------------------------------------------------
4.18 Warrant dated December 10, 1999, issued to John M.
Black. (18)
--------------------------------------------------------------------
4.19 Warrant dated December 10, 1999, issued to James
S. Gillespie. (18)
--------------------------------------------------------------------
4.20 Warrant dated December 10, 1999, issued to N.
Bruce Walko. (18)
--------------------------------------------------------------------
4.21 Warrant dated December 10, 1999, issued to Robert
J. Schmier. (18)
--------------------------------------------------------------------
4.22 Warrant dated December 10, 1999, issued to Diane
Nowak. (18)
--------------------------------------------------------------------
4.23 Warrant dated March 1, 2000, issued to William M.
Stephens. (19)
--------------------------------------------------------------------
4.24 Convertible Debenture Purchase Agreement by and
between NHancement Technologies Inc. and certain
investors, dated May 19, 2000. (20)
--------------------------------------------------------------------
4.25 Common Stock Purchase Agreement by and between
NHancement Technologies Inc. and Kedrick
Investments Limited Inc. and certain investors,
dated June 15, 2000. (20)
--------------------------------------------------------------------
4.26 Amendment to the Convertible Debenture Purchase
Agreement by and between NHancement Technologies
Inc. and Kedrick Investments Limited, dated June
30, 2000. (20)
--------------------------------------------------------------------
4.27 Amendment to the Common Stock Purchase Agreement
by and between NHancement Technologies Inc. and
Kedrick Investments Limited, dated June 30, 2000.
(20)
--------------------------------------------------------------------
4.28 Form of Convertible Debenture. (20)
--------------------------------------------------------------------
4.29 Warrant dated May 1, 2000, issued to Cisco Systems
Capital Corporation. (21)
--------------------------------------------------------------------
4.30 Warrant dated May 24, 2000, issued to Kedrick
Investments Limited. (21)
--------------------------------------------------------------------
4.31 Certificate of Designation of NHancement
Technologies Inc. filed with the Secretary of
State of the State of Delaware on October 5, 2000.
(22)
--------------------------------------------------------------------
4.32 Warrant dated July 31, 2000 issued to L. Thomas
Baldwin III. (23)
--------------------------------------------------------------------
4.33 Warrant dated August 8, 2000 issued to Allen F.
Jacobson. (23)
--------------------------------------------------------------------
4.34 Warrant dated November 28, 2000 issued to Jack
T. Zahran. (23)
--------------------------------------------------------------------
4.35 Warrant dated October 31, 2000 issued to Joseph
Stevens & Co. (26)
--------------------------------------------------------------------
4.36 Warrant dated November 28, 2000 issued to Jack
T. Zahran. (26)
--------------------------------------------------------------------
4.37 Warrant dated January 10, 2001 issued to Baldwin
Partners, L.P. (26)
----------------------------------
4.38 Warrant dated May 31, 2001 issued to various
investors as identified in Item 5. (26)
--------------------------------------------------------------------
4.39 Warrant dated June 2001 issued to various
investors as identified in Item 5. (26)
--------------------------------------------------------------------
4.40 Warrant dated October 2001 issued to various
investors as identified in Item 5. (26)
--------------------------------------------------------------------
4.41 Warrant dated November 2001 issued to various
investors as identified in Item 5. (26)
--------------------------------------------------------------------
4.42 Warrant dated December 2001 issued to various
investors as identified in Item 5. (26)
--------------------------------------------------------------------
4.43 Convertible promissory note dated March 21, 2001
issued to L. Thomas Baldwin III as identified
in item 5. (26)
--------------------------------------------------------------------
4.44 Warrant dated March 21, 2001 issued to L. Thomas
Baldwin III as identified in Item 5. (26)
--------------------------------------------------------------------

4.45 Warrant dated March 31, 2001 issued to L. Thomas
Baldwin III as identified in Item 5. (26)_
--------------------------------------------------------------------
4.46 Warrant dated March 31, 2001 issued to L. Thomas
Baldwin III as identified in Item 5. (26)
--------------------------------------------------------------------
4.47 Amendment dated May 31, 2001 to the Convertible
Promissory Note dated March 21, 2001 to L. Thomas
Baldwin III as identified in Item 5. (26)
--------------------------------------------------------------------
4.48 Warrant Number 2002-36, issued August 9, 2002 (28)
number exhibit 5.6 in error
--------------------------------------------------------------------
4.49 Warrant Number 2002-37, issued August 9, 2002 (28)
numbered exhibit 5.7 in error.
--------------------------------------------------------------------
10.1 Formation Agreement, dated as of October 15, 1996,
between BFI and Voice Plus, Inc. ("Voice Plus").
(3)
--------------------------------------------------------------------
10.2 Agreement and Plan of Merger, dated as of October
30, 1996, between the Company, BFI Acquisition
Corporation and BFI. (4)
--------------------------------------------------------------------
10.3 Agreement and Plan of Merger, dated as of October
25, 1996, between the Company, Voice Plus
Acquisition Corporation, Voice Plus and James S.
Gillespie, together with Forms of Promissory
Notes. (8)
--------------------------------------------------------------------
10.4 Agreement of Merger between Voice Plus and BFI
dated as of October 10, 1997. (5)
--------------------------------------------------------------------
10.5 License Agreement, dated November 24, 1988, by and
between BFI and Systems Technology, Inc., as
amended by Addendum to License Agreement, dated
May 19, 1994, as amended by Second Addendum to
License Agreement, dated November 18, 1996. (4)
--------------------------------------------------------------------
10.7 Secured Note and Warrant Purchase Agreement, dated
December 1, 1994, between BFI and the purchasers
listed therein, as amended by the First Amendment
to Secured Note and Warrant Purchase Agreement,
dated July 1995, as amended by Amendment to
Secured Note and Warrant Purchase Agreement, dated
December 1, 1995, as amended by Third Amendment to
Secured Note and Warrant Purchase Agreement, dated
March 1, 1996, and as amended by Fourth Amendment to
Secured Note and Warrant Purchase Agreement, dated
October 1, 1996, together with Amended and Restated
Security Agreement and Form of Secured Promissory
Note. (4)
--------------------------------------------------------------------
10.8 Secured Note and Stock Purchase Agreement,
dated December 1, 1995, between BFI and the
purchasers listed therein, as amended by the
First Amendment to Secured Note and Stock
Purchase Agreement, dated March 1, 1996, as
amended by Second Amendment to Secured Note and
Stock Purchase Agreement, dated July 1, 1996,
and as amended by Third Amendment to Secured
Note and Stock Purchase Agreement, dated
October 1, 1996, together with Form of Secured
Promissory Note. (4)
--------------------------------------------------------------------
10.9 Unsecured Note and Stock Purchase Agreement, dated
February 1, 1996, between BFI and the
First Amendment to Unsecured Note and Stock
Purchase Agreement, dated March 1, 1996, as
amended by Second Amendment to Unsecured Note
and Stock Purchase Agreement, dated July 1,
1996, and as amended by Third Amendment to
Unsecured Note and Stock Purchase Agreement,
dated October 1, 1996, together with Form of
Unsecured Promissory Note. (4)
--------------------------------------------------------------------
10.10 Unit Subscription Agreement, dated May 17, 1996,
between BFI and the purchasers listed therein, as
amended by First Amendment to Unit Subscription
Agreement, dated October 1, 1996, together with
Form of Promissory Note. (4)
--------------------------------------------------------------------

10.11 Unit Subscription Agreement, dated October 1,
1996, between BFI and the purchasers listed
therein, together with Form of Promissory Note and
Form of Warrant. (2)
--------------------------------------------------------------------
10.12 Equity Incentive Plan. (2)
--------------------------------------------------------------------
10.13 Employment Agreement, dated as of October 30,
1996, between Douglas S. Zorn and the Company.(2)
--------------------------------------------------------------------
10.14 Employment Agreement, dated as of October 25,
1996, between James S. Gillespie and the Company.
(3)
--------------------------------------------------------------------
10.15 Employment Agreement, dated as of October 30,
1996, between Esmond T. Goei and the Company. (3)
----------------------------------------------------------------
10.16 Form of Factor 1000-Registered Trademark - Service
Contract. (3)
--------------------------------------------------------------------
10.17 Office Building Lease, dated April 8, 1996,
between BFI and Denver West Office Building No. 21
Venture. (4)
--------------------------------------------------------------------
10.18 Authorized U.S. Distributor Agreement, dated April
16, 1996, between Centigram Communications
Corporation and Voice Plus. (3)
--------------------------------------------------------------------
10.19 Office Lease, dated October 16, 1995, between AJ
Partners Limited Partnership and Voice Plus. (4)
--------------------------------------------------------------------
10.20 Agreement, dated October 16, 1995, between BFI,
Burton Kanter and Elliot Steinberg, as amended by
Amendment dated July 16, 1996, between BFI, Esmond
Goei, Douglas Zorn, Burton Kanter and Elliot
Steinberg. (4)
--------------------------------------------------------------------
10.21 Stockholder Agreement, dated October 25, 1996,
between the Company and James D. Gillespie. (4)
--------------------------------------------------------------------
10.22 1997 Management and Company Performance Bonus
Plan. (4)
--------------------------------------------------------------------
10.23 Employment Agreement, dated as of November 1,
1996, between Diane E. Nowak and Voice Plus. (2)
--------------------------------------------------------------------
10.24 Employment Agreement, dated as of November 1,
1996, between Bradley Eickman and Voice Plus. (2)
--------------------------------------------------------------------
10.25 Promissory Note Payable to the Company by Esmond
T. Goei. (5)
--------------------------------------------------------------------
10.26 Agreement for the Sale of Shares in Advantis
Network & System Sdn Bhd dated June 20, 1997,
between the Company and the shareholders of
Advantis, as amended by the Supplemental
Agreement to the Agreement dated November 26,
1997, and the Second Supplemental Agreement
dated November 26, 1997. (9)
--------------------------------------------------------------------
10.27 Building Lease dated June 9, 1997 by and between
the Company, as Tenant and El Dorado Holding
Company, Inc., as Landlord. (10)
--------------------------------------------------------------------
10.28 Form of Lock Up Agreement between the Company and
the former shareholders of Advantis. (11)
--------------------------------------------------------------------
10.29 Securities Purchase Agreement, dated as of April
13, 1998, by and among the Company, the Endeavour
Capital Fund S.A. and AMRO. (5)
--------------------------------------------------------------------
10.30 Form of Escrow Instructions related to Securities
Purchase Agreement, dated as of April 13, 1998.
(5)
--------------------------------------------------------------------
10.31 Form of Reseller Agreement between Interactive
Intelligence Inc. and the Company dated July 8,
1998. (12)
--------------------------------------------------------------------
10.32 Form of Associate Agreement between NEC, Inc. and
the Company dated May 26, 1998. (12)
--------------------------------------------------------------------
10.33 Form of Loan and Security Agreement between
Aerofund Financial and the Company dated October
9, 1998. (12)
--------------------------------------------------------------------
10.34 Form of Guaranty from Lee Giam Teik, Man Yiew Ming
and Ng Kok Wah dated September 30, 1998. (12)
--------------------------------------------------------------------
10.35 Letter Agreement between Lee Giam Teik, Man Yiew
Ming and Ng Kok Wah and the Company dated
September 30, 1998. (12)
--------------------------------------------------------------------

10.36 Agreement relating to the sale and purchase of
500,000 ordinary shares in the Capital of Infotel
Technologies (Pte) Ltd ("Infotel"), dated as of
January 19, 1998, by and between the Company and
the stockholders of Infotel (the "Sale
Agreement"). (13)
--------------------------------------------------------------------
10.37 Letter Agreement amending the Sale Agreement,
dated as of April 2, 1998, by and between the
Company and the stockholders of Infotel. (13)
--------------------------------------------------------------------
10.38 Form of letter agreement amending the Sale
Agreement, as amended by Supplement No. 1, dated
as of April 22, 1998, by and between the Company
and the stockholders of Infotel. (13)
--------------------------------------------------------------------
10.39 Letter agreement amending the Sale Agreement,
dated as of June 22, 1998, by and between the
Company and stockholders of Infotel. (14)
--------------------------------------------------------------------
10.40 Promissory Note, dated as of June 15, 1998, in the
original principal amount of $375,000, payable by
the Company to AMRO. (14)
--------------------------------------------------------------------
10.41 Promissory Note, dated as of June 15, 1998, in the
original principal amount of $375,000, payable by
the Company to Endeavour Capital Fund S.A.
("Endeavour"). (14)
--------------------------------------------------------------------
10.42 Letter agreement, dated as of June 15, 1998,
amending Securities Purchase Agreement, dated as
of April 13, 1998, by and among the Company, AMRO
and Endeavour. (14)
--------------------------------------------------------------------
10.43 Letter agreement, dated as of June 12, 1998, by
and among the Company, Esmond T. Goei, Douglas S.
Zorn and James S. Gillespie. (14)
--------------------------------------------------------------------
10.44 Promissory Note, dated as of June 12, 1998, in the
original principal amount of $125,000 payable by
the Company to Esmond T. Goei. (14)
--------------------------------------------------------------------
10.45 Promissory Note, dated as of June 12, 1998, in the
original principal amount of $225,000 payable by
the Company to Douglas S. Zorn. (14)
--------------------------------------------------------------------
10.46 Promissory Note, dated as of June 12, 1998, in the
original principal amount of $300,000 payable by
the Company to James S. Gillespie. (14)
--------------------------------------------------------------------
10.47 Separation Agreement dated January 13, 1999
between Esmond T. Goei and the Company. (15)
--------------------------------------------------------------------
10.48 Letter Agreement dated February 2, 1999 between
the Company and JWGenesis Capital Markets LLC.(6)
--------------------------------------------------------------------
10.49 Amendment dated June 11, 1999, to Securities
Purchase Agreement dated April 13, 1998. (1)
-----------------------------------------------------------
10.50 Termination, Consulting and Confidentiality
Agreement dated June 7, 1999 between James S.
Gillespie and the Company. (7)
--------------------------------------------------------------------
10.51 Loan and Security Agreement, dated as of
August 31, 1999, by and among Eastern Systems
Technology, Inc. ("Eastern"), Ram V. Mani
("Mani"), Front-End Technologies, Srini
Ramakrishnan ("Ramakrishnan") and the Company.
(16)
--------------------------------------------------------------------
10.52 Secured Promissory Note, dated as of August 31,
1999, in the principal amount of $250,000, payable
by Eastern to the Company. (16)
--------------------------------------------------------------------
10.53 Employment Agreement, dated as of August 31, 1999,
by and between Mani and the Company. (16)
--------------------------------------------------------------------
10.54 Plan and Agreement of Reorganization, dated August
31, 1999, among Eastern, Mani and the Company.
(16)
--------------------------------------------------------------------
10.55 Form of Ratification Agreement, dated September 10,
1999, by the Company, Eastern, Mani and
Ramakrishnan. (16)
--------------------------------------------------------------------

10.56 Employment Agreement, dated as of January 21,
2000, by and between Richard Glover and the
Company. (17)
--------------------------------------------------------------------
10.57 Employment Agreement, dated as of January 21,
2000, by and between Greg Darling and the Company.
--------------------------------------------------------------------
10.58 Form of Non-Compete Agreement, dated as of January
21, 2000, by and among the Company, Merger Sub and
each of Greg Darling and Richard Glover. (17)
--------------------------------------------------------------------
10.59 Letter dated December 10, 1999, terminating the
Consultancy Agreement dated June 7, 1999 between
the Company and James S. Gillespie. (18)
--------------------------------------------------------------------
10.60 Master Agreement to lease equipment entered into
as of April 21, 2000 with Cisco Systems Capital
Corporation. (21)
--------------------------------------------------------------------
10.61 Series B Preferred Stock Purchase Agreement dated
as of October 31, 2000, by and between NHancement
Technologies Inc. and certain investors. (22)
--------------------------------------------------------------------
10.62 Shelf Registration Agreement dated as of October
31, 2000, by and between NHancement Technologies
Inc. and certain investors. (22)
-----------------------------------------------
10.63 Master Agreement to lease equipment entered into
As of July 25, 2000 with Hewlett-Packard. (24)
--------------------------------------------------------------------
10.64 Form of Convertible Promissory Note dated March 21,
2001 issued to L. Thomas Baldwin III. (25)
--------------------------------------------------------------------
10.65 Master Services agreement dated as of March 22,
2001 by and between Appiant Technologies and
InPhonic, Inc. (26)number exhibit 10.63 in error
--------------------------------------------------------------------
10.66 Debenture and Warrant Purchase Agreement, dated
April 19, 2002. (27) numbered exhibit 10.1 in error.
--------------------------------------------------------------------
10.67 Secured Convertible Debenture, dated April 19, 2002
(27) numbered exhibit 10.2 in error.
--------------------------------------------------------------------
10.68 Warrant to Purchase Shares of Common Stock, issued
April 19, 2002 (27) numbered exhibit 10.3 in error
--------------------------------------------------------------------
10.69 Registration Rights Agreement, dated April 19, 2002
(27) numbered exhibit 10.4 in error.
--------------------------------------------------------------------
10.70 Security Agreement, dated April 19, 2002 (27)
numbered exhibit 10.5 in error.
--------------------------------------------------------------------
10.71 Asset Purchase Agreement, dated July 12, 2002
(28) numbered exhibit 5.1 in error.
--------------------------------------------------------------------
10.72 Equipment Lease Agreement, dated July 12, 2002
(28) numbered exhibit 5.2 in error.
--------------------------------------------------------------------
10.73 First Amendment to Equipment Lease Agreement, dated
August 9, 2002 (28) numbered exhibit 5.3 in error.
--------------------------------------------------------------------
10.74 Bill of Sale, dated July 12, 2002 (28)
numbered exhibit 5.4 in error.
--------------------------------------------------------------------
10.75 First Amendment to Master Services Agreement,
dated August 9, 2002 (28) numbered exhibit 5.5 in
error.
--------------------------------------------------------------------
21 Subsidiaries
--------------------------------------------------------------------
23.1 Consent of PricewaterhouseCoopers LLP.
--------------------------------------------------------------------
23.2 Consent of BDO Seidman, LLP.
--------------------------------------------------------------------
24 Power of Attorney (included on signature page to
this Report on Form 10-K).
--------------------------------------------------------------------
27 Financial Data Schedule {Note: will be for the
twelve months ended 9/30/00}.
--------------------------------------------------------------------
99.1 Sarbanes-Oxley Act Certification (27)
--------------------------------------------------------------------
* To be filed herewith

(1) Incorporated by reference to the document bearing the same exhibit
number as contained in Issuer's Report on Form 8-K, as filed with the Securities
and Exchange Commission on June 15, 1999.

(2) Incorporated by reference to the document bearing the same exhibit
number as contained in Amendment No. 2 to Issuer's Registration Statement on
Form SB-2 (Reg. No. 333-15563), as filed with the Securities and Exchange
Commission on January 13, 1997.

(3) Incorporated by reference to the document bearing the same exhibit
number as contained in Issuer's Registration Statement on Form SB-2(Reg. No.
333-15563), as filed with the Securities and Exchange Commission on November 5,
1996.

(4) Incorporated by reference to the document bearing the same exhibit
number as contained in Amendment No. 1 to Issuer's Registration Statement on
Form SB-2 (Reg. No. 333-15563), as filed with the Securities and Exchange
Commission on December 20, 1996.

(5) Incorporated by reference to the document bearing the same exhibit
number as contained in Issuer's Annual Report on Form 10-KSB, as filed with the
Securities and Exchange Commission on April 15, 1998.

(6) Incorporated by reference to the document bearing the same exhibit
number as contained in Issuer's Quarterly Report on Form 10-QSB, as filed with
the Securities and Exchange Commission on February 16, 1999.

(7) Incorporated by reference to the document bearing the same exhibit
number as contained in Registrant's Quarterly Report on Form 10-QSB, as filed
with the Securities and Exchange Commission on July 28, 1999.

(8) Incorporated by reference to the document bearing the same exhibit
number as contained in Amendment No. 3 to Issuer's Registration Statement on
Form SB-2 (Reg. No. 333-15563), as filed with the Securities and Exchange
Commission on January 28, 1997.

(9) Incorporated by reference to Exhibit 2.01 to Issuer's Form 8-K, as filed
with the Securities and Exchange Commission on December 30, 1997.

(10) Incorporated by reference to the document bearing the same exhibit
number as contained in Issuer's Quarterly Report on Form 10-QSB, as filed with
the Securities and Exchange Commission on November 14, 1997.

(11) Incorporated by reference to Exhibit 4.01 to Issuer's Form 8-K, as
filed with the Securities and Exchange Commission on December 30, 1997.

(12) Incorporated by reference to the document bearing the same exhibit
number as contained in Issuer's Annual Report, as amended, on Form 10-KSB/A, as
filed with the Securities and Exchange Commission on January 29, 1999.

(13) Incorporated by reference from Issuer's Registration Statement on Form
S-3 (Reg. No. 333-52709), as initially filed with the Securities and Exchange
Commission on May 14, 1998.

(14) Incorporated by reference from Issuer's Report on Form 8-K, as filed
with the Securities and Exchange Commission on July 7, 1998.

(15) Incorporated by reference to the document bearing the same exhibit
number as contained on Form 8-K, as filed with the Securities and Exchange
Commission on February 12, 1999.

(16) Incorporated by reference from Issuer's Report on Form 8-K, as filed
with the Securities and Exchange Commission on September 15, 1999.

(17) Incorporated by reference from Issuer's Report on Form 8-K, as filed
with Securities and Exchange Commission on February 7, 2000.

(18) Incorporated by reference from Issuer's Quarterly Report on Form
10-QSB, as filed with the Securities and Exchange Commission on February 14,
2000.

(19) Incorporated by reference from Issuer's Quarterly Report on Form 10-Q
as filed with the Securities and Exchange Commission on May 15, 2000.

(20) Incorporated by reference from Issuer's Registration Statement on Form
S-3 (Reg. No. 333-41474), as filed with the Securities and Exchange Commission
on July 14, 2000.

(21) Incorporated by reference from Issuer's Quarterly Report on Form 10-QSB
as filed with Securities and Exchange Commission on August 14, 2000.

(22) Incorporated by reference from Issuer's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on November 13, 2000.

(23) Incorporated by reference from Issuer's Annual Report on Form 10KSB as
filed with the Securities and Exchange Commission on January 12, 2001.

(24) Incorporated by reference from Issuer's Quarterly Report on Form 10-Q
as filed with the Securities and Exchange Commission on February 14, 2001.

(25) Incorporated by reference from Issuer's Quarterly Report on Form 10-Q
as filed with the Securities and Exchange Commission on May 21, 2001.

(26) Incorporated by reference from Issuer's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on January 14, 2002.

(27) Incorporated by reference from Issuer's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on May 3, 2002 (numbered
exhibits 10.x in error).

(28) Incorporated by reference from Issuer's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on August 27, 2002 (numbered
exhibits 5.x in error).

(b) Reports on Form 8-K

On May 3, 2002 we filed a report on form 8-K to announce a secured financing of
up to 4,025,000 with certain accredited investors pursuant to a Debenture and
Warrant Purchase Agreement dated April 19, 2002.

On July 19, 2002 we filed a report on form 8-K to announce two members of the
Appiant Technologies, Inc. Board of Directors, Allen F. Jacobson and Robert J.
Schmier, have resigned their positions due to personal and business reasons
unrelated to Appiant.

On August 15, 2002 we filed a report on form 8-K to announce Mr. Robert Landis
and Mr. Fred E. Tannous have been elected to become new outside directors on the
Company's Board of Directors as of August 15, 2002. Both Mr. Landis and Mr.
Tannous have been appointed to the audit and compensation committees of the
Company.

On August 27, 2002 we filed a report on form 8-K to announce an execution of
execution of various agreements between Appiant Technologies and InPhonic, Inc.
providing for the sale and lease back of equipment, purchase of additional
license rights, minimum subscriber payments, and the issuance of additional
warrants to purchase Appiant common stock.

On September 20, 2002 we filed on form 8-K the Company requested a hearing
before a NASDAQ Listing Qualifications Panel in order to appeal a NASDAQ Staff
Determination indicating that, in association with its recent private placement
of $3.525 million to accredited investors, the Company does not comply with the
shareholder approval provisions set forth in Marketplace Rules 4350(i)(1)(B) and
4350(i)(1)(D)(ii), and that the Company's securities are subject to delisting
from the NASDAQ Small Cap Market on September 13, 2002.

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
PLEASANTON, STATE OF CALIFORNIA ON THIS 14TH DAY OF JANUARY, 2002.

APPIANT TECHNOLOGIES INC.

By: /s/ DOUGLAS S. ZORN
------------------------------------

Douglas S. Zorn
President and Chief Executive Officer

POWER OF ATTORNEY

EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS DOUGLAS
S.ZORN AS HIS OR HER TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT WITH FULL POWER
OF SUBSTITUTION AND RESUBSTITUTION FOR HIM OR HER AND IN HIS OR HER NAME, PLACE
AND STEAD IN ANY AND ALL CAPACITIES TO EXECUTE IN THE NAME OF EACH SUCH PERSON
WHO IS THEN AN OFFICER OR DIRECTOR OF THE REGISTRANT ANY AND ALL AMENDMENTS TO
THIS REPORT ON FORM 10-K AND TO FILE THE SAME WITH ALL EXHIBITS THERETO AND
OTHER DOCUMENTS IN CONNECTION THEREWITH WITH THE SECURITIES AND EXCHANGE
COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT AND AGENTS AND EACH OF THEM
FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUIRED
OR NECESSARY TO BE DONE IN AND ABOUT THE PREMISES AS FULLY AS HE OR SHE MIGHT OR
COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID
ATTORNEYS-IN-FACT AND AGENTS, OR ANY OF THEM, OR THEIR OR HIS SUBSTITUTE OR
SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE THEREOF.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT
AND IN THE CAPACITIES AND ON THE DATE INDICATED BELOW.

SIGNATURE TITLE DATE

/s/ Douglas S. Zorn Chairman of the Board, Chief Executive February 18, 2003
------------------- and Financial Officer, President and
Douglas S. Zorn Director (Principal Executive Officer)

/s/ N. Bruce Walko Director February 18, 2003
------------------
N. Bruce Walko

INDEX TO EXHIBITS

EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
---------------------------------------------------------------------------

All exhibits indicated in Item 14 of this Annual Report have been incorporated
by reference herein as indicated in Item 14.

APPIANT TECHNOLOGIES INC.
AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2002, 2001 and 2000

INDEPENDENT AUDITORS' REPORT

Board of Directors
Appiant Technologies Inc. (f.k.a. Nhancement Technologies Inc.) and Subsidiaries
Pleasanton, California

We have audited the accompanying consolidated balance sheets of Appiant
Technologies Inc. (f.k.a. Nhancement Technologies Inc.) and Subsidiaries as of
September 30, 2002 and September 30, 2001 (restated), and the related
consolidated statements of operations, and comprehensive loss stockholders'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Appiant Technologies
Inc. (f.k.a. Nhancement Technologies Inc.) and Subsidiaries as of September 30,
2002 and September 30, 2001(restated), and the results of its operations and its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has negative working capital and substantially all of its liabilities are in
default, which raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

STONEFIELD JOSEPHSON, INC.
CERTIFIED PUBLIC ACCOUNTANTS

Santa Monica, California
February 14, 2003

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30,
2001
(restated, See
2002 Note 1)
------------- -------------

ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,026,000 $ 3,379,000
Restricted cash 117,000 117,000
Accounts receivable, less allowance for doubtful accounts of $63,000
and $335,000 2,252,000 1,200,000
Inventory 450,000 889,000
Equipment at customers under integration - 206,000
Prepaid expenses and other 1,430,000 856,000
---------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 5,275,000 6,647,000
---------------------------------------------------------------------------------------------------
Property and equipment, net 2,859,000 5,381,000
Capitalized software, net 16,070,000 16,664,000
Goodwill and other intangible assets, net 5,869,000 10,255,000
Other assets 160,000 1,933,000
---------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 30,233,000 $ 40,880,000
===================================================================================================

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ 300,000 $ 300,000
Accounts payable 7,089,000 9,344,000
Accrued liabilities 3,296,000 3,212,000
Deferred revenue 589,000 1,041,000
Income tax payable 236,000 302,000
Accrued liability related to warrants 1,921,000 4,430,000
Convertible promissory notes payable, net of discounts - including
related parties 8,933,000 1,496,000
Notes payable, net of discounts - including related parties 6,018,000 5,732,000
Capital lease obligations, current portion 587,000 4,085,000
---------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 28,969,000 29,942,000
Capital lease obligations, net of current portion 393,000 93,000
Long term notes payable, net of current portion -- 379,000
Other 26,000 39,000
---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 29,388,000 30,453,000
---------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENGIES (Note 8) -- --
---------------------------------------------------------------------------------------------------
REDEEMABLE CONVERTIBLE PREFERRED STOCK: $0.01 par
value, 2,000,000 shares authorized, 1,500 shares issued and
outstanding 253,000 253,000
---------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY

Common stock, $0.01 par value, 40,000,000 shares authorized,
16,480,712 and 15,983,200 shares issued and outstanding,
respectively 164,000 159,000
Additional paid-in capital 81,226,000 75,810,000
Unearned stock-based compensation (83,000) (401,000)
Accumulated deficit (80,703,000) (64,932,000)
Accumulated other comprehensive loss (12,000) (462,000)
---------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 592,000 10,174,000
---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY $ 30,233,000 $ 40,880,000
===================================================================================================

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

------------------------------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30,
2002 2001 2000
------------------------------------------------------------------------------------------------------------
(restated see
Note 1)

NET REVENUES:
Products and integration services $ 687,000 $ 5,492,000 $ 11,236,000
Other services 11,125,000 16,256,000 14,293,000
------------- --------------- -------------
TOTAL NET REVENUES 11,812,000 21,748,000 25,529,000
------------- --------------- -------------

Cost of net revenues:
Products and integration services 5,454,000 5,008,000 9,852,000
Other services 8,676,000 12,538,000 8,621,000
------------- --------------- -------------
TOTAL COSTS OF NET REVENUES 14,130,000 17,546,000 18,473,000
------------- --------------- -------------

GROSS PROFIT (LOSS) (2,318,000) 4,202,000 7,056,000

OPERATING EXPENSES
Selling, general and administrative 6,146,000 16,587,000 16,365,000
Research and development 1,851,000 2,981,000 189,000
Amortization of goodwill and other intangibles 3,614,000 1,883,000 676,000
Amortization of stock-based compensation 113,000 91,000 -
Impairment of (gain on) equipment and capitalized software (2,840,000) 3,669,000 -
------------- --------------- -------------
TOTAL OPERATING EXPENSES 8,884,000 25,211,000 17,230,000
------------- --------------- -------------

LOSS FROM OPERATIONS (11,202,000) (21,009,000) (10,174,000)
------------- --------------- -------------
OTHER INCOME (EXPENSE)
Interest income 412,000 265,000 217,000
Interest expense (6,448,000) (5,352,000) (2,307,000)
Other 1,558,000 (104,000) (312,000)
------------- --------------- -------------

Total other expense (4,478,000) (5,191,000) (2,402,000)
------------- --------------- -------------
Loss before provision for income taxes (15,680,000) (26,200,000) (12,576,000)
Provision for income taxes 91,000 279,000 268,000
------------- --------------- -------------

NET LOSS $(15,771,000) $ (26,479,000) $(12,844,000)
PREFERRED STOCK DIVIDENDS - (7,626,000) (22,000)
------------- --------------- -------------

NET LOSS AVAILABLE TO COMMON STOCKHOLDERS (15,771,000) (34,105,000) (12,866,000)
============= =============== =============

BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.97) $ (2.32) $ (1.25)
============= =============== =============

SHARES USED IN PER SHARE CALCULATION-BASIC AND DILUTED 16,295,947 14,687,363 10,302,900
============= =============== =============

COMPREHENSIVE LOSS
Net loss $(15,771,000) $ (26,479,000) $(12,844,000)

Other comprehensive loss
Translation gain (loss) 450,000 (106,000) (147,000)
------------- --------------- -------------

COMPREHENSIVE LOSS $(15,321,000) $ (26,585,000) $(12,991,000)
============= =============== =============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

------------------------------------------------------------------------------------------------------------------------------
Unearned
Additional Stock
Common Stock Paid-in -based Accumulated
Shares Amount Capital Compensation Deficit
------------------------------------------------------------------------------------------------------------------------------

Balance at September 30, 1999 . . . . . . . . . . . . . . 8,219,700 $ 82,000 $24,473,000 $ -- $(17,965,000)
Conversion of preferred stock into common stock . . . . . 1,056,400 11,000 844,000 -- --
Issuance of common stock related to:
Dividends on preferred stock paid in common stock . . . 23,700 -- 22,000 -- --
Exercise of stock options and warrants. . . . . . . . . 1,580,500 15,000 2,381,000 -- --
Conversion of convertible debentures into common stock. . 685,400 7,000 5,890,000 -- --
Repurchase of common stock. . . . . . . . . . . . . . . . (216,500) (2,000) (789,000) -- --
Stock based compensation for the issuance of warrants to:
Consultants for services. . . . . . . . . . . . . . . . -- -- 2,050,000 -- --
Employees for services. . . . . . . . . . . . . . . . . -- -- 2,036,000 -- --
Other third parties . . . . . . . . . . . . . . . . . . -- -- 2,827,000 -- --
Common stock and warrants issued in acquisitions:
Trimark, Inc. . . . . . . . . . . . . . . . . . . . . 750,000 7,000 3,453,000 -- --
SVG Software Services, Inc. . . . . . . . . . . . . . 250,000 3,000 2,175,000 -- --
Unearned stock-based compensation . . . . . . . . . . . . -- -- 2,073,000 (2,073,000) --
Amortization of stock-based compensation. . . . . . . . . -- -- -- 61,000 --
Deemed interest expense related to convertible
debentures at a discount. . . . . . . . . . . . . . . . -- -- 1,595,000 -- --
Stock based compensation related to benefit associated
with accelerated vesting of options . . . . . . . . . . -- -- 231,000 -- --
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- (12,844,000)
Translation loss. . . . . . . . . . . . . . . . . . . . . -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 . . . . . . . . . . . . . . 12,349,200 $123,000 $49,261,000 $ (2,012,000) $(30,809,000)
------------------------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Loss Total
-----------------------------------------------------------------------------------------

Balance at September 30, 1999 . . . . . . . . . . . . . . $ (209,000) $ 6,381,000
Conversion of preferred stock into common stock . . . . . -- 855,000
Issuance of common stock related to:
Dividends on preferred stock paid in common stock . . . -- 22,000
Exercise of stock options and warrants. . . . . . . . . -- 2,396,000
Conversion of convertible debentures into common stock. . -- 5,897,000
Repurchase of common stock. . . . . . . . . . . . . . . . -- (791,000)
Stock based compensation for the issuance of warrants to:
Consultants for services. . . . . . . . . . . . . . . . -- 2,050,000
Employees for services. . . . . . . . . . . . . . . . . -- 2,036,000
Other third parties . . . . . . . . . . . . . . . . . . -- 2,827,000
Common stock and warrants issued in acquisitions:
Trimark, Inc. . . . . . . . . . . . . . . . . . . . . -- 3,460,000
SVG Software Services, Inc. . . . . . . . . . . . . . -- 2,178,000
Unearned stock-based compensation . . . . . . . . . . . . -- --
Amortization of stock-based compensation. . . . . . . . . -- 61,000
Deemed interest expense related to convertible
debentures at a discount. . . . . . . . . . . . . . . . -- 1,595,000
Stock based compensation related to benefit associated
with accelerated vesting of options . . . . . . . . . . -- 231,000
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . -- (12,844,000)
Translation loss. . . . . . . . . . . . . . . . . . . . . (147,000) (147,000)
-----------------------------------------------------------------------------------------
Balance at September 30, 2000 . . . . . . . . . . . . . . $ (356,000) $ 16,207,000
-----------------------------------------------------------------------------------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)

-------------------------------------------------------------------------------------------------------------------------
Unearned
Additional Stock-
Common Stock Paid-in based
Shares Amount Capital Compensation
-------------------------------------------------------------------------------------------------------------------------

Balance at September 30, 2000 . . . . . . . . . . . . . . . . . . . . 12,349,200 $123,000 $49,261,000 $ (2,012,000)
Reclassification of warrants to liabilities (restated). . . . . . . . -- -- (3,436,000) --
Reclassification of warrant liabilities for cancellation of warrants
(restated) 1,107,000
Beneficial conversion feature related to issuance of convertible
promissory notes payable (restated) . . . . . . . . . . . . . . . . -- -- 4,611,000 --
Dividend related to beneficial conversion feature of preferred
stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 7,626,000 --
Conversion of Series B Preferred Stock to Common Stock. . . . . . . . 831,000 9,000 4,669,000 --
Reduction in warrant exercise price . . . . . . . . . . . . . . . . . -- -- 1,848,000 --
Issuance of common stock related to:
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . 219,000 2,000 319,000 --
Exercise of warrants. . . . . . . . . . . . . . . . . . . . . . . . 602,000 6,000 1,491,000 --
Equity Line Agreement . . . . . . . . . . . . . . . . . . . . . . . 332,000 3,000 (3,000) --
Common stock issued for:
Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 -- -- --
Quaartz acquisition . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000 15,000 8,295,000 --
Convertible notes financing . . . . . . . . . . . . . . . . . . . . 100,000 1,000 544,000 --
Preferred stock consultants . . . . . . . . . . . . . . . . . . . . 25,000 -- 568,000 --
Stock options granted in Quaartz acquisition. . . . . . . . . . . . . -- -- 430,000 --
Reversal of unearned stock-based compensation related to
employee terminations . . . . . . . . . . . . . . . . . . . . . . . -- -- (1,520,000) 1,520,000
Amortization of stock-based compensation. . . . . . . . . . . . . . . -- -- -- 91,000
Net loss (restated) . . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- --
Translation loss. . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- --
---------- -------- ------------ --------------
Balance at September 30, 2001 . . . . . . . . . . . . . . . . . . . . 15,983,200 $159,000 $75,810,000 $ (401,000)
--------------------------------------------------------------------- ---------- -------- ------------ --------------

--------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Accumulated Comprehensive
Deficit Loss Total
--------------------------------------------------------------------------------------------------------------------

Balance at September 30, 2000 . . . . . . . . . . . . . . . . . . . . $(30,809,000) $ (356,000) $ 16,207,000
Reclassification of warrants to liabilities (restated). . . . . . . . -- -- (3,436,000)
Reclassification of warrant liabilities for cancellation of warrants
(restated) 1,107,000
Beneficial conversion feature related to issuance of convertible
promissory notes payable (restated) . . . . . . . . . . . . . . . . -- -- 4,611,000
Dividend related to beneficial conversion feature of preferred
stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,626,000) -- --
Conversion of Series B Preferred Stock to Common Stock. . . . . . . . -- 4,678,000
Reduction in warrant exercise price . . . . . . . . . . . . . . . . . -- -- 1,848,00
Issuance of common stock related to:
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . -- -- 321,000
Exercise of warrants. . . . . . . . . . . . . . . . . . . . . . . . -- -- 1,497,000
Equity Line Agreement . . . . . . . . . . . . . . . . . . . . . . . -- -- --
Common stock issued for:
Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- --
Quaartz acquisition . . . . . . . . . . . . . . . . . . . . . . . . -- -- 8,310,000
Convertible notes financing . . . . . . . . . . . . . . . . . . . . -- -- 545,000
Preferred stock consultants . . . . . . . . . . . . . . . . . . . . -- -- 568,000
Stock options granted in Quaartz acquisition. . . . . . . . . . . . . -- -- 430,000
Reversal of unearned stock-based compensation related to
employee terminations . . . . . . . . . . . . . . . . . . . . . . . -- -- --
Amortization of stock-based compensation. . . . . . . . . . . . . . . -- -- 91,000
Net loss (restated) . . . . . . . . . . . . . . . . . . . . . . . . . (26,497,000) -- (26,497,000)
Translation loss. . . . . . . . . . . . . . . . . . . . . . . . . . . -- (106,000) (106,000)
--------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 . . . . . . . . . . . . . . . . . . . . $(64,932,000) $ (462,000) $ 10,174,000
--------------------------------------------------------------------------------------------------------------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)

---------------------------------------------------------------------------------------------------------------------
Unearned
Additional Stock-
Common Stock Paid-in based
Shares Amount Capital Compensation
---------------------------------------------------------------------------------------------------------------------

Balance at September 30, 2001(restated) . . . . . . . . . . . . . 15,983,200 $159,000 $75,810,000 $ (401,000)
Beneficial conversion feature related to issuance of convertible
promissory notes payable. . . . . . . . . . . . . . . . . . . . 4,761,000

Common stock issued for:
Acquisition of XiMnet . . . . . . . . . . . . . . . . . . . . . 250,000 3,000 437,000
Settlement. . . . . . . . . . . . . . . . . . . . . . . . . . . 247,512 2,000 432,000
Stock options granted in Quaartz acquisition
Amortization of stock-based compensation. . . . . . . . . . . . . (214,000) 318,000
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation gain. . . . . . . . . . . . . . . . . . . . . . . . .
---------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 . . . . . . . . . . . . . . . . . . 16,480,712 $164,000 $81,226,000 $ (83,000)
=====================================================================================================================

----------------------------------------------------------------------------------------------------------------
Accumulated
Other
Accumulated Comprehensive
Deficit Loss Total
----------------------------------------------------------------------------------------------------------------

Balance at September 30, 2001(restated) . . . . . . . . . . . . . $(64,932,000) $ (462,000) $ 10,174,000
Beneficial conversion feature related to issuance of convertible
promissory notes payable. . . . . . . . . . . . . . . . . . . . 4,761,000

Common stock issued for:
Acquisition of XiMnet . . . . . . . . . . . . . . . . . . . . . 440,000
Settlement. . . . . . . . . . . . . . . . . . . . . . . . . . . 434,000
Stock options granted in Quaartz acquisition
Amortization of stock-based compensation. . . . . . . . . . . . . 104,000
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,771,000) (15,771,000)
Translation gain 450,000 450,000
----------------------------------------------------------------- ------------- --------------- -------------
Balance at September 30, 2002 . . . . . . . . . . . . . . . . . . $(80,703,000) $ (12,000) $ 592,000
================================================================= ============= =============== =============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

----------------------------------------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30,
2002 2001 2000
----------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(15,771,000) $(26,497,000) $(12,844,000)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Provision for doubtful accounts (272,000) 622,000 411,000
Depreciation and amortization 4,546,000 2,673,000 1,071,000
Amortization of goodwill and intangibles 4,386,000 2,086,000 676,000
Amortization of stock based compensation 104,000 91,000 61,000
Provision for excess and obsolete inventory 200,000 397,000 44,000
Interest expense related to issuance of warrants to related party 822,000 4,044,000 --
Impairment of equipment and capitalized software -- 3,669,000 --
Write-off of equipment 1,204,000 -- --
Gain on extinguishment of capital leases (3,662,000) -- --
Unearned stock-based compensation -- -- 4,317,000
Amortization of discount on convertible notes payable 7,653,000 3,572,000 1,595,000
Accrued liability related to warrants (5,624,000) (3,864,000) --
Issuance of common stock for settlement 428,000 -- --
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (780,000) 2,085,000 1,403,000
Inventory 239,000 (736,000) 718,000
Equipment at customers under integration 206,000 1,502,000 (1,426,000)
Prepaid expenses and other 375,000 (543,000) (36,000)
Other assets 811,000 (559,000) (190,000)
Income tax payable (66,000) 22,000 201,000
Deferred Revenue (452,000) (1,878,000) 1,311,000
Accounts payable and other current liabilities (2,171,000) 3,838,000 (799,000)
----------------------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (9,468,000) (9,476,000) (3,486,000)
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted cash (1,000) 74,000
Proceeds from (payments on) note payable to related party -- 574,000
Proceeds from sale of property and equipment -- 17,000
Cash acquired in connection with acquisition 89,000 22,000 45,000
Purchases of software (637,000) --
Capitalization of software development costs (1,565,000) (2,064,000) (618,000)
Purchase of property and equipment -- (3,493,000) (1,206,000)
----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,476,000) (6,173,000) (1,114,000)
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Share repurchase -- (791,000)
Repayments under lines of credit (343,000) (197,000)
Advance payment on future lease obligation -- (2,000,000)
Proceeds from issuance of note payable to software vendor 3,000,000 --
Repayment of notes payable (50,000) -- --
Proceeds from issuance of common stock 1,745,000 --
Proceeds from issuance of convertible notes and warrants 7,111,000 5,500,000 5,397,000
Repayment of convertible notes (408,000) (400,000) --
Advanced payments for preferred stock -- 3,559,000
Proceeds from warrants and options exercised for common stock 1,818,000 2,396,000
Proceeds from issuance of preferred stock, net of issuance costs 4,956,000 --
Principal payments on capital lease obligations (256,000) (897,000) (344,000)
Principal payment on notes payable to stockholders -- --
----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,497,000 15,379,000 8,020,000
----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 450,000 (106,000) (146,000)
----------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,353,000) (2,224,000) 3,274,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,379,000 5,603,000 2,329,000
----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,026,000 $ 3,379,000 $ 5,603,000
======================================================================================================================

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SUPPLEMENTAL CASH FLOW INFORMATION:
----------------------------------------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30,
2002 2001 2000
----------------------------------------------------------------------------------------------------------------------

CASH TRANSACTIONS:
Income taxes $ - $ 53,000 $ 6,000
Interest paid - 725,000 440,000

NON-CASH TRANSACTIONS:
Issuance of Common Stock and options in acquisitions 438,000 8,740,000 5,638,000
Renegotiation of lease terms resulting in return of equipment 800,000 1,504,000 -
Deemed dividends related to beneficial conversion feature of
Preferred Stock - 7,626,000 -
Beneficial conversion feature on convertible promissory notes payable 4,082,000 2,548,000 1,595,000
Cancellation of capital lease obligations 3,600,000 7,193,000 -
Estimated value of warrants issued to customer 571,000 449,000 -
Estimated value of warrants issued to underwriters - 2,226,000 -
Conversion of Preferred Stock into Common Stock - 4,678,000 855,000
Property and equipment acquired under capital lease 720,000 5,092,000 1,481,000
Conversion of convertible debentures to common stock - - 5,897,000
Dividends on preferred stock paid in common stock - - 22,000
Unearned stock-based compensation - - 2,073,000
Conversion of advanced payment to preferred stock - 3,559,000 -
Issuance of Common Stock for conversion of Stockholder debt - - -
Conversion of Infotel debt to common stock - - -

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. OVERVIEW

BACKGROUND AND BUSINESS

We formally changed our name to Appiant Technologies, Inc. from Nhancement
Technologies, Inc. upon receiving shareholder approval. We have also filed a
trademark application for the name change. Appiant Technologies Inc.,
("Appiant" or the "Company") is a Delaware corporation headquartered in
Pleasanton, California and was incorporated in October 1996 as a holding
company. The Company's businesses have been conducted through its operating
Subsidiaries, Appiant Technologies North America, Inc. ("APPIANT NA"), a
California corporation headquartered in Pleasanton, California, and Infotel
Technologies (Pte), Ltd., based in Singapore. APPIANT NA has historically been a
systems distributor and integrator of voice processing and multimedia messaging
equipment and software and in fiscal 2000, began the development and purchase of
software for its hosted internet protocol based unified communication and
unified information portal services under the name inUnison(TM) . Infotel is a
distributor of telecommunications and other electronic products and provides
consulting and a range of other services for the telecommunications and
information technology market. Infotel also provides radar system integration,
turnkey project management, and electronic test instrumentation services.

APPIANT NA revenues were 18%, 40% and 55% of consolidated net revenues in fiscal
years 2002, 2001 and 2000. Infotel revenues were 82%, 60% and 45% of
consolidated net revenues for fiscal years 2002, 2001 and 2000, respectively.

During fiscal year 1999, the Company acquired the assets of Eastern Systems
Technology, Inc. ("Eastern"), which primarily consisted of a software search
engine capable of accessing information contained in multiple corporate
databases. The Eastern acquisition provided the Company with a search engine for
inclusion in the Company's inUnison(TM) portal services applications.

During fiscal year 2000, the Company acquired the assets of SVG Software
Services, Inc., a California corporation ("SVG"), which primarily consisted of
customer relationship management software, and Appiant Technologies (India) Pte.
Ltd. ("APPIANT India") a company incorporated in Chennai, India. APPIANT India
had conducted software development activities for the inUnison(TM) portal and
also focuses on call center solutions and outsourcing for enterprises seeking to
establish call centers in India. During the fiscal year 2001, the Company sold
Appiant India operations to rationalize costs and to focus on its core
competencies.

During fiscal year 2000, the Company acquired Trimark, Inc., headquartered in
San Diego, California and doing business as Triad Marketing ("Triad"). Triad
designs, manufactures and markets profile selling software products to corporate
and credit union clients. During 2001, the legacy Triad operations were
substantially terminated. The Company's acquisitions and the disposal of
Appiant India are described further in Note 3 to the consolidated financial
statements.

The Triad and SVG acquisitions provided the Company with recommendation engine
software tools and customer relationship management software, respectively, for
inclusion in the Company's inUnison(TM) portal service applications.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

During fiscal year 2001, the Company acquired Quaartz, an application and
service provider primarily involved in software development projects for the
Company. Acquisition of Quaartz provided the Company with calendar software
tools for inclusion in the Company's inUnison(TM) portal service applications.
Quaartz is a pioneering Internet affinity marketing company that provides
Internet-hosted applications enabling companies and organizations to deliver
event announcements, communication tools and e-commerce directly to their online
communities.

The Company restructured its operations, closing a number of remote divisions
and implementing a 20% work force reduction for the year ended September 30,
2001. Restructuring charges consisted principally of severance payments to
former officers and executives and operational and administrative employees of
APPIANT NA. A total of 63 employees were terminated during fiscal year 2001 and
a total of $363,000 was expensed and included in selling, general and
administrative expenses.

The Company also has a Canadian subsidiary, which facilitates the sale of
APPIANT NA's voice processing and multimedia messaging equipment and integration
services.

BASIS OF PRESENTATION

The consolidated financial statements of the Company and its Subsidiaries
contemplate the realization of assets and satisfaction of liabilities in the
normal course of business. The Company recorded a net loss of $15.8 million for
fiscal year 2002 and also sustained significant losses for the fiscal years
ended 2001 and 2000. At September 30, 2002, the Company has negative working
capital of $23.7 million and an accumulative deficit of $80.7 million.
Additionally, substantially all the Company's liabilities are in default. As a
result, the Company will need to generate significantly higher revenue to reach
profitability as the organization of the new inUnison(TM) portal business is
built. There remains significant uncertainly, however, about the Company's
ability to continue as a going concern. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.

Management's plans to reverse the recent trend of losses are to increase
revenues and gross margins while controlling costs, primarily based on expected
revenues for the Company's inUnison(TM) portal services applications. Continued
existence of the Company is dependent on the Company's ability to obtain
adequate funding and eventually establish profitable operations. The Company
intends to obtain additional equity and/or debt financing in order to further
finance the development and market introduction of its inUnison(TM) portal
services and to meet working capital requirements.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION

The consolidated financial statements include the accounts of the Company and
its wholly owned Subsidiaries. Inter-company accounts and transactions have been
eliminated. Assets and liabilities of Infotel, which operates in a local
currency environment, are translated into U.S. dollars at exchange rates in
effect at the balance sheet date and income and expense accounts are translated
at average exchange rates during the fiscal year. Resulting translation
adjustments are recorded in other comprehensive loss.

USE OF ESTIMATES

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

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FINANCIAL INSTRUMENTS

The Company classifies highly liquid investments with an original or remaining
maturity of three months or less at date of purchase as cash equivalents. The
carrying amounts reported for cash and cash equivalents are considered to
approximate fair values based upon the short maturities of those financial
instruments and comprise cash deposits at September 30, 2002 and 2001.

The carrying amounts of certain of the Company's other financial instruments
including accounts receivable, accounts payable, lines of credit, notes payable
and certain promissory notes payable approximate fair value due to their short
maturities.

The Company's Infotel subsidiary maintains fixed deposits to secure bankers'
guarantees of its performance on radar system integration projects. The
restrictions on these funds are released when the projects are completed. The
Company expects guaranteed work collateralized by these deposits to be completed
within one year.

The Company has significant international sales transactions generated by its
Singapore subsidiary, Infotel. The Company has historically used forward
exchange contracts to hedge unrecognized firm purchase commitments that expose
the Company to risk as a result of fluctuations in foreign currency exchange
rates. Unrealized gains and losses of forward exchange contracts that are
designated as hedges of firm purchase commitments are recorded in other current
liabilities or assets and are included in the measurement of the underlying
transaction. Hedge accounting was only applied if the derivative reduced the
risk of the underlying hedged item and was designated at inception as a hedge.
Derivatives were measured for effectiveness both at inception and on an ongoing
basis. There were no foreign exchange forward contracts outstanding at September
30, 2002.

CERTAIN RISKS AND UNCERTAINTIES

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents and accounts
receivable. The Company maintains substantially all of its cash and cash
equivalent balances with one financial institution domiciled in the United
States and another domiciled in Singapore. The Company maintains its cash in
bank deposit accounts in the United States which, at times, may exceed federally
insured limits. The amounts on deposit in Singapore are not insured. The
Company has not experienced any losses in such accounts.

The Company performs ongoing credit evaluations of its customers, generally does
not require collateral of its customers and maintains allowances for potential
credit losses. At September 30, 2002 and 2001, no customers constituted more
than 10% of accounts receivable.

Suppliers

The Company's Enterprise operations of APPIANT NA depend upon the integration of
hardware, software, and communications and data processing equipment
manufactured by others into systems designed to meet the needs of customers.
Although the Company has agreements with a number of equipment manufacturers, a
major portion of the Company's revenues has been generated from the sale of
products manufactured by three companies. The Company relies significantly on
products manufactured and services provided by three major suppliers. Any
disruption in the Company's relationships with the suppliers would have a
significant adverse effect on the Company's business for an indeterminate period
of time until new supplier relationships could be established. Any interruption
in the delivery of products by key suppliers would materially adversely affect
the Company's results of operations and financial conditions.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Some of the Company's current suppliers may currently or, at some point, compete
with the Company as it rolls out its inUnison(TM) Unified Communications/Unified
Information ("UC/UI") applications. Any potential competition from the Company's
suppliers could have a material negative impact on its business and financial
performance.

The Company's inUnison(TM) UC/UI product applications are designed to provide
the Company's customers with hosted unifying communications and unifying
information solutions. The Company's inUnison applications utilize a unified
communications platform, Unified Open Network Exchange ("uOne").

While the Company believes that the Company's inUnison(TM) applications will
provide the Company's customers with scaled, carrier grade IP-based solutions,
the Company cannot assure that the Company's customers will accept or adopt them
on a large scale. The Company's integration efforts with other third party
software has and could continue to result in product delays and cost overruns.
The Company cannot assure that other software vendors whose software products
the Company licenses or incorporates into the inUnison-(TM)- portal will
continue to support their products. If these vendors discontinue their support,
the Company's business would be adversely affected.

Infotel, the Company's Singapore subsidiary, offers a wide range of
infrastructure communications equipment products. It has an established
business-providing test measuring instrumentation and testing environments, and
is the regional distributor and test and repair center for Rohde & Schwarz test
instruments. Infotel is also a network service provider, and manages data
networks for various customers. Infotel's financial performance depends in part
on a steady stream of revenues relating to the services performed for Rohde &
Schwarz test instruments. Any material change in Infotel's relationship with
their manufacturers, including but not limited to Rohde & Schwarz, would
materially adversely affect their results of operations and financial condition.

Revenue

Customer revenues from the Company's two largest customers accounted for
approximately 24% and 8%, 16% and 10%, 29% and 5% of total revenues during
fiscal years 2002, 2001 and 2000, respectively. This concentration of revenue
has resulted in additional risk to the Company's operations and any disruption
of orders from our largest customers would adversely affect the Company's
results of operations and financial condition.

INVENTORY

Inventory consists of systems and system components and is valued at the lower
of cost (first-in, first-out method) or market.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets,
generally three to seven years. Depreciation for leasehold improvements is
recorded using the straight-line method over the shorter of the lease term or
their estimated useful lives. Upon sale or retirement of assets, cost and
related accumulated depreciation are removed from the balance sheet and the
resulting gain or loss is reflected in operations. Maintenance and repairs are
expensed as incurred and improvements are capitalized and depreciated.

The Company reviews property and equipment for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable, or whenever management has committed a plan to dispose of the
assets. Recoverability of an asset is measured by comparison of its carrying
amount to future net cash flows that the asset is expected to generate. If such
assets are considered to be impaired, the impairment recognized is measured by
the amount by which the carrying amount of the assets exceeds the projected
discounted future cash flows arising from the assets.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

GOODWILL AND OTHER INTANGIBLES

Goodwill, which is the excess of cost over net assets acquired, relates to the
Company's acquisitions of Infotel, Triad and Quaartz and is amortized over
periods of three to ten years using the straight-line method. Other intangible
assets relate to acquired assembled workforce and are amortized over a period of
two years using the straight-line method.

In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be disposed of", whenever events or circumstances
indicate the carrying value of goodwill and other intangible assets might not be
recoverable, and periodically, the Company assesses the recoverability of
intangible assets by determining whether the amortization of the asset balance
over its remaining life can be recovered through undiscounted future operating
cash flows of the acquired operations. The amount of impairment, if any, is
recognized to the extent that the carrying value exceeds the projected
discounted future operating cash flows and is recognized as a write down of the
intangible assets.

At September 30, 2001, the Company had substantially terminated operations for
its Triad subsidiary including termination of employees of Triad and sales
activities. Consequently, the Company expects to generate no future cash flows
from this operation. The company determined that the goodwill and workforce
acquired had no remaining value and as a result, recorded an impairment charge
of $204,000. The Company has retained the acquired customer relationship
management software for integration into its inUnison(TM) portal.

SOFTWARE DEVELOPMENT COSTS

The Company has adopted SOP 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" as it intends to offer its software
applications in a hosted service model. Software development costs, including
costs incurred to purchase third party software, are capitalized beginning when
the Company has determined factors are present, including among others, that
technology exists to achieve the performance requirements, buy versus internal
development decisions have been made and the Company's management has authorized
the funding for the project. Capitalization of software costs ceases when the
software is substantially complete and is ready for its intended use and is
amortized over its estimated useful life of three to seven years using the
straight-line method. To the extent that the Company were to license software,
any revenues net of any direct incremental costs such as marketing, commissions,
software reproduction costs, warranty, and service obligations, would be applied
against the capitalized cost of software, and no profit would be recognized from
such transactions unless and until net proceeds from licenses and amortization
have reduced the capitalized carrying amount of the software to zero.
Subsequent proceeds from licensing the software would be recognized as revenue.

When events or circumstances indicate the carrying value of internal use
software might not be recoverable, the Company will assess the recoverability of
these assets by determining whether the amortization of the asset balance over
its remaining life can be recovered through undiscounted future operating cash
flows. The amount of impairment, if any, is recognized to the extent that the
carrying value exceeds the projected discounted future operating cash flows and
is recognized as a write down of the asset. In addition, when it is no longer
probable that computer software being developed will be placed in service, the
asset will be recorded at the lower of its carrying value or fair valueless
direct selling costs, if any.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

REVENUE RECOGNITION

The Company derives its revenue from APPIANT NA and Infotel. Generally, revenue
derived from APPIANT NA relates to the distribution and integration of voice
processing and multimedia messaging equipment manufactured by others and
maintenance services. Also, in 2002, APPIANT NA began recognizing revenue form
its inUnison portal service. The Company recognizes revenue on a monthly basis
for subscription services. The revenue derived from Infotel primarily relates
to the distribution and integration of telecommunications and other electronic
products and providing services primarily for radar system integration, turnkey
project management and test instrumentation. Equipment sales and related
integration services revenue is recognized upon acceptance and delivery if a
signed contract exists, the fee is fixed or determinable, and collection of the
resulting receivable is reasonably assured. Equipment at customer sites and
related costs of integration are included in "Equipment at customers under
integration" in the accompanying Consolidated Balance Sheet.

Revenue from maintenance services related to ongoing customer support is
recognized ratably over the period of the maintenance contact. Maintenance
service fees are generally received in advance and are non-refundable. Service
revenue is recognized as the related services are performed.

Revenues from projects undertaken for customers under fixed price contracts are
recognized under the percentage-of-completion method of accounting for which the
estimated revenue is based on the ratio of cost incurred to costs incurred plus
estimated costs to complete. When the Company's current estimates of total
contract revenue and cost indicate a loss, the Company records a provision for
estimated loss on the contract.

Deferred revenue includes advance payments received for maintenance services for
ongoing customer support, other prepaid services and revenues received or due
under the terms of the contracts for which customer acceptance had not been
received.

INCOME TAXES

Deferred tax assets and liabilities are determined based on differences between
the financial statement and tax bases of assets and liabilities using enacted
tax rates in effect for the country and the period in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.

STOCK-BASED COMPENSATION

The Company uses the intrinsic value method to record stock-based compensation
for employees provided the stock option terms meet the requirements for fixed
accounting. The intrinsic value method requires that deferred stock compensation
be recorded for the difference between the exercise price and the fair value of
the underlying common stock on the grant date of the stock option. Pro forma net
loss disclosures are presented in Note 11, assuming all employee options were
valued using the Black-Scholes model and the resulting stock-based compensation
is amortized over the term of the option as it becomes exercisable, using the
straight-line method. Stock-based compensation to non-employees is based on the
fair value of the option estimated using the Black-Scholes model on the date of
grant and re-measured until vested. Compensation expense resulting from
non-employee options is amortized to expense using an accelerated method
described in Financial Accounting Standards Board ("FASB") Interpretation No.
28.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company has granted warrants to purchase its common stock to non-employees
and certain companies for services or software. Stock-based compensation is
estimated using the Black-Scholes model on the date of grant if vested and if
not vested, re-measured until vested.

NET LOSS PER SHARE

Basic net loss per share is computed based on the weighted average number of
shares outstanding during the period. Diluted net loss per share is also
computed based on the weighted average number of shares outstanding during the
period. Diluted net loss per share does not include the weighted average effect
of dilutive potential common shares including convertible preferred stock and
debt, options and warrants to purchase common stock and common stock subject to
repurchase in any period presented because the effect is anti-dilutive. The
following table presents information necessary to reconcile basic and diluted
net loss per common and common equivalent share:

FISCAL YEARS
-------------------------------------------
2002 2001 2000
------------- ------------- -------------

Net loss $(14,342,000) $(24,649,000) $(12,844,000)
Preferred stock dividends - (7,626,000) (22,000)
------------- ------------- -------------

Net loss attributable to common
stockholders $(14,342,000) $(32,275,000) $(12,866,000)
============= ============= =============

Weighted average shares used in net loss per
share calculation 16,295,947 14,687,363 10,302,900
============= ============= =============

Anti-dilutive securities:
Convertible preferred stock 253,000 253,000 -
Options and warrants to purchase
common stock 10,352,823 7,418,000 4,888,500
Additional shares issuable as
consideration in connection with
acquisitions 410,043 250,000 250,000
Convertible promissory notes payable 18,977,647 1,605,000 -
------------- ------------- -------------

Anti-dilutive securities not included
in net loss per share calculation $ 29,927,513 $ 9,526,000 $ 5,138,500
============= ============= =============

RESTATEMENT OF FINANCIAL STATEMENTS

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

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The effect of the accounting change on income as previously reported for 2001,
and to the balance sheet accounts at September 30, 2001, including Stockholders'
equity, is:

As Previously
Reported As Restated
-------------- -------------

September 30, 2001:
Net loss ($29,929,000) ($26,497,000)
Net loss available to
Common Stockholders ($37,555,000) ($34,105,000)
Basic and diluted net loss per
Common share ($2.56) ($2.32)
Comprehensive loss ($30,035,000) (26,585,000)

Additional Paid in Capital 80,657,000 75,810,000
Accumulated Deficit (68,364,000) (64,932,000)
Total Stockholders' Equity 11,587,000 10,174,000

Accounts Receivable 1,123,000 1,200,000
Prepaids 418,000 856,000
Accounts Payable 8,834,000 9,344,000
Debentures 2,700,000 1,496,000
Warrant Liability 1,818,000 4,430,000

RECLASSIFICATION

Certain amounts in prior years consolidated financial statements have been
reclassified to conform to the current year presentation.

COMPREHENSIVE LOSS

Comprehensive loss is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. Comprehensive loss includes cumulative translation
adjustments, the impact of which has been excluded from net loss and reflected
in equity. The company has reported the components of comprehensive loss on its
consolidated statement of stockholders' equity.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2001, the Emerging Issues Task Force "EITF" issued EITF Issue 00-19
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock". The Task Force discussed the accounting for
freestanding contracts that are indexed to, and potentially settled in, a
company's own stock (including options and warrants) and reached several
consensuses. The consensuses are to be applied to all freestanding derivative
financial instruments that are indexed to, and potentially settled in, a
company's own stock. The Company adopted the EITF in fiscal year 2001 and
recorded warrants with the June 8, 2001 Convertible Notes Payable as a liability
(see Note 6).

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company believes that the adoption of SFAS 141 will not have a significant
impact on its financial statements.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles."
SFAS No. 142 addresses the initial recognition, measurement and amortization of
intangible assets acquired individually or with a group of other assets (but not
those acquired in a business combination) and addresses the amortization
provisions for excess cost over fair value of net assets acquired or intangibles
acquired in a business combination. The statement is effective for fiscal years
beginning after December 15, 2001, and is effective July 1, 2001 for any
intangibles acquired in a business combination initiated after June 30, 2001.
The Company is evaluating the accounting effect arising from the recently issued
SFAS No. 142, "Goodwill and Other Intangibles" on the Company's financial
position or results of operations, other than the cessation of the Goodwill
amortization expense, which totaled approximately $4,386,000 for the year ended
September 30, 2002.

In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which requires companies to record the fair value of a liability
for asset retirement obligations in the period in which they are incurred. The
statement applies to a company's legal obligations associated with the
retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The Company does not expect the adoption to have a
material impact to the Company's financial position or results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". Statement 144 addresses the accounting and
reporting for the impairment or disposal of long-lived assets. The statement
provides a single accounting model for long-lived assets to be disposed of. New
criteria must be met to classify the asset as an asset held-for-sale. This
statement also focuses on reporting the effects of a disposal of a segment of a
business. This statement is effective for fiscal years beginning after December
15, 2001. The Company does not expect the adoption to have a material impact to
the Company's financial position or results of operations.

In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers". This Statement amends FASB Statement No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The Company does not expect the adoption to have a material impact
to the Company's financial position or results of operations.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
Company does not expect the adoption to have a material impact to the Company's
financial position or results of operations.

In October 2002, the FASB issued Statement No. 147, "Acquisitions of Certain
Financial Institutions-an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9", which removes acquisitions of financial institutions from
the scope of both Statement 72 and Interpretation 9 and requires that those
transactions be accounted for in accordance with Statements No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets. In addition,
this Statement amends SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible assets.
The requirements relating to acquisitions of financial institutions is effective
for acquisitions for which the date of acquisition is on or after October 1,
2002. The provisions related to accounting for the impairment or disposal of
certain long-term customer-relationship intangible assets are effective on
October 1, 2002. The adoption of this Statement did not have a material impact
to the Company's financial position or results of operations as the Company has
not engaged in either of these activities.

In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", which amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of Statement
148 are effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. The adoption of this
statement did not have a material impact on the Company's financial position or
results of operations as the Company has not elected to change to the fair value
based method of accounting for stock-based employee compensation.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation 46 changes the criteria by which one
company includes another entity in its consolidated financial statements.
Previously, the criteria were based on control through voting interest.
Interpretation 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. A company that consolidates a variable
interest entity is called the primary beneficiary of that entity. The
consolidation requirements of Interpretation 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company does not expect the
adoption to have a material impact to the Company's financial position or
results of operations.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. BUSINESS AND ASSET ACQUISITIONS AND DISPOSITIONS

EASTERN SYSTEMS TECHNOLOGY, INC.

On August 31, 1999, the Company acquired software from Eastern, a software
development company, in exchange for 675,000 shares of the Company's Common
Stock with an estimated value of $1,029,000, calculated based on the average of
the share price two days before and after the date of announcement of the
acquisition on August 31, 1999, which was restricted stock for the period of one
year, cash of $150,000 and extinguishment of a debt of $250,000 loaned to
Eastern, resulting in a total purchase price of $1,429,000 for the software. The
software was acquired for internal use for the Company's inUnison(TM) portal
service applications and was capitalized. Amortization of the software will
commence when the inUnison(TM) portal is substantially complete and is ready for
its intended use.

SVG SOFTWARE SERVICES, INC. AND APPIANT TECHNOLOGIES (INDIA) PTE. LTD.

On February 4, 2000, the Company completed its acquisition of certain assets of
SVG pursuant to the Plan and Agreement of Reorganization between Appiant and
SVG. The transaction was structured as a tax-free reorganization. Under terms of
the Agreement, The Company acquired all rights to SVG's intellectual property,
primarily software, and the right to use its corporate name in exchange for
250,000 shares of the Company's Common Stock valued at $2,178,000, calculated
based on the average of the share price two days before and after the
announcement date on February 4, 2000. The purchase price was allocated to
software and goodwill of $2,129,000 and $49,000, respectively. The software was
acquired for internal use for the Company's hosted internet inUnison(TM) portal
service applications and was capitalized. Amortization of the software will
commence when the hosted internet portal is substantially complete and ready for
its intended use.

In February 2000, the Company also entered into an agreement with certain
parties affiliated with the Company and SVG (their Subsidiary, SVG) to acquire
all of the outstanding shares of the common stock of APPIANT India. The
acquisition price of $50,000 and assets and liabilities acquired were not
material to the Company's financial position or results of operations. The
results of operations of APPIANT India have been included with the Company's
results of operations since April 4, 2000, the date of acquisition.

In fiscal year 2001 the Company sold its Appiant India Subsidiary to a related
party. The disposition did not have a significant impact on the Company's
financial position or results of operations as the net assets of the India
subsidiary were not significant.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

TRIMARK, INC.

On January 21, 2000, the Company completed its acquisition of all of the
outstanding shares of common stock of Trimark, Inc. (d.b.a Triad) in exchange
for approximately 750,000 shares of Common Stock of the Company, and warrants to
purchase 250,000 shares of the Company's Common Stock at an exercise price of
$1.56 per share. The transaction was structured as a tax free reorganization.
The purchase agreement provides that in the event that the average closing price
of Appiant Common Stock for the five consecutive trading days ending on the
trading day immediately prior to the first anniversary and second anniversary of
the transaction's closing (the "Valuation Formula") falls below $4.00, the Triad
shareholders are entitled to additional consideration either in cash or Appiant
Common Stock, at the Company's option. On the first anniversary date, Triad
shareholders are entitled to additional consideration equal to one-half of the
unregistered shares of the Company's Common Stock that they still own plus all
of the registered shares of the Company's Common Stock that they still own,
multiplied by the lesser of (i) $4.00 minus the Valuation Formula, or (ii)
$2.50. At the second anniversary date, the Triad shareholders are entitled to
additional consideration of equal to 250,000 unregistered shares owned by the
Triad shareholders multiplied by the lesser of (i) $4.00 minus the Valuation
Formula, or (ii) $2.50. As the guaranteed price of $4.00 per share was in excess
of the fair value of the Company's common stock two days before and after the
announcement of the acquisition on December 10, 1999, the common stock issued
was valued at $4.00 per share or $3,000.000. The estimated value of the warrants
issued to purchase the Company's common stock of $460,000 was estimated using
the Black-Scholes option pricing model using the following assumptions: expected
volatility of 90%, weighted-average risk free interest rate of 6%, term of 3
years and no expected dividends. The acquisition has been accounted for as a
purchase, which means the purchase price was allocated to the assets acquired
and liabilities assumed based on estimated fair values at the date of the
acquisition. The results of operations of Triad have been included with the
Company's results of operations since January 21, 2000, the date of acquisition.
The total purchase price of $3,460,000 was allocated based on established
valuation techniques used in the software industry as follows:

Tangible assets, primarily cash,
accounts receivable and property
and equipment $ 11,000
Purchased software 3,325,000
Assembled work force 206,000
Goodwill 250,000
Liabilities assumed (332,000)
-----------

$3,460,000
===========

QUAARTZ, INC.

Effective May 23, 2001, the Company acquired all of the outstanding stock of
Quaartz, Inc. ("Quaartz"). The total purchase price was $9.1 million and
consisted of the following:

a) 1,500,000 shares of Appiant's common stock with an estimated value of
$8,310,000, calculated by multiplying the number of shares issued by
Appiant by $5.54, which represents the average price of Appiant's
common stock for the period two days preceding through two days
following Appiant's announcement of the merger, which occurred on
February 8, 2001,
b) An estimated $342,000 of acquisition expenses, and
c) an estimated fair value of $430,000 relating to 92,387 stock options
issued by Appiant in relation to the cancellation of all of the stock
options held by Quaartz employees. The stock options, which were fully
exercisable, were valued using the Black-Scholes option pricing model
with the following assumptions: fair market value of Appiant's common
stock of $5.54, exercise price of $4.50, estimated life of the options
of 4 years, volatility of 147%, dividend rate of 0%, and risk-free
interest rate of 4.375%.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The acquisition has been accounted for using the purchase method of accounting
and accordingly the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date. The results of operations of
Quaartz have been included with those of the Company since the date of
acquisition, May 23, 2001.

The total purchase price of $9.1 million was allocated based on established
valuation techniques used in the software industry as follows:

Tangible assets, primarily
property and equipment $ 393,000

Workforce 1,223,000

Technology 2,790,000

Liabilities assumed:
Fair value of notes
payable to related party
(principle amount $3,000,000) (2,729,000)

Other liabilities (1,271,000)

Goodwill 8,675,000
------------

$ 9,081,000
============

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

Year Ended Year Ended
September 30, September 30,
2001 2000
--------------- ---------------

Net Revenues $ 25,127,000 $ 27,485,000
Net loss (55,732,000) (28,649,000)
--------------- ---------------

Net loss per common share $ (3.72) $ (2.43)
=============== ===============

Weighted average common and common
equivalent shares outstanding 14,980,000 11,803,000
=============== ===============

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Sales Agreements

On August 9, 2002, Appiant and the primary reseller of Appiant's inUnison(SM)
unified communication system, InPhonic, Inc., entered into a series of
agreements. In the first part of the agreements, InPhonic agreed to purchase
certain Appiant assets, including the Company's data processing center, and
lease them back to Appiant. The three-year equipment lease agreement provides
for sub-market rate payments for the first six months. Lease payments
subsequently increase to market rate for the following 30 months. In the second
part of the agreements, InPhonic was to purchase a broader license for Appiant's
inUnison(SM) product for $900,000. In the third and final part of the
agreements, Appiant and InPhonic agreed that InPhonic would make minimum monthly
payments to Appiant based on an assumed minimum of 10,000 paying subscribers. As
additional consideration related to these agreements, the Company granted
InPhonic additional warrants to purchase a number of common shares of Appiant
stock equal to 19.9% of all outstanding shares.

Subsequent to year end, on December 6, 2002, the second and third agreements
described above were amended to an advance payment of $300,000 for services to
be rendered by Appiant. Any excess of the advance over actual services
delivered will be offset as payment for any service fees incurred after March 1,
2003. Additionally, InPhonic agreed to purchase from Appiant a communications
server and associated equipment, for $300,000, which Appiant will lease back
from InPhonic. Lastly, the amendment cancelled the warrants granted to purchase
a number of common shares of the Company's stock equal to 19.9% of all
outstanding, and replaced them with a grant for warrants to purchase 800,000
shares of the Company's common stock at an exercise price of $0.25.

4. BALANCE SHEET ACCOUNTS

PROPERTY AND EQUIPMENT, NET

SEPTEMBER 30,
-------------------------
USEFUL LIVES IN YEARS 2002 2001
------------ -----------

Office equipment 3 to 5 $ 1,387,000 $ 680,000
Computers and software 3 to 5 3,977,000 6,422,000
Automobiles 3 to 5 129,000 100,000
Furniture and fixtures 3 to 7 840,000 432,000
Leasehold Improvements 7 497,000 483,000
------------ -----------

6,830,000 8,117,000
Less accumulated depreciation and amortization (3,971,000) (2,736,000)
------------ -----------

$ 2,859,000 $5,381,000
============ ===========

Depreciation and amortization expense was $1,942,000, $2,637,000 and $650,000
for fiscal years 2002, 2001 and 2000, respectively.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CAPITALIZED SOFTWARE, GOODWILL AND OTHER INTANGIBLE ASSETS

SEPTEMBER 30,
-----------------------------
2002 2001
--------------- ------------

Capitalized software:
Purchased for internal use $ 13,277,000 $12,857,000
Developed for internal use 5,397,000 3,807,000
--------------- ------------

18,674,000 16,664,000
Less accumulated amortization 2,604,000 -
--------------- ------------

$ 16,070,000 $16,664,000
=============== ============

Goodwill $ 12,303,000 $12,303,000
Other intangible assets 1,223,000 1,223,000
--------------- ------------

13,526,000 13,526,000
Less accumulated amortization (7,657,000) (3,271,000)
--------------- ------------

$ 5,869,000 $10,255,000
=============== ============

During fiscal years 2002, 2001 and 2000, the Company capitalized approximately $
1,590,000, $1,690,000 and 618,000 of internally developed software,
respectively. During fiscal 2002 and 2001 the Company capitalized $645,000 and
$3,802,000 of purchased software, of which, $2,790,000 was acquired with the
acquisition of Quaartz. Also during 2001, the Company reduced purchased software
by $7,200,000 for the cancellation of a capital lease. During fiscal year 2000
the Company capitalized 16,237,000 of purchased software.

In December 2001, the Company began amortizing approximately $10.4 million of
capitalized software costs, as project was substantially completed and ready for
its intended use. Amortization expense for the period from the date placed in
service to September 31, 2002 was approximately $2.6 million.

Amortization expense related to goodwill and other intangibles was $4,386,000,
$2,086,000 and 676,000 for fiscal years 2002, 2001 and 2000, respectively.

OTHER ASSETS

SEPTEMBER 30,
--------------------
2002 2001
-------- ----------

Deferred finance charges for equity line $ - $ 399,000
Convertible promissory notes
payable issuance costs - 462,000
Prepaid license - 948,000
Security deposits 160,000 -
Other - 124,000
-------- ----------

$160,000 $1,933,000
======== ==========

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ACCRUED LIABILITIES

SEPTEMBER 30,
----------------------
2002 2001
---------- ----------

Accrued payroll $1,146,000 $1,145,000
Accrued expenses 335,000 954,000
Accrued interest 1,815,000 496,000
Other - 617,000
---------- ----------

$3,296,000 $3,212,000
========== ==========

5. LINE OF CREDIT AGREEMENTS

The line of credit provides for unsecured borrowings of up to $300,000, and was
due on June 30, 2001 and bears interest at a rate equal to the Wall Street
Journal prime rate (4.75% at September 30, 2002). Under this line of credit, the
Company is not required to maintain any financial covenants. As at September 30,
2002, $300,000 was outstanding under the line of credit, all of which was past
due.

The Company's subsidiary Infotel has two different short-term banking facilities
and a long term foreign exchange line. The short-term banking facilities include
an overdraft facility and a letter of credit facility with maximum limits of
$118,000 and $765,000 respectively. The long term foreign exchange line (valid
for 3 years) has a maximum draw limit of $588,000. As of September 30, 2002,
Infotel had no amounts outstanding under any these facilities. The facilities
are guaranteed by the company.

6. CONVERTIBLE PROMISSORY NOTES PAYABLE

A summary of convertible promissory notes payable is as follows:

September 30, September 30,
2002 2001
--------------- ---------------

Notes Payable:
Face amount $ 11,803,000 $ 5,100,000
Discount (2,870,000) (3,225,000)
--------------- ---------------

8,933,000 1,875,000
less current portion - (1,496,000)
--------------- ---------------

$ 8,933,000 $ 379,000
=============== ===============

May 19, 2000 convertible Notes Payable

On May 19, 2000, the Company entered into a convertible debentures purchase
agreement with certain investors in the aggregate principal amount of $5,850,000
(the "May 19, 2000 Debentures"). The May 19, 2000 Debentures accrued interest
at 8% per annum from the date such convertible debentures were issued until the
earlier of conversion into shares of our common stock or May 30, 2001, and was
payable quarterly in arrears. The May 19, 2000 Debentures were convertible by
the holder into shares of our common stock at any time prior to the close of
business on May 30, 2001. The conversion price, as amended, is equal to the
lesser of $13.00 per share or 91% of the average of the three lowest bid prices
during the ten trading days immediately preceding the date on which the holder
of the debenture gives us notice of the intent to convert the debenture,
provided that the conversion price shall not be less than $8.00 per share. This
beneficial conversion feature resulted in a non-cash deemed interest charge of
$1,595,000 during the fiscal year 2000. In August 2000, all convertible
debentures were converted into 685,400 shares of the Company's Common Stock.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 21, 2001 Convertible Notes Payable

On March 21, 2001, the Company entered into Convertible Promissory Notes Payable
with a member of the Board of Directors and a shareholder in the principal
amount of $2,500,000 (the "$2,500,000 Note"). The $2,500,000 Note accrues
interest at 10% per annum and became fully due and payable on May 31, 2001 (the
"Maturity Date"). Upon approval by the Company's shareholders, the principal and
accrued interest under the $2,500,000 Note converts into shares of the Company's
common stock at any time on or after the Maturity Date. The conversion price is
equal to 80% of the average of the five days lowest closing market price of the
Company's common stock during the period beginning on March 16, 2001 and ending
on the Maturity Date. If the principal and accrued interest on the $2,500,000
Note is not paid in full or converted into Common Stock for any reason other
than awaiting shareholder approval, and otherwise in accordance with the terms
on or before the Maturity Date, then the conversion price shall be reduced 20%
for each full week that this note is not paid or converted, provided that the
conversion price shall not in any event be reduced to less than $1.00. If the
shareholders fail to approve the issuance of equity, the related party may
receive cash in the amount of $250,000 in addition to the repayment of the
principal and unpaid accrued interest at 25% per annum. The $2,500,000 Note was
past due and was not converted to common stock as of May 31, 2001 as the
Company's shareholders had not approved it. Instead the Company entered into an
Amendment To Convertible Promissory Note, extending the term of the note until
May 31, 2002, and specifying the conversion price at $1.00. The modified debt
instrument is considered substantially different under EITF 96-19 and is
accounted for in the same manner as a debt extinguishment.

The Amended Convertible Promissory Note in the principal amount of $ 2,500,000
is recorded at fair value. As a result a beneficial conversion feature of
$1,800,000 was recorded as additional paid in capital, and as a discount. The
discount was accreted over its maturity period as non-cash interest expense in
the fiscal year 2001 and 2002.

In conjunction with the $2,500,000 Note dated March 21, 2001, the Company issued
warrants to purchase 462,963 shares of its common stock at an exercise price of
$2.70 per share with a term of 7 years (see Note 11). The estimated value of the
warrants was determined using the Black-Scholes option pricing model and the
following assumptions: contractual term of seven years, a risk free interest
rate of 4.87% , a dividend yield of 0% and volatility of 141%. The allocation of
note proceeds to the warrant was recorded as additional paid-in capital (and
subsequently transferred to warrant liability) and a discount on the $2,500,000
Note and accreted over the note maturity period as non-cash interest expense in
the fiscal year 2001. In addition, as a result of the beneficial conversion
feature described above for the $2,500,000 Note, the Company recorded
$1,327,000 as additional paid in capital, which was recorded as a discount on
$2,500,000 Notes and was accreted over its maturity period as non-cash interest
expense in the fiscal year 2001.

In addition to the Amendment To Convertible Promissory Note on May 31, 2001, the
Company issued 1,018,518 additional warrants to the same related party to
purchase shares of the Company's common stock at an exercise price of $2.70 per
share due to the failure of the Company's completion of an equity investment of
at least $6 million on or before May 31, 2001 (See Note 10). The estimated value
of the warrants of $1,800,000 was determined using the Black-Scholes option
pricing model and the following assumptions: contractual term of 7 years, a risk
free interest rate of 4.822%, a dividend yield of 0% and volatility of 141%. The
$1,800,000 was recorded as non-cash interest expense in fiscal year 2001.

May 31, 2001 Convertible Notes Payable

On May 31, 2001, the Company entered into Convertible Promissory Notes Payable
with two related parties, the Company's Chief Executive Officer and the Vice
President of Sales, in the principal amount of $100,000 each (the "$200,000
Notes"). The $200,000 Notes accrue interest at 14% per annum and became fully
due and payable on June 21, 2001 ("maturity date"). The $200,000 Notes were also
convertible on the maturity date into shares of the Company's common stock at
90% of the conversion price applicable to any security received in any interim
financing subsequent to the date of the notes. If no interim financing was
obtained on or before the maturity date, the $200,000 Notes were convertible
into shares of the Company's common stock at 90% of the closing price on the
trading day immediately preceding the issuance date.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In addition, the Company issued warrants to the same related parties to purchase
40,000 shares of the Company's common stock at an exercise price of $1.57 per
share. The estimated value of the warrants of $144,000 was determined using the
Black-Scholes option pricing model and the following assumptions: contractual
term of 5 years, a risk free interest rate of 4.625%, a dividend yield of 0% and
volatility of 147%. The allocation of the $200,000 Note proceeds to the fair
value of the warrants was recorded as a discount on the $200,000 Notes and
accreted over the note maturity period as interest expense in fiscal year 2001.

In addition, as a result of the beneficial conversion feature described above
for the $200,000 Notes, the Company recorded additional paid-in capital of
$67,000, which was recorded as a discount on the notes payable and accreted over
the maturity period as interest expense in fiscal year 2001. The Chief Executive
Officer's note was repaid in full on June 21, 2001. The Vice President of Sales'
note has not been converted into common stock and remains outstanding at
September 30, 2002.

On May 31, 2001, the Company also entered into Convertible Promissory Notes
Payable with the same terms as the $200,000 Notes, with a shareholder in the
principal amount of $150,000 and a non-related party in the principal amount of
$250,000 (the "$400,000 Notes").

In addition, the Company issued warrants to purchase 80,000 shares of the
Company's common stock at an exercise price of $1.57 per share. The estimated
value of the warrants of $88,000 was determined using the Black-Scholes option
pricing model and the following assumptions: contractual term of 5 years, risk
free interest rate of 4.625%, a dividend yield of 0% and volatility of 147%. The
allocation of the $400,000 Note proceeds to the fair value of the warrants was
recorded as additional paid in capital and a discount on the notes payable and
fully accreted as interest expense in the fiscal year 2001.

In addition, as a result of the beneficial conversion feature described above,
the Company recorded additional paid-in capital and a discount of $133,000 on
the $400,000 Notes, which was accreted to the note extinguishment date and as a
result $51,000 was recorded as non-cash interest expense for fiscal year 2001.
On the extinguishment date, the Company calculated the intrinsic value of the
beneficial conversion feature of $44,000, reversed the beneficial conversion
charge previously recorded and recorded additional non-cash interest expense.

June 8, 2001 Convertible Notes Payable

On June 8, 2001, the Company entered into a Convertible Notes purchase agreement
with certain investors in the aggregate principal amount of $2,400,000 (the
"June 8, 2001 Notes"). The June 8, 2001 Notes accrue interest at 8% per annum,
payable in common stock at the time of conversion are collateralized by the
assets of Infotel, and matures on June 8, 2003. The conversion price is equal to
the lower of 110% of the average of any three closing bid prices selected by the
investor during the 15 trading days prior to issuance or $2.44.

In connection with the June 8, 2001 Notes, the Company issued warrants to
purchase 1,065,152 shares of the Company's common stock at an exercise price of
$2.89 per share. The allocated estimated value of the warrants of $ 1,116,000
was determined using the Black-Scholes option pricing model and the following
assumptions: contractual term of 5 years, a risk free interest rate of 4.812%, a
dividend yield of 0% and volatility of 142%. The allocation of the June 8, 2001
Notes proceeds to the fair value of the warrants was recorded as a discount on
the June 8, 2001 Notes and as a warrant liability. The discount on the June 8,
2001 Notes is accreted over the note maturity period.

In addition, as a result of the beneficial conversion feature described above
for the June 8, 2001 Notes, the Company recorded $1,283,000 additional paid-in
capital, and a discount on the notes payable which is accreted over the note
maturity period to interest expense.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company committed to issue warrants to purchase 293,750 shares of the
Company's common stock to its strategic partner for services rendered in
connection with the June 8, 2001 Notes at an exercise price of $1.60 per share.
The estimated value of the warrants of $546,000 was determined using the
Black-Scholes option pricing model and the following assumptions: contractual
term of 5 years, a risk free interest rate of 4.63%, a dividend yield of 0% and
volatility of 147%. The estimated value of $546,000 was accounted for as a
convertible debentures issuance cost and recorded as a deferred charge in fiscal
year 2001. In September 2001, the Company issued 100,000 shares of common stock
instead of warrants. The fair value of common stock approximated the fair value
of warrants. The issuance cost is amortized over the note maturity.

As of September 30, 2002 and September 30, 2001 the total unamortized discount
on the June 8, 2001 Convertible Notes Payable was $1,575,000 and 2,028,000,
respectively.

Between October 31, 2001 and December 20, 2001, the Company entered into several
Convertible Promissory Notes Payable (the "Convertible Notes") with certain
investors in the aggregate principal amount of $ 1,590,000, of which $400,000
was with members of the board of directors or shareholders. The Notes accrue
interest at 8% per annum, which is payable in common stock at the time of
conversion and are collateralized by the Company's legacy business accounts
receivables, and the assets of the Infotel subsidiary, and mature on various
dates from December 27, 2001 to November 16, 2003. The conversion price is equal
to the lower of 90% of the closing price of the Company's common stock on the
trading day immediately preceding the maturity date, or 90% of any subsequent
interim financing that occurs between the issuance date of the notes and the
maturity date. Upon conversion, the Convertible Notes have no specific
registration rights.

In connection with these Convertible Notes, the Company issued warrants to
purchase 1,096,000 shares of the Company's common stock at an exercise price of
ranging from $1.20 per share to $1.77 per share. The estimated value of the
warrants of $1,461,000 was determined using the Black-Scholes option pricing
model and the following assumptions: contractual term of 5 years, a risk free
interest rate ranging from 3.59% to 4.40%, a dividend yield of 0% and
volatility of ranging from 141% to 148%, depending on the respective issuance
dates of the warrants . The allocation of the Convertible Notes proceeds to the
fair value of the warrants was recorded as a discount on the Convertible Notes
and as warrant liability . Upon exercise of the warrants, the holder has no
specific registration rights. In addition, as a result of the beneficial
conversion feature described above for the Convertible Notes, the Company
recorded $726,000 additional paid-in capital, and a discount on the notes
payable. These discounts are accreted over the note maturity period.

Between January 17, 2002 and March 22, 2001, the Company entered into several
Convertible Promissory Notes Payable (the "Convertible Notes") with certain
investors in the aggregate principal amount of $2,025,000, of which $1,550,000
was with members of the board of directors or shareholders. The Notes accrue
interest at 10% per annum, which is payable in common stock at the time of
conversion and are collateralized by the Company's legacy business accounts
receivables, and the assets of the Infotel subsidiary, and mature on various
dates from April 30, 2002 through October 15, 2002. The conversion price is
equal to the lower of 90% of the closing price of the Company's common stock on
the trading day immediately preceding the maturity date, or 90% of any
subsequent interim financing that occurs between the issuance date of the notes
and the maturity date. Upon conversion, the Convertible Notes have no specific
registration rights.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In connection with these Convertible Notes, the Company issued warrants to
purchase 1,379,000 shares of the Company's common stock at an exercise price of
ranging from $1.32 per share to $1.80 per share.The estimated value of the
warrants of $1,878,000 was determined using the Black-Scholes option pricing
model and the following assumptions: contractual term of 5 years, a risk free
interest rate ranging from 4.19% to 4.78%, a dividend yield of 0% and
volatility of ranging from 146% to 148%, depending on the respective issuance
dates of the warrants . The allocation of the Convertible Notes proceeds to the
fair value of the warrants was recorded as a discount on the Convertible Notes
and as warrant liability. Upon exercise of the warrants, the holder has no
specific registration rights. In addition, as a result of the beneficial
conversion feature described above for the Convertible Notes, the Company
recorded $977,000 additional paid-in capital, and a discount on the notes
payable. These discounts are accreted over the note maturity period.

In addition, Appiant issued to Investors warrants to purchase up to an aggregate
of 1,456,612 shares of unregistered, restricted Appiant Common Stock on the
total financing of $3,525,000. Appiant has also agreed to issue warrants for
100,000 shares of unregistered, restricted Appiant Common Stock as part of the
finders fee for this financing. The warrants have a term of five years and are
exercisable at a warrant price equal to 110% of the closing price or $1.33 per
share. The estimated value of the warrants of $1,846,000 was determined using
the Black-Scholes option pricing model and the following assumptions:
contractual term of 5 years, a risk free interest rate of 4.52%, a dividend
yield of 0% and volatility of 145%. The allocation of the Convertible Notes
proceeds to the fair value of the warrants was recorded as a discount on the
Convertible Notes and as warrant liability. In addition, as a result of the
beneficial conversion feature described above for the Convertible Notes, the
Company recorded $2,052,000 additional paid-in capital, and a discount on the
notes payable, which is accreted over the note maturity period to interest
expense. As a result, these discounts are accreted over the note maturity
period.

Terms of the financing also provide that the Investors may nominate up to two
additional members to the Appiant Board of Directors, and provide the Investors
certain rights and options regarding possible future equity based financings by
Appiant. Appiant paid cash finder's fee of 7% and Convertible Debentures of 3%
and warrants to purchase 100,000 shares of Common Stock, and other related
expenses. No underwriters were involved in this private placement.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In connection with these Convertible Notes, the Company issued warrants to
purchase 123,174 shares of the Company's common stock at an exercise price of
ranging from $0.90 per share to $1.26 per share. The estimated value of the
warrants of $112,000 was determined using the Black-Scholes option pricing model
and the following assumptions: contractual term of 5 years, a risk free interest
rate ranging from 4.34% to 4.81%, a dividend yield of 0% and volatility of
ranging from 144% to 145%, depending on the respective issuance dates of the
warrants. The allocation of the Convertible Notes proceeds to the fair value of
the warrants was recorded as a discount on the Convertible Notes and as warrant
liability. Upon exercise of the warrants, the holder has no specific
registration rights. In addition, as a result of the beneficial conversion
feature described above for the Convertible Notes, the Company recorded $66,000
additional paid-in capital, and a discount on the notes payable, which is
accreted over the note maturity period to interest expense. As a result, these
discounts are accreted over the note maturity.

7. ACCRUED WARRANT LIABILITY

Under the terms of several convertible debentures issued on May 31, 2001 (see
Note 6), the number of shares that could be required to be delivered upon
conversion is essentially indeterminate. As a result, in accordance with the
guidelines of EITF 00-19, all warrants outstanding at that date that had
initially been classified as equity, with a value of $3,463,000 have been
reassessed and reclassified as Warrant Liability. Furthermore, the
classification of the warrants as a liability require variable accounting, with
remeasurement of the fair value of the warrants at each balance sheet, with any
adjustments reflected in earnings.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

All outstanding warrants were remeasured at September 30, 2001 using the
Black-Scholes option pricing model and the following assumptions: contractual
term of 5 years, a risk-free interest rate of 3.864%, a dividend yield of 0% and
volatility of 144%. The allocated liability related to the warrants was
$4,430,000 at September 30, 2001 and the Company has recorded an additional
$4,772,000 as a credit against interest expense in fiscal year 2001.

All outstanding warrants were remeasured at September 30, 2002 using the
Black-Scholes option pricing model and the following assumptions: contractual
term of 5 years, a risk-free interest rate of 2.752%, a dividend yield of 0% and
volatility of 144%. The liability related to the warrants was $1,921,000 at
September 30, 2002 and the Company has recorded an additional $5,623,000 as a
credit against interest expense in fiscal year 2002.

8. NOTES PAYABLE

A summary of Notes Payable is as follows:

September 30, September 30,
2002 2001
--------------- ---------------

Face amount $ 6,050,000 $ 6,000,000
Discount (32,000) (268,000)
--------------- ---------------

$ 6,018,000 $ 5,732,000
=============== ===============

On August 15, 2001, the Company executed a Settlement Agreement and Release,
("Settlement Agreement") effective as of July 27, 2001, with Cisco Systems, Inc.
("Cisco") and Cisco Systems Capital ("Cisco Capital"). The Settlement Agreement
provides that Cisco Capital will convert Appiant's down payment of $3,000,000
into a software license fee for "Paid Up" uOne licenses. In addition, Cisco
Capital forgave approximately $7,000,000 for the remaining sums owed for the
Lease Licenses. Under the terms of the Settlement Agreement, Appiant may use the
Paid Up licenses and Cisco will maintain its support for nine months (the
"Transition Period") while Appiant evaluates its options of transitioning to the
vendor that purchased Cisco's Unified Communication Software Business or
otherwise pursuing other opportunities. Cisco also loaned Appiant $3,000,000
(the "Cisco Loan") for use during the Transition Period. On or before the end
of the Transition Period, Appiant may elect to continue using the Paid Up
licenses and repay the Cisco Loan, or return the Paid Up licenses, in which
case, the Cisco Loan will be deemed to have been paid in full and completely
discharged. As no interest is payable on this note, a discount of $93,000 is
being amortized to interest expense, with an unamortized discount of $80,000 at
September 30, 2001. The discount was fully amortized during the year ended
September 30, 2002.

In connection with the acquisition of Quaartz (see Note 3), the Company assumed
certain notes payable to a related party comprised of a $1,000,000 recourse note
and a $2,000,000 non-recourse note, both of which were originally due on
December 31, 2000. No interest is payable on either of these notes, and
accordingly the discount of $274,000 is being amortized to interest expense.

In September 2002, the Company entered into a Promissory Notes Payable with a
member of the Board of Directors and a shareholder in the principal amount of
$300,000. The Notes accrue interest at 10% per annum and are payable on demand

In connection with the September 2002 Notes, the Company issued warrants to
purchase 572,727 shares of the Company's common stock at exercise prices of
$0.45 and $0.495 per share. The allocated estimated value of the warrants of
143,000 was determined using the Black-Scholes option pricing model and the
following assumptions: contractual term of 5 years, a risk free interest rate of
2.82%, a dividend yield of 0% and volatility of 144%. The fair value of the
warrants of $143,000 was expensed during the fiscal year 2002.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases its principal office facilities pursuant to non-cancelable
operating leases in Pleasanton, California, which expire in 2007. Infotel
leases office space in Singapore with the lease expiring in December 2002.

Future minimum rental payments under operating leases as of September 30, 2001
are as follows (in thousands):

FISCAL YEAR
2003 $ 347,000
2004 300,000
2005 288,000
2006 275,000
2007 272,000
Thereafter 68,000
----------

$1,550,000
==========

Rent expense was $ 721,000, $1,098,000 and $470,000 for fiscal years 2002, 2001,
and 2000 respectively.

Capital Leases

During the years ended 2000 and 2001, the Company entered into lease financing
arrangements for approximately $5.6 million related to hardware and related
product costs and consulting services related to its data center in Atlanta,
Georgia. The Company relocated its data center to Sunnyvale, California in June
2001 and relocated hardware of approximately $500,000 to this location in
September 2001 and returned approximately $1.6 million of computer and related
equipment from the Atlanta data center to the lessor. Also, the Company charged
to operating expense as an "impairment of equipment and capitalized software"
approximately $3.0 million with a net book value of approximately $2.5 million,
which related to the installation of the hardware in the Atlanta data center, as
such costs had no future value following the relocation. Also, the lessor
reduced the lease payments due by $1.6 million and as a result the Company
reduced equipment and the related capital lease obligations by an equal amount.

In December 2001, the Company reached an agreement with the lessor under which
the lessor agreed to release the Company from capital lease obligations of
approximately $3.6 million. The agreement also provided for the return of
equipment capitalized under the capital lease obligations of approximately
$800,000. As discussed above, In June 2001, the Company had recognized an
expense of $3.7 million of impairment in relation to the relocation of its first
data center in Atlanta, Georgia. According, the Company has recorded a gain of
$2.8 million within operating expenses equal to the difference between the
capital lease obligation and the book value of the capitalized equipment
returned to the lessor.

At September 30, 2002, the Company leased other computer equipment and software
under capital leases. These leases extend for varying periods through 2004.

The Company also leases computer equipment and other software under capital
leases. These leases extend for varying periods through 2004. Effective July 27,
2001, the Company entered into a settlement and release agreement with a
software vendor which the Company has a leasing arrangement for the
non-exclusive license of certain software (See Note 8).

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Equipment and software under capital leases included in property and equipment
and capitalized software are as follows:

September 30, September 30,
2002 2001
--------------- ---------------

Equipment $ 2,839,000 $ 2,119,000
Less: accumulated amortization (750,000) (614,000)
--------------- ---------------

$ 2,089,000 $ 1,505,000
=============== ===============

Future capital lease payments are as follows:

September 30, September 30,
2002 2001
--------------- ---------------

2002 $ - $ 4,250,000
2003 587,000 316,000
2004 344,000 27,000
2005 205,000 -
--------------- ---------------

1,136,000 4,593,000
Less amount representing interest (156,000) (415,000)
--------------- ---------------

Present value of minimum future payments 980,000 4,178,000
Less current portion (587,000) (4,085,000)
--------------- ---------------

$ 393,000 $ 93,000
=============== ===============

Contingencies

In October 2001, a software vendor filed suit against the Company for breach of
contract totaling approximately $703,000 plus interest and attorney's fees. On
December 28, 2001, Appiant filed an answer denying this general demand, and is
preparing a counter-suit for return of over $600,000 paid to this vendor. In
August 2002, the parties entered into a mutual settlement agreement and release
of claims wherein the Company has agreed to make cash payments totaling $200,000
between February 2003 and May 2003, and will issue warrants to purchase 50,000
shares of Appiant common stock at an exercise price of $0.37. the entire amount
of this liability has been recorded in the company's books.

In January 2002, a default judgment was issued against the Company in favor of
an equipment vendor in the amount of $123,000. The Company was successful in
having that default judgment set aside on February 6, 2002. The Company
subsequently entered into a mutual settlement agreement and release of claims in
July 2002 wherein the Company has agreed to make payments totaling $69,000. This
liability is recorded in the company's books.

In January 2002, a services and equipment provider filed suit in Texas for
breach of contract totaling $117,000. The Company is currently in negotiations
to resolve this claim. This liability is recorded in the company's books.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In February 2002, the Company resolved an arbitration matter and litigation
action involving a dispute over employment contract terms for two former Company
management employees. The settlement provides for payment of $88,000 to one
claimant over six months, and payment of $147,000 to the second claimant over a
total of twelve months. The company has accrued $235,000 for this matter. Also
in February 2002, these same claimants filed suit against the Company regarding
the Company's calculation of additional common stock due to the claimants under
an unrelated agreement. The Company Is in settlement negotiations with the
claimant to resolve matters.

In May 2002, a former note holder tendered notice of the Company's default on a
settlement agreement and release relating to a $2.75 million indebtedness
arising out of the cancelled notes. The Company is currently in negotiations
toward an agreement to cure the default and amend the payment plan called for in
the settlement agreement. The entire $2.75 million liability is recorded in the
Company's books.

In June 2002, the Company's former trademark counsel tendered notice of its
claim for $51,260.26 in unpaid fees and indicated that it would file suit to
collect these fees. The Company disputes some of these fees, but intends to
work with counsel towards a mutually agreed resolution of the matter. The
Company has recorded the $51,260.26 on its books.

In July 2002, a former supplier of equipment filed suit against the Company for
breach of contract and breach of guarantee totaling $419,581.95 plus interest
and attorney's fees. The Company has negotiated a settlement to a payment
schedule totaling $400,000, which is fully accrued on the Company's books.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

From time to time, the company is involved in other legal actions arising in the
ordinary course of business.

10. REDEEMABLE CONVERTIBLE PREFERRED STOCK

In October 2000, the Company sold 87,620 shares of Series B Preferred Stock to
domestic "accredited investors" for aggregate gross proceeds of $8,762,000,
including $3.5 million received in advance. In connection with this issuance,
the Company also issued to its investment bankers a fully exercisable warrant to
acquire 75,000 shares of its Common Stock at an exercise price of $13.50 per
share and paid a placement fee of 10% of the proceeds, 35% in cash and 65% paid
in common stock issued in the second quarter of 2001. Holders of the Series B
Preferred Stock are entitled to a non-cumulative 5% per annum dividend, payable
quarterly in arrears, when, if and as declared by the Company's Board of
Directors, which may be paid in cash or shares of the Company's Common Stock, in
the Company's sole discretion. Each share of Series B Preferred Stock is
immediately convertible into shares of our Common Stock at the lesser of (i)
$13.50 per share or (ii) 90% of the average closing bid prices for the 10
trading days immediately preceding the date of conversion, provided, that such
conversion price shall not be less than $10.00. At any time after the third
anniversary of the Closing, the Company may require the holders of the Series B
Preferred Stock to convert.

Upon voluntary or involuntary liquidation, dissolution or winding up of the
Company, the investors will be entitled to receive, on a pari passu basis with
holders of other shares of Preferred Stock, if any, an amount equal to such
investors investment in the Offering and any declared but unpaid dividends. As a
result, the net proceeds from the sale of the Series B Preferred Stock has been
classified outside of stockholders' equity. As a result of the beneficial
conversion feature described above, the Company recorded a deemed dividend of
$7,626,000 during the year ended September 30, 2001. In addition, the Company
estimated the value of the warrant at $1,107,000 issued to its investment
bankers using the Black-Scholes option pricing model with the assumptions that
follow: expected volatility of 135%, weighted average risk free interest rate of
5.8%, term of 1 year, and no expected dividend. The Company recorded this
warrant as a cost of financing. As of September 30, 2001, 86,120 preferred
shares have been converted into 831,000 shares of the Company's common stock and
1,500 preferred shares remain outstanding.

11. STOCKHOLDERS' EQUITY

PREFFERED STOCK

In fiscal 1999, the Company issued 17,500 shares of preferred stock for
$1,472,000 net of issuance costs of $278,000. All of these preferred shares have
been converted to common stock by September 30, 2000.

STOCK PURCHASE AGREEMENT

On June 6, 2000, the Company exercised its right under the terms of the Purchase
and Sale Agreement for it's subsidiary Infotel, to repurchase 216,500 shares of
its common stock at a price of approximately $3.65 per share from the former
Infotel stockholders. The reacquired shares were originally issued to the
Infotel stockholders in connection with the Company's acquisition of Infotel in
June 1998.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In fiscal year 2000 the Company entered into a common stock purchase agreement
(the "Equity Line Agreement"), dated May 24, 2000 and amended as of June 30,
2000 with an investment corporation under which the Company may require the
investment corporation to purchase up to $50 million of its common stock. Under
the terms of the Equity Line Agreement, the Company is under no obligation to
sell its common stock to the investment corporation. However, the Company may
make up to a maximum of twelve requests for the purchase of its common stock
with no single purchase exceeding $4 million unless otherwise agreed to by the
investment corporation. In addition, the Equity Line Agreement does not require
the investment corporation to purchase the Company's common stock if it would
result in the investment corporation owning more than 9.9% of the Company's
outstanding common stock. The purchase price of the common stock is 92% of the
volume weighted average price per share of the Company's common stock over the
eighteen-day period prior to the date the Company requests the investment
corporation to purchase its common stock. In addition, the investment
corporation will receive a 2% placement fee and an escrow agent fee from the
proceeds due to the Company. In conjunction with the Equity Line Agreement, the
Company issued a warrant to purchase 120,000 shares of its common stock. The
warrant exercise price was subsequently adjusted to $13.50 per share on November
15, 2000 in exchange for a waiver from the investment corporation allowing the
Company to issue Series B preferred stock to other investors, as well as engage
in other financing transactions (see "Warrants" below). The Black-Scholes option
pricing model was used to value the warrants and the following assumptions:
contractual term of 3 years, a risk free interest rate of 5,8%, a dividend yield
of 0% and a volatility of 135%. The estimated value of $2,144,000 was accounted
for as a non-current asset. As and when stock was purchased under the equity
line agreement, the non-current asset was reduced on a dollar for dollar basis
with the amount of proceeds received from the sale of common stock.

During the second quarter of 2001, the Company requested that the investment
corporation purchase $1.745 million of the Company's common stock under the
equity line agreement. As of January 2002, the Company had not exhausted the
line and expensed approximately $399,000 of the remaining non-current asset.

STOCK OPTIONS AND WARRANTS

STOCK OPTION PLAN

The Equity Incentive Plan (the "Plan") is administered by the Company's Board of
Directors and the Company's Management. The Company has reserved 4,000,000
shares of common stock for issuance under the Plan. Options granted under the
Plan may be either incentive stock options ("ISOs"), or non-qualified stock
options ("NSOs"). ISOs generally must have an exercise price of not less than
fair market value of the Common Stock on the date of grant (or, for a person
holding more than 10% of the voting power of the Company, a price equal to 110%
of the fair market value, and be exercisable only for a period of five
years).The aggregate fair market value of the Common Stock subject to options
granted to an optionee that are exercisable for the first time by an optionee
during any calendar year may not exceed $100,000. Options generally expire three
months following termination of employment. Historically, the Company's ISO's
have become exercisable over periods of two to seven years and ranged from
one-third becoming exercisable immediately and the remainder equally over the
next two years, to seven year cliff exercisability. In fiscal year 2001, ISOs
have generally become exercisable 25% after one year and the remainder ratably
over 36 months. ISOs generally have a ten-year life. Exercisability of NSOs has
generally been determined on a grant-by-grant basis.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

During 2001, the Company created a new stock option plan (the "Broad Based
Plan"). The Company intends to use the plan to give each officer, and
non-officer of the company who received a qualified stock option grant under the
Plan with a strike price of more than $ 4.50 the opportunity to be eligible to
receive the benefit of an additional options that allow for a strike price of $
4.50 per share, for which the vesting schedules for such options shall be the
same as the vesting schedule of the related option. The Primary purpose of the
Broad Based Plan is to retain and provide additional incentives to employees and
to promote business success for the Company. The exercise price shall be not
less than 85% of the fair market value of the Company's common stock on the date
of grant unless otherwise determined by the administrator and in the case of
other awards, such price to be determined by the Board of Directors. The maximum
aggregate number of shares issuable under the Broad Based Plan is 500,000
shares. Under the Broad Based Plan, the grants were made on March 16, 2001 for
options to purchase 381,000 shares of the Company's common stock at an exercise
price of $4.50. At September 30, 2002 and 2001, 1,692,000 and 3,189,000
options, respectively, were outstanding and 1,866,100 and 227,000 shares,
respectively, were available for award.

The following table summarizes transactions pursuant to the Company's Plans:

Weighted Average
Option Price Per Options
Share Outstanding
----------------- ------------

December 31, 1997 $ 3.16 1,133,400
Granted 2.05 258,000
Canceled 2.69 (186,900)
------------

SEPTEMBER 30, 1998 3.00 1,204,500
Granted 1.33 1,402,700
Canceled 2.91 (1,151,400)
------------

SEPTEMBER 30, 1999 1.51 1,455,800
Granted 9.14 2,265,000
Exercised 1.40 (390,600)
Canceled 1.89 (201,900)
------------

SEPTEMBER 30, 2000 7.03 3,128,300
Granted 6.91 2,323,700
Exercised 1.47 (218,900)
Canceled 9.74 (2,044,100)
------------
SEPTEMBER 30, 2001 5.58 3,189,000

Granted 1.87 846,000
Exercised -- --
Canceled 4.88 (2,343,000)
------------
SEPTEMBER 30, 2002 $ 4.66 1,692,000
============

----------------------------
OPTIONS EXERCISABLE AT:
September 30, 2002 $ 4.66 1,039,000
September 30, 2001 $ 6.18 856,240
September 30, 2000 $ 1.86 256,600

At September 30, 2002, 2001, and 2000, 1,866,100, 227,000 and 871,700 shares of
common stock, respectively, were available for grant under the Plans.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table summarizes information about stock options outstanding and
exercisable at September 30, 2002:

OPTIONS CURRENTLY
OPTIONS OUTSTANDING EXERCISABLE
------------------- -----------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
NUMBER OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE SHARES LIFE IN EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING YEARS PRICE EXERCISABLE PRICE
--------------- ----------- ----------- --------- ----------- ---------

0.00 - $2.20 573,600 6.4 $ 1.30 195,000 $ 1.57
2.20 - $4.40 354,000 7.0 $ 3.16 41,300 $ 3.63
4.40 - $6.60 1,281,600 6.7 $ 4.64 213,500 $ 4.58
6.60 - $8.80 722,300 7.0 $ 8.74 354,100 $ 8.74
8.80 - $11.00 63,000 9.1 $ 9.59 8,100 $ 9.72
13.20 - $15.40 75,000 1.5 $ 14.75 22,500 $ 14.70
15.40 - $17.60 117,000 8.9 $ 16.35 21,800 $ 16.12
19.80 - $22.00 2,500 9.1 $ 22.00 - -
----------- -----------

3,189,000 856,300
=========== ===========

At September 30, 2000 and 1999 options to purchase 256,000 and 149,000 shares,
respectively, of the Company's common stock were exercisable.

Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the awards, the
Company's net loss attributable to common stockholders would have been increased
to the pro forma amounts indicated below:

YEARS ENDED SEPTEMBER 30,
-------------------------------------------
2002 2001 2000
-------------------------------------------

Net loss attributable to common
stockholders:
As reported $(15,771,000) $(34,105,000) $(12,844,000)
Pro forma $(16,700,000) $(37,497,000) $(15,703,000)
Net loss per share attributable
to common stockholders--basic
and diluted:
As reported $ (0.97) $ (2.32) (1.25)
Pro forma $ (1.02) $ (2.55) (1.52)

The weighted average fair value of options granted in fiscal year 2002, 2001 and
2000 was $1.68, $4.07 and $8.56 per share under option, respectively.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company estimated the fair value of each stock option at the date of grant
using the assumptions that follow:

FISCAL YEAR
-------------------------------------------
2002 2001 2000
-------------------------------------------

Dividend yield - - -
Volatility 1.45 144% 135%
Risk-free interest rate 3.4% 5.0% 5.5%
Estimated lives 3 to 8 years 3 to 8 years 3 to 8 years

These pro forma amounts may not be representative of the effects on reported net
loss for future years as options vest over several years and additional awards
are generally made each year.

WARRANTS

In December 1999, the Company issued warrants to purchase 375,000 shares of its
Common Stock to its outside advisors, all for services rendered, with an
exercise price of $3.43 per share. During fiscal years 2000 and 2001, all
warrants were exercised and as a result, no warrants to purchase the Company's
common stock remained outstanding as of September 30, 2002. The Company valued
these warrants using the Black-Scholes option pricing model and the following
assumptions: contractual term of one to two years, a risk free interest rate of
5.15%, a dividend yield of 0% and volatility of 142%. The estimated value of
$138,000 was expensed during fiscal year 2000.

In December, 1999 the Company issued warrants to the President and Chief
Executive Officer to purchase 100,000 shares of its Common Stock and warrants to
the Company's Board members to purchase 50,000 shares of Common Stock at $3.43
per share, all of which were fully exercisable. The term of the warrants was one
year and in fiscal 2001 they were extended one more year. Under the terms of the
warrant agreements, upon exercise of the warrant, the warrant holders can pay
the exercise price by having the Company issue the number of shares under the
warrant less the number of shares having a fair value on the date exercised
equal to the exercise price. As a result, the Company has used variable
accounting to account for these awards and has recorded $2,036,000 of
stock-based compensation related to the warrants during fiscal year 2000 which
was reversed in fiscal year 2001 because of the decline in the fair market value
of the Company's common stock. At September 30, 2002, all these warrants to
purchase the Company's Common Stock have expired.

On January 21, 2000 the Company issued warrants to purchase 250,000 shares of
the Company's common stock at $1.53 per share to former owners of Trimark, Inc.
(see Note 3). The warrants are fully exercisable and expire in 3 years. In
December 2000, 150,000 of these warrants were exercised. No warrants to
purchase the Company's common stock remained outstanding as of September 30,
2002.

In January 2001, the Company issued warrants to purchase 300,000 shares of its
Common Stock with an exercise price of $6.00 per share to an external financial
advisor and shareholder for past services. The warrants were valued using the
Black-Scholes option pricing model and the following assumptions: contractual
term of one year, a risk free interest rate of 5.49%, a dividend yield of 0% and
volatility of 133%. The estimated value of $1,912,000 was expensed during fiscal
year 2000.

In connection with a software purchase agreement, the Company on May 1, 2000
issued to the supplier a warrant to purchase 45,600 shares of its Common Stock
at an exercise price of $15.50 per share. The Black-Scholes option pricing model
was used to value the warrants with the following assumptions: contractual term
of five years, a risk free interest rate of 5.8%, a dividend yield of 0% and
volatility of 135%. The estimated value of approximately $684,000 was accounted
for as purchased capitalized software.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In October 2000 the Company issued a warrant to purchase 75,000 shares of common
stock at $13.50 to its investment bankers for its Series B Preferred Stock (see
Note 8). The warrants were valued using Black-Sholes option pricing model with
the following assumptions: expected volatility of 135%, weighted average risk
free interest rate of 5.80%, term of 1 year, and no expected dividend. The
estimated value of the warrants of $1,107,000 was accounted as stock issuance
costs in fiscal 2001.

In November 2000, the Company issued a fully exercisable warrant to purchase
30,000 shares to a professional services firm in consideration for certain
services rendered to us at an exercise price of $8.34 per share. The warrants
were valued using the Black-Scholes option pricing model and the following
assumptions: contractual term of five years, a risk free interest rate of 5.08%,
a dividend yield of 0% and volatility of 135%. The estimated fair value of the
warrants of $413,000 was expensed during the fiscal year 2001.

In December 2001, the Company issued a warrant to purchase 9,469 shares of its
common stock with an exercise price of $4.46 in connection with certain services
rendered to the Company. The warrant is immediately exercisable and expires in 5
years. The warrants were valued using the Black-Scholes option pricing model and
the following assumptions: contractual term of 5 years, a risk free interest
rate of 4.33%, a dividend yield of 0% and volatility of 148%. The estimated
value of $12,000 was expensed during fiscal year 2002.

In March 2001, the Company issued a warrant to purchase 1,500 shares of its
common stock with an exercise price of $1.32 in connection with certain services
rendered to the Company. The warrant is immediately exercisable and expires in 5
years. The warrants were valued using the Black-Scholes option pricing model and
the following assumptions: contractual term of 5 years, a risk free interest
rate of 4.78%, a dividend yield of 0% and volatility of 146%. The estimated
value of $2,000 was expensed during fiscal year 2002.

In April 2001, the Company issued a warrant to purchase 200,000 shares of its
common stock with an exercise price of $2.00 to a customer in connection with a
Master Service Agreement. The warrant is immediately exercisable and expires in
5 years. The warrants were valued using the Black-Scholes option pricing model
and the following assumptions: contractual term of 5 years, a risk free interest
rate of 4.625%, a dividend yield of 0% and volatility of 147%. The estimated
value of $449,000 was accounted for as a deferred cost of sales and recorded as
an "Other asset." The deferred cost of sales will be amortized over the Master
Service Agreement term and after the InUnison product is launched.

On August 21, 2001, the company issued warrants to purchase 10,000 shares of its
common stock to a consultant with an exercise price of $1.95 per share. The
warrants were valued using the Black-Scholes option pricing model and the
following assumptions: contractual term of 5 years, a risk-free interest rate
of 4.51%, a dividend yield of 0% and a volatility of 144%. The estimated value
of $18,000 was expensed during fiscal year 2001.

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

At September 30, 2002, the following warrants to purchase the Company's common
stock were outstanding, all of which were exercisable:

SHARES
UNDER EXERCISE
EXPIRATION DATE WARRANTS PRICE
--------------- --------- ---------

December, 2002 100,000 $ 1.56
December, 2002 198,000 $ 3.43
December, 2002 61,375 $ 4.80
December, 2002 300,000 $ 6.00
December, 2002 50,000 $ 9.19
May, 2003 120,000 $ 20.82
February, 2004 50,564 $ 1.00
May, 2005 43,613 $ 15.50
November, 2005 30,000 $ 8.34
April, 2006 200,000 $ 2.00
May, 2006 50,000 $ 1.80
May, 2006 70,000 $ 1.57
June, 2006 1,065,152 $ 2.64
October, 2006 178,572 $ 1.68
November, 2006 65,789 $ 1.52
November, 2006 77,519 $ 1.29
November, 2006 150,000 $ 1.35
November, 2006 143,885 $ 1.39
December, 2006 38,462 $ 1.30
December, 2006 19,084 $ 1.31
December, 2006 154,166 $ 1.20
December, 2006 9,469 $ 1.46
December, 2006 268,361 $ 1.77
January, 2007 301,205 $ 1.66
January, 2007 277,778 $ 1.80
February, 2007 500,345 $ 1.40
March, 2007 100,000 $ 1.54
March, 2007 226,500 $ 1.32
April, 2007 19,841 $ 1.26
April, 2007 20,000 $ 1.25
April, 2007 1,556,612 $ 1.33
May, 2007 83,333 $ 0.90
September, 2007 300,000 $ 0.45
September, 2007 272,727 $ 0.50
March, 2008 1,481,481 $ 2.70
April, 2008 50,000 $ 1.57
----------
TOTAL 8,633,833
==========

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

STOCK-BASED COMPENSATION

In connection with stock option grants to employees to purchase 527,000 shares
of the Company's Common Stock during fiscal year 2000, the Company recognized
$2,073,000 of unearned stock-based compensation for the excess of the fair
market value of the shares of common stock subject to such options over the
exercise price of the options at the date of grant. Such amounts are included in
stockholders' equity and are being amortized over the vesting period of
generally four years. In 2001, the Company recorded a net benefit of $1,520,000
in connection with unearned stock-based compensation charges associated with
employees who were terminated during 2001. The Company recorded unearned
stock-based compensation amortization expense of $318,000, $91,000 and $61,000
for fiscal year 2002, 2001 and 2000, respectively.

12. EMPLOYEE COMPENSATION AND BENEFITS

The Company's APPIANT NA subsidiary maintains a Sec. 401(k) profit sharing plan
in which all qualifying employees with a minimum of 1,000 hours of service at
year end are eligible to participate. Matching contributions are made at the
discretion of the Company's Board of Directors. The Company pays all fees to
administer the plan. The Company did not make any matching contributions the
fiscal years 2002, 2001 and 2000, respectively.

13. INCOME TAXES

Income taxes are summarized below:

FISCAL YEAR
---------------------------------------
2002 2001 2000
---------------------------------------

Current:
U.S. federal - $ - $ -
Foreign 91,000 279,000 250,000
State - - 17,000
------------- ------------- -------------

Total Current 91,000 279,000 268,000
------------- ------------- -------------

Deferred: - -
U.S. federal - - -
Foreign - - -
State - - -
------------- ------------- -------------

Total deferred - - -
------------- ------------- -------------

Total provision for income taxes $ 91,000 $ 279,000 $ 268,000
============= ============= =============

The Company's net loss is taxable as follows:

FISCAL YEAR
-------------------------------------------
2002 2001 2000
-------------------------------------------

Continuing operations:
United States $(15,200,000) $(30,723,000) $(13,645,000)
Foreign (571,000) 1,073,000 1,069,000
------------- ------------- -------------

$(15,771,000) $(29,650,000) $(12,576,000)
============= ============= =============

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Tax effects of temporary differences that give rise to significant portions of
deferred tax assets are as follows:

FISCAL YEAR
-------------------------------------
2002 2001 2000
-------------------------------------

Net operating loss carryforward $16,344,000 $10,784,000 $ 4,073,000
Reserve and accrued liabilities 105,000 1,700,000 1,598,000
Tax Credits 1,008,000 105,000 105,000
Accumulated depreciation and amortization 17,457,000 327,000 -
----------- ------------ ------------

- 12,916,000 5,776000
Capitalized Software (1,058,000) (3,853,000) (2,798,000)
Accumulated Depreciation and amortization - - (108,000)
----------- ------------ ------------

(1,058,000) (3,853,000) (2,906,000)
Net total deferred assets/liabilities 16,399,000 9,063,000 2,870,000
----------- ------------ ------------

Valuation allowance (16,399,000) (9,063,000) (2,870,000)
----------- ------------ ------------

$ - $ - $ -
=========== ============ ============

Due to uncertainty surrounding the realization of the favorable tax attributes
in future tax returns, the Company has placed a 100% valuation allowance against
its deferred tax assets. At such time it is determined that it is more likely
than not that the deferred tax assets are realizable, the valuation allowance
will be reduced.

As of September 30, 2001 the Company's net operating losses for federal income
tax purposes were approximately $41.6 million, and will expire between the years
2008 and 2020. For state income tax purposes, as of September 30, 2001, the
Company had net operating loss carry forwards of approximately $16.8 million,
which begins to expire in 2003. The use of federal net operating loss carry
forwards is subject to an annual limit of approximately $250,000 as the Company
has incurred an 'ownership change'.

The principal items accounting for the difference between income tax benefit at
the U.S. statutory rate and total income taxes reflected in the statement of
operations are as follows.

FISCAL YEAR
--------------------------------------
2002 2001 2000
------------ ------------- ------------

Federal tax $(5,341,000) $(10,446,000) $(4,276,000)
State tax - - 12,000
Foreign taxes 91,000 279,000 250,000
Goodwill amortization 1,491,000 624,000 98,000
Stock-based compensation charges 35,000 31,000 1,379,000
Changes in valuation allowance 4,766,000 7,121,000 3,294,000
Impairment charges (1,231,000) 1,247,000 -
Interest charges on warrant 280,000 1,362,000 -
Other - 61,000 (490,000)
------------ ------------- ------------

$ 91,000 $ 279,000 $ 267,000
============ ============= ============

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. SEGMENT REPORTING

The Company defines operating segments as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. The operating segments
disclosed are managed separately, and each represents a strategic business unit
that offers different products and serves different markets.

The Company's reportable operating segments include Appiant Technologies Inc.
("Appiant NA")and Infotel. This represents a change in the Company's internal
organization. Accordingly, segment information for the year ended September 30,
2000 has been reclassed to conform to the current . Appiant NA includes the
Company's enterprise operations in the US. Appiant NA enterprise operations
include systems integration and distribution of voice processing and multimedia
messaging equipment, technical support, ongoing maintenance and product
development. The Company acquired Quaartz on May 23, 2001, an application and
service provider primarily involved in software development. The results of
Quaartz have been included with those of Appiant NA since the date of
acquisition. The following table presents APPIANT NA's net revenue by country
and is attributed to countries based on location of the customer:

FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------------
2002 2001 2000
-------------------------------------

United States $ 2,166,000 $ 8,663,000 $25,529,000
Asia 9,646,000 13,085,000 -
----------- ----------- -----------

$11,812,000 $21,748,000 $25,529,000
=========== =========== ===========

Infotel is a distributor and integrator of telecommunications and other
electronics products operating in Singapore and provides radar system
integration, turnkey project management, networking and test instrumentation
services. Infotel derives substantially all of its revenue from sales from
Singapore to Asia. There are no intersegment revenues.

The revenues from our five largest customers for approximately 9.4%, 9.3%, 7.0%,
5.5% and 5.2% of total revenues during our fiscal year ended September 30, 2001.

The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies.

FISCAL YEAR 2002 AND AT SEPTEMBER 30, 2002

(in thousands) APPIANT NA INFOTEL OTHER (1) TOTAL
------------ ---------- ---------- ------

Net sales to external customers $ 2,166,000 $9,646,000 $ $
Net income (loss) 13,772,000 571,000
Interest income (2) 365,000 -
Interest expense (5,698,000) -
Tax expense - 92,000
Total assets 27,013,000 3,220,000
Property and equipment, net 2,627,000 232,000
Depreciation and Amortization (3,481,000)

APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FISCAL YEAR 2001 AND AT SEPTEMBER 30, 2001

(in thousands) APPIANT NA INFOTEL OTHER (1) TOTAL
------------- ------------ ------------ -------------

Net sales to external customers $ 8,291,000 $13,085,000 $ 372,000 $ 21,748,000
Net income (loss) (15,757,000) 712,000 (5,964,000) (21,009,000)
Interest income (2) 129,000 136,000 265,000
Interest expense (8,732,000) (70,000) (8,802,000)
Tax expense - (29,000) (29,000)
Total assets 23,673,000 9,939,000 6,754,000 40,366,000
Property and equipment, net 4,690,000 398,000 293,000 5,381,000
Depreciation and Amortization (646,000) (380,000) (1,493,000) (2,519,000)

FISCAL YEAR 2000 AND AT SEPTEMBER 30, 2000
(in thousands) APPIANT NA INFOTEL OTHER (1) TOTAL
------------- ------------ ------------ -------------

Net sales to external customers $ 13,979,000 $11,550,000 $ - $ 25,529,000
Net income (loss) (5,700,000) 432,000 (7,576,000) (12,844,000)
Interest income(2) 20,000 153,000 44,000 217,000
Interest expense (441,000) - (1,866,000) (2,307,000)
Tax expense (18,000) - - (268,000)
Total assets 15,801,000 (332,000) 15,548,000 38,785,000
Property and equipment, net 2,336,000 78,000 308,000 3,395,000
Depreciation and Amortization (732,000) (12,000) (166,000) (1,395,000)

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

14. SUBSEQUENT EVENTS

SCHEDULE II

Appiant Technologies Inc.

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FISCAL YEARS 1999, 2000 AND 2001

Column A Column B Column C Column D Column E
------------------------ ----------- ------------ ------------ -----------

Additions
Charged to
Balance Revenues Write-offs Balance at
Beginning and Costs and End of
Description of Period and Expense Deductions Period
------------------------ ----------- ------------ ------------ -----------

2000
---------

Allowance for Doubtful
Accounts $ 158,000 $ 411,000 $ (167,000) $ 402,000

Valuation Allowance on
Deferred Tax Assets $ 3,576,000 $ - $ 706,000 $ 2,870,000

Provision for excess and
Obsolete inventory $ 119,000 $ 44,000 $ (62,000) $ 101,000

2001
---------

Allowance for Doubtful
Accounts $ 402,000 $ 622,000 $ (689,000) $ 335,000

Valuation Allowance on
Deferred Tax Assets $ 2,870,000 $ 6,193,000 $ - $ 9,063,000

Provision for excess and
Obsolete inventory $ 101,000 $ 397,000 $ (357,000) $ 141,000

2002
---------

Allowance for Doubtful
Accounts $ 335,000 $ $ (272,000) $ 63,000

Valuation Allowance on
Deferred Tax Assets $ $ $ $

Provision for excess and
Obsolete inventory $ 141,000 $ 200,000 $ -- $ 341,000