Edgar Filing: ALTERNATIVE TECHNOLOGY RESOURCES INC

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2001

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from _____ to ____

COMMISSION FILE NUMBER 0-20468

ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(Exact name of issuer as specified in its charter)

DELAWARE 68-0195770
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)

33 JEWEL COURT, PORTSMOUTH, N.H. 03801
(Address of principal executive offices, including zip code)

(603) 501-3200
(Issuer's telephone number, including area code)

Securities registered under Section 12 (b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
NONE

Securities registered under Section 12(g) of the Act:

COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)

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

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

State issuer's revenue for its most recent fiscal year: $359,413

Aggregate market value of the Registrant's common voting stock held by
non-affiliates of the Registrant on September 17, 2001 was $52,103,775 (based on
the final trading price on that date).

Number of shares of Common Stock outstanding at September 17, 2001: 59,411,844

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's definitive Proxy Statement for the Company's Annual
Meeting of Stockholders are incorporated by reference in Part III. The Proxy
Statement will be filed within 120 days of the Company's fiscal year end.

Exhibit index is located on page 23.

PART I

ITEM 1. BUSINESS

GENERAL

Alternative Technology Resources, Inc. (hereinafter referred to as
"ATR," the "Company" "we" or "us") has developed and is operating an Exchange
for healthcare services ("Healthcare Exchange"). The purpose of the Healthcare
Exchange is to utilize the Internet and other technologies to facilitate
Provider initiated discounts and administrative, billing and remittance services
for all commercial lines of business. The Healthcare Exchange offers a direct
and efficient conduit between Providers and Purchasers of healthcare services
and/or their agents, such as Preferred Provider Organizations.

The Company is currently recruiting in twenty states medical doctors,
medical groups, hospitals and other health care practitioners (collectively,
"Providers") to offer their services, through the Healthcare Exchange to those
who purchase or facilitate the purchase of healthcare services ("Purchasers").

The Company has outsourced to multiple vendors portions of the
development and operations of the information systems for its Healthcare
Exchange. The Company signed agreements effective in January 2001 with an
application services provider to license, support and run software to process
medical bills submitted to the Company's Healthcare Exchange. ATR has also
signed agreements to receive claims from Providers through electronic clearing
houses and to convert paper claims into electronic formats. ATR is evaluating
other potential technology vendors as well.

ATR will not provide healthcare services, but rather expects to act as a
neutral conduit for efficiency between Providers, Purchasers and their
intermediaries including preferred provider organizations, that should benefit
all. ATR believes that eliminating the costs associated with traditional "bricks
and mortar" operations, creating economies of scale, facilitating access to
Providers and Purchasers, streamlining overhead costs, exploiting possibilities
for functional integration, reducing errors and speeding the payment of claims
should allow Purchasers to pay less and Providers to recover more of what they
bill.

HISTORY

Alternative Technology Resources, Inc. was founded as 3Net Systems, Inc.
in 1989. In August 1999, James W. Cameron, Jr., the Company's largest
stockholder, was named Chairman and Chief Executive Officer. Under his direction
the Company identified what it believes to be a significant business opportunity
and began developing a business model involving the establishment of a
Healthcare Exchange under the name "DoctorandPatient."

In February 2000, Jeffrey S. McCormick assumed the position of the
Company's Chief Executive Officer. Mr. McCormick has significant experience in
financing, managing and growing early stage development companies as a managing
director of Boston-based Saturn Asset Management, Inc. Mr.

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McCormick has served as an advisor or director of several Internet and
electronic commerce companies over the last six years. As the Company's CEO, Mr.
McCormick is responsible for all phases of development, implementation and
operation of the Company's Healthcare Exchange. Mr. Cameron still acts as
Chairman and Chief Financial Officer and continues to play an active and
substantial role in formulating the Company's business strategy and policy.

The Company is using its management's experience in health care and
information technology to establish the Healthcare Exchange, which has become
the Company's sole focus. At present, the Healthcare Exchange is operating with
a limited number of Providers so the Company can refine its model and determine
the amount and timing of remaining development efforts. ATR's previous business
was recruiting, hiring, and training foreign computer programmers and placing
them with U.S. companies. In line with the Company's strategy to focus on the
establishment of a Healthcare Exchange for health care services, ATR suspended
recruitment of foreign computer programmers in December 1999 and began pursuing
the conversion of foreign computer programmers to become employees of ATR's
customers. This conversion process was complete as of June 30, 2001.

OVERVIEW OF THE INDUSTRY

According to the Healthcare Financing Administration ("HCFA"), in 1999
health care in the United States was a $1.2 trillion dollar industry, up 5.6%
from 1998 and comprising approximately 13% of gross domestic product. The
industry is characterized by extremely complex decision-making, high
fragmentation, high barriers to entry, rising costs and slow adoption and
incorporation of many information technologies. The health care industry's poor
rate of investment in technological innovation has created a system rampant with
inefficiencies. According to the Health Data Directory, less than 39% of private
sector billing claims (including commercial, indemnity, PPO and HMO claims) were
automated in 1999. Even those that are automated often have processing delays
because of myriad reasons, including improper coding of information, inaccurate
data on patients and improper eligibility information. Waste in the acquisition,
delivery and processing of billing and payment for health services has been
widely reported and documented. The Company believes that there are gaps and
inefficiencies in the purchasing process and in billing and claims processing
systems creating a key business opportunity for the Healthcare Exchange.

In its simplest form, health care can be described as the demand for
services by individuals ("Patients") and the supply of services by Providers,
which include medical doctors, hospitals, physical therapists and other health
practitioners. Providers often form groups and practice associations. Purchasers
include Patients and various forms of third parties, such as HMO's, insurance
companies, Medicare, Medicaid and self-insured employers, that act as purchaser
and payor for services provided to Patients.

In most instances, Patients are members of a health service purchasing
group or pool commonly offered by Purchasers. The members' health coverage is
described in a plan that spells out what care is fully, partially or not
covered, rules relating to payment and deductibles, selection of Providers, use
of specialists, required permissions, exclusions and so on. In these
circumstances, Patients rarely pay Providers directly except for co-payments and
deductibles that represent only a fraction of the total bill.

Purchasers pay Providers generally after considerable delay. Provider
bills are reviewed by Purchasers and their managed care companies to verify
Patient's eligibility, plan group membership, compliance with treatment and
billing format and rules, and other plan provisions. The Provider's bill often
is adjusted for

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violations and errors. Providers, like their Patients, often do not understand
many health plans and may accept incorrect payment lowered by reductions they do
not understand.

There are a large number of variations of the above
Patient-Provider-Purchaser relationship - such as HMOs, PPOs, Medicare, Medicare
enrolled HMOs, Medicaid - all of which involve some combination or
redistribution of some of the functions described.

In a cash model, the Patient will pay the Provider directly. For many
Americans, this simple cash model is the only one possible for all or much of
their care. In many cases, these individuals may have the financial wherewithal
to pay for many health services. However, Providers generally do not have the
time, inclination or capability to seek out these cash Patients.

BUSINESS DESCRIPTION

The purpose of the Healthcare Exchange is to utilize the Internet and
other technologies to facilitate Provider initiated discounts and
administrative, billing and remittance services for all commercial lines of
business. The Healthcare Exchange offers a direct and efficient conduit between
Providers and Purchasers of health care services, their PPOs' and/or their
agents. Providers submit bills to the Company, who reprices the bills to the
Provider's Healthcare Exchange rate, including adding a transaction-processing
fee, and then routes them to Purchasers or their intermediaries. The Company
receives payments from Purchasers on behalf of Providers, and then remits
payments to Providers.

RELATIONSHIP TO THE PROVIDER

The Company has developed the Healthcare Exchange for Providers
(including Provider groups) to market their services to Purchasers more
efficiently. The Company believes eliminating costs and delays in the billing
process should allow Providers to recover more of what they bill. In the United
States, there are approximately 750,000 medical doctors, 6,000 hospitals and
539,000 licensed ancillary Providers (such as chiropractors, optometrists,
physical therapists and physician assistants) and suppliers (such as pharmacies,
durable medical equipment suppliers, and transportation). The Company is
currently marketing to and entering into contracts with Providers. A
transaction-processing fee will be added to bills received from Providers and
routed to Purchasers or their intermediaries.

RELATIONSHIP TO PURCHASERS

The Company has developed the Healthcare Exchange so Purchasers can
access services offered by Providers. The Company believes eliminating costs and
delays in the billing process should allow Purchasers to reduce costs. The
Company will process medical bills submitted to the Healthcare Exchange so as to
add efficiencies to the purchasing and processing function. We will make these
additional services available to Purchasers on a contractual basis and through
Provider initiated discount offers. Purchasers may contract with us in order to
receive Providers' offered rates, and in order to lower their costs by receiving
bills electronically and pre-priced. The goal of this system is to introduce
additional cost certainty and to streamline the billing and payment process. A
transaction-processing fee will be charged to Purchasers or their
intermediaries.

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RELATIONSHIP TO INDIVIDUAL UNINSURED AND UNDER INSURED PURCHASERS

In September 1999, the Company entered into an agreement with WebMD
Corp. to develop a web-based portal through which individual uninsured and under
insured Patients can procure healthcare services. Currently both parties are
reevaluating this agreement, given changed directions and priorities of each
company. The agreement has not formally been modified or terminated, nor has
either party proposed any specific changes. However, neither party is currently
devoting any substantial resources to this project. (See Note 4 to Financial
Statements.)

APPLICATION SERVICES PROVIDER

The Company signed agreements effective in January 2001 with an
application services provider to license, support and run software to process
medical bills submitted to the Company's Healthcare Exchange. The agreements are
for a period of 66 months. They required payment of an initial base license fee
of $250,000, which is being amortized over 66 months, and start-up costs,
including data center set up, training and implementation fees of approximately
$145,000, which were expensed. The agreements require monthly minimum payments
currently of about $35,000 and additional fees that are transaction based if
volumes exceed levels included in the monthly minimums.

COMPETITION

The Company's Healthcare Exchange generally will endeavor to cooperate
with certain established preferred provider organizations, integrated delivery
systems and health plans and other companies offering "discount plans" to
potential Purchasers, and Internet companies. However, such plans and companies
may choose to compete against the Healthcare Exchange and its purchasers,
providers and affiliated organizations. These industries are intensely
competitive and rapidly evolving.

Increased competition in the industry could result in price reductions,
reduced gross margins or loss of market share, which could seriously harm the
Company's business and operating results. The Company's success depends on the
ability to market the Healthcare Exchange to potential Providers and Purchasers
and their agents. The Company believes that the principal competitive factors in
this market are health and managed care expertise, data integration and transfer
of technology, ability to persuade Providers and Purchasers to accept new
technology and new models, customer service and support and product and service
fees. Competition is expected to increase in the future.

As a new participant in the health care industry, the Company's
potential competitors have longer operating histories, significantly greater
financial, technical, marketing and other resources and significantly greater
name recognition. In addition, many of the Company's competitors have
well-established relationships with the Company's current and potential
Purchasers and have extensive knowledge of the industry. Current and potential
competitors have established or may establish strategic relationships among
themselves or with third parties to increase the ability of their products and
services to address Purchaser needs. These competitors may seek and obtain
business method patents on portions of or all their operations, which could
effectively preclude the Company from competing with the most efficient model.
Also, other companies may implement a similar Internet strategy. Accordingly, it
is possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share.

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GOVERNMENT REGULATION

The Company's operations are subject to various federal and state laws.
The Company believes that its operations currently comply with such laws, but
there can be no assurance that subsequent laws, or subsequent changes in current
laws or legal interpretations, will not adversely affect the Company's
operations.

The confidentiality of patient records and claims data and the
circumstances under which records and data may be released or must be secured
for inclusion in the Company's databases may be subject to substantial
regulation by state governments. These state laws govern both the disclosure and
the use of confidential patient medical records. Although compliance with these
laws currently is principally the responsibility of Providers and health plans,
these regulations may be extended to cover the business and the claims data and
other information that are included in the Company's databases. If these laws
are extended to cover the Company's business, the Company may be required to
expend additional resources in order to comply with these laws, including
changes to the Company's security practices, and may be exposed to greater
liability in the event of failure to comply with these laws.

The Health Insurance Portability and Accountability Act of 1996
("HIPAA") mandates the use by health plans of standard transactions,
identifiers, security and other provisions. The Company plans to design its
products and services to comply with HIPAA, but any change in federal standards
would require the Company to expend additional resources. Finally, the Federal
Trade Commission has become very active in investigating privacy issues on the
Internet within its jurisdiction over unfair and deceptive trade practices.

The offering of health provider services is subject to extensive
regulation under state laws. Under some state laws, regulators may take the
position that a registration fee for Purchaser access to favorable fees from
Providers requires meeting the requirements for licensing as a health plan or
health insurer. In addition, to the extent that fees are paid by Providers,
state regulators could assert that the Company's Healthcare Exchange is a
referral agency, which requires licensing under many state laws, or that
Providers are paying prohibited referral fees, which could subject the Provider
or the Company to civil or criminal penalties. In addition, the Company's
relationships with Purchasers may require licensing or certifications in some
states. Also, although the Company does not currently anticipate entering the
Medicare or state Medicaid markets, similar federal regulations could adversely
impact the business. Because the e-commerce business is relatively new to the
provider network industry, the impact of current or future regulations is
difficult to anticipate.

In November 1999, the California Department of Corporations, Health
Enforcement Division, announced that it is taking enforcement action against
discount health benefit card plans conducting operations in California in
violation of the Health Care Service Plan Act of 1975 (the "HCSP Act"). In
October 1999, the Department issued the Company a subpoena with respect to
documents relating to the Company's relationship with WebMD Corp. and the
potential of being a health care service plan under the Department's
jurisdiction. The Company has responded to this subpoena. We do not believe our
Healthcare Exchange is within the scope of the HCSP Act. Further, in June 2001
the California Department of Managed Health Care, which now resolves questions
of law regarding the HCSP Act, issued an opinion that discount health benefit
card plans are not health care service plans subject to the HCSP Act.

As we develop our business plan, compliance with or prohibitions by
state regulations could delay or eliminate certain aspects of our business or
force us to modify our business, which could have a material adverse impact on
our business and prospects.

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HUMAN RESOURCES

At August 31, 2001, the Company had 76 employees, consisting of 33
employees located in Sacramento, and 41 employees in satellite offices in 18
states, including California, and 2 employees in the Company's headquarters
located in Portsmouth, New Hampshire. This includes Provider Development staff
of 43 that is recruiting medical providers for contracting in 32 markets in 22
states for the Healthcare Exchange.

INSURANCE

The annual coverage limits for the Company's general premises liability,
professional liability and workers' compensation insurance policies are
$3,000,000 for liability insurance policies and $1,000,000 for workers'
compensation. ATR also has a $1,000,000 policy for errors and omissions
insurance. Management believes such limits are adequate for the Company's
business; however, there can be no assurance that potential claims will not
exceed the limits on these policies.

RISK FACTORS

An investment in our common stock involves considerable risk. In
addition to the other information contained in this annual report, you should
carefully consider the following factors in evaluating an investment in the
Company. This annual report contains forward-looking statements that involve
risks and uncertainties. Our actual results will differ materially from the
results discussed in such forward-looking statements. Factors that might cause
such a difference includes those discussed below. Note that this is not an
all-inclusive list of the risks to which we are subject.

WE ONLY HAVE A LIMITED OPERATING HISTORY IN THE HEALTH CARE AND INTERNET
INDUSTRIES THAT INVESTORS MAY USE TO ASSESS OUR FUTURE PROSPECTS.

Although we have been an operating company in the computer programmer
recruiting and placement industry for several years, we only recently began
operating in the Internet and health care industries. We have not generated
significant revenues and may never generate sufficient revenues to achieve
profitability in this new venture. We have limited experience addressing
challenges frequently encountered by early-stage companies in the electronic
commerce and health care industries. Accordingly, our limited operating history
does not provide investors with a meaningful basis for evaluating an investment
in our common stock.

The likelihood of our success must be considered in light of the
potential problems, expenses, difficulties, complications and delays frequently
encountered in connection with any enterprise starting a new business with a
completely new business plan, particularly in new and rapidly evolving markets
such as the Internet. Such risks include an evolving, untested and unpredictable
business model, the creation of brand identity, the expansion or creation of
competing services, the uncertainty of the acceptance of the marketing medium
and the management of anticipated growth.

OUR CURRENT OPERATIONS ARE NOT PROFITABLE AND WE HAVE A HISTORY OF SIGNIFICANT
LOSSES.

We have experienced losses since our inception. Our net loss applicable
to common stockholders for the years ended June 30, 2001 and 2000 was $9,800,897
and $4,938,141. As of June 30, 2001 we have completed the phase out of the
contract programmer operations that resulted in previous operating losses.

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However, there is no assurance we can develop our Healthcare Exchange into a
profitable and sustainable business. As a result, the report of independent
auditors on the Company's June 30, 2001 financial statements includes an
explanatory paragraph indicating there is substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.

WE MAY BE REQUIRED TO OBTAIN ADDITIONAL FINANCING.

Based on the steps the Company has taken to refocus its operations and
obtain additional financing, the Company believes that it has developed a viable
plan to address the Company's ability to continue as a going concern, and that
this plan will enable the Company to continue as a going concern through at
least the end of fiscal 2002. However, the Company believes it will need to
raise additional funds during fiscal 2002. There can be no assurance that this
plan will be successfully implemented. If unsuccessful the Company may be
required to reduce the development efforts of its Healthcare Exchange or be
forced into seeking protection under federal bankruptcy laws. Traditionally, we
have relied on major stockholders or affiliates to finance our operations.
However, there can be no assurance that they will continue to do so. The
issuance of additional shares of common stock will dilute the ownership of
existing stockholders.

OUR GROWTH DEPENDS ON INDUSTRY ACCEPTANCE OF OUR HEALTH CARE PRODUCTS AND
SERVICES.

The time, expense and effort of securing Purchasers and Providers may
exceed our expectations and may negatively impact our business and operating
results. The decision to implement our products and services requires time
intensive education of both Providers and Purchasers of the advantages of our
products and services. The failure of industry participants to accept our
services and products as a replacement for traditional methods of operations
could limit our revenue growth. We, therefore, will devote significant resources
and incur costs without any assurance that sufficient medical providers will
join our network or that Purchasers will use our products or services. In the
event that Purchasers do not use our products or services, we may have incurred
substantial costs that cannot be recovered and which will not result in future
revenues.

OUR FUTURE REVENUE GROWTH DEPENDS UPON OUR ESTABLISHMENT AND MAINTENANCE OF
SUCCESSFUL RELATIONSHIPS WITH PROVIDERS AND STRATEGIC VENDORS IN ORDER TO
ATTRACT PURCHASERS TO OUR PRODUCTS AND SERVICES.

We believe that our future revenue growth depends in part upon the
successful creation and maintenance of relationships with Providers, Purchasers
and strategic vendors. To date we have established relationships with a small
number of the Providers that we are targeting. In order to successfully attract
Purchasers, we may need to have a large number of relationships with Providers
with diverse practices and over broad geographic areas. We may not be able to
adequately develop relationships with the number of Providers necessary to
achieve this type of coverage and those already existing relationships with
Providers may not be ultimately successful.

The Company signed agreements effective in January 2001 with an
application services provider to license, support and run software to process
medical bills submitted to the Company's Healthcare Exchange. ATR has also
signed agreements to receive claims from Providers through electronic clearing
houses and to convert paper claims into electronic formats. These relationships
are non-exclusive.

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In September 1999, ATR entered into an agreement with WebMD Corp. to
develop a web-based portal through which Patients can procure health services.
This relationship is nonexclusive and the status of the project is currently
being reevaluated by the parties.

We may enter into additional strategic relationships in the future and
are currently evaluating other potential technology vendors. Strategic vendors
may offer products or services of several different companies, including
products and services that compete with our products or services. Strategic
vendors may be influenced by our competitors to scale back or end their
relationships with us. We may not establish additional strategic relationships,
and any relationships we do establish ultimately may be unsuccessful.

If we are unable to establish and maintain successful relationships with
Providers or strategic vendors, we may have to devote substantially more
resources to the sales and marketing of our products and services.

THE FAILURE OF OUR PROVIDERS TO PROVIDE HIGH QUALITY SERVICES WILL DIMINISH OUR
BRAND VALUE AND THE NUMBER OF PURCHASERS WHO USE OUR PROPOSED SERVICES MAY
DECLINE.

Promotion of our brand value depends on our ability to provide a high
quality experience for finding Providers. If our Providers do not provide
Purchasers high quality service, the value of our services could be damaged and
the number of Purchasers using our proposed services may decrease. The failure
by our Providers to provide the level of health care that Purchasers expect will
result in low satisfaction, damage our brand name and could materially and
adversely affect our business, results of operations and financial condition.

FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD HARM OUR BUSINESS AND OPERATING
RESULTS.

We recently have hired a significant number of new employees, including
a key executive. We will continue to add personnel to maintain our ability to
grow in the future. Our growth will place significant strain upon our management
and operational systems and resources. We must integrate our new employees and
key executive into a cohesive team and at the same time increase the total
number of employees and train and manage our employee work force in a timely and
effective manner to expand our business. We may not be able to do so
successfully.

OUR BUSINESS COULD SUFFER IF THE INTEGRITY OF OUR SYSTEMS AND THE SYSTEMS OF
THOSE THIRD PARTIES WE DEPEND ON ARE INADEQUATE.

We will depend on third parties to develop significant portions of the
information systems for our Healthcare Exchange. Any failure of the systems we
are developing, or those of other third parties, could harm our business and
operating results. Once implemented, we intend that these systems will process
vast amounts of pricing and financial data and execute large numbers of payment
transactions. Any delay or failure in these systems or in our ability to
communicate electronically with Purchasers or in our ability to collect, store,
analyze or process accurately pricing and financial data may result in the
denial of claims, or in the delay or failure to execute payment transactions
accurately. This type of delay or failure would harm our business and operating
results.

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OUR BUSINESS AND REPUTATION MAY BE HARMED IF WE ARE UNABLE TO PROTECT THE
PRIVACY OF OUR CONFIDENTIAL HEALTH INFORMATION.

Our information systems and Internet communications may be vulnerable to
damage from physical break-ins, computer viruses, programming errors, attacks by
computer hackers and similar disruptive problems. A user who is able to access
our computer or communication systems, when developed, could gain access to
confidential health information of individuals. Therefore, a material security
breach could harm our business and our reputation or could result in liability
to us.

OUR FUTURE REVENUE GROWTH DEPENDS IN PART ON INCREASING USE OF THE INTERNET AND
ON THE GROWTH OF E-COMMERCE.

Rapid growth in the use of the Internet is a recent phenomenon. As a
result, its acceptance and use may not continue to develop at historical rates
and a sufficiently broad base of business customers and individual customers may
not adopt or continue to use the Internet as a medium of commerce. Demand and
market acceptance for recently introduced products and services over the
Internet are subject to a high level of uncertainty, and there exist few proven
products and services.

Our future profitability depends, in part, upon increased Provider and
Purchaser demand for additional Internet and e-commerce solutions that we are in
the process of developing or may develop in the future.

STATE, FEDERAL AND LOCAL LAWS REGARDING CONFIDENTIALITY AND SECURITY OF HEALTH
INFORMATION COULD HARM OUR BUSINESS AND OPERATING RESULTS.

The confidentiality of patient records and claims data and the
circumstances under which records and data may be released or must be secured
for inclusion in our databases may be subject to substantial regulation by state
governments. These state laws govern both the disclosure and the use of
confidential patient medical records. Although compliance with these laws
currently is principally the responsibility of Providers and health plans, these
regulations may be extended to cover our business and the claims data and other
information that we include in our databases. If these laws are extended to
cover our business, we may be required to expend additional resources in order
to comply with these laws, including changes to our security practices, and may
be exposed to greater liability in the event we fail to comply with these laws.

STATE LAWS AND REGULATIONS CONCERNING THE MARKETING OF HEALTH PROVIDER SERVICES
OVER THE INTERNET COULD HARM OUR BUSINESS AND OPERATING RESULTS.

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INTERNET COMMERCE HAS YET TO ATTRACT SIGNIFICANT REGULATION, BUT GOVERNMENT
REGULATIONS MAY RESULT IN ADMINISTRATIVE MONETARY FINES, PENALTIES OR TAXES THAT
MAY REDUCE OUR FUTURE EARNINGS.

There are currently few laws or regulations that apply directly to the
Internet. Because our business utilizes the Internet, the adoption of new (or
applications of existing) local, state, national or international laws or
regulations may decrease the growth of Internet usage or the acceptance of
Internet commerce which could, in turn, decrease the demand for our services and
increase our costs or otherwise have a material adverse effect on our business,
results of operations and financial condition.

WE FACE A RISK OF LITIGATION.

We have been involved in several significant litigation matters in our
history. No assurances can be given that additional legal proceedings will not
be initiated against us. In addition, involvement in litigation will require us
to spend time and pay expenses to defend ourselves, which will have an adverse
effect on our operations and financial condition and results. The health care
and Internet industry that we are entering into may cause us to face an
increased risk of litigation. Patients who file lawsuits against doctors often
name as defendants all persons and companies with any relationship to the
doctors.

OUR COMMON STOCK PRICE IS VOLATILE AND COULD BE IMPACTED BY FLUCTUATING RESULTS
IN THE FUTURE AND BY GENERAL MARKET CONDITIONS.

Our common stock price is volatile and could be impacted by fluctuating
results in the future and by general market conditions. Our common stock is
quoted and traded on the OTC Bulletin Board and the public market for our common
stock has been limited, sporadic and highly volatile. Between July 1, 2000 and
June 30, 2001, the closing price of a share of our Common Stock ranged from a
low of $1.34 to a high of $4.81. There can be no assurance that a more active
trading market for our common stock will develop or be sustained.

OUR EXECUTIVE OFFICERS AND EXISTING STOCKHOLDERS HAVE SIGNIFICANT CONTROL.

Our executive officers, directors and holders of over five percent (5%)
of our stock and their affiliates beneficially own approximately 80% of the
outstanding shares of our common stock as of June 30, 2001. As a result, if
these holders act as a group, they may be able to control us and direct our
affairs, including the

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election of directors and approval of significant corporate transactions without
further approval by other stockholders. This concentration of ownership also may
delay, defer or prevent a change in control of our company, and make some
transactions more difficult or impossible without the support of these
stockholders.

OUR STOCK PRICE MAY BE AFFECTED BY THE AVAILABILITY OF SHARES FOR SALE IN THE
NEAR FUTURE, AND THE FUTURE SALE OF LARGE AMOUNTS OF OUR STOCK, OR THE
PERCEPTION THAT SUCH SALES COULD OCCUR, COULD NEGATIVELY AFFECT OUR STOCK PRICE.

On August 28, 2000, we completed the sale of $10 million of our common
stock at $3.00 per share resulting in the issuance of 3,333,334 shares of our
common stock. Proceeds, net of offering costs, were approximately $9,560,345.

On September 11, 2000, we agreed with one of our note holders to extend
the due date on notes totaling $2,288,815 including interest, in consideration
of such notes becoming convertible promissory notes. The convertible promissory
notes are convertible into common stock at $3.00 per share at the note holder's
option.

Also on September 11, 2000, we agreed with the Series D Preferred
stockholders to exchange all their outstanding Series D shares and $475,915 in
accrued preferred stock dividends into 566,972 shares of common stock based on a
purchase price of $3.00 per common share.

On April 11, 2001 under an agreement with purchasers of common stock
from the August 28, 2000 sale, we have registered those and other shares of
common stock for resale in a registration statement on Form S-1. The number of
shares of common stock available for resale by the registration statement on
Form S-1 represents approximately 34% of our outstanding common stock.

In addition, the exercise of any outstanding options or warrants could
dilute the net tangible book value of our common stock. Further, the holders of
such options and warrants may exercise them at a time when we would otherwise be
able to obtain additional equity capital on terms more favorable to us. As of
August 31, 2001, the Company has reserved a total of 11,666,981 shares of common
stock pursuant to outstanding warrants, options, convertible notes payable to
stockholders, and future issuance of options to employees and non-employee
directors.

The market price of our common stock could drop as a result of sales of
a large number of shares of common stock in the market, or the perception that
such sales could occur, due to the shares registered for resale by the
registration statement on Form S-1 and common stock that may be issued upon the
exercise of our outstanding warrants, options, and convertible promissory notes.

FUTURE ISSUANCES OF PREFERRED STOCK COULD REDUCE THE VALUE OF OUR COMMON STOCK.

We are authorized to issue up to 1,200,000 shares of our preferred
stock. The preferred stock may be issued in one or more series, on such terms
and with such rights, preferences and designations as our board of directors may
determine, without action by stockholders. The issuance of any preferred stock
could adversely affect the rights of the holders of common stock, and therefore
reduce the value of the common stock. In particular, specific rights granted to
future holders of preferred stock could be used to restrict our ability to merge
with or sell our assets to a third party, thus making it more difficult for a
third party to acquire a majority of our outstanding voting stock. We have no
current plans to issue shares of preferred stock.

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WE HAVE NOT PAID DIVIDENDS, AND EXPECT TO RETAIN OUR EARNINGS FOR THE
FORESEEABLE FUTURE.

We have not paid cash dividends on our common stock since our inception.
We do not intend to pay cash dividends on our common stock in the foreseeable
future so that we may reinvest earnings, if any, in the development of our
business.

ITEM 2. DESCRIPTION OF PROPERTY

The Company's headquarters are located in Portsmouth, New Hampshire,
consisting of approximately 2,340 square feet of office space for a monthly rent
of $3,263. The lease commenced December 1, 2000, and runs through May 31, 2003.

In addition, the Company has an office located in Sacramento,
California. The Company occupies approximately 7,523 square feet of office space
in Sacramento, which it leases from Mr. James W. Cameron, Jr., the Company's
Chairman of the Board and majority stockholder, for a monthly rent of $11,778. A
February 1, 2000, addendum to the lease extended the expiration of the lease to
January 31, 2004.

ITEM 3. LEGAL PROCEEDINGS

The Company is not currently a party to any pending legal proceedings.

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

No matters were submitted during the quarter ended June 30, 2001 to a
vote of security holders.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

ATR's common stock is quoted on the OTC Bulletin Board under the symbol
"ATEK." Transactions in ATR's common stock are subject to the "penny stock"
disclosure requirements of Rule 15g-9 under the Exchange Act.

The table below sets forth the high and low closing prices for the
common stock of the Company for each of the last eight quarters. Such over the
counter market quotations reflect inter dealer prices without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.

Period High Low
------ ---- ---

Quarter ended September 30, 1999 $5.53 $0.25
Quarter ended December 31, 1999 $4.44 $1.88
Quarter ended March 31, 2000 $10.44 $4.13
Quarter ended June 30, 2000 $7.75 $3.00

Quarter ended September 30, 2000 $4.81 $2.75
Quarter ended December 31, 2000 $3.38 $1.38

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Period High Low
------ ---- ---

Quarter ended March 31, 2001 $2.31 $1.34
Quarter ended June 30, 2001 $2.26 $1.90

As of September 17, 2001, the Company had approximately 224 holders of
its shares of common stock, excluding holders of the Company's common stock held
in street name.

DIVIDEND POLICY

The Company has never paid a cash dividend on its common stock and does
not anticipate paying cash dividends on its common stock in the foreseeable
future. ATR's Series D preferred stock carried a cumulative dividend of $0.60
per share per year until the Series D preferred stock was exchanged for common
stock on September 11, 2000. On September 11, 2000, in connection with the
exchange of 204,167 shares Series D preferred stock, for 408,334 shares of
common stock based on a per share price of $3.00 per share, the Company declared
accrued dividends of $759,110 in the aggregate. Of the $759,110 in accrued
dividends, two of the Series D preferred stockholders agreed to accept 158,638
shares of common stock for $475,915 in accrued dividends based on a $3.00 per
share value.

The Board of Directors, on the basis of various factors, including the
Company's results of operations, financial condition, capital requirements and
other relevant factors, will determine ATR's future dividend policy.

ITEM 6. SELECTED FINANCIAL DATA

The following table presents a summary of unaudited selected financial
data for each of the five years ended June 30. The data should be read in
conjunction with the Financial Statements and related notes included herein.

Years Ended June 30,
----------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------

STATEMENT OF OPERATIONS DATA
Healthcare Exchange revenue $ 50,944 $ - $ - $ - $ -
Healthcare Exchange gross profit (loss) (33,584) - - - -
Contract programming revenue 308,469 2,561,101 6,340,235 5,250,002 2,018,064
Contract programming gross profit (loss) 62,797 422,062 1,030,893 530,379 (74,275)
Product development costs (5,097,513) (1,154,244) - - -
General and administrative expenses (3,850,971) (1,276,726) (1,223,539) (1,336,342) (1,160,015)
Loss from operations (8,919,271) (2,008,908) (192,646) (805,963) (990,579)
Total other income (expense) 4,516 (2,806,733) (524,101) (437,981) 342,392
Net loss (8,914,755) (4,815,641) (716,747) (1,243,944) (648,187)
Preferred stock dividends in arrears (886,142) (122,500) (122,500) (122,500) (122,500)
Net loss applicable to common stockholders (9,800,897) (4,938,141) (839,247) (1,366,444) (770,687)
Basic and diluted net loss per share $ (0.17) $ (0.10) $ (0.03) $ (0.05) $ (0.03)
Shares used in per share calculation 58,686,778 50,329,614 26,127,730 25,964,142 25,369,315

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Years Ended June 30,
--------------------------------------------------------------
2001 2000 1999 1998 1997
------------ -------------------------------------------------

BALANCE SHEET DATA
Total assets $5,577,658 $2,502,703 $ 599,440 $ 837,353 $ 298,142
Long term obligations 3,740,450 3,567,424 4,258,090 4,006,565 2,787,262
Accrued preferred stock dividends 283,195 735,001 612,501 490,001 367,500
Redeemable Preferred Stock, Series D - 1,225,002 1,225,002 1,225,002 1,225,002

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

The following discussion provides information to facilitate the
understanding and assessment of significant changes in trends related to the
financial condition of the Company and its results of operations. It should be
read in conjunction with the audited financial statements and footnotes
appearing elsewhere in this annual report.

RESULTS OF OPERATION

YEAR ENDED JUNE 30, 2001 COMPARED TO YEAR ENDED JUNE 30, 2000

Healthcare Exchange

Healthcare Exchange Revenue. The Company developed a proof of concept of
its Healthcare Exchange, which began operations with a limited number of
Providers in the quarter ending June 30, 2001. Providers submit bills to ATR,
who reprices the bills to the Provider's Healthcare Exchange rate, including
adding a transaction-processing fee, and then routes them to Purchasers or their
intermediaries. ATR receives payments from Purchasers on behalf of Providers,
and then remits payments to Providers. The Company recognizes revenue for the
transaction-processing fee when earned and no other contractual obligations or
contingencies exist. During the quarter ending June 30, 2001, the first quarter
of operations, $50,944 of revenue was recognized.

Healthcare Exchange Costs. Healthcare Exchange costs are the direct
costs related to the processing of the bills submitted by Providers and payments
received from Purchasers. These costs include the salary and other wage and
benefit costs of the Healthcare Exchange operations staff and the operating cost
of the application services provider. The costs for fiscal year 2001 were
$84,528. No operating costs were incurred in fiscal year 2000.

Contract Programming

ATR's previous business was recruiting, hiring, training and placing
foreign computer programmers with U.S. companies. In line with the Company's
strategy to focus on the establishment of the Healthcare Exchange for health
care services, ATR suspended recruitment of foreign computer programmers in
December 1999 and began pursuing the conversion of computer programmers to
employees of ATR's customers. This conversion process was complete as of June
30, 2001.

Contract Programming Revenue. Contract programming revenue resulted
primarily from sales of programmer services. Revenue decreased $2,252,632 or 88%
in fiscal year 2001 compared to fiscal year 2000. This decrease was due to a
reduction in the monthly average number of contract programmers working at

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customer sites in fiscal year 2001 compared to fiscal year 2000. This decline in
the number of programmers at customer sites, started in the last half of fiscal
year 1999, was due to several customers choosing to exercise a contract
termination provision which allowed them to convert, for a fee, ATR's
programmers to their employees. The Company escalated this conversion process
during fiscal years 2000 and 2001 to enable it to focus its business strategy
toward developing its Healthcare Exchange.

As of June 30, 2001, all contract programmers had been converted to
customer employees. The phase out of contract programming services is complete
and all expenses have been incurred.

Contract Termination Fees. Contract termination fees represent amounts
received from customers when they exercised the contract provision, which
allowed them to convert ATR's programmer to their employee. In addition, these
fees were also received from programmers when they exercised their contract
provision to terminate their relationship with the Company prior to the
termination date of their contract. These fee amounts were stipulated in
customer and programmer contracts, were based on the length of time remaining
under the contract, and were recognized as revenue when such contract provisions
were invoked.

Programmer Costs. Programmer costs represent the salary and other wage
and benefit costs of ATR's programmer employees. These costs decreased by
$1,509,753 or 87% in fiscal year 2001 compared to fiscal year 2000. This
decrease was primarily due to the reduction in the number of contract
programmers working at customer sites as discussed above in "Contract
Programming Revenue".

Start-up and Other Costs. Start-up and other costs represent the costs
of recruiting fees, training, and travel for programmer employees coming to the
United States from the former Soviet Union for the first time, relocation costs
within the United States, and legal and other costs related to obtaining and
maintaining compliance with required visas, postings and notifications. Start-up
and other costs were expensed as incurred.

Included in this category of costs is compensation paid by ATR whenever
programmer employees were hired and entered the United States or were relocated
once in the United States but before these programmers began working at a
customer's work site. There were times when under immigration law, ATR, as
employer, paid a programmer employee at least 95% of prevailing wages for his or
her specialty even when the programmer was not placed.

Start-up and other costs decreased $389,067 or 97% in fiscal year 2001
as compared to fiscal year 2000. This decrease was due to a decrease in the
number of programmers who were in the United States but not working at customer
sites. In fiscal year 2001 there were no programmers temporarily unassigned
compare to 2 in fiscal year 2000.

Product Development Costs

In October 1999 the Company began incurring costs to develop its
Healthcare Exchange. Costs incurred are primarily the salary, other wage and
benefit costs of ATR's employees and other operational costs associated with
recruiting the network of healthcare Providers. The increase of the sales and
marketing staff from 23 in fiscal year 2000 to 55 in fiscal year 2001 resulted
in the cost increase of $3,943,269 for fiscal year 2001 as compared to fiscal
year 2000. The Company continues to receive, process and analyze operating data,
and the results of the Company's analysis will determine the amount and timing
of remaining development related efforts.

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General and Administrative Expenses

General and administrative expense increased $2,574,245 in fiscal year
2001 compared to fiscal year 2000. This increase was primarily due to non-cash
stock based compensation expense of $1,931,036 and costs relating to increases
in support staff, licensing and consulting fees and rent and facilities for the
New Hampshire headquarters.

Other Income (Expense)

Interest Income. Interest income increased $360,068 in fiscal year 2001
compared to fiscal year 2000 primarily due to increased interest income earned
on higher average cash balances as a result of funds received from the sale of
our common stock in August 2000.

Interest Expense. Interest expense decreased $2,451,179 in fiscal year
2001 compared to fiscal year 2000 due to the charges recorded as a result of the
benefit accruing to the note holders from amending the conversion terms of the
$1,000,000 convertible note in fiscal year 2000.

Net Loss

Net loss increased to $8,914,755 in fiscal year 2001 from $4,815,641 in
fiscal year 2000 primarily due to product development costs associated with the
Healthcare Exchange.

YEAR ENDED JUNE 30, 2000 COMPARED TO YEAR ENDED JUNE 30, 1999

Contract Programming

Contract Programming Revenue. Contract programming revenue resulted
primarily from sales of programmer services. Revenues decreased $3,779,000 or
60% in fiscal year 2000 compared to fiscal year 1999. This decrease was due to a
reduction in the monthly average number of contract programmers working at
customer sites in fiscal year 2000 compared to fiscal year 1999. There was an
average of 31 contract programmers at customer sites for fiscal year 2000
compared an average of 82 in fiscal year 1999. The Company's results of
operations, in the last half of fiscal year 1999, were impacted by customers'
moves toward utilizing individual programmers or small (2 to 4 people)
programming teams rather than large programming teams, and the election by
several customers to exercise their contract termination provision allowing them
to convert, for a fee, the Company's programmers to their employees. As a
result, when contracts with several customers approached their termination date,
they were either not renewed, renewed for a fewer number of programmers, were
converted to customer employees. The Company escalated this conversion process
during fiscal year 2000 to enable it to focus its business strategy towards
developing its Healthcare Exchange.

Contract Termination Fees. Contract termination fees represent amounts
received from customers when they exercised the contract provision to convert
the Company's programmer to their employee. In addition, these fees were also
received from programmers when they exercised their contract provision to
terminate their relationship with the Company prior to the termination date of
their contract. These fee amounts were stipulated in customer and programmer
contracts, were based on the length of time remaining under the contract, and
were recognized as revenue when such contract provisions are invoked.

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Programmer Costs. Programmer costs represent the salary and other wage
and benefit costs of the Company's programmer employees. These costs decreased
by $2,769,000 or 61% in fiscal year 2000 compared to fiscal year 1999. This
decrease was primarily due to the reduction in the number of contract
programmers working at customer sites as discussed above in "Contract
Programming Revenue."

Start-up and Other Costs. Start-up and other costs represent the costs
of recruiting, training, and travel for programmer employees coming to the
United States for the first time, relocation costs within the United States, and
legal and other costs related to obtaining and maintaining compliance with
required visas, postings and notifications.

Included in this category of costs is compensation paid by the Company
whenever programmer employees were hired and entered the United States or were
relocated once in the United States but before these programmers began working
at a customer's work site. There were times when under immigration law, the
Company, as employer paid a programmer employee at least 95% of prevailing wages
for his or her specialty even when the programmer was not placed.

The Company expensed start-up and other costs as incurred, which
resulted in timing differences between incurring the expense and recognition of
resulting future revenue. Such differences may be particularly evident in the
Company's case because of its relatively small revenue base. The effect may be
particularly noticeable whenever the timing of placement of employees is such
that the major start-up costs occur late in one reporting period and the
revenues appear in subsequent periods.

Start-up and other costs decreased $649,000 or 62% in fiscal year 2000
as compared to fiscal year 1999. This decrease is due to a decrease in the
number of programmers who were in the United States but not working at customer
sites. In fiscal year 2000 there was an average of 2 programmers per month
temporarily unassigned as compared to 8 in fiscal year 1999.

Product Development Costs

In October 1999 the Company began incurring costs to develop its
Healthcare Exchange. Costs incurred primarily represent the salary and other
wage and benefit costs of the Company's employees involved in recruiting the
network of healthcare providers.

General and Administrative Expenses

General and administrative expense increased $53,000 or 4% in fiscal
year 2000 compared to fiscal year 1999 primarily due to start-up development
fees payable to WebMD Corp. of $135,000.

Other Income (Expense)

Interest Income. Interest income increased $88,000 in fiscal year 2000
primarily due to short-term investment of cash balances and to notes receivable
from employees and officers of the Company. No such investments or notes
receivable existed in fiscal year 1999.

Interest Expense. Interest expense increased $2,370,000 in fiscal year
2000 compared to fiscal year 1999 due to the charges recorded as a result of the
benefit accruing to the note holders from amending the conversion terms of the
$1,000,000 convertible note. See "Liquidity and Capital Resources."

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Net Loss

Net loss increased to $4,815,641 in fiscal year 2000 from $716,747 in
fiscal year 1999 primarily due to product development costs of the Company's
Healthcare Exchange and increased interest expense.

INCOME TAXES

As of June 30, 2001 the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $37 million and $21
million, respectively. The federal net operating loss carryforwards expire in
2004 through 2020 and the state net operating loss carryforwards expire in 2001
through 2010. The Company also has approximately $98,000 and $25,000 of research
and development tax credit carryforwards for federal and state income tax
purposes, respectively. The federal research and development tax credit
carryforwards expire in 2005.

In connection with the Company's initial public offering in August 1992,
a change of ownership (as defined in Section 382 of the Internal Revenue Code of
1986, as amended) occurred. As a result, the Company's net operating loss
carryforwards generated through August 20, 1992 (approximately $1,900,000) are
subject to an annual limitation in the amount of approximately $300,000.

In 1993, a controlling interest of the Company's stock was purchased,
resulting in a second annual limitation in the amount of approximately $398,000
on the Company's ability to utilize net operating loss carryforwards generated
between August 11, 1992 and September 13, 1993 (approximately $7,700,000).

LIQUIDITY AND CAPITAL RESOURCES

Traditionally, the Company has used a combination of equity and debt
financing and internal cash flow to fund operations and finance accounts
receivable but has incurred operating losses since its inception, which has
resulted in an accumulated deficit of $49,546,973 at June 30, 2001.

The Company's Healthcare Exchange development efforts will require
substantial funds prior to generating sufficient revenues to fund operations and
repay debt. Therefore, the Company engaged a New York based financial and
investment banking firm to assist the Company in raising capital. On August 28,
2000, the Company sold 3,333,334 shares of its common stock at $3.00 per share.
Proceeds, net of offering costs, were approximately $9,560,345. Proceeds are
being used to develop the Company's Healthcare Exchange. The Company's Chief
Executive Officer and related entities purchased 2,333,335 shares of the
Company's common stock in the private placement. Because the purchase price of
such stock was less than the public trading price on the date of purchase, the
Company recorded compensation expense of $1,458,334 in the first fiscal quarter
ended September 30, 2000.

On September, 11, 2000, the Company agreed with the Series D preferred
stockholders to exchange all their outstanding Series D shares and $475,915 in
accrued preferred stock dividends into 566,972 shares of common stock based on a
purchase price of $3.00 per common share. The benefit accruing to the Series D
preferred stockholders was recorded in the quarter ended September 30, 2000,
approximately $316,702 in compensation expense and $862,000 in preferred stock
dividends.

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interest at 10.25%. On September 11, 2000, the Company agreed with Mr. Cameron
to extend the due date on notes payable to him until December 31, 2001,in
exchange for an extension fee of 2%. These extended notes total $1,511,635,
including accrued interest and extension fees, and bear interest at 10.25% per
annum. Also on September 11, 2000, the Company agreed with the other note holder
to extend the due date of his notes until December 31, 2001, in consideration of
such notes becoming convertible promissory notes. The convertible promissory
notes total $2,288,815, including accrued interest, bear interest at 10.25% per
annum and are convertible into common stock at $3.00 per share (approximate
public trading price on that date) at the note holder's option. Subsequent to
June 30, 2001 the due dates of these notes were extended from December 31, 2001
to December 31, 2002. Mr. Cameron's extended notes total $1,630,529, including
accrued interest and extension fees of 2%, and bear interest at 10.25% per
annum. The convertible promissory notes total $2,423,826, including accrued
interest at 10.25% per annum.

On April 21, 1997, the Company issued an unsecured note payable (the
"Straight Note") to Mr. Cameron for $1,000,000 in accordance with the
Reimbursement Agreement the Company signed on February 28, 1994. Terms of the
note provided for an interest rate of 9.5% and monthly interest payments. No
maturity date was stated in the note; however, under the terms of the
Reimbursement Agreement, upon written demand by Mr. Cameron, the Straight Note
was to be replaced by a note convertible into the Company's common stock (the
"Convertible Note") in a principal amount equal to the Straight Note and bearing
interest at the same rate. The conversion price of the Convertible Note was
equal to 20% of the average trading price of the Company's common stock over the
period of ten trading days ending on the trading day next preceding the date of
issuance of such Convertible Note.

Subsequent to June 30, 1999, Mr. Cameron disposed of a portion of his
interest in the Straight Note, reducing the balance due him to $711,885, plus
accrued interest. On August 19, 1999, the Company's Board of Directors agreed
with the Straight Note holders to fix the conversion price of the Convertible
Note to $0.044 in exchange for the Straight and/or Convertible Notes ceasing to
accrue interest as of that date. Because of the decline in revenues caused by
the non-renewal of programmer contracts and the steady decline in the quoted
value of the Company's common stock at that time (trading price was at $0.25 on
August 19, 1999), the Board agreed it was in the best interest of the Company to
eliminate the future market risk that the conversion price become lower than a
fixed conversion price of $0.044. The benefit accruing to the note holders
resulting from the amendment to the conversion terms, as measured on August 19,
1999, was approximately $2.4 million and was recorded as additional interest
expense in the quarter ended September 30, 1999.

Subsequent to August 19, 1999, Mr. Cameron elected to replace his
remaining interest in the Straight Note, including accrued interest, with the
Convertible Note and then simultaneously converted the Convertible Note into
19,762,786 shares of the Company's common stock. All other Straight Note holders
also replaced their Straight Notes, including accrued interest, with Convertible
Notes and converted such Convertible Notes into an aggregate of 7,998,411 shares
of the Company's common stock during fiscal 2000.

The Company received $3,712,348 in private sales of its common stock at
an average price of $3.42 per share during fiscal year 2000.

The Company signed agreements effective in January 2001 with an
application services provider to license, support and run software to process
medical bills submitted to the Company's Healthcare Exchange. The agreements are
for 66 months. They required payment of an initial base license fee of $250,000,
which is being amortized over 66 months, and start-up costs, including data
center set up, training and implementation fees of approximately $145,000, which
were expensed. The agreements require monthly minimum payments

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currently of about $35,000 and additional fees that are transaction based if
volumes exceed levels included in the monthly minimums.

Based on the steps the Company has taken to refocus its operations and
obtain additional financing, the Company believes that it has developed a viable
plan to address the Company's ability to continue as a going concern, and that
this plan will enable the Company to continue as a going concern through at
least the end of fiscal 2002. However, the Company believes it will need to
raise additional funds during fiscal 2002. There can be no assurance that this
plan will be successfully implemented. If unsuccessful the Company may be
required to reduce the development efforts or its Healthcare Exchange or be
forced into seeking protection under federal bankruptcy laws. As a result, the
report of independent auditors on the Company's June 30, 2001 financial
statements includes an explanatory paragraph indicating there is substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain areas of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The adoption of SAB 101 did not have an effect on the Company's
financial position, results of operations or cash flows.

In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, Interpretation of Opinion No. 25" ("FIN 44"). FIN 44 clarifies the
application of Accounting Principle Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") to certain issues including: (i) the definition
of an employee for purposes of applying APB 25, (ii) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (iii) the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and (iv) the accounting for an exchange of stock
compensation awards in business combinations. The adoption of FIN 44 did not
have an effect on the Company's financial position, results of operations or
cash flows.

In July 2001, the Financial Accounting Standards Boards issued
Statements of Financial Accounting Standards No. 141, "Business Combinations,"
or SFAS 141 and No. 142, "Goodwill and Other Intangible Assets," or SFAS 142.
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is no longer permitted. SFAS 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination that is completed after
June 30, 2001. SFAS 142 no longer permits the amortization of goodwill and
indefinite-lived intangible assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment in
accordance with this statement. Intangible assets that do not have indefinite
lives will continue to be amortized over their useful lives and reviewed for
impairment in accordance with existing guidance. We are required to adopt SFAS
142 effective July 1, 2002. Because the Company has historically not been party
to any business combinations and therefore has not recorded related goodwill and
intangible assets, the adoption of SFAS 141 and 142 did not and will not,
respectively, have an effect on the Company's results of operations, financial
position or cash flows.

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EFFECTS OF INFLATION

Management does not expect inflation to have a material effect on the
Company's operating expenses.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has long-term debt in the aggregate amount of $3,740,450 as
of June 30, 2001, payable to two stockholders of the Company. The debt bears
interest at 10.25% per annum and is due December 31, 2002. The Company does not
believe that any change in interest rates will have a material impact on the
Company during fiscal 2002. Further, the Company has no foreign operations and
therefore is not subject to foreign currency fluctuations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements of the Company, including the notes thereto and
report of the independent auditors thereon, and the supplementary financial
information required by Item 302, are attached hereby as exhibits following page
number 23.

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The information required by this item is incorporated by reference to
the Captions "Election of Directors", "Further Information concerning the Board
of Directors" and "Section 16 (a) Information" of the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders, which will be filed within 120
days of the Company's fiscal year end.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to
the Caption "Principal Stockholders" of the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders, which will be filed within 120 days of
the Company's fiscal year end.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

22
23

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to
the Caption "Certain Relationships and Related Transactions" of the Company's
definitive Proxy Statement for the Annual Meeting of Stockholders which will be
filed within 120 days of the Company's fiscal year end.

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

Exhibit
Number Description of Document
------- -----------------------

3.1 Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit
3.3 to Amendment No. 1 to Registration Statement on Form S-18, Reg. No. 33-48666).

3.2 Amendment to Second Amended and Restated Bylaws of the Registrant (incorporated by reference
to Exhibit 3.3 of the Registrant's Annual Report on Form 10-KSB for the fiscal year ended
June 30, 1994).

3.3 Amended and Restated Certificate of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.3 of Form 10-KSB for the fiscal year ended June 30, 1997).

4.1 Amended and Restated Certificate of Incorporation of Registrant, including Certificates of
Designation with respect to Series A, Series B, Series C, Series D, and Series E Preferred
Stock, including any amendments thereto (incorporated by reference to Exhibit 4.1 to
Registration Statement on Form S-3, Reg. No. 33-86962).

10.1 Form of Director and Executive Officer Indemnification Agreement (incorporated by reference
to Exhibit 10.19 to Registration Statement on Form S-18, Reg. No. 33-48666).

10.3 Form of Stock Purchase Warrant issued in connection with the Confidential Private Placement
Memorandum of the Registrant, dated February 13, 1992 (Class A Warrant) (incorporated by
reference to Exhibit 10.31 to Form 10-KSB for the fiscal year ended June 30, 1994).

10.8 Form of Amended Stock Purchase Warrant issued to certain Class A, Class B, Class C and Class
D Warrant Holders (incorporated by reference to Exhibit 10.37 to Form 10-KSB for the fiscal
year ended June 30, 1994).

10.9 Form of Stock Purchase Warrant, dated June 30, 1994, issued to stockholders of record on
September 7, 1993 (incorporated by reference to Exhibit 10.38 to Form 10-KSB for the fiscal
year ended June 30, 1994).

10.11+ 1993 Stock Option/Stock Issuance Plan (incorporated by reference to Exhibit 10.47 to Form
10-KSB for the fiscal year ended June 30, 1994).

23
24

10.12+ Stock Option Agreement, dated August 11, 1993, between the Registrant and Russell J.
Harrison (incorporated by reference to Exhibit 10.51 to Form 10-KSB for the fiscal year
ended June 30, 1994).

10.18 Note Payable between the Registrant and the Negri Foundation dated December 24, 1996
(incorporated by reference to Exhibit 10.60 to Form 10-QSB for the quarter ended December
31, 1996).

10.19 Note Payable between the Registrant and the Negri Foundation dated December 31, 1996
(incorporated by reference to Exhibit 10.61 to Form 10-QSB for the quarter ended December
31, 1996).

10.20 Note Payable between the Registrant and the Max Negri Trust dated December 31, 1996
(incorporated by reference to Exhibit 10.62 to Form 10-QSB for the quarter ended December
31, 1996).

10.21 Note Payable between the Registrant and the Cameron Foundation dated December 31, 1996
(incorporated by reference to Exhibit 10.63 to Form 10-QSB for the quarter ended December
31, 1996).

10.22 Note Payable between the Registrant and the James W. Cameron, Jr., as an individual, dated
December 31, 1996 (incorporated by reference to Exhibit 10.64 to Form 10-QSB for the quarter
ended December 31, 1996).

10.23 Note Payable between the Registrant and James W. Cameron, Jr., as an individual, dated
January 16, 1997 (incorporated by reference to Exhibit 10.65 to Form 10-QSB for the quarter
ended December 31, 1996).

10.24 Note Payable between the Registrant and James W. Cameron, Jr., as an individual, dated
January 31, 1997 (incorporated by reference to Exhibit 10.66 to Form 10-QSB for the quarter
ended December 31, 1996).

10.25 Note Payable between the Registrant and James W. Cameron, Jr., as an individual, dated
February 7, 1997 (incorporated by reference to Exhibit 10.67 to Form 10-QSB for the quarter
ended December 31, 1996).

10.29 Note Payable between the Registrant and James W. Cameron, Jr., dated April 21, 1997
(incorporated by reference to Exhibit 10.29 to Form 10-KSB for the year ended June 30,
1997).

10.33+ Alternative Technology Resources, Inc. 1997 Stock Option Plan (incorporated by
reference to Exhibit 10.33 to Form 10-KSB for the year ended June 30, 1998).

10.34 Memorandum regarding rent reduction on that Lease between James W. Cameron, Jr., and the
Registrant, dated July 15, 1998 (incorporated by reference to Exhibit 10.34 to Form 10-KSB
for the year ended June 30, 1998).

24
25

10.35 Fourth Addendum to Lease between James W. Cameron, Jr., and the Registrant, effective
January 1, 1999 (incorporated by reference to Exhibit 10.35 to Form 10-QSB for the quarter
ended March 31, 1999).

10.36 Fifth Addendum to Lease between James W. Cameron, Jr., and the Registrant, effective January
1, 2000 (incorporated by reference to Exhibit 10.36 to Form 10-KSB for the year ended June
30, 2000).

10.37 Healtheon Customer Agreement effective September 16, 1999 (incorporated by reference to
Exhibit 10.37 to Form 10-K for the year ended June 30, 2001).

10.38 Employment Agreement with Jeffrey McCormick

10.40 Master Agreement for Computer Software Products and Related Services between Alternative
Technology Resources, Inc. and Resource Information Management Systems, Inc. (incorporated
by reference to Exhibit 10.40 to Form 10-Q for the quarterly period ended December 31,
2000).

23.1 Consent of Ernst & Young LLP, Independent Auditors

+ Indicates a management contract or compensatory plan or arrangement as
required by Item 13(a).

FINANCIAL STATEMENT SCHEDULES

All schedules have been omitted because they are not required or are not
applicable or the required information is shown in the financial
statements or related notes

REPORTS ON FORM 8-K

There were no reports on Form 8-K filed during the last quarter of the
period covered by this report.

25
26

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

Dated: September 28, 2001 ALTERNATIVE TECHNOLOGY RESOURCES, INC.

By /S/ JEFFREY S. MCCORMICK
------------------------
Jeffrey S. McCormick.
Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.

Signature Title Date
--------- ----- ----

/S/ JAMES W. CAMERON, JR. Chairman of the Board, Director September 28, 2001
------------------------------------------ And Chief Financial Officer
James W. Cameron, Jr.

/S/ EDWARD L. LAMMERDING Director September 28, 2001
------------------------------------------
Edward L. Lammerding

/S/ JEFFREY S. MCCORMICK Director September 28, 2001
------------------------------------------
Jeffrey S. McCormick

/S/ THOMAS W. O'NEIL, JR. Director September 28, 2001
------------------------------------------
Thomas W. O'Neil, Jr.

26
27

INDEX TO FINANCIAL STATEMENTS

Alternative Technology Resources, Inc.

Page
----

Report of Ernst & Young LLP, Independent Auditors.................................... F-1
Balance Sheets as of June 30, 2001 and 2000.......................................... F-2
Statements of Operations for the Years Ended June 30, 2001, 2000 and 1999............ F-3
Statements of Stockholders' Equity (Deficit) for the Years Ended June 30, 2001, 2000 and
1999................................................................................. F-4
Statements of Cash Flows for the Years Ended June 30, 2001, 2000 and 1999............ F-5
Notes to Financial Statements........................................................ F-7

Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Stockholders
Alternative Technology Resources, Inc.

We have audited the accompanying balance sheets of Alternative Technology
Resources, Inc. as of June 30, 2001 and 2000, and the related statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended June 30, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alternative Technology
Resources, Inc. at June 30, 2001 and 2000 and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 2001 in
conformity with accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that
Alternative Technology Resources, Inc. will continue as a going concern. As more
fully described in Note 1, the Company has incurred recurring operating losses
and has an accumulated deficit of $49,546,973. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.

/s/ Ernst & Young LLP

Sacramento, California
August 15, 2001

F-1
29

Alternative Technology Resources, Inc.

Balance Sheets

JUNE 30,
2001 2000
------------ ------------

ASSETS
Current assets:
Cash and cash equivalents $ 3,159,017 $ 1,909,421
Short-term investments 1,354,137 -
Trade accounts receivable 24,252 98,128
Interest receivable 52,134 -
Prepaid expenses and other current assets 267,635 84,183
------------ ------------
Total current assets 4,857,175 2,091,732

Property and equipment:
Equipment and software 501,626 175,415
Accumulated depreciation and amortization (107,848) (14,444)
------------ ------------
Property and equipment, net 393,778 160,971

Prepaid license and service fees 259,155 250,000
Other non-current assets 67,550 -
------------ ------------

$ 5,577,658 $ 2,502,703
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Payable to Healthcare Exchange participants $ 40,756 $ -
Trade accounts payable 151,371 97,205
Accrued payroll and related expenses 181,028 167,507
Accrued preferred stock dividends 283,195 735,001
Notes payable to directors - 23,324
Accounts payable and accrued interest payable to stockholders 728,941 613,630
Other current liabilities 295,680 273,018
------------ ------------
Total current liabilities 1,680,971 1,909,685

Notes payable to stockholders 1,511,635 3,567,424
Convertible notes payable to stockholders 2,228,815 -
------------ ------------
Total long term liabilities 3,740,450 3,567,424

Commitments and contingencies (Notes 1 and 6)

Stockholders' equity (deficit):
Convertible preferred stock, $6.00 par value - 1,200,000 shares authorized,
None issued and outstanding at June 30, 2001, 204,167 shares designated
Series D issued and outstanding, with a liquidation preference value of
$1,960,003 at June 30, 2000 1,225,002
Common stock, $0.01 par value - 100,000,000 shares authorized
59,394,844 shares issued and outstanding at June 30, 2001
(55,329,605 at June 30, 2000) 593,949 553,297
Additional paid-in capital 49,109,283 35,879,513
Accumulated deficit (49,546,973) (40,632,218)
Accumulated other comprehensive loss (22) -
------------ ------------
Total stockholders' equity (deficit) 156,237 (2,974,406)
------------ ------------

$ 5,577,658 $ 2,502,703
============ ============

See accompanying notes.

F-2
30

Alternative Technology Resources, Inc.

Statements of Operations

YEARS ENDED JUNE 30,
------------------------------------------------
2001 2000 1999
------------ ------------ ------------

HEALTHCARE EXCHANGE
Healthcare Exchange revenue $ 50,944 $ - $ -
Healthcare Exchange costs (84,528) - -
------------ ------------ ------------
Healthcare Exchange gross profit (loss) (33,584) - -

CONTRACT PROGRAMMING:
Contract programming revenue 308,469 2,561,101 6,340,235
Contract termination fees - 5,453 253,179
Programmer costs (235,258) (1,745,011) (4,513,673)
Start-up and other costs (10,414) (399,481) (1,048,848)
------------ ------------ ------------
Contract programming gross profit 62,797 422,062 1,030,893

Product development costs (5,097,513) (1,154,244) -

General and administrative expenses (3,850,971) (1,276,726) (1,223,539)
------------ ------------ ------------
Loss from operations (8,919,271) (2,008,908) (192,646)
------------ ------------ ------------

Other income (expense):
Interest income 447,742 87,672 -
Interest expense to stockholders and directors (443,226) (2,894,405) (524,101)
------------ ------------ ------------
Total other income (expense) 4,516 (2,806,733) (524,101)
------------ ------------ ------------

Net loss (8,914,755) (4,815,641) (716,747)

Preferred stock dividends (886,142) (122,500) (122,500)
------------ ------------ ------------

Net loss applicable to common stockholders $ (9,800,897) $ (4,938,141) $ (839,247)
============ ============ ============

Basic and diluted net loss per share $ (0.17) $ (0.10) $ (0.03)
============ ============ ============

Weighted-average common stock outstanding 58,686,778 50,329,614 26,127,730
============ ============ ============

See accompanying notes.

F-3
31

Alternative Technology Resources, Inc.

Statements of Stockholders' Equity (Deficit)

Years ended June 30, 2001, 2000 and 1999

CONVERTIBLE PREFERRED STOCK COMMON STOCK
------------------------------------------------------------------ UNEARNED
SHARES AMOUNT SHARES AMOUNT COMPENSATION
------------ ------------ ------------ ------------ ------------

Balance, June 30, 1998 204,167 $ 1,225,002 26,120,499 $ 261,205 $ (77,343)

Issuance of common stock in
settlement of accounts
payable - - 36,719 367 -
Amortization of unearned
compensation - - - - 77,343
Warrants exercised - - 12,500 125 -
Preferred stock dividends - - - - -
Net loss - - - - -
------------ ------------ ------------ ------------ ------------
Balance, June 30, 1999 204,167 1,225,002 26,169,718 261,697 -
Issuance of common stock in
settlement of accounts
payable - - 15,126 151 -
Issuance of common stock on
conversion of notes payable - - 27,761,197 277,612 -
Private sale of common stock - - 1,086,145 10,862 -
Options and warrants exercised - - 309,919 3,100 -
Retirement of treasury stock - - (12,500) (125) -
Preferred stock dividends - - - - -
Net loss - - - - -
------------ ------------ ------------ ------------ ------------

Balance, June 30, 2000 204,167 1,225,002 55,329,605 553,297 -

Issuance of common stock in
settlement of accounts
payable - - 80,000 800 -

Issuance of common stock
upon conversion of Series D
preferred stock (204,167) (1,225,002) 566,972 5,670 -

Issuance of common stock
upon conversion of
note payable - - 20,000 200 -
Issuance of common stock - - 3,333,334 33,333 -
Options exercised - - 64,933 649 -
Preferred stock dividends - - - - -
Accumulated other
comprehensive loss - - - - -
Net loss - - - - -
------------ ------------ ------------ ------------ ------------

Balance, June 30, 2001 - $ - 59,394,844 $ 593,949 $ -
============ ============ ============ ============ ============

ACCUMULATED TOTAL
ADDITIONAL OTHER STOCKHOLDERS
PAID-IN COMPREHENSIVE ACCUMULATED EQUITY
CAPITAL (LOSS) DEFICIT (DEFICIT)
------------ --------- ------------ ------------

Balance, June 30, 1998 $ 28,846,692 $ $(35,099,830) $ (4,844,274)

Issuance of common stock in
settlement of accounts
payable 18,211 - - 18,578
Amortization of unearned
compensation - - - 77,343
Warrants exercised - - - 125
Preferred stock dividends (122,500) - - (122,500)
Net loss - - (716,747) (716,747)
------------ --------- ------------ ------------
Balance, June 30, 1999 28,742,403 - (35,816,577) (5,587,475)
Issuance of common stock in
settlement of accounts
payable 8,751 - - 8,902
Issuance of common stock on
conversion of notes payable 3,359,029 - - 3,636,641
Private sale of common stock 3,701,486 - - 3,712,348
Options and warrants exercised 190,219 - - 193,319
Retirement of treasury stock 125 - - -
Preferred stock dividends (122,500) - - (122,500)
Net loss - - (4,815,641) (4,815,641)
------------ --------- ------------ ------------

Balance, June 30, 2000 35,879,513 - (40,632,218) (2,974,406)

Issuance of common stock in
settlement of accounts
payable 155,200 - - 156,000

Issuance of common stock
upon conversion of Series D
preferred stock 2,011,949 - - 792,617

Issuance of common stock
upon conversion of
note payable 59,800 - - 60,000
Issuance of common stock 10,985,346 - - 11,018,679
Options exercised 41,584 - - 42,233
Preferred stock dividends (24,109) - - (24,109)
Accumulated other
comprehensive loss - (22) - (22)
Net loss - - (8,914,755) (8,914,755)
------------ --------- ------------ ------------

Balance, June 30, 2001 $ 49,109,283 $ (22) $(49,546,973) $ 156,237
============ ========= ============ ============

See accompanying notes.

F-4
32

Alternative Technology Resources, Inc.

Statements of Cash Flows
Increase (decrease) in Cash and Cash Equivalents

YEARS ENDED JUNE 30,
2001 2000 1999
----------- ----------- -----------

Cash flows from operating activities:
Net loss $(8,914,755) $(4,815,641) $ (716,747)
Adjustments to reconcile net loss to net cash -
used in operating activities:
Depreciation and amortization 93,404 14,444 -
Interest expense resulting from amendment
to conversion terms of notes payable - 2,415,223 -
Interest expense included in notes payable
to stockholders 233,026 309,334 273,647
Write-off of WebMD prepaid service fee 250,000 - -
Non-cash stock based compensation 1,931,036 - 77,343
Changes in operating assets and liabilities:
Trade accounts receivable 73,876 374,008 167,221
Interest receivable 52,135 - -
Other current assets (287,721) (239,521) 13,638
Non-current assets (326,705) - -
Accounts payable to stockholders 115,311 73,509 199,296
Trade accounts payable 54,166 12,911 (27,302)
Payable to Healthcare Exchange providers 40,756 - -
Accrued payroll and related expenses 13,521 (136,781) (42,215)
Other current liabilities 22,662 157,329 16,372
----------- ----------- -----------
Net cash used in operating activities (6,649,288) (1,835,185) (38,747)
----------- ----------- -----------

Cash flows from investing activities:

Purchases of equipment and software (326,211) (175,415) -
Purchases of short-term investments (6,306,989) - -
Maturities of short-term investments 4,952,830 - -
----------- ----------- -----------
Net cash used in investing activities (1,680,370) (175,415) -
----------- ----------- -----------

(Continued on next page)

F-5
33

Alternative Technology Resources, Inc.

Statements of Cash Flows
Increase (decrease) in Cash and Cash Equivalents

(continued)

YEARS ENDED JUNE 30,
---------------------------------------------
2001 2000 1999
----------- ----------- -----------

Cash flows from financing activities:
Proceeds from sale of common stock $ 9,560,345 $ 3,712,348 $ -
Proceeds from exercise of warrants and options 42,233 193,319 125
Proceeds from notes payable to stockholders - 33,500 992,543
Payments on notes payable to stockholders - (33,500) (1,014,665)
Proceeds from notes payable to directors - 3,361 72,690
Payments on notes payable to directors (23,324) (21,649) (69,000)
----------- ----------- -----------
Net cash provided (used) by financing activities 9,579,254 3,887,379 (18,307)
----------- ----------- -----------

Net increase (decrease) in cash and cash equivalents 1,249,596 1,876,779 (57,054)

Cash and cash equivalents at beginning of year 1,909,421 32,642 89,696
----------- ----------- -----------
Cash and cash equivalents at end of year $ 3,159,017 $ 1,909,421 $ 32,642
=========== =========== ===========

Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 94,611 $ 54,926 $ 89,699
=========== =========== ===========

Supplemental disclosure of non-cash financing activities:
Conversion of notes payable to common stock $ 60,000 $ 1,000,000 -
=========== =========== ===========

See accompanying notes.

F-6
34

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

Years Ended June 30, 2001, 2000 and 1999

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Alternative Technology Resources, Inc. (hereinafter referred to as "ATR," the
"Company" "we" or "us") has developed and is operating an Exchange for
healthcare services ("Healthcare Exchange"). The purpose of the Healthcare
Exchange is to utilize the Internet and other technologies to facilitate
Provider initiated discounts and administrative, billing and remittance services
for all commercial lines of business. The Healthcare Exchange offers a direct
and efficient conduit between Providers and Purchasers of healthcare services,
their PPOs' and/or their agents.

ATR's Healthcare Exchange began operations with a limited number of Providers
and Purchasers in the quarter ending June 30, 2001. The Company continues to
receive, process and analyze operating data, and the results of the Company's
analysis will determine the amount and timing of remaining development related
efforts. ATR's previous business was recruiting, hiring, and training foreign
computer programmers and placing them with U.S. companies. In line with the
Company's strategy to focus on the establishment of a Healthcare Exchange for
the healthcare services, ATR suspended recruitment of foreign computer
programmers in December 1999 and began pursuing the conversion of foreign
computer programmers to become employees of ATR's customers. This conversion
process was complete as of June 30, 2001.

The Company has incurred operating losses since inception, which have resulted
in an accumulated deficit of $49,546,973 at June 30, 2001. Based on the steps
the Company has taken to refocus its operations and obtain additional financing,
the Company believes that it has developed a viable plan to address the
Company's ability to continue as a going concern, and that this plan will enable
the Company to continue as a going concern, at least through the end of fiscal
year 2002. However, the Company believes it will need to raise additional funds
during fiscal 2002. There can be no assurance that this plan will be
successfully implemented. If unsuccessful, the Company may be required to reduce
the development efforts of its Healthcare Exchange or be forced into seeking
protection under federal bankruptcy laws. As a result, the report of independent
auditors on the Company's June 30, 2001 financial statements includes an
explanatory paragraph indicating there is substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.

USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS

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

F-7
35

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

Years Ended June 30, 2001, 2000 and 1999

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The Company considers all highly liquid investments with an original maturity of
three months or less from the date of purchase to be cash equivalents. At June
30, 2001 substantially all of the Company's cash equivalents represents
investments in corporate bonds and money market accounts.

Short-term investments are corporate obligations with maturity dates of 91 days
to one year from the date of purchase. As of June 30, 2001 the cost of the
Company's available-for-sale securities approximates the estimated fair value
because these securities matured shortly after year-end.

The Company has not classified any debt securities as held-to-maturity as of
June 30, 2001.

PREPAID LICENSE AND SERVICE FEES

Prepaid License and Service Fees are recorded at cost and amortized on a
straight-line basis over the service period of 66 months. Management considers
whether indicators of impairment of these assets are present at each balance
sheet date and an impairment loss is recorded, if necessary.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and are depreciated on a
straight-line basis over the estimated useful lives of the assets or the lease
term, whichever is shorter. The estimated useful lives range from three to five
years.

REVENUE RECOGNITION

The Company has developed a proof of concept of its Healthcare Exchange, which
began operations with a limited number of providers in the quarter ending June
30, 2001. The Company recognizes revenue for the transaction-processing fee when
it is earned and if no other contractual obligations or contingencies exist.

Contract programming revenue represents work performed for customers, primarily
on a time and materials basis, and is recognized when the related services are
rendered. Contract termination fees are amounts received from customers when
they exercise the contract provision, which allows them to convert ATR's
programmer to their employee. In addition, these fees can also be received from
programmers when they exercise their contract provision to terminate their
relationship with the Company prior to the termination date of their contract.
These fee amounts are stipulated in customer and programmer contracts, are based
on the length of time remaining under the contract, and are recognized as
revenue when such contract provisions are invoked.

F-8
36

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

Years Ended June 30, 2001, 2000 and 1999

PRODUCT DEVELOPMENT COSTS

In October 1999, the Company began incurring costs to develop its Healthcare
Exchange. In accordance with SOP 98-5, "Reporting on Costs of Start-Up
Activities," start-up costs associated with the Healthcare Exchange have been
expensed as incurred. ATR's Healthcare Exchange began operations with a limited
number of Providers and Purchasers in the quarter ending June 30, 2001. The
Company continues to receive, process and analyze operating data, and the
results of the Company's analysis will determine the amount and timing of
remaining development related efforts.

STOCK-BASED COMPENSATION

As permitted under the provisions of Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company
has elected to account for stock-based compensation using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25"). Under the intrinsic value method,
compensation cost is the excess, if any, of the quoted market price or fair
value of the stock at the grant date or other measurement date over the amount
an employee must pay to acquire the stock. Disclosures required under SFAS No.
123 are included in Note 7 to the financial statements.

NET LOSS PER SHARE

All loss per share amounts for all periods have been presented in accordance
with Statement of Financial Accounting Standards Board No. 128, "Earnings per
Share". As the Company has reported net losses in all periods presented, basic
and diluted loss per share have been calculated on the basis of net loss
applicable to common stockholders divided by the weighted average number of
common stock shares outstanding without giving effect to outstanding options,
warrants, and convertible securities whose effects are anti-dilutive. For the
fiscal years ended June 30, 2001, 2000 and 1999, there were stock options, stock
warrants, and a convertible note payable outstanding, in fiscal years ended June
30, 2000 and 1999 there were also convertible preferred stock outstanding (Notes
3 and 7) which could potentially dilute earnings per share in the future but
were not included in the computation of diluted loss per share as their effect
was anti-dilutive in the periods presented.

SEGMENT DISCLOSURES

As of June 30, 2001, the Company operates in one segment, the development and
operation of an exchange for health care services. Prior to beginning operations
with a limited number of Providers and Purchasers in the quarter ending June 30,
2001, the Company was in the business of recruiting, hiring and training foreign
computer programmers and placing them with U.S. companies.

F-9
37
Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

Years Ended June 30, 2001, 2000 and 1999

COMPREHENSIVE LOSS

Total comprehensive loss for fiscal year end June 30, 2001, 2000 and 1999 was
$8,914,777, $4,815,641 and $716,747 respectively. Other comprehensive income
(loss) represents the net change in unrealized gains (losses) on
available-for-sale securities.

CONCENTRATIONS OF RISK

The Company's trade accounts receivable are unsecured and are primarily with
companies in the contract placement and consulting industry. Although the
Company does not require collateral, ATR performs periodic credit evaluations of
its customers and may provide a provision for uncollectable accounts receivable.
The Company has not incurred significant losses to date.

The Company invests its excess cash with high credit quality financial
institutions. The Company believes the financial risks associated with these
financial instruments are minimal.

During the fiscal year ended June 30, 2001, three customers individually
accounted for 41%, 39% and 11% of Contract Programming revenues. During the
fiscal year ended June 30, 2000, three customers individually accounted for 40%,
21% and 10% of total revenues. During the fiscal year ended June 30, 1999, two
customers individually accounted for 52% and 31% of total revenues.

At fiscal year end June 30, 2001 two customers individually accounted for 55%
and 31% of accounts receivable. At fiscal year end June 30, 2000 five customers
individually accounted for 25%, 24%, 13%, 11% and 11% of accounts receivable. At
fiscal year end June 30, 1999 two customers accounted for 42% and 26% of
accounts receivable. All other customers in 2001, 2000 and 1999 accounted for
less than 10% of accounts receivable at fiscal year end.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist of cash, cash equivalents,
short-term investments, accounts receivable, and accounts and notes payable.
Fair values of cash, cash equivalents, short-term investments, accounts
receivable, and accounts payable (other than accounts payable to stockholders)
are considered to approximate their carrying values.

Fair values of accounts payable to stockholders and notes payable could not be
determined with sufficient reliability because these are instruments held by
related parties and because of the cost involved in such determination.
Principal characteristics of these financial instruments that, along with
information on the financial position of the Company, are pertinent to their
fair values are described in Notes 2 and 3.

F-10
38
Alternative Technology Resources, Inc.
Notes to Financial Statements

Years Ended June 30, 2001, 2000 and 1999

RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 summarizes certain areas of the Staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
adoption of SAB 101 did not have an effect on the Company's financial position,
results of operations or cash flows.

In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation,
Interpretation of Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application
of Accounting Principle Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") to certain issues including: (i) the definition of an
employee for purposes of applying APB 25, (ii) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (iii) the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award, and (iv) the accounting for an exchange of stock compensation
awards in business combinations. The adoption of FIN 44 did not have an effect
on the Company's financial position, results of operations or cash flows.

In July 2001, the Financial Accounting Standards Boards issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," or SFAS 141 and
No. 142, "Goodwill and Other Intangible Assets," or SFAS 142. SFAS 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Use of the pooling-of-interests method is no
longer permitted. SFAS 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination that is completed after June 30, 2001. SFAS 142 no longer permits
the amortization of goodwill and indefinite-lived intangible assets. Instead,
these assets must be reviewed annually (or more frequently under certain
conditions) for impairment in accordance with this statement. Intangible assets
that do not have indefinite lives will continue to be amortized over their
useful lives and reviewed for impairment in accordance with existing guidance.
The Company is required to adopt SFAS 142 effective July 1, 2002. Because the
Company has historically not been party to any business combinations and
therefore has not recorded related goodwill and intangible assets, the adoption
of SFAS 141 and 142 did not and will not, respectively, have an effect on the
Company's results of operations, financial position or cash flows.

2. INVESTOR GROUP TRANSACTIONS

In fiscal 1994, the Company entered into a series of agreements with James W.
Cameron, Jr. pursuant to which Mr. Cameron and Dr. Max Negri became principal
stockholders of the Company. As of June 30, 2001, Mr. Cameron owned 39,391,784
shares of common stock. As of June 30, 2001 Dr. Negri held less than 5% of the
Company's common stock.

F-11
39
Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

Years Ended June 30, 2001, 2000 and 1999

During fiscal years 2001, 2000 and 1999, the Company did not generate sufficient
cash flow from operations and borrowed from these two stockholders. Notes
payable to stockholders were $3,740,450 at June 30, 2001 and $3,567,424 at June
30, 2000 (Note 3). Accrued interest of $232,469 at June 30, 2001 and $148,481 at
June 30, 2000 on these notes is included in accounts payable and accrued
interest payable to stockholders.

The Company leases its office facilities from Mr. Cameron (Note 6). Accrued
lease expense of $496,472 at June 30, 2001 and $465,149 at June 30, 2000 is also
included in accounts payable to stockholders at June 30, 2001.

During the fiscal years ended June 30, 2001 and 2000, Cameron & Associates,
which is wholly owned by Mr. Cameron, provided consulting services to the
Company. Fees for such services totaled $120,000 in fiscal year 2001, $90,000 in
fiscal year 2000 and none in 1999.

3. FINANCING ARRANGEMENTS

The Company has received short-term, unsecured financing to fund its operations
in the form of notes payable of $3,740,450 as of June 30, 2001, from Mr. Cameron
and another stockholder. These notes bear interest at 10.25%. On September 11,
2000, the Company agreed with Mr. Cameron to extend the due date on notes
payable to him until December 31, 2001, in exchange for an extension fee of 2%.
These extended notes total $1,511,635, including accrued interest and extension
fees, and bear interest at 10.25% per annum. Also on September 11, 2000, the
Company agreed with the other note holder to extend the due date of his notes
until December 31, 2001, in consideration of such notes becoming convertible
promissory notes. The convertible promissory notes total $2,228,815, including
accrued interest, bear interest at 10.25% per annum and are convertible into
common stock at $3.00 per share (approximate public trading price on that date)
at the note holder's option. Subsequent to June 30, 2001 the due dates of these
notes were extended from December 31, 2001 to December 31, 2002. Mr. Cameron's
extended notes total $1,630,529, including accrued interest and extension fees
of 2%, and bear interest at 10.25% per annum. The convertible promissory notes
total $2,423,826, including accrued interest at 10.25% per annum.

The aggregate principal maturities of long-term debt obligations are $4,054,355
in fiscal year ending June 30, 2003, and none in each of the fiscal years ending
June 30, 2002, 2004, 2005 and 2006, and thereafter.

On April 21, 1997, the Company issued an unsecured note payable (the "Straight
Note") to Mr. Cameron for $1,000,000 in accordance with the Reimbursement
Agreement the Company signed on February 28, 1994. Terms of the note provided
for an interest rate of 9.5% and monthly interest payments. No maturity date was
stated in the note; however, under the terms of the Reimbursement Agreement,
upon written demand by Mr. Cameron, the Straight Note was to be replaced by a
note convertible into ATR's common stock (the "Convertible Note") in a principal
amount equal to the Straight Note and bearing interest at the same rate. The
conversion price of the Convertible Note was equal to 20% of the average trading
price of

F-12
40

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

Years Ended June 30, 2001, 2000 and 1999

the Company's common stock over the period of ten trading days ending on the
trading day next preceding the date of issuance of such Convertible Note.

Subsequent to June 30, 1999, Mr. Cameron disposed of a portion of his interest
in the Straight Note, reducing the balance due him to $711,885, plus accrued
interest. On August 19, 1999, the Company's Board of Directors agreed with the
Straight Note holders to fix the conversion price of the Convertible Note to
$0.044 in exchange for the Straight and/or Convertible Notes ceasing to accrue
interest as of that date. Because of the decline in revenues caused by the
non-renewal of programmer contracts and the steady decline in the quoted value
of the Company's common stock at that time (trading price was at $0.25 on August
19, 1999), the Board agreed it was in the best interest of the Company to
eliminate the future market risk that the conversion price become lower than a
fixed conversion price of $0.044. The benefit accruing to the note holders
resulting from the amendment to the conversion terms, as measured on August 19,
1999, was approximately $2,415,222 and was recorded as additional interest
expense.

Subsequent to August 19, 1999, Mr. Cameron elected to replace his remaining
interest in the Straight Note, including accrued interest, with the Convertible
Note and then simultaneously converted the Convertible Note into 19,762,786
shares of ATR's common stock. All other Straight Note holders have since
replaced their Straight Notes, including accrued interest, with Convertible
Notes and converted such Convertible Notes into an aggregate of 7,998,411 shares
of the Company's common stock.

4. WEBMD CORP. AGREEMENT

In September 1999, the Company entered into an agreement with WebMD Corp. to
develop a web-based portal through which individual uninsured and under insured
Patients can procure healthcare services. The agreement required a prepaid
service fee to be paid to WebMD of $250,000 upon a promotional announcement on
WebMD's Internet portal, and a sharing of revenues when operational. Currently
both parties are reevaluating this agreement, given changed directions and
priorities of each company. The agreement has not formally been modified or
terminated, nor has either party proposed any specific changes. However, neither
party is currently devoting any substantial resources to this project.
Accordingly, the prepaid service fee was written off in fiscal year 2001 and is
included as a component of product development costs in the statement of
operations.

F-13
41
Alternative Technology Resources, Inc.
Notes to Financial Statements

Years Ended June 30, 2001, 2000 and 1999

5. INCOME TAXES

Significant components of the Company's deferred tax assets and liabilities for
federal and state income taxes as of June 30, 2001 and 2000 are as follows:

June 30,
2001 2000
------------ ------------

Net operating loss carry forwards $ 14,603,000 $ 11,486,000
Research credits 123,000 123,000
Common stock options 2,539,000 2,539,000
Common stock warrants 789,000 789,000
Other - net (572,000) (348,000)
------------ ------------
Total deferred tax assets 17,482,000 14,589,000
Valuation allowance for deferred tax assets (17,482,000) (14,589,000)
------------ ------------
Net deferred tax assets $ - $ -
============ ============

The Company's valuation allowance as of June 30, 2000 and 1999 was $14,589,000
and $12,512,000, respectively, resulting in a net change in the valuation
allowance of $2,893,000 and $2,077,000 in the fiscal years ended June 30, 2001
and 2000, respectively.

As of June 30, 2001 the Company had net operating loss carryforwards for federal
and state income tax purposes of approximately $37 million and $21 million,
respectively. The federal net operating loss carryforwards expire in 2004
through 2020 and the state net operating loss carryforwards expire in 2001
through 2010. The Company also has approximately $98,000 and $25,000 of research
and development tax credit carryforwards for federal and state income tax
purposes, respectively. The federal research and development tax credit
carryforwards expire in 2005.

In connection with the Company's initial public offering in August 1992, a
change of ownership (as defined in Section 382 of the Internal Revenue Code of
1986, as amended) occurred. As a result, the Company's net operating loss
carryforwards generated through August 20, 1992 (approximately $1,900,000) are
subject to an annual limitation in the amount of approximately $300,000.

In 1993, a controlling interest of the Company's stock was purchased, resulting
in a second annual limitation in the amount of approximately $398,000 on the
Company's ability to utilize net operating loss carryforwards generated between
August 11, 1992 and September 13, 1993 (approximately $7,700,000).

The Company expects that the aforementioned annual limitations will result in
net operating loss carryovers which will not be utilized prior to the expiration
of the carryover period.

F-14
42

Alternative Technology Resources, Inc.
Notes to Financial Statements

Years Ended June 30, 2001, 2000 and 1999

6. COMMITMENTS AND CONTINGENCIES

The Company may from time to time become a party to various legal proceedings
arising in the ordinary course of its business. The Company is not currently
subject to any legal proceedings.

The Company signed agreements effective in January 2001 with an application
services provider to license, support and run software to process medical bills
submitted to the Company's Healthcare Exchange. The agreements are for a period
of 66 months. They required payment of an initial base license fee of $250,000,
which is being amortized over 66 months, and data center set up, training and
implementation fees of about $145,000, which were expensed. The agreements
require monthly minimum payments currently of about $35,000 and additional fees
that are transaction based if volumes exceed levels included in the monthly
minimums.

In November 1999, the California Department of Corporations, Health Enforcement
Division, announced that it is taking enforcement action against discount health
benefit card plans conducting operations in California in violation of the
Health Care Service Plan Act of 1975 (the "HCSP Act"). In October 1999, the
Department issued the Company a subpoena with respect to documents relating to
the Company's relationship with WebMD Corp. and the potential of being a health
care service plan under the Department's jurisdiction. The Company has responded
to this subpoena. We do not believe our Healthcare Exchange is within the scope
of the HCSP Act. Further, in June 2001 the California Department of Managed
Health Care, which now resolves questions of law regarding the HCSP Act, issued
an opinion that discount health benefit card plans are not health care service
plans subject to the HCSP Act.

In November 1995, the Company entered into a lease agreement for its current
facility under a one-year lease with Mr. Cameron. The lease has been extended to
January 31, 2004. Payments under this facilities lease are approximately
$141,330 per year. At June 30, 2001, $496,472 of rent owed for fiscal years 1996
through 2001 is included in the balance of accounts payable to stockholders.
Rental expense for all operating leases was approximately $196,390, $189,121,
and $224,598 for the fiscal years ended June 30, 2001, 2000 and 1999,
respectively, including approximately $139,272, $114,285 and $88,676 related to
the lease of the office facilities from Mr. Cameron for the fiscal years ended
June 30, 2001, 2000 and 1999, respectively, and $22,841 related to the lease of
the headquarters in Portsmouth, New Hampshire for fiscal year ended June 30,
2001. There was no rental expense for the New Hampshire headquarters for fiscal
years ended June 30, 2000 and 1999.

F-15
43

Alternative Technology Resources, Inc.
Notes to Financial Statements

Years Ended June 30, 2001, 2000 and 1999

Minimum annual rental payments for all non-cancelable operating leases on
equipment are as follows:

2002 $ 33,362
2003 $ 32,799
2004 $ 25,029
2005 $ 23,511
2006 $ 3,040

7. STOCKHOLDERS' EQUITY (DEFICIT)

SERIES D PREFERRED STOCK

In June 1994, existing stockholders purchased 204,167 shares of Series D
Convertible Preferred Stock for $1,225,002. ATR's Series D Preferred Stock
carried a cumulative dividend of $0.60 per share per year, until the Series D
preferred stock was exchanged for common stock on September 11, 2000. On
September 11, 2000, in connection with the exchange of 204,167 shares Series D
preferred stock, for 408,334 shares of common stock based on a per share price
of $3.00 per share, the Company declared accrued dividends of $759,110 in the
aggregate. Of the $759,110 in accrued dividends, two of the Series D preferred
stockholders agreed to accept 158,638 shares of common stock for $475,915 in
accrued dividends based on a $3.00 per share value. The benefit accruing to the
Series D Preferred stockholders recorded in the quarter ended September 30, 2000
was approximately $316,702 in compensation expense and $862,000 in preferred
stock dividends. As of June 30, 2001, cumulative unpaid, dividends are $283,195.

COMMON STOCK

The Company's Healthcare Exchange development efforts will require substantial
funds prior to generating sufficient revenues to fund operations and repay debt.
Therefore, the Company engaged a New York based financial and investment banking
firm to assist the Company in raising capital. On August 28, 2000, the Company
sold $10,000,000 of its common stock at $3.00 per share. Proceeds, net of
offering costs, were approximately $9,560,345. Proceeds are being used to
develop the Company's Healthcare Exchange. The Company's Chief Executive Officer
and related entities purchased 2,333,335 shares of the Company's common stock in
the private placement. Because the purchase price of such stock was less than
the public trading price on the date of purchase, the Company recorded
compensation expense of approximately $1,458,344 in the fiscal quarter ended
September 30, 2000.

The Company received $3,712,348 in private sales of its common stock at an
average price of $3.42 per share during fiscal year 2000.

F-16
44

Alternative Technology Resources, Inc.
Notes to Financial Statements

Years Ended June 30, 2001, 2000 and 1999

WARRANTS

Warrant activity during the periods indicated is as follows:

Number of Range of Weighted Average
Shares Exercise Prices Exercise Price
---------------------------------------------------

Balance at June 30, 1998 705,583 $0.01-$25.00 $3.47
Exercised (12,500) $0.01 $0.01
Expired/Canceled (133,283) $5.00-$15.00 $14.40
--------
Balance at June 30, 1999 559,800 $0.01-$25.00 $0.94
Exercised (20,000) $0.75 $0.75
--------
Balance at June 30, 2000 539,800 $0.01-$25.00 $0.95
Expired/Canceled (40,000) $0.01 $0.01

Balance at June 30, 2001 499,800 $0.01-$25.00 $0.95
========

At June 30, 2001, the weighted-average remaining contractual life of outstanding
warrants was 4.5 years. All warrants are immediately exercisable for common
stock at June 30, 2001.

STOCK OPTION/STOCK ISSUANCE PLANS

The 1993 Stock Option/Stock Issuance Plan (the "1993 Plan"), pursuant to which
key employees (including officers) and consultants of the Company and the
non-employee members of the Board of Directors may acquire an equity interest in
the Company, was adopted by the Board of Directors on August 31, 1993 and became
effective at that time. The 1993 Plan provided that up to 400,000 shares of
common stock could be issued over the ten-year term of the 1993 Plan. As of June
30, 2001, shares available for future issuance under this plan were 31,173.

The 1997 Stock Option Plan (the "1997 Plan"), pursuant to which key employees
(including officers) and consultants of the Company and the non-employee members
of the Board of Directors may acquire an equity interest in the Company, was
adopted by the Board of Directors on November 18, 1997 and became effective at
that time. An aggregate of 3,000,000 shares of common stock may be issued over
the five-year term of the 1997 plan. Subject to the oversight and review of the
Board of Directors, the 1997 Plan shall generally be administered by the
Company's Compensation Committee consisting of at least two non-employee
directors as appointed by the Board of Directors. The grant date, the number of
shares covered by an option and the terms and conditions for exercise of options
shall be determined by the Committee, subject to the 1997 Plan requirements. The
Board of Directors shall determine the grant date, the number of shares covered
by an option and the terms and conditions for exercise of options to be

F-17
45

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

Years Ended June 30, 2001, 2000 and 1999

granted to members of the Committee. As of June 30, 2001, shares available for
future issuance under this plan were 1,236,900.

Outstanding option activity for the 1993 and the 1997 Plans during the periods
indicated is as follows:

Weighted
Number of Range of Average
Shares Exercise Prices Exercise Price
-------------------------------------------------

Balance at June 30, 1998 569,919 $0.75-$13.10 $1.01
Granted 25,000 $0.28 $0.28
---------
Balance at June 30, 1999 594,919 $0.28-$13.10 $0.98
Granted 880,000 $0.25-$7.19 $2.72
Exercised (269,919) $0.25-$1.62 $0.65
Cancelled (25,000) $0.25 $0.25
---------
Balance at June 30, 2000 1,180,000 $0.25-$13.10 $2.36
Granted 920,600 $1.34-$4.50 $2.77
Exercised (49,933) $0.25 $0.25
Cancelled (317,500) $3.44-$7.19 $4.04
---------
Balance at June 30, 2001 1,733,167 $0.25-$13.10 $2.33
=========

The following table summarizes information about stock options outstanding under
the 1993 and the 1997 Plans at June 30, 2001:

Weighted
Average
Weighted Remaining Weighted
Range of Options Average Contractual Options Average
Exercise Prices Outstanding Exercise Price Life Exercisable Exercise Price
--------------------------------------------------------------------------------------------

$ 0.25-1.95 807,567 $0.85 7.59 555,022 $0.80
$ 2.00-3.85 583,100 $2.71 9.55 35,833 $3.67
$ 4.00-6.63 327,500 $4.89 8.83 142,500 $4.77
$ 7.19 5,000 $7.19 8.67 1,667 $7.19
$ 13.10 10,000 $13.10 2.83 10,000 $13.10
--------- -------
1,733,167 $2.33 745,022 $1.88
========= =======

As of June 30, 2000 and 1999, 485,000 and 572,919 options were exercisable,
respectively.

F-18
46

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

Years Ended June 30, 2001, 2000 and 1999

In addition to options granted pursuant to the 1993 and 1997 Stock Option/Stock
Issuance Plans, the Company has granted options outside these plans. In fiscal
year 1994, the Company granted to its former Chief Executive Officer and
director stock options for 400,000 shares of common stock exercisable at $0.10
per share. Out of these options 370,000 remain outstanding and are fully vested
as of June 30, 2001. These options expire on August 10, 2003.

In September 1996, the Board of Directors granted a non-statutory option to
purchase 20,000 shares of the Company's common stock at an exercise price of
$2.00 per share to the then Chairman of the Board. Of this option, 5,000 remain
outstanding and are fully vested as of June 30, 2001. This option expires in
September 2001.

During fiscal year 2000, in accordance with an employment agreement, the Company
granted the current Chief Executive Officer stock options for 7,000,000 shares
of common stock exercisable at $3.00 per share, the fair market value of the
Company's common stock on the date of grant. As of June 30, 2001, 1,400,000
options have vested. The options vest ratably over 5 years and expire on April
14, 2010. Also on August 1, 2000, Mr. Cameron entered into an agreement with the
Company's Chief Executive Officer to grant him the option to purchase 6,000,000
shares of the Company's common stock from Mr. Cameron at the purchase price of
$3.625 per share, the fair market value of the Company's stock on that date.
This option is vested immediately and can be exercised within 6 years from the
date of grant.

SFAS No. 123 requires presentation of pro forma information regarding net loss
and loss per share as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value of ATR
options was estimated at the date of grant using the binomial option pricing
model with the following weighted average assumptions for fiscal years 2001,
2000 and 1999: dividend yield of 0%, an expected life of five years from grant
date, a risk-free interest rate of 5.0%, and expected volatility of 1.168, 1.271
and 0.959.

The binomial model was developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully transferable. It
requires the input of highly subjective assumptions, the quality of which cannot
be judged except by hindsight. The Company's pro forma information is as
follows:

Years Ended June 30,
---------------------------------------------------
2001 2000 1999
--------------- --------------- -------------

Net loss applicable to common stockholders:
As reported $ (9,800,897) $ (4,938,141) $ (839,247)
Pro forma $ (14,153,429) $ (6,224,858) $ (938,388)

Basic and diluted net loss per share:
As reported $ (0.17) $ (0.10) $ (0.03)
Pro forma $ (0.24) $ (0.12) $ (0.04)

F-19
47

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

Years Ended June 30, 2001, 2000 and 1999

Future pro forma results may be materially different from amounts reported as
future years will include the effects of additional stock option grants.

The weighted average fair value of options granted during the fiscal years ended
June 30, 2001, 2000 and 1999 was $2.30, $2.58 and $0.21, respectively.

Compensation cost for non-cash stock based compensation awards was $1,931,036
for fiscal 2001 and $77,343 for fiscal 1999. No such expense was incurred in
fiscal 2000. Costs incurred in fiscal 2001 primarily represent $1,458,334
recorded in connection with the purchase of 2,333,335 shares of the Company's
common stock in August 2000 because the purchase price of such stock was less
than the public trading price on the date of purchase. In addition, in
connection with the agreements with the Series D preferred stockholders to
exchange all their outstanding Series D shares into shares of common stock, the
Company record $316,702 for the benefit accruing to the Series D preferred
stockholders. The remaining cost incurred in fiscal 2001 related to the issuance
of stock pursuant to consulting agreements.

STOCK RESERVED FOR ISSUANCE

As of June 30, 2001, the Company has reserved a total of 11,672,616 shares of
common stock pursuant to outstanding warrants, options, convertible notes
payable to stockholders, and future issuance of options to employees and
non-employee directors.

Common Shares Reserved for Issuance
---------------------------------------------------

Options 10,376,240
Warrants 499,800
Notes (including accrued interest) 796,576
----------
Total 11,672,616
==========

8. SUBSEQUENT EVENTS (UNAUDITED)

On September 1, 2001 the Company extended the notes to stockholders from the due
date of December 31, 2001 to December 31, 2002 (Note 3). Mr. Cameron's extended
notes total $1,630,529, including accrued interest and extension fees of 2%, and
bear interest at 10.25% per annum. The convertible promissory notes total
$2,423,826, including accrued interest at 10.25% per annum.

9. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table presents the Company's unaudited quarterly statement of
operations data for the four quarters of fiscal 2001 and fiscal 2000. The
Company believes that this information has been prepared on the same basis as
its audited consolidated financial statements and that all necessary
adjustments,

F-20
48

Alternative Technology Resources, Inc.
Notes to Financial Statements (continued)

Years Ended June 30, 2001, 2000 and 1999

consisting only of normal recurring adjustments, have been included
to present fairly the selected quarterly information. The Company's quarterly
results of operations for these periods are not necessarily indicative of future
results of operations.

2001
-----------------------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30

Healthcare Exchange revenue $ - $ - $ - $ 50,944
Healthcare Exchange gross profit (loss) - - - (33,584)
Contract Programming revenue 178,019 47,812 46,385 36,253
Contract Programming gross profit 42,217 1,160 9,466 9,954
Product development costs (1,057,426) (1,238,497) (1,227,696) (1,573,894)
General and administrative expenses (2,141,486) (490,072) (640,279) (579,134)
Loss from operations (3,156,695) (1,727,409) (1,858,509) (2,176,658)
Total other income (expense) (50,935) 79,980 11,268 (35,797)
Net loss (3,207,631) (1,647,429) (1,847,241) (2,212,454)
Preferred stock dividends in arrears (886,142) - - -
Net loss applicable to common stockholders (4,093,773) (1,647,429) (1,847,241) (2,212,454)
Basic and diluted net loss per share $ (0.07) $ (0.03) $ (0.03) $ (0.04)
Shares used in per share calculation 56,695,586 59,329,251 59,358,090 59,383,954

2000
-----------------------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30

Healthcare Exchange revenue $ - $ - $ - $ -
Healthcare Exchange gross profit (loss) - - - -
Contract Programming revenue 949,901 700,829 543,133 367,238
Contract Programming gross profit 94,714 92,579 129,583 105,186
Product development costs (1,588) (234,232) (307,854) (610,570)
General and administrative expenses (275,356) (279,124) (322,242) (400,004)
Loss from operations (182,230) (420,777) (500,513) (905,388)
Total other income (expense) (2,512,402) (87,348) (149,869) (57,114)
Net loss (2,694,632) (508,125) (650,382) (962,502)
Preferred stock dividends in arrears (30,625) (30,625) (30,625) (30,625)
Net loss applicable to common stockholders (2,725,257) (538,750) (681,007) (993,127)
Basic and diluted net loss per share $ (0.07) $ (0.01) $ (0.01) $ (0.01)
Shares used in per share calculation 36,818,746 54,299,591 55,056,986 55,247,854

F-21
49
EXHIBIT INDEX

Exhibit
Number Description of Document
------- -----------------------

3.1 Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit
3.3 to Amendment No. 1 to Registration Statement on Form S-18, Reg. No. 33-48666).

3.3 Amended and Restated Certificate of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.3 of Form 10-KSB for the fiscal year ended June 30, 1997).

10.1 Form of Director and Executive Officer Indemnification Agreement (incorporated by reference
to Exhibit 10.19 to Registration Statement on Form S-18, Reg. No. 33-48666).

10.11+ 1993 Stock Option/Stock Issuance Plan (incorporated by reference to Exhibit 10.47 to Form
10-KSB for the fiscal year ended June 30, 1994).
10.12+ Stock Option Agreement, dated August 11, 1993, between the Registrant and Russell J.
Harrison (incorporated by reference to Exhibit 10.51 to Form 10-KSB for the fiscal year
ended June 30, 1994).

10.18 Note Payable between the Registrant and the Negri Foundation dated December 24, 1996
(incorporated by reference to Exhibit 10.60 to Form 10-QSB for the quarter ended December
31, 1996).

10.19 Note Payable between the Registrant and the Negri Foundation dated December 31, 1996
(incorporated by reference to Exhibit 10.61 to Form 10-QSB for the quarter ended December
31, 1996).

10.20 Note Payable between the Registrant and the Max Negri Trust dated December 31, 1996
(incorporated by reference to Exhibit 10.62 to Form 10-QSB for the quarter ended December
31, 1996).

10.21 Note Payable between the Registrant and the Cameron Foundation dated December 31, 1996
(incorporated by reference to Exhibit 10.63 to Form 10-QSB for the quarter ended December
31, 1996).

10.29 Note Payable between the Registrant and James W. Cameron, Jr., dated April 21, 1997
(incorporated by reference to Exhibit 10.29 to Form 10-KSB for the year ended June 30,
1997).

10.33+ Alternative Technology Resources, Inc. 1997 Stock Option Plan (incorporated by
reference to Exhibit 10.33 to Form 10-KSB for the year ended June 30, 1998).

10.37 Healtheon Customer Agreement effective September 16, 1999 (incorporated by reference to
Exhibit 10.37 to Form 10-K for the year ended June 30, 2001).

10.38 Employment Agreement with Jeffrey McCormick

23.1 Consent of Ernst & Young LLP, Independent Auditors

+ Indicates a management contract or compensatory plan or arrangement as
required by Item 13(a).