EPICEDGE INC - 10-K Annual Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended DECEMBER 31, 2002

[OR]

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

COMMISSION FILE NUMBER: 001 - 15493

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 (229.405 of this chapter) 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. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities and Exchange Act of 1934). Yes[ ] No|X|

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The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the last sale price of $0.15 as quoted by The American
Stock Exchange on June 28, 2002 was $1,282,542. As of March 3, 2003, the
registrant had 18,200,333 shares of common stock outstanding.

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DOCUMENTS INCORPORATED BY REFERENCE

DOCUMENTS FORM 10-K REFERENCE
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None.

GENERAL INFORMATION

We were incorporated in Texas in June 1979. We maintain our executive
offices at 5508 Two Ninety West, Suite 300, Austin, Texas 78735 and our main
telephone number at that location is 512-261-3346. We also maintain a Web site
on the Internet at www.epicedge.com.

WHERE YOU CAN FIND MORE INFORMATION

You are advised to read this Form 10-K in conjunction with other reports
and documents that we file from time to time with the Securities and Exchange
Commission (the "SEC"). In particular, please read our Quarterly Reports on Form
10-Q and any Current Reports on Form 8-K that we may file from time to time. You
may obtain copies of these reports from the SEC at the SEC's Public Reference
Room at 450 Fifth Street, N.W. Washington, D.C. 20549, and you may obtain
information about obtaining access to the Reading Room by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains information for electronic filers
(including us) at its web site www.sec.gov.

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TABLE OF CONTENTS

PART I

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This Annual Report on Form 10-K contains forward-looking statements reflecting
management's current forecast of certain aspects of our future. It is based on
current information that we have assessed but which by its nature is dynamic and
subject to rapid and even abrupt changes. Forward looking statements include
statements regarding future operating results, liquidity, capital expenditures,
numbers of personnel, strategic relationships with third parties, and strategy.
The forward-looking statements are generally accompanied by words such as
"plan," "estimate," "expect," "intend," "believe," "should," "would," "could,"
"anticipate" or other words that convey uncertainty of future events or
outcomes. Example of sections containing forward-looking statements include the
"Business Strategy," "Clients, Products and Services" and other sections of Part
I, Item 1, entitled "Business" and Item 7, entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Our actual results
could differ materially from those stated or implied by our forward-looking
statements due to risks and uncertainties associated with our business. These
risks are described throughout this Annual Report on Form 10-K, which you should
read carefully. We would particularly refer you to the section under the heading
"Risk Factors" for an extended discussion of the risks confronting our business.
The forward-looking statements in this Annual Report on Form 10-K should be
considered in the context of these risk factors.

PART I

ITEM 1. BUSINESS

GENERAL

EpicEdge, Inc. is an information technology consulting firm, primarily
focused on serving state and local government agencies and technology and
commercial customers. We help our clients meet their business goals through
implementation and support of client/server and Internet-enabled enterprise
software packages, custom Web application development, and strategic consulting.
We deliver successful IT project-based services by combining the elements of
market-leading, third-party products such as PeopleSoft, highly skilled
technical personnel and proven project methodologies. Our focused and
comprehensive approach to technology is driven by our clients' business needs,
and is designed to help our clients maximize return on their software investment
and lower their total cost of ownership. The majority of our revenues are
associated with providing project management, consulting services, and software
implementation to state and local governments. We believe our strengths are
technical expertise, marketplace relationships, vendor alliances, customer
service orientation, strong consulting methodology, and ability to hire and
retain skilled professionals.

HISTORY

We are a publicly held Texas corporation currently traded on the Pink
Sheets under the symbol "EPED." We were originally incorporated under the name
Loch Exploration, Inc. in June 1979. In April 1989, Loch Exploration filed for
Chapter 11 bankruptcy and was reorganized effective November 17, 1989. In
December 1998, Loch Exploration transferred all of its assets and liabilities to
Loch Energy, Inc. in exchange for shares of Loch Energy common stock, whereby
Loch Energy became a subsidiary of Loch Exploration. During the quarter ended
September 30, 2000, we irrevocably transferred all of the shares of Loch Energy
to a designated trustee. In January 1999, Loch Exploration acquired all of the
issued and outstanding capital stock of Design Automation Systems, Inc., a
private company, in exchange for shares of our common stock. In April 1999,
Design Automation was merged into Loch Exploration, and Loch Exploration changed
its name to Design Automation Systems Incorporated. In March 2000, we changed
our name to EpicEdge, Inc.

BUSINESS STRATEGY

Over the past few years, we have transformed ourselves from a pure
systems integrator into a leading, project-based professional services firm
specializing in enterprise software and Internet technologies. This was
accomplished via a strategy of aggressively acquiring consulting firms. This
acquisition process was completed in fiscal year 2000. Although significant
difficulties were experienced in integrating these acquisitions as more fully
discussed elsewhere in this Form 10-K, we believe that the net effect of these
acquisitions has culminated in an improved organization with an experienced and
dedicated management team, a reputation for client satisfaction and a superior
professional consulting staff. We have also scaled back our infrastructure,
sales and marketing, and operations in an attempt to align us for profitability
in the coming years. Management intends to execute on the following strategies
for 2003: leverage existing customers and vendor alliances, gain market share
and acquire new revenues through selective geographic growth, and expand into
the federal government agencies.

MARKETING AND SALES

Generally, our marketing efforts are designed to generate qualified
leads for our services and to continually improve our reputation in the
marketplace by performing quality work. A key component of our strategy is to
successfully execute on the current contracts of our existing business lines.
Our goal is to grow internally, through replacing or renewing completed
engagements and expanding the scope of current contracts. We intend to continue
to leverage our significant government and custom Web application development
clients. In addition, we intend to leverage our core competencies to find and
win new long term engagements in the verticals where we have a strong market
presence, specifically, state and local governments and technology companies.
However, we may not be able to generate new clients, leverage our existing
clients or increase revenues.

Our external communications efforts involve sharing client success
stories, new alliance partnerships and accolades in addition to significant and
material corporate news. We expect to continue to build momentum in our national
sales efforts to generate new business in 2003. Our business development
professionals secure new business through a combination of qualified lead
generation and targeted direct marketing efforts.

We have a seasoned proposal development team. State and local government
agencies award contracts to information technology vendors through a lengthy and
complicated bidding and proposal process. We are also experienced in assembling
the large amounts of information required

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to submit detailed proposals in response to Requests for Proposals (RFPs) in a
timely manner. In addition, the expertise and experience of our managers and
employees helps us to more accurately estimate project costs and productivity
levels.

We win many of our consulting services and systems solutions contracts
for state and local agencies by responding to RFPs. We have developed and
implemented an RFP tracking system that provides us with real-time information
about the status of existing RFPs and our actions to date with respect to those
RFPs. Our public affairs consultants provide introductions to government
personnel and provide information to us regarding the status of legislative
initiatives and executive decision-making. Following the issuance of an RFP, we
participate in formal discussions, if any, between the contracting government
agency and the group of potential service providers seeking to modify the RFP
and prepare the proposal. Upon the award of a government operations contract,
our representatives may help us negotiate the contract with representatives of
the government authority until an agreement is reached. We generate leads for
contracts by tracking bid notices, employing marketing consultants, maintaining
relationships with government personnel and communicating directly with current
and prospective clients. We participate in professional associations of
government administrators and industry seminars, which from time to time feature
presentations by our executives and employees. Senior executives develop leads
through on-site presentations to decision makers. A major portion of our new
consulting business results from prior client engagements.

We were recently named a Certified Consulting Services Alliance Partner
with PeopleSoft. We believe this provides greater credibility with our existing
client base and prospects. This status may also strengthen our current market
positions and give us a greater competitive advantage in contested procurements
against our competitors who are not partners with PeopleSoft. However, even with
this status, we may not be able to gain any additional clients or maintain our
present clients.

EXPENSE REDUCTION AND ACHIEVING OPERATIONAL EFFICIENCIES.

We intend to continue our cost reduction strategy, which includes
reductions in administrative staff and under-utilized technical staff. We also
intend to increase the gross margins of our business lines through cost
reductions and efficient hiring. All cost reductions are intended to bring
expenses in line with the revenues expected with the execution of current
contracts.

ACQUISITIONS, DISPOSITIONS AND GOODWILL IMPAIRMENT LOSSES

In March 1999, we acquired all of the issued and outstanding stock of
COAD Solutions, Inc. ("COAD"), an information technology consulting firm, in
exchange for (1) 600,000 shares of our common stock valued at $2,625,000 and (2)
$200,000 cash, payable $100,000 at closing, and $100,000 payable in quarterly
installments of $25,000 beginning 90 days from the closing date. Goodwill of
$3,000,000 was recorded related to this transaction and was fully amortized as
of December 31, 2001.

In May 1999, we acquired all of the issued and outstanding stock of
Dynamic Professional Services, LLC ("Dynamic"), an information technology
consulting firm, in exchange for (1) 524,000 shares of our common stock valued
at $2,695,600; (2) $200,000 cash, payable $100,000 at closing and $100,000
payable in quarterly installments of $25,000 beginning 90 days from the closing
date; and (3) additional stock consideration if, on June 1, 2000, the closing
price for our common stock for the prior 15 business days was less than $5.15
per share in an amount equal to 5,340 shares for each $0.01 below $5.15. No
additional consideration was paid during 2000. Goodwill of $2,732,000 was
recorded related to this acquisition. Accumulated amortization of $2,472,000 had
been recorded related to this goodwill through December 31, 2001.

In July 1999, we acquired all of the issued and outstanding stock of
Connected Software Solutions, Inc. ("Connected"), an electronic-business
consulting and training firm, in exchange for (1) 300,000 shares of our common
stock valued at $1,545,000; (2) $300,000 cash payable in six quarterly
installments of $50,000 beginning 90 days from the closing date; and (3)
additional stock consideration if, on August 1, 2000, the closing price for our
common stock for the prior 15 business days is less than $5.15 per share in an
amount equal to 3,000 shares for each $0.01 below $5.15. No additional
consideration was paid in 2000. Goodwill of $1,800,000 was recorded related to
this acquisition and was fully amortized as of December 31, 2001.

In November 1999, we acquired substantially all of the assets of NET
Information Systems, Inc. ("NET"), an e-Business solutions provider, in exchange
for (1) 350,000 shares of our common stock valued at $1,093,750; (2) $180,000
cash; (3) a one-year promissory note in the amount of $50,000 payable quarterly,
with the first payment due 90 days after closing; and (4) the assumption of
NET's Wells Fargo debt not to exceed $220,000. Goodwill of $1,500,000 was
recorded related to this acquisition. Accumulated amortization of $1,300,000 had
been recorded related to this goodwill through December 31, 2001.

In March 2000, we acquired all the outstanding common shares of The
Growth Strategy Group, Inc. ("Growth Strategy"), an e-marketing and
strategy-consulting firm, for 277,000 unregistered shares of our common stock
valued at $6,076,800 and $375,000 in cash. Goodwill of $6,100,000 was recorded
related to this acquisition. Accumulated amortization of $643,000 had been
recorded related to this goodwill through December 31, 2000. As a result of a
review by management of the carrying value and recoverability of this goodwill,
management wrote off the unamortized balance of Growth Strategy's goodwill of
$5,457,000 as of December 31, 2000.

In June 2000, we acquired all of the issued and outstanding stock of IPS
Associates, Inc. ("IPS"), a project management firm, for $3,000,000 in cash,
1,472,586 unregistered shares of our common stock, options to purchase 1,082,060
shares of our common stock and the assumption of net liabilities of $2,940,000.
The aggregate value of the shares and stock options issued in connection with
the transaction was $36,405,000. We also assumed an employee stock ownership
plan ("ESOP") from IPS and 607,023 of the 1,472,586 shares of common stock
related to the transaction were issued to the ESOP. We recorded unearned
compensation of $9,445,000 related to 493,220 shares of common stock issued to
the ESOP but not yet committed to be released by the ESOP's trustee. This amount
was to be amortized over a period of approximately three to five years as the
shares were committed to be released. In connection with the assumption of the
ESOP, we assumed a note payable to a financial institution for ESOP financing of
approximately $5,000,000. The note is secured by the accounts receivable,
investments, and property and equipment of IPS. Goodwill

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of $34,240,000 was recorded related to this acquisition. Accumulated
amortization of $2,558,000 had been recorded related to this goodwill through
December 31, 2000. In connection with the purchase transaction, we paid a
commission to an organization that facilitated the execution of the transaction
of $300,000 in cash and issued 25,065 unregistered shares of our common stock
valued at $576,000 and recorded as part of the cost of the IPS acquisition. As
discussed below, IPS was sold effective January 1, 2001, at a substantial loss.

In July 2000, we acquired substantially all of the assets of Tumble
Interactive Media, Inc. ("Tumble"), a creative and design firm, for 250,000
unregistered shares of our common stock valued at $4,937,500, and $325,000 in
cash. Goodwill of $5,300,000 was recorded related to this acquisition.
Accumulated amortization of $307,000 had been recorded related to this goodwill
through December 31, 2000. As a result of a review by management of the carrying
value and recoverability of this goodwill, management wrote off the unamortized
balance of Tumble's goodwill of $5,125,901 as of December 31, 2000.

All of these acquisitions were accounted for under purchase accounting,
with the resulting goodwill being originally amortized over eight years until
the goodwill impairment loss was recognized as of December 31, 2000. Beginning
January 1, 2001, the original amortization period was decreased to 32 months.
The operations of each acquired entity are included in our operations from their
respective acquisition date. Beginning January 1, 2002, the effective date of
SFAS 142, goodwill will no longer be amortized, but will be tested for
impairment annually and also in the event of an impairment indicator (Note 1).

In view of the sale of IPS, at a substantial loss, effective January 1,
2001, management concluded that goodwill related to IPS as of December 31, 2000,
was impaired and wrote it down to the amount recoverable in the sale, which was
$7,643,000; accordingly, $24,040,000 was written off. Management also concluded
that the entire amount of goodwill related to the Tumble and Growth Strategy
acquisitions and a portion of the goodwill related to the COAD and Connected
acquisitions, as of December 31, 2000, was impaired based on evaluations of the
related estimated future undiscounted cash flows and the lack of continuity of
the related key employees; accordingly, $12,400,000 was also written off, with a
remaining goodwill of $5,434,000 related to COAD, Dynamic, Connected and NET.
The total of these goodwill impairment write-offs of $36,440,000 was reported as
an operating expense in 2000. Goodwill of $460,000 at December 31, 2001, had
been related to Dynamic ($260,000) and NET ($200,000).

Effective January 1, 2001 with a closing date of February 5, 2001, we
sold all of the issued and outstanding stock of IPS to Red & Blue, Inc., a
Delaware corporation and to the IPS Associates, Inc. Stock Ownership Plan. The
consideration for the sale was: (1) the return of an aggregate 740,260 shares of
our common stock, (2) $5,700,000 in cash, and (3) the transfer of the IPS
employee stock ownership plan (ESOP) along with the note payable to a financial
institution for the ESOP financing. The Stock Purchase Agreement provided that
143,323 shares of the 740,260 shares of our common stock be held in escrow until
the earlier of: (1) the completion of audited financial statements of IPS for
the year ended December 31, 2000, or (2) six months from the date of closing. In
the event that the net equity, revenues or net earnings of IPS differs by more
than $500,000 from the financial statements disclosed in the Agreement, Red &
Blue had the right to set-off the difference against the shares held in escrow
at a value based upon the closing price of our common stock on the day before
the set-off. Based on the audited financial results of IPS, no such set-off
occurred and no claim for a set-off has been made by the acquirer. The sale of
IPS resulted in write-offs of goodwill and deferred compensation with a non-cash
charge to income of approximately $24 million in the fourth quarter ended
December 31, 2000. IPS was included in the results of our operations since its
acquisition in June 2000.

CLIENTS, PRODUCTS AND SERVICES

Our client base includes state and local government agencies, small- and
mid-size companies and Fortune 1,000 companies. They are geographically located
in the Continental United States, primarily in Texas, Washington and California.
While our clients span various industries, most of our clients are in state and
local government and technology companies. The State of Texas is a significant
client. We have executed contracts with several agencies of that state for which
we are performing services. During 2002, approximately 54% of our revenue was
derived from these agencies, one of which represented 29%. These contracts, for
the most part, are multi-year and run through 2005. However, many of the
contracts are terminable by our clients following limited notice and without
significant penalties. Northrop Grumman has also been a significant client. We
had a subcontract with that organization which represented approximately 20% of
our 2002 revenue. This contract was terminated on March 15, 2003. Due to
anticipated government budget shortfalls, many government clients may terminate
or sharply reduce the scope of work performed under our contracts with them.

We provide services in two core areas of competency: Enterprise Software
Consulting and Implementation, and E-Business Strategy and Solutions. Our
business strategy is to combine the elements of market-leading products and
highly skilled technical personnel to deliver comprehensive information
technology solutions within these core competencies to both new and existing
clients. We believe this single-source solution reduces risk, increases realized
productivity, reduces consulting engagement duration, and promotes alignment
with the client's overall business goals.

Enterprise Software Consulting and Implementation.

We are a total solution provider managing all aspects of our clients'
enterprise applications, specifically implementation, ongoing support, and
outsourcing. We are an Certified Consulting Services Alliance Partner with
PeopleSoft, Inc. We also provide business process consulting, helping the client
automate and streamline business operations by focusing on Human Resources and
Financial systems. We offer expertise in the following: professional services
for implementation; business process consulting; integration with the Internet;
data conversion and analysis; fit/gap analysis; production support and
outsourcing for entire financial and human resource systems. We specialize in
large-scale government projects utilizing our implementation methodology. This
helps our clients streamline business processes and gain efficiencies throughout
the organization thus maximizing their return on investment with the software.
Over the last three years, this service provided 75%, 77% and 19.5% of total
revenue for 2002, 2001, and 2000, respectively.

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E-Business Strategy and Solutions.

We provide consulting services that help companies visualize the
Internet as an integrated part of their operations and provide the planning
framework for the critical building and managing phases of the engagement. We
also design and build systems that become the infrastructure for Internet-based
management of information and transactions. We believe this is the most crucial
part of client engagements. With technology changing rapidly, we believe it is
imperative that we retain personnel who have thorough and deep knowledge of
existing and emerging technologies and have the ability to train our clients in
these technologies. We implement total project solutions for custom web
applications that are mission critical to our clients. We employ a
multidisciplinary approach utilizing cutting edge technologies, including IBM,
SUN, and Microsoft. We offer expertise in the following: assessing viability and
fit of latest proven technologies; architecture and network-systems design;
application development; integration with legacy systems; integration with
intranet, extranet, and Internet applications; and training in these
technologies. Over the last three years, this service provided 25%, 22% and 7.9%
of total revenue for 2002, 2001 and 2000, respectively. Many of our contracts
are terminable by the client following limited notice and without significant
penalties. The cancellation of contracts by clients, especially large contracts,
after we have staffed and committed resources to fulfilling the services
required by such contracts, can have a negative impact on our business and can
cause us to incur high fixed costs. In addition, approximately 54% of our
contracts are with government agencies. Substantially all of our contracts with
government agencies could be renegotiated or terminated at the election of the
applicable government agency.

COMPETITION

The markets for the services we provide are highly competitive. We
believe that we currently compete principally with large accounting and
consulting firms and systems consulting and implementation firms. We compete to
a lesser extent with specialized e-business consulting firms, strategy
consulting firms, other package technology vendors, and our clients' own
internal information systems groups. Some of our competitors are Accenture Ltd.,
Maximus, Inc., Lante Corporation, IBM Global Services, Braxton Consulting
(formerly Deloitte), Intelligroup, Inc. and KPMG Consulting, Inc. Many of the
companies that provide such services have significantly greater financial,
technical and marketing resources than we do and generate greater revenues and
have greater name recognition. These firms may attempt to gain a competitive
advantage by offering large pricing concessions. In addition, there are
relatively low barriers to entry into our markets and we have faced, and expect
to continue to face, additional competition from new entrants into our markets.
Increased competition may result in price reductions, fewer client projects,
underutilization of our technical staff, reduced operating margins and loss of
market share, any of which could have a material adverse effect on our business,
operating results and financial condition. We believe that the major competitive
factors in our market relate to a company's distinctive technical capabilities,
successful past contract performance, reputation for quality and pricing.

PERSONNEL

Our people are very important to the success of our business. Our
collaborative culture is the hallmark of our delivery approach. The key values
that we strive to attain are teamwork, character and excellence. To encourage
the achievement of these values, we reward teamwork and promote individuals who
demonstrate these values. As of March 3, 2003, we employed 117 persons, of whom
37 were engaged in providing our e-solution services, 69 were Enterprise
Resource Planning consultants, and 11 were engaged in finance, administration,
marketing and management functions. None of our employees is covered by a
collective bargaining agreement. There is increasing competition for experienced
technical professionals. We consider relations with our employees to be good.

INTELLECTUAL PROPERTY RIGHTS

We rely upon a combination of trade secret, nondisclosure and other
contractual arrangements, and copyrights to protect our proprietary rights. We
currently do not have any registered trademarks. We enter into confidentiality
agreements with certain of our key employees; generally require that our
consultants and clients enter into such agreements; and limit access to and
distribution of our proprietary information. The steps taken by us in this
regard may not be adequate to deter misappropriation of our proprietary
information and we may not be able to detect unauthorized use or take
appropriate steps to enforce our intellectual property rights.

A portion of our business involves the development of software
applications for specific client engagements. Ownership of client-specific
software is generally retained by the client, but we usually retain some rights
to applications, processes and intellectual property developed in connection
with client engagements.

ITEM 2. PROPERTIES

We do not own any real property. As of December 31, 2002, we lease the
following properties:

Our headquarters and principal administrative, accounting, selling and
marketing operations are located in Austin, Texas. We are obligated for the St.
Louis space until June 2005, but the facility is currently not being utilized as
the office was closed during the fourth quarter of 2001. Other than the St.
Louis facility, we believe that these leases will be renewed as they expire or
that alternative properties can be leased on acceptable terms.

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ITEM 3. LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We are not currently a party to
any material litigation, except for the legal matters currently pending as
described below.

SEC Investigation. We have been notified by the SEC Staff that the SEC
is conducting an investigation into (1) the trading activity of certain
individuals and entities in our securities and the securities of other
companies during the period between 1999 and 2000, and (2) certain of
our actions during that same period. We intend to fully cooperate with
the SEC to the extent it requests information. As a result of the
investigation, we could become subject to an order enjoining us from
unlawful conduct and incur civil monetary penalties. Such penalties
could have a material adverse effect on our operations or financial
condition.

Cause No: GN 103836: David Launey v. EpicEdge, Inc., Jeff Sexton,
Margaret C. Fitzgerald and Brewer and Pritchard, P.C.: In the 201st
Judicial District Court of Travis County, Texas. November 20, 2001.
This suit involves a former employee who alleges the Company wrongfully
prohibited him from selling company stock. Damages alleged are
$2,715,630. The former employee claims that through the acts and/or
omissions of the Company and other named parties of the suit, the
Company and other named parties failed to give correct and truthful
information that he needed before he could sell his stock. In March
2003, we settled this case through mediation and the Company is
awaiting final documentation.

Cause No: 2001-28197; EpicEdge, Inc. v. Reliant Energy; In the 133rd
Judicial District Court of Harris County, Texas. May 31, 2001. This
suit involves breach of contract. We filed suit on May 31, 2001 against
Reliant Energy seeking specified damages in the amount of $973,804 plus
costs and attorneys fees. On October 28, 2002, Reliant Resources, Inc.
sent a demand letter in connection with this case stating that the
Company breached a written contract with Reliant Resources, Inc. for
the delivery of a system and demanding payment of $657,000 plus
expenses. In March 2003, we settled with Reliant in exchange for mutual
release of all claims.

While the outcome of these and other legal matters cannot be predicted
with certainty, we believe that they will not have a material adverse effect on
our financial statements. However, an unfavorable outcome of any of these
matters could have a material adverse effect. In addition, any failure in a
client's system could result in a claim against us for substantial damages,
regardless of our responsibility for such failure. We cannot guarantee that the
limitations of liability set forth in our service contracts will be enforceable
or will otherwise protect us from liability for damages. The successful
assertion of one or more claims against us that exceed available insurance
coverage or changes in insurance policies, including premium increases or the
imposition of large deductible or co-insurance requirements, would adversely
affect our business.

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

No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year covered by this Report.

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PART II

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

(a) Market Price of Common Stock - Prior to December 1, 1999, our common
stock was quoted on the OTC Bulletin Board. On December 1, 1999, we
began trading on The American Stock Exchange. On March 12, 2003, we were
delisted from The American Stock Exchange at the closing price of $0.04.
Our Common Stock is currently being traded on the Pink Sheets under the
symbol "EPED." See Risk Factor entitled "Our common stock was recently
delisted from the American Stock Exchange...." The following table sets
forth for the periods indicated the high and low closing sale prices for
our common stock.

(1) On April 12, 2001, our stock was halted from trading
by the AMEX due to the delayed filing of our Form 10-KSB
for 2000 and the first and second quarter filings on Form
10-Q for 2001. These forms were subsequently filed and
the AMEX reinstated our trading status on August 31, 2001.

(b) Holders - As of March 3, 2003, there were approximately 3,194
holders of record of the common stock.

(c) Dividends - We did not declare or pay any cash dividends on our
common stock in 2001 or 2002 and do not intend to pay any cash dividends
in the foreseeable future. We plan to retain any future earnings to
finance the development and growth of our business. Pursuant to our
Loan and Security Agreement with Silicon Valley Bank, we are restricted
from paying any dividends on shares of our common or preferred stock,
other than dividends payable in our securities. Furthermore, our
Articles of Incorporation require that we provide 20 days notice to the
holders of our outstanding preferred stock before taking record of our
shareholders for purposes of effecting a dividend of any type.

(d) Securities Authorized for Issuance Under Equity Compensation Plans

For a description of our stock option plans, please see Footnote 14 to
the audited financial statements included herein.

(e) Recent Sales of Unregistered Securities

On November 11, 2002, in accordance with the April 2002 Note
Agreement, we converted $6,000,000 of convertible debt and the related
accrued and unpaid interest of $1,272,000 into 9,695,000 shares of
Series A Preferred Stock and $2,150,000 of convertible debt and the
related accrued and unpaid interest of $230,089 into 3,173,000 shares of
Series B Preferred Stock. We issued the preferred stock in reliance upon
the exemption from registration provided by Rule 506 of Regulation D of
the Securities Act of 1933 or Section 3(a)(9) of the Securities Act
of 1933.

9

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
our financial statements and related notes and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein. The selected financial data represented below under the captions
"Statement of Operations Data" and "Balance Sheet Data" for, and as of the end
of, each of the years in the five-year period ended December 31, 2002, are
derived from the financial statements of EpicEdge, Inc. The financial statements
as of December 31, 2002 and 2001, and for each of the years in the three-year
period ended December 31, 2002, and the independent auditors' report thereon,
are included elsewhere herein.

- ------------------------------
(1) Pursuant to an Exchange Agreement, dated December 31, 1998, and amended on
January 27, 1999, the shareholders of Design Automation Systems, Inc. became
beneficial owners of 82.14% of the issued and outstanding common stock of Loch
Exploration, Inc. Prior to the effectiveness of and in connection with the
Exchange Agreement, Loch Exploration, Inc. assigned all of its assets and
liabilities to Loch Energy, Inc. in return for 100% of the issued and
outstanding common stock of Loch Energy, Inc., whereby Loch Energy, Inc. became
a subsidiary of Loch Exploration, Inc. During the quarter ended September 30,
2000, EpicEdge irrevocably transferred all of the shares of Loch Energy, Inc. to
a designated trustee. As a result of the Exchange Agreement, the shareholders
who had held 100% of the issued and outstanding common stock of Loch
Exploration, Inc. immediately prior to the effectiveness of the Exchange
Agreement consequently held 17.86% of the issued and outstanding common stock of
Loch Exploration, Inc. upon the effectiveness of the Exchange Agreement. Because
of these fundamental changes in the control and in the operations of Loch
Exploration, Inc., the selected financial data shown above for 1998 is presented
as if Design Automation Systems, Inc. had acquired Loch Exploration, Inc.

10

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

OVERVIEW

The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and notes thereto appearing elsewhere in this Form 10-K. This
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions and, with respect to this section, the cautionary
language applicable to such forward-looking statements described above before
Item 1 of this Form 10-K is incorporated by reference into this Item 7. Our
actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Form 10-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to bad debts,
income taxes and contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.

We believe the following are critical accounting policies and estimates
used in the preparation of our financial statements.

Revenue Recognition - In 2001 and 2002, we engaged in the
business of providing consulting services to assist state and local
government agencies, as well as commercial enterprises, meet their
business goals through implementation and support of client/server and
Internet-enabled PeopleSoft applications, custom Web application
development, and strategic consulting. We deliver successful IT
project-based services by combining the elements of market-leading
products, highly skilled technical personnel, and proven project
methodologies. Our business technology solutions are designed to help
clients maximize their return on investment and lower their total cost
of ownership of their software.

Our services currently include guiding clients through the entire
software development life cycle of their projects, including the
following: strategic planning, project management, business process
evaluation, integrated marketing and communications, system
architecture and design, product acquisition, application hosting,
configuration and implementation, ongoing operational support, and
evolutions in technology. We also focus our solutions on application
management and business process outsourcing. The majority of our
revenues was, and is expected to be, associated with providing project
management, consulting services, and software implementation to state
and local governments, including those in the States of Texas,
Washington and California.

Professional services revenues are recognized as the services
are performed, primarily on a time-and-materials basis using the number
of hours worked by consultants at agreed-upon rates per hour. Billings
that are subject to be withheld by the customer are included in
revenues when the project completion event has occurred. Fixed price
contract revenues are recognized when defined milestones are achieved.
Out-of-pocket expenses reimbursed by clients are included in
professional services revenues, and the expenses incurred by us are
included in cost of professional services revenues.

Concentration of Credit Risk -- Our financial instruments that
are exposed to concentrations of credit risk consist primarily of trade
receivables. Concentrations of credit risk with respect to receivables
are a result of a limited number of customers and their significant
percentage of accounts receivable. We perform periodic credit
evaluations of our customers' financial condition and generally do not
require collateral. Two customers account for approximately 41% and 53%
of total accounts receivable as of December 31, 2002 and 2001,
respectively. At December 31, 2002, two other customers accounted for
13% and 11% of accounts receivable. No other single group or customer
represents greater than 10% of total accounts receivable for 2002 or
2001.

Allowance for Doubtful Accounts -- We maintain allowances for
doubtful accounts for estimated losses resulting from the inability of
our customers to make required payments. If the financial condition of
our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
Management specifically analyzes accounts receivable and analyzes
historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer
payment terms when evaluating the adequacy of the allowance for
doubtful accounts. Our accounts receivable balance was $2,393,000, net
of allowance for doubtful accounts of $197,000 as of December 31, 2002,
as compared to an accounts receivable balance of $1,803,000, net of
allowance for doubtful accounts of $505,000 as of December 31, 2001.

Property and Equipment -- Property and Equipment is stated at
cost less accumulated depreciation and amortization. Depreciation and
amortization are provided using the straight-line method over the
following estimated useful lives: computer hardware and software, three
to five years; office furniture and fixtures, three to seven years; and
leasehold improvements, three years.

Goodwill -- Goodwill represents the unamortized excess of cost
over the estimated fair value of net assets acquired in business
combinations, less impairment write-offs. Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"), which revises the accounting for purchased goodwill and
intangible assets, became effective for us on January 1, 2002. Under
SFAS 142, goodwill will no longer be amortized, but will be tested for
impairment annually and also in the event of an impairment indicator.
The Company assessed the carrying value of its goodwill of $460,000 in
the fourth quarter of 2002. No further impairment was required at
December 31, 2002.

11

Valuation Allowance for Deferred Tax Assets -- Deferred income
taxes are recorded, in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes."
Under SFAS 109, deferred tax assets and liabilities are determined
based on the differences between financial reporting and the tax basis
of assets and liabilities using the tax rates and laws in effect when
the differences are expected to reverse. SFAS 109 provides for the
recognition of deferred tax assets if realization of such assets are
more likely than not to occur. Realization of our net deferred tax
assets is dependent upon our generating sufficient taxable income in
future years in appropriate tax jurisdictions to realize benefit from
the reversal of temporary differences and from net operating loss
carryforwards. Based on the weight of the available evidence, we have
provided a valuation allowance against all of our net deferred tax
asset. Management will continue to evaluate the realizability of the
deferred tax asset and its related valuation allowance.

Stock Based Compensation -- Stock Based Compensation arising
from stock option grants to employees is accounted for by the intrinsic
value method under Accounting Principles Board ("APB") Opinion No. 25.
Statement of Financial Accounting Standards ("SFAS") No. 123 encourages
(but does not require) the cost of stock-based compensation
arrangements with employees to be measured based on the fair value of
the equity instrument awarded. As permitted by SFAS No. 123, we apply
APB Opinion No. 25 to our stock-based compensation awards to employees
and disclose the required pro forma effect on net income and earnings
per share.

BUSINESS COMBINATIONS AND GOODWILL IMPAIRMENT LOSSES

Effective January 1, 2001, with a closing date of February 5, 2001, we
sold all of the issued and outstanding stock of IPS to Red & Blue, Inc., a
Delaware corporation and to the IPS Associates, Inc. Stock Ownership Plan, as
described under ACQUISITIONS, DISPOSITIONS AND GOODWILL IMPAIRMENT LOSSES. In
view of the sale of IPS at a substantial loss, effective January 1, 2001,
management concluded that goodwill related to IPS as of December 31, 2000, was
impaired and wrote it down to the amount recoverable in the sale, which was
$7,643,000; accordingly, $24,040,000 was written off. Management also concluded
that the entire amount of goodwill related to the Tumble and Growth Strategy
acquisitions and a portion of the goodwill related to the COAD and Connected
acquisitions, as of December 31, 2000, was impaired based on evaluations of the
related estimated future undiscounted cash flows and the lack of continuity of
the related key employees; accordingly, $12,400,000 was also written off, with a
remaining goodwill of $5,434,000 related to COAD, Dynamic, Connected and NET.
The total of these goodwill impairment write-offs of $36,440,000 was reported as
an operating expense in 2000. Goodwill of $460,000 at December 31, 2001, related
to Dynamic ($260,000) and NET ($200,000).

Results of operations 2001 reflect our first full year after a
successful transition into a pure professional services company. Results of
operations 2000 of Growth Strategy, IPS and Tumble have been included in our
financial statements commencing on April 1, 2000, June 1, 2000, and July 1,
2000, respectively, the effective dates of the transactions for accounting
purposes. Although IPS was included in our accompanying actual results of
operations since IPS's acquisition in June 2000, the disposition of IPS has been
deemed "significant"; accordingly, pro-forma results of operations 2000 and 1999
listed below under the heading PRO-FORMA RESULTS exclude IPS. The results of
operations of Tumble would not have a material affect on the pro forma financial
information presented and unless otherwise noted, has also been excluded from
the pro forma financial information listed below under the heading PRO-FORMA
RESULTS.

12

RESULTS OF OPERATIONS

The following table sets forth the percentage of total revenues of operations
data for the period indicated:

ACTUAL RESULTS

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Revenues

Revenues increased $3.0 million or 20.6% from $14.6 to $17.7
million for the year ended December 31, 2001 and 2002, respectively.
The increase in revenues is due primarily to the addition of projects
with state and local agencies. Two customers represented 61% and 49% of
revenues for the year ended December 31, 2001 and 2002, respectively.
Another customer represented 10% of revenues for the year ended
December 31, 2002. No other single customer represented 10% or more of
revenues for the years ended December 31, 2001 and 2002.

Gross Profit

Gross profit increased $1.3 million or 28.5% from $4.6 million
to $5.9 million for the year ended December 31, 2001 and 2002,
respectively. The gross profit as a percent of revenues improved 2.0%
from 31.4% to 33.4% of revenues for the year ended December 31, 2001
and 2002, respectively. The increase is a result of increased
utilization of billable staff partially offset by the increase in
utilization of subcontractors.

13

Operating Expenses

Compensation and Benefits -- Compensation and benefit expenses
decreased $1.5 million or 34.9% from $4.3 million to $2.8 million for
the year ended December 31, 2001 and 2002, respectively. These expenses
represent 29.4% and 15.9% of revenues in the respective periods. The
decrease in compensation and benefit expenses is a result of effects of
our stabilization and reduction strategy that began in October 2000
with a reduction in our workforce by 43 full-time positions, or 14% of
our workforce at that time, as well as another 15% reduction in our
workforce in the Creative, Research and Sales departments in the first
quarter of 2001 and the 15% reduction in our workforce in the third
quarter 2001. These reductions in workforce coupled with controlled
growth in staff to maintain high utilization rates among our consulting
staff and effective use of our non-billable resources resulted in
decreased expenses. Additionally, in August 2002, we implemented a plan
to reduce annual cost by $1 million, which included a reduction in our
workforce of 10 full-time positions, or 8% of our workforce at that
time. Due to the nature and timing of the execution of the plan, we
expect the associated cost reductions will begin to be fully realized
in the first quarter of 2003.

Selling, General and Administrative -- Selling, general and
administrative expenses (SG&A) decreased $145,000 or 4.3% from $3.3
million to $3.2 million for the year ended December 31, 2001 and 2002
respectively. These expenses represent 22.9% and 18.1% of revenues in
the respective periods. The decrease in SG&A expenses is due primarily
to a decrease in facilities as a result of closing several offices
beginning in 2001 offset by increases in legal expenses, insurance
costs and bad debt during 2002.

Depreciation and Amortization-- Depreciation and amortization
decreased $5.0 million or 83.1% from $6.0 million to $1.0 million for
the year ended December 31, 2001 and 2002 respectively. These expenses
represent 41.1% and 5.7% of revenues in the respective periods.
Depreciation and amortization increased during the year ended December
31, 2001 due to an acceleration of amortization of goodwill as a result
of a review by management of the carrying value and recoverability of
the remaining goodwill of some of the previous acquisitions.

Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"), which revises the accounting
for purchased goodwill and intangible assets, became effective on
January 1, 2002. Under SFAS 142, goodwill will no longer be amortized,
but will be tested for impairment annually and also in the event of an
impairment indicator. We assessed the carrying value of goodwill of
$460,000 in the fourth quarter of 2002. No further impairment was
required at December 31, 2002.

Other Expenses (Income)

Debt Discount Amortization --In November 2000, our former
Chairman and a principal stockholder provided a $1,000,000 line of
credit in the form of convertible notes (the "November Notes"). In
connection with the November Notes, the lender was issued five-year
warrants to purchase an aggregate of 2,000,000 shares of our common
stock at $.01 per share, which resulted in a net carrying value of zero
for the November Notes. In August 2001, as a condition precedent to the
Series A and Series B Preferred Stock financings, we renegotiated the
terms of the November Notes, which cancelled the warrants and the
unused balance of the November Notes. As of August 2001, we had drawn
$900,000 on the line of credit. Upon cancellation of the warrants, the
remaining unamortized portion of the debt discount of $225,000 was
amortized. We recorded debt discount amortization of $600,000 for the
year ending December 31, 2001.

In December 2000, we issued $1,500,000 in convertible notes to
two of our stockholders (the "December Notes'), both of which formerly
served or had a representative serve on our Board of Directors. In
connection with the December Notes, the lenders were issued five-year
warrants to purchase an aggregate of 3,000,000 shares of our common
stock at $.01 per share. We recorded debt discount of $1,500,000 in
connection with the issuance of the warrants, which resulted in a net
carrying value of zero for the December Notes. This discount was to be
amortized into interest expense over the original life of the December
Notes. This debt discount was fully amortized as of December 31, 2001
and amortization of $1,300,000 was recorded in 2001. Warrants to
purchase 2,000,000 shares of our common stock were relinquished on
April 16, 2002.

Interest Expense --Interest expense was $814,000 and $951,000
for the year ended December 31, 2001 and 2002, respectively. Although
this is an increase of $137,000 in 2002 over 2001, in 2001 there was
$2.4 million of debt that had warrants issued in conjunction with the
debt and this caused the debt to be recorded at a net carrying value of
zero (see above). As a result, the interest that would have normally
been associated with these debt instruments was reflected in the debt
discount amortization.

In addition, as a result of the debt conversion (see
"Liquidity and Capital Resources"), the majority of debt that generates
this interest expense was converted into equity. After the debt
conversion, which occurred on November 11, 2002, interest expense is
expected to be approximately $75,000 per quarter.

14

ACTUAL RESULTS

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

Revenues

Total revenue decreased $18.1 million or 55.2% from $32.7 to $14.6
million for the year ended December 31, 2000 and 2001, respectively. During
2001, we completed the transition of our operations to a professional services
company and all of our current and future revenues are to be derived from
delivery professional services to our clients.

Professional Services Revenues -- Professional services
revenues decreased $7.3 million or 33.2% from $21.9 million to $14.6
million for the year ended December 31, 2000 and 2001, respectively.
Approximately $9.8 million of the 2000 professional services revenue is
due to IPS, which was sold in 2001 (see "Pro-Forma Results" below).
Professional services revenue represented 67.0% and 100% of total
revenue for the year ended December 31, 2000 and 2001, respectively.

Technology Integration Revenues -- Technology integration
revenue decreased $10.8 million or 100% from $10.8 million to $0.0
million for the year ended December 31, 2000 and 2001, respectively.
Technology integration revenues represented 33% and 0% of total
revenues for the year ended December 31, 2000 and 2001, respectively.
This elimination of technology integration revenues is reflective of
our strategy to phase out of our hardware sales or value-added reseller
("VAR") operations. We do not expect to generate substantial future
revenues from our historical VAR business.

Cost Of Revenues And Gross Profit

Total cost of revenues decreased $13.5 million or 57.3% from
$23.6 million to $10.1 million for the year ended December 31, 2000 and
2001, respectively. This was mainly due to our transition out of the
historical VAR business. Cost of professional services revenues consist
primarily of salaries and employee cost for personnel dedicated to
client projects, sub-contractor costs related to client projects, and
direct expenses incurred to complete projects that were not reimbursed
by clients. Cost of professional services revenues decreased $2.6
million or 20.5% from $12.7 million to $10.1 million for the year ended
December 31, 2000 and 2001, respectively.

Total gross profit decreased $4.6 million or 50.1% from $9.2
million to $4.6 million for the year ended December 31, 2000 and 2001,
respectively. The total gross profit percentage was 28.2% and 31.4% for
the year ended December 31, 2000 and 2001, respectively. Our goal is to
maintain this level of gross margin into the future as we continue to
transition into higher margin longer contracted professional services
revenues.

Operating Expenses

Compensation and Benefits -- Compensation and benefit expenses
decreased $7.6 million or 64% from $11.9 million to $4.3 million for
the year ended December 31, 2000 and 2001, respectively. These expenses
represent 36.6% and 29.4% of total revenues in the respective periods.
The decrease in compensation and benefit expenses is due to planned
staff reductions consistent with our reorganization plan. The majority
of these staff reductions were in redundant administrative support and
salesmen. As well, these reductions were in part due to the divestiture
of IPS in 2001.

Selling, General and Administrative -- Selling, general and
administrative expenses (SG&A) decreased $8.4 million or 71.3% from
$11.7 million to $3.3 million for the year ended December 31, 2000 and
2001 respectively. These expenses represent 35.8% and 22.9% of total
revenues in the respective periods. The decrease in SG&A expenses
reflect the Company's focus on cost cutting measures, reduction in the
sales force, and non-billable staff. This is consistent with our
restructuring goals, and is due in part to the IPS divestiture, which
was sold in 2001.

Depreciation and Amortization-- Depreciation and amortization
increased $0.4 million or 7.1% from $5.6 million to $6.0 million for
the year ended December 31, 2000 and 2001 respectively. These expenses
represent 17.1% and 41.1% of total revenues in the respective periods.
Depreciation and amortization increased during the year ended December
30, 2001 due to an acceleration of amortization of goodwill as a result
of a review by management of the carrying value and recoverability of
the remaining goodwill of some of the previous acquisitions.

Stock Based Compensation and Costs -- Stock based compensation
and costs decreased $8.9 million or 100% from $8.9 million to $0.0
million for the year ended December 31, 2000 and 2001, respectively. In
2000, $8.9 million of various stock based compensation awards were
issued.

Goodwill and other impairment losses -- Goodwill and other
impairment losses decreased $37.5 million or 100% from $37.5 million to
$0.0 million for the year ended December 31, 2000 and 2001,
respectively. In 2000, $37.5 million of goodwill and other impairment
losses were incurred.

Other Expenses (Income)

Debt Discount Amortization --In November 2000, we issued the
November Notes. As of December 31, 2000, we had drawn $900,000 on the
November Notes. The November Notes bear annual interest at the rate of
8%, and originally were convertible at the lenders' option at $.50 per
share and matured on December 31, 2001. The lender had the option to
demand repayment of the November

15

Notes within 30 days after the IPS sale; however, the lender made no
such demand. In connection with the November Notes, the lender was
issued five-year warrants to purchase an aggregate of 2,000,000 shares
of our common stock at $.01 per share, which resulted in a net carrying
value of zero for the November Notes. We recorded debt discount
amortization of $600,000 and $75,000 as interest expense for the year
ending December 31, 2001 and December 31, 2000, respectively. In April
2002, the terms of the November Notes were renegotiated and the
maturity date was extended to December 2004.

In December 2000, we issued the December Notes. The December
Notes were convertible at the lenders' option at $.50 per share, bore
interest at 8% per annum and were originally to have matured on
December 31, 2001. In connection with the December Notes, the lenders
were issued five-year warrants to purchase an aggregate of 3,000,000
shares of our common stock at $.01 per share. We recorded debt discount
of $1,500,000 in connection with the issuance of the warrants, which
resulted in a net carrying value of zero for the December Notes. This
discount was to be amortized into interest expense over the original
life of the December Notes. This debt discount is fully amortized as of
December 31, 2001 and amortization of $1,300,000 and $200,000 was
recorded as interest expense in 2001 and 2000, respectively. In April
2002, the terms of the December Notes were renegotiated and the
maturity date was extended to April 2003. Of the December Notes,
$1,000,000 was converted into Series A Preferred Stock in November 2002
and the remaining $500,000 was fully paid as of February 2003. See
"Liquidity and Capital Resources" below.

Discontinued Operations

Additional expenses of $10,000 relating to the disposal of the
remaining assets of Loch Exploration, Inc. in 2001 are included in
discontinued operations.

16

QUARTERLY RESULTS

We derived this information from unaudited quarterly financial
statements that include, in the opinion of our management, all adjustments
necessary for a fair presentation of the information for such periods. You
should read this information in conjunction with the audited consolidated
financial statements and notes thereto. Results of operations for any fiscal
quarter are not necessarily indicative of results for any future period.

Our revenues and operating results are subject to significant variation
from quarter to quarter depending on a number of factors, including:

o the progress of contracts;
o the revenues earned on contracts;
o the timing of revenues on performance-based contracts;
o the commencement and completion of contracts during any particular
quarter;
o the schedule of government agencies for awarding contracts; and
o the term of each contract that we have been awarded.

We have occasionally experienced a pattern in our results of operations
pursuant to which we incur greater operating expenses during the start-up and
early stages of significant contracts prior to receiving related revenues. As
well we have noticed seasonality in our revenues, in that due to holiday and
vacation time there are not enough billable hours available for high utilization
of billable consultants. Our quarterly results may fluctuate, causing a material
adverse effect on our operating results and financial condition.

17

PRO-FORMA RESULTS

The following information reflects the unaudited pro-forma statement of
operations combining the historical results of operations of EpicEdge and the
1999 and 2000 acquisitions, discussed under the heading ACQUISITIONS,
DISPOSITIONS AND GOODWILL IMPAIRMENT LOSSES IN PART I, ITEM 1 - BUSINESS (except
for IPS, which was subsequently sold effective January 1, 2001, and for Tumble
Interactive, which would not have a material effect, and therefore has been
excluded from the pro-forma financial information), as if the acquisitions had
occurred and the related common shares had been issued as of January 1, 2000,
and as though the IPS acquisition and sale had occurred at that date (and,
therefore, the IPS results and goodwill impairment loss are excluded). Actual
results may have materially differed from the results indicated in the unaudited
pro-forma financial information had the combinations actually occurred as of the
beginning of the periods presented. Additionally, the unaudited pro-forma
information should not be relied upon as being indicative of the future results
of operations of the combined entity.

PRO-FORMA RESULTS

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 ON A PRO-
FORMA BASIS

Revenues

The increase in revenues from Professional Services of $2.3 million or
18.5% from $12.4 million (pro-forma) to $14.6 million (actual) for the year
ended December 31, 2000 and 2001, respectively, is due principally to the
effects of the growth in the company's core services areas. This growth has come
in the form of larger, long-term contracts in the public sector ERP practice
group as well as expansion of the e-Solutions practice.

Cost Of Revenues And Gross Profit

Although the cost of professional services increased $1.1 million or
11.7% from $9.0 million (pro-forma) to $10.1 million (actual) for the year ended
December 31, 2000 and 2001, respectively, the cost of professional services as a
percentage of the professional services revenues decreased 4.3%, from 72.9%
(pro-forma) to 68.6% (actual). This decrease in costs translates into a $1.2
million or 36.8% increase gross profit from professional services, from $3.3
million (pro-forma) to $4.6 million (actual) for the year ended December 31,
2000 and 2001, respectively. These increases in gross margin can be attributed
to increasing average billing rates and stabilizing the cost of delivering
services.

Operating Expenses

The decrease in selling, general and administrative expenses, including
compensation and benefits, of $12.3 million or 61.8% from $19.9 million
(pro-forma) to $7.7 million (actual) for the year ended December 31, 2000 and
2001, respectively, was due primarily to payroll and payroll reductions as well
as redundant administrative costs. The strategy in 2000 was to acquire
complementary business practices to be able to provide

18

current and potential clients the entire spectrum of e-services from planning
and design to implementation and maintenance. In anticipation of the execution
of this strategy, we hired additional staff even beyond that which came to us
through the acquired businesses. These staff additions were made up of a sales
force designed to capture new business and expand our scope of work in existing
clients. In addition, with the transition out of the VAR business, we had excess
administration personnel. In the spring of 2001, a strategy and plan of
execution was adopted to stabilize the organization and return to cash flow
positive and eventually profitability. This strategy included a strict
line-by-line review and evaluation of non-compensation expenses as well as
another 15% reduction in our workforce in the Creative, Research and Sales
departments. In the fourth quarter 2000 and in the first quarter 2001, there was
continuing additional non-recurring expenses associated with these reductions in
force.

19

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2002, our primary sources of liquidity were cash and
cash equivalents of $24,000, net accounts receivable of $2,393,000, and our
available line of credit of $735,000.

As of December 31, 2001, our primary sources of liquidity were cash and
cash equivalents of $256,000 and net accounts receivable of $1,803,000.

Our contractual cash obligations at December 31, 2002, are as follows:

- ----------------------
(1) As more fully described above and in the notes to the audited financial
statements, the maturity of these obligations may not require all cash.
Convertible notes payable are classified as current or long-term based on
the contractual maturities as amended on April 2002 and March 2003. The
convertible notes of $2,000,000 are expected to be converted into Series
B-1 preferred stock and $1,179,000 may require cash payments over the next
2 years if not converted into common stock at the note holder's option.
However, we cannot ensure that all of the notes will be converted which
would adversely affect our financial condition.

Net cash used in operating activities was $2,085,000 for the year ended
December 31, 2002, as compared to $6,504,000 at December 31, 2001. The
difference was primarily due to a reduction in losses from operations, an
increase in accrued expenses and other liabilities and a decrease in non-cash
items for depreciation and amortization of debt discount.

Net cash used in investing activities was $103,000 for the year ended
December 31, 2002, as compared to net cash provided by investing activities of
$5,457,000 for the year ended December 31, 2001. This was primarily due to the
proceeds received with the sale of IPS in the first quarter of 2001.

Net cash provided by financing activities was $1,956,000 for the year
ended December 31, 2002, as compared to net cash used in financing activities of
$132,000 for the year ended December 31, 2001. The difference was primarily a
result of the $3,100,000 of proceeds from the issuance of convertible debt in
2002 as compared to $1,050,000 of proceeds from the issuance of convertible debt
in 2001.

In July 2000, we issued $5 million in a convertible debt offering to
Edgewater and Fleck T.I.M.E. These notes (the "July 2000 Convertible Notes")
were originally convertible at a 25% discount to the price paid by investors in
a qualified financing into the security sold in such qualified financing or, if
no such financing occurred, at $5.00 per share into our common stock. A
qualified financing never occurred, so these notes remained convertible at $5.00
per share into our common stock until we entered into the Note Agreement (as
defined below). On November 11, 2002, the July 2000 Convertible Notes plus
accrued interest were converted into 8,151,481 shares of Series A Preferred
Stock.

In November 2000, our former Chairman and major stockholder provided a
$1,000,000 line of credit to us in the form of convertible notes (the "November
2000 Convertible Notes"). Initially, we were able to draw upon the line of
credit from time to time as needed, and as of September 30, 2001, we had drawn
$900,000 on the line of credit. As a result of later amendments, we no longer
have any available borrowing under the line of credit. The November 2000
Convertible Notes originally bore interest at an annual rate of 8%, were
convertible at the lenders' option at $.50 per share and were scheduled to
mature on December 31, 2001. In August 2001, we renegotiated the terms of the
November 2000 Convertible Notes that extended the maturity date and increased
the conversion feature to $1.00 per share, convertible at the lender's option.
In exchange, we agreed to commence interest only payments to the lender based
upon the principal and accrued interest as of September 1, 2001. On April 16,
2002, in conjunction with the Note Agreement discussed below, the November 2000
Convertible Notes were again renegotiated. The new terms are that the November
2000 Convertible Notes still bear an annual interest rate of 8%, are convertible
at the lenders' option into shares of our common stock at $.25 per share and
mature on December 1, 2004. We are still making monthly interest-only payments
of approximately $6,400 per month.

In December 2000, we issued $1,500,000 in convertible notes to two of
our stockholders (the "December 2000 Convertible Notes"), both of which formerly
served or had representatives serve on our Board of Directors. The December 2000
Convertible Notes were initially convertible at the lenders' option at $.50 per
share. The December 2000 Convertible Notes bear interest at 8% per annum and
originally matured on December 31, 2001. The principal and accrued interest on
$1,000,000 of the December Convertible Notes was converted into 1,544,000 shares
of Series A Preferred Stock on November 11, 2002. Of the remaining $500,000
under the December Convertible Notes, $300,000 was due and was paid in April
2002 and the remaining $221,000, consisting of remaining principle and accrued
interest as of April 2002, plus accrued and unpaid interest of $13,000 was paid
on January 10, 2003.

In June 2001, we began negotiations with certain existing stockholders
and convertible debt holders for additional funding to provide the ability to
execute on the unsecured creditor payment plan (see RESTRUCTURING PLAN below),
pay or renegotiate legacy expenses, and provide working capital. Although the
final documents were not executed until April 2002, we had received $1,050,000
as of December 31, 2001 as interim bridge

20

financing in the form of convertible promissory notes (the "June 2001
Convertible Notes"). We received additional funding under the June 2001
Convertible Notes of $3,100,000 during 2002. On April 16, 2002, the terms were
finalized on these convertible notes and approval was obtained at the 2002
Annual Meeting held in July 2002 (the "2002 Annual Meeting"). Until converted,
these June 2001 Convertible Notes were for a term of one year and were due April
2003, and have a stated interest rate of 8%.

On April 16, 2002, we entered into a Note and Preferred Stock Purchase
Agreement with Edgewater, Fleck T.I.M.E., DeJoria and Loche (the "Note
Agreement"), whereby the holders of the July 2000 Convertible Notes and
$1,000,000 of the December 2000 Convertible Notes agreed to convert the
outstanding principal balance of such notes and accrued interest into shares of
the our Series A Convertible Preferred Stock (the "Series A Preferred Stock") at
the Equity Closing (as defined in the Note Agreement). However, the holder of
the remaining $500,000 of the December 2000 Convertible Notes demanded payment.
On April 16, 2002, we negotiated with this individual to repay this note over an
installment period. We paid $300,000 on the remaining December 2000 Convertible
Notes in April 2002. The balance plus accrued interest was due and was paid in
January 2003.

In addition to the conversion of the July 2000 Convertible Notes and
certain of the December 2000 Convertible Notes at the Equity Closing, the
holders of the June 2001 Convertible Notes agreed to convert most of the
outstanding principal balance of such notes and accrued interest into shares of
our Series B Convertible Preferred Stock (the "Series B Preferred Stock"). On
November 11, 2002, in accordance with the Note Agreement, we converted
$6,000,000 of convertible debt, (July 2000 Convertible Notes of $5,000,000 and
$1,000,000 of the December 2000 Convertible Notes), and the related accrued and
unpaid interest of $1,272,000 into 9,695,000 shares of Series A Preferred Stock
and $2,150,000 of convertible debt, (all but $2,000,000 of the June 2001
Convertible Notes), and the related accrued and unpaid interest of $230,089 into
3,173,000 shares of Series B Preferred Stock.

The additional $2,000,000 (the "Edgewater Special Debt") could be
converted into Series B Preferred Stock at the sole election of the holder,
Edgewater. However, in November 2002, we entered into a Term Sheet with
intentions of entering into a Series B-1 Note and Preferred Stock Purchase
Agreement (the "B-1 Note Agreement") with Edgewater whereby Edgewater will have
the option to convert the entire outstanding principal balance of the Edgewater
Special Debt, plus accrued interest into shares of our Series B-1 Convertible
Preferred Stock (the "Series B-1 Preferred Stock"). In March 2003, we reached an
agreement on the $2,000,000 outstanding balance of the June Convertible Notes to
extend the due date to January 31, 2006 pursuant to a term sheet for the B-1
Note Agreement. In Lieu of entering into the B-1 Note Agreement, we have agreed
with Edgewater to issue a new Substitute Secured Convertible Promissory Note to
Edgewater in substitution for the current convertible note representing the
Edgewater Special Debt (the "New Substitute Note"). It is anticipated that the
New Substitute Note will have a maturity date of January 31, 2006, a new lower
interest rate of 4% per annum and will allow Edgewater to convert at its option
the aggregate principal amount plus any accrued interest into Series B-1
Preferred Stock at any time up to the maturity date. We intend to issue
Edgewater a warrant to purchase up to 1,333,333 shares of Series B-1 Preferred
Stock at an exercise price of $.01 per share.

The Series A Preferred Stock has the following terms: a conversion rate
equal to one share of common stock for each $.75 of stated value or a
liquidation preference such that in the event of any liquidation, dissolution or
winding up of EpicEdge, the holders thereof shall be entitled to receive, at
their option, either: (a) in preference to the holders of the common stock and
on a pro-rated pari passu basis with the Series B Preferred Stock, an amount
equal to 2.75 times the stated value, or (b) a ratable share of the distribution
of assets and property with the holders of the common stock, participating on an
as converted basis, if a liquidation event occurs within 24 months. If, however,
a liquidation event occurs after 24 months, the preference multiple becomes 3
times the stated value. The Series A Preferred Stock shall have a stated value
of $.75. A merger or sale of capital stock in which our shareholders do not own
a majority of the outstanding shares of the surviving corporation or sale of all
or substantially all of our assets shall be deemed to be a liquidation.

The Series B Preferred Stock has the following terms: a conversion rate
equal to one share of common stock for each $.25 of stated value or a
liquidation preference such that in the event of any liquidation, dissolution or
winding up of EpicEdge, the holders thereof shall be entitled to receive, at
their option, either: (a) in preference to the holders of the common stock and
on a pro-rated pari passu basis with the Series A Preferred Stock, an amount
equal to 2.75 times the stated value, or (b) a ratable share of the distribution
of assets and property with the holders of the common stock, participating on an
as converted basis, if a liquidation event occurs within 24 months. If, however,
a liquidation event occurs after 24 months, the preference multiple becomes 3
times the stated value. In addition, if the holders of the Series B Preferred
Stock choose upon a liquidation event to receive the liquidation preference
multiple in effect at the time of the event and there still remains
undistributed new equity value after any debt obligations and Series A Preferred
Stock liquidating preference payments, then the Series B Preferred Stock will
participate in that additional distribution on an as converted basis at a
conversion rate equal to one share of common stock for each $.75 of stated
value. The Series B Preferred Stock shall have a stated value of $.75. A merger
or sale of capital stock in which our shareholders do not own a majority of the
outstanding shares of the surviving corporation or sale of all or substantially
all of our assets shall be deemed to be a liquidation.

It is anticipated that the Series B-1 Preferred Stock will have the
following terms: a conversion rate equal to one share of common stock for each
$.25 of stated value or a liquidation preference such that in the event of any
liquidation, dissolution or winding up of EpicEdge, the holders thereof shall be
entitled to receive, at their option, either: (a) senior to the holders of the
Series A Preferred Stock and Series B Preferred Stock and in preference to
common stock, an amount equal to 3.5 times the original Series B-1 Preferred
Stock purchase price per share (the "Series B-1 Preference") and a ratable share
of the distribution of assets and property with the holders of Common Stock at a
conversion price of $0.75 per share, or (b) a ratable share of the distribution
of assets and property with the holders of common stock, participating on an as
converted basis at $0.25 per share. The Series B-1 Preferred Stock shall have a
stated value of $.75. The holders of the Series B-1 Preferred Stock will have
the right to convert shares of Series B-1 Preferred Stock, at the option of each
holder thereof, at any time, into shares of common stock at a conversion price
equal to one share of common stock for each $0.25 of stated value if the holders
of the Series B-1 Preferred Stock elect not to take the Series B-1 Preference.
If the holders of the Series B-1 Preferred Stock take the Series B-1 Preference,
the conversion price will be $0.75 per share. The total number of shares of
common stock into which such shares may be converted initially will be
determined by dividing the aggregate original Series B-1 Preferred Stock
purchase price of $.75 plus accrued interest, by the conversion price. The
initial conversion price for the Series B-1 Stock will be $0.25 or $0.75 (if the
holders of the Series B-1 Stock take the Series B-1 Preference), as the case may
be. A merger or sale of capital stock in which our shareholders do not own a
majority of the outstanding shares of the surviving corporation or sale of all
or substantially all of our assets shall be deemed to be a liquidation.

All of the preferred stock has anti-dilution protection that will adjust
the conversion price of each series to increase the number of shares of common
stock issuable upon conversion of such shares of preferred stock if, and to the
extent, we issue additional securities at a price per share lower than the
conversion price of each such series of preferred stock. The adjustment will be
based upon a broad-based, weighted average formula that

21

increases the conversion rate based upon the number of new securities issued and
the extent to which such securities were issued below the conversion price of
each series of preferred.

Also, on November 6, 2002, we entered into a Loan and Security
Agreement with Silicon Valley Bank ("SVB"), whereby SVB agreed to loan us up to
$1,400,000. This facility includes a $1 million revolving line of credit that is
an accounts receivable based operating line of credit to support short-term
working capital requirements as well as a $400,000 term note. At the closing of
the loan, we used $400,000 from the term note facility to extinguish the
$856,000 balance and cure our secured loan from GE Access that was in default
since it was due on October 16, 2002. As of March 3, 2003, we have borrowed
$752,000 under the SVB line of credit, and have $548,000 of borrowing ability
remaining. Of the $1,400,000 credit facility with SVB, $1,000,000 was guaranteed
by Edgewater. The SVB debt is secured by all of our assets. The line of credit
is priced at prime plus 1% on a fully-floating basis and matures in twelve
months. The advance rate on the line is determined by the defined borrowing
base, which is 80% of eligible accounts receivable. The term loan is priced at
10% on a fixed-rate basis. The term loan is fully amortizing and also matures in
one year.

On January 9, 2003, we entered into a Loan Modification Agreement with
SVB which amended the November 6, 2002 Loan and Security Agreement and
temporarily increased the line of credit extended from $1,000,000 to $1,300,000
until July 31, 2003 at which time the line will be reduced to $1,000,000 for the
remaining term of the agreement. Edgewater agreed to guarantee the amount to
which the line of credit exceeds $1,000,000 on July 31, 2003, up to a maximum of
$300,000. We intend to issue Edgewater a warrant to purchase up to 200,000
shares of our Series B-1 Preferred Stock at an exercise price of $0.01 per share
in consideration for Edgewater entering into the Guarantee, whether or not the
Guarantee is required or called upon by the Bank.

At December 31, 2002, we had a working capital deficit of $30,000, as
compared to a deficit of $8.5 million at December 31, 2001. Management expects
that our current available funds, funds provided from operations, and the
available funds under our line of credit and term loan facility with SVB will be
sufficient to satisfy our cash requirements through the end of 2003 based on our
current projections. Our current projections include a plan to reduce headcount
and expenses to better align us for profitability. We believe that our success
in satisfying our cash requirements in 2003 will depend upon, among other
factors, successfully executing on our current operating plan.

RESTRUCTURING PLAN

Effective January 1, 2001, with a closing date of February 5, 2001, we
sold all of the issued and outstanding stock of IPS to Red & Blue, Inc., a
Delaware corporation, and to the IPS Associates, Inc. Stock Ownership Plan. The
consideration for the sale was (1) the return of an aggregate 740,260 shares of
our common stock, including ESOP shares, (2) $5,700,000 in net proceeds and (3)
the transfer of the IPS ESOP plan, along with the note payable to a financial
institution for the ESOP financing of $4,861,000. The stock purchase agreement
provided that 143,323 shares of the 740,260 shares of our common stock be held
in escrow until the earlier of (1) the completion of audited financial
statements of IPS for the year ended December 31, 2000, or (2) six months from
the date of closing. In the event that the net equity, revenues or net earnings
of IPS differed by more than $500,000 from the financial statements disclosed in
the purchase agreement, Red & Blue, Inc. had the right to setoff the difference
against the shares held in escrow at a value based upon the closing price of our
common stock on the day before the setoff. In the event of a setoff, we had
agreed to immediately register the setoff shares. Based on audited financial
results of IPS, no such setoff occurred. The goodwill related to IPS was written
down as of December 31, 2000, to the amount recoverable in the sale.

In the first quarter of 2001, we received the above-described proceeds,
cancellation of the inter-company payable and receivables with IPS, along with
the return of 740,260 shares, in exchange for the transfer of assets of
$6,085,000 and liabilities of $8,028,000. In addition, with the return of the
shares held by the ESOP, a reduction in unearned compensation of $8,979,000
associated with these unreleased ESOP shares was recorded as a charge against
the additional paid in capital arising from the IPS acquisition. The net
proceeds from the sale of IPS were used to pay off the secured debt for
$2,275,000 and the balance was used to fund working capital needs such as
payroll and current accounts payable.

In February 2001, we adopted a strategy and a plan of execution to
reduce our workforce and other costs in order to stabilize the organization. We
hired a consulting group to assist in designing and executing a repayment plan
(the "Plan") with its unsecured creditors. This Plan, which was executed in June
2001, after achieving an acceptable percentage of consents from the unsecured
creditors, was designed to repay this group over time either in-full for those
creditors whose balance was $5,000 or less, or who were willing to accept $5,000
as full payment, or up to 60% of $3,094,000, which represented the original
unsecured accounts payable amount as of February 1, 2001. The Plan further
provided that, if sufficient cash was available, we could pay a total of 30% of
the original unsecured accounts payable amount by December 31, 2001, and this
total amount would fully and completely satisfy our obligations to the unsecured
creditors. In June 2001, in accordance with the Plan, we paid the initial
installment to consenting unsecured creditors under the Plan representing 18% of
the original obligation. In December 2001, we made a second installment of 12%
of the original obligation to fully satisfy its obligations under the Plan as it
relates to $2,045,000 of the original unsecured accounts payable. The then
remaining balance of $1,049,000 would be paid quarterly at four (4%) percent of
the original balance through June 2004, unless the remaining unsecured creditors
agree to a lesser amount over a shorter time. Negotiations were made with one
vendor to pay the balance out quarterly through September 2006. At December 31,
2002, $443,000 of the remaining balance is classified as long-term notes
payable. As a result of settlement agreements and other legal causes of action
by our unsecured creditors, during 2002 it was necessary to reverse some
extraordinary gain recognized in previous quarters. The reversal of
extraordinary gain in 2002 of $58,000 resulted in a net extraordinary loss of
$1,000 for the year ended December 31, 2002.

In March 2001, we negotiated new terms for $1,933,000 of other notes
payable, which extended repayment terms into 2002.

In October 2000, we reduced our workforce by 43 full-time positions, or
14% of our workforce at that time. In the spring of 2001, a strategy and plan of
execution was adopted to stabilize the organization and return to positive cash
flow and eventual profitability. This strategy includes a strict line-

22

by-line review and evaluation of non-compensation expenses as well as another
15% reduction in our workforce in the Creative, Research and Sales departments.
In the fourth quarter 2000 and in the first quarter 2001, there were continuing
additional non-recurring expenses associated with these reductions in force.
During the third quarter of 2001, our workforce was reduced by another 15%.

RISK FACTORS

The following important factors could cause actual results to differ materially
from those contained in forward-looking statements made in this Annual Report on
Form 10-K or presented elsewhere by management from time to time.

WE MAY NEED TO RAISE ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE.

Management expects that our current available funds, provided from
operations, and the available funds under our line of credit and term loan
facility with SVB will be sufficient to satisfy our cash requirements through
the end of 2003 based on our current projections. Our current projections
include a plan to reduce headcount and expenses to better align us for
profitability. We believe that our success in satisfying our cash requirements
in 2003 will depend upon, among other factors, successfully executing on our
current operating plan.

However, if we fail to execute on our current operating plan, revenues
deteriorate or our operating cash flows and SVB line of credit become
inadequate, or if our revenues grow faster and/or higher than expected in a
manner that increases expenses, we may not be able to continue successfully
funding our operations. In that event, we may need to raise additional funding
from other sources. Sources of additional financing may include additional bank
debt, factoring of accounts receivable or the public or private sale of equity
or debt securities. However, there can be no assurance that we will be
successful in arranging such additional financing at all or on terms
commercially acceptable to us. In addition, the issuance of more debt or equity
may require us to agree to restrictive covenants that could hamper our business
and operations. These uncertainties could have a material adverse affect on us.

WE MAY REPORT AN OPERATING LOSS IN 2003 AND MAY NOT ACHIEVE OR SUSTAIN FUTURE
PROFITABILITY.

Although our core business is providing information technology
services, our business strategy continues to evolve. We have reported an
operating loss in each of the previous four fiscal years. Although our revenues
have generally been increasing since the third quarter of fiscal 2000 and this
trend has continued through most of 2002, it is possible that we may continue to
incur operating losses, and that our revenues may decline for 2003. During the
course of 2001, we fundamentally restructured our business by consolidating
office space, reducing our workforce and reshaping our service offerings. To the
extent that our restructuring plan and continued cost cutting measures does not
generate the cost savings or revenues that we anticipate, our results of
operations and liquidity could be materially and adversely affected. If we are
unable to maintain the historical increase in our revenues, or if our operating
expenses exceed our expectations, we may continue to incur losses and may not
achieve profitability. If we achieve profitability in the future, we may not be
able to sustain it.

WE DEPEND ON GOVERNMENT AGENCIES FOR A MAJORITY OF OUR REVENUES AND THE LOSS OR
DECLINE OF EXISTING OR FUTURE GOVERNMENT AGENCY FUNDING WOULD ADVERSELY AFFECT
OUR REVENUES AND CASH FLOWS.

For the year ended December 31, 2002, approximately 87% of our revenues
were either directly or indirectly, as a subcontractor, derived from services
provided to government agencies. These government agencies may be subject to
budget cuts, budgetary constraints, a reduction or discontinuation of funding or
changes in the political or regulatory environment that may cause government
agencies to divert funds. A significant reduction in funds available for
government agencies to purchase professional services would significantly reduce
our revenues and cash flows. In addition, the loss of a major government client,
or any significant reduction or delay in orders by that client, would also
significantly reduce our revenues and cash flows. See Risk Factor entitled "We
depend heavily on our principal clients" below.

WE DEPEND HEAVILY ON OUR PRINCIPAL CLIENTS.

We have derived, and believe that we will continue to derive, a
significant portion of our revenues from a limited number of large clients. In
2002, our two largest clients, the Texas Department of Health and Northrop
Grumman, accounted for approximately 56% of our revenues. Another customer
accounted for 10% of our revenues in 2002. The volume of work performed for
specific clients is likely to vary from year to year, and a major client in one
year may not use our services in a subsequent year. In addition, revenues from a
large client may constitute a significant portion of our total revenues in a
particular quarter. Most of our contracts are terminable by the client following
limited notice and without significant penalty to the client. The loss of any
large client could have a material adverse effect on our business, financial
condition and results of operations.

The State of Texas is a significant client. We have executed contracts
with several agencies of that state for which we are performing services. During
2002, approximately 54% of our revenue was derived from these agencies, one of
which represented 29%. These contracts, for the most part, are multi-year and
run through 2005. However, many of the contracts are terminable by our clients
following limited notice and without significant penalties. Northrop Grumman has
also been a significant client. We had a subcontract with that organization
which represented approximately 27% of our 2002 revenue. This contract
terminated on March 15, 2003. Due to anticipated government budget shortfalls,
many government clients may terminate or sharply reduce the scope of work
performed under our contracts with them.

DUE TO THE LIQUIDATION PREFERENCES OF OUR OUTSTANDING PREFERRED STOCK, THE
HOLDERS OF SUCH PREFERRED STOCK MAY BE ENTITLED TO RECEIVE ALL OR SUBSTANTIALLY
ALL OF THE PROCEEDS FROM ANY SALE OF THE COMPANY THAT RESULTS IN A LIQUIDATION
EVENT UNDER THE TERMS OF THE PREFERRED STOCK.

According to the terms of our currently outstanding shares of Series A
and Series B Preferred Stock, any merger or sale of capital stock in which our
shareholders prior to such action do not own a majority of the outstanding
shares of the surviving corporation or any sale of all or substantially all of
our assets shall be deemed to be a liquidation event. Upon a liquidation event,
the holders of the Series A and Series B Preferred Stock have a right to receive
2.75 times the original purchase price of such

23

preferred stock in the event such liquidation event occurs on or before April
15, 2004. After such date, these holders will be entitled to a liquidation
preference equal to 3 times the original purchase price of such preferred. As a
result, the holders of the 12,868,932 shares of currently outstanding preferred
stock would currently be entitled to the first approximately $26,543,000 of
proceeds from any liquidation event available to be distributed to our
shareholders if such liquidation event happens on or before April 15, 2004, or
approximately $28,956,000 if such event occurs after such date. In addition, the
liquidation preference of the proposed Series B-1 Preferred Stock is anticipated
to be 3.5 times the original purchase price of the Series B-1 Preferred Stock.
Lastly, the management participants in our cash Bonus Plan could be entitled to
receive certain of the proceeds available for distribution to our shareholders
in preference to the holders of both our preferred and common stock. For a
description of the Bonus Plan, please see Footnote 12 in the Notes to Financial
Statements contained in Part II Item 8 of this 10-K. As a result of the
liquidation preferences of the preferred stock and the Bonus Plan, certain
members of our management and the holders of our preferred stock may be entitled
to receive all or substantially all of the proceeds from any sale of the company
that results in a liquidation event under the terms of the preferred stock in
preference to the holders of our common stock. The existence of such liquidation
preferences could materially affect the market price of our common stock.

WE HAVE SIGNIFICANT FIXED OPERATING COSTS AND OUR OPERATING RESULTS ARE SUBJECT
TO FLUCTUATION.

A high percentage of our operating expenses, approximately 80%,
particularly personnel and rent, are fixed in advance of any particular quarter.
As a result, unanticipated variations in the number, or progress toward
completion, of our projects or in employee utilization rates may cause
significant variations in operating results in any particular quarter and could
result in losses for such quarter. An unanticipated termination of a major
project, a client's decision not to proceed to the subsequent stage of a
project, or the completion during a quarter of several major client projects
could require us to maintain underutilized employees and therefore have a
material adverse effect on our business, financial condition and results of
operations. Our revenues and earnings may also fluctuate from quarter to quarter
based on such factors as the contractual terms and degree of completion of such
projects, any delays incurred in connection with projects, the accuracy of
estimates of resources required to complete ongoing projects, and general
economic conditions.

WE ARE DEPENDENT ON A NUMBER OF KEY PERSONNEL.

Our success will depend in large part upon the continued services of a
number of key employees, including our senior management, key consultants and
practice leaders. The loss of the services of any of these individuals or of one
or more of our other key personnel could have a material adverse effect on us.
In addition, if one or more of our key employees resigns to join a competitor or
to form a competing company, the loss of such personnel and any resulting loss
of existing or potential clients to any such competitor could have a material
adverse effect on our business, financial condition and results of operations.
In the event of the loss of any such personnel, there can be no assurance that
we would be able to prevent the unauthorized disclosure or use of our technical
knowledge, practices or procedures by such personnel.

IF WE DO NOT ATTRACT AND RETAIN QUALIFIED PROFESSIONAL STAFF, WE MAY NOT BE ABLE
TO ADEQUATELY PERFORM OUR CLIENT ENGAGEMENTS AND COULD BE LIMITED IN ACCEPTING
NEW CLIENT ENGAGEMENTS.

A critical component of our business is the level of experience and
technical proficiency of our employees. Our business is labor intensive and our
success will depend upon our ability to attract, retain, train and motivate
highly skilled employees. Although many specialized e-business and other
business and technology companies have reduced their workforces or slowed their
hiring efforts, and we reduced our workforce in October 2000, March and
September 2001, September 2002 and again in March 2003, intense competition
still exists for certain employees who have specialized skills or significant
experience in business and technology consulting. We may not be successful in
attracting a sufficient number of these highly skilled employees in the future.
In particular, qualified project managers and senior technical and professional
staff are in great demand worldwide. In addition, we require that some of our
employees travel to client sites to perform services on our behalf, which may
make a position with us less attractive to potential employees. Additionally,
the industry attrition rates for these types of employees are high, and we may
not be successful in retaining, training and motivating the employees we are
able to attract. The failure of our employees to achieve expected levels of
performance could adversely affect our business as well. Any inability to
attract, retain, train and motivate employees could impair our ability to
adequately manage and complete existing projects and to bid for or accept new
client engagements.

IF OUR MARKETING RELATIONSHIPS WITH SOFTWARE VENDORS DETERIORATE, WE WOULD LOSE
THEIR POTENTIAL CLIENT REFERRALS.

We currently have marketing relationships with software vendors,
including PeopleSoft and Sun Microsystems. We estimate that we derive most of
our revenues directly or indirectly from these relationships. Although we have
historically received a number of business leads from these software vendors to
implement their products, they are not required to refer business to us, may
cease referring business to us and furthermore may terminate these relationships
at any time. If our relationships with these software vendors deteriorate, we
may lose their client leads and thus our ability to develop new clients could be
negatively impacted. Any decrease in our ability to obtain new clients may cause
a reduction in our revenue growth.

24

OUR CLIENTS MAY CANCEL OR DELAY SPENDING ON BUSINESS AND TECHNOLOGY INITIATIVES
BECAUSE OF THE CURRENT ECONOMIC CLIMATE.

Since the second half of 2000, many companies have experienced financial
difficulties or uncertainty, and have cancelled or delayed spending on business
and technology consulting initiatives. Additionally, the severe financial
difficulties that many start-up Internet companies have experienced have reduced
or eliminated their competition and have further reduced the perceived urgency
by larger companies to begin or continue technology initiatives. Since some of
our revenues are derived from large companies, if large companies continue to
cancel or delay their business and technology consulting initiatives because of
the current economic climate, or for other reasons, our business, financial
condition and results of operations could be materially adversely affected.

BUSINESSES MAY DECREASE OR DELAY THEIR USE OF ADVANCED TECHNOLOGIES AS A MEANS
FOR CONDUCTING COMMERCE.

Our future success depends heavily on the increased acceptance and use
of advanced technologies as a means for conducting commerce and streamlining
operations. We focus our services on the development and implementation of
advanced technology strategies and solutions. If use of these advanced
technologies does not continue to grow, or grows more slowly than expected, our
revenue growth could slow or decline and our business, financial condition and
results of operations could be materially adversely affected. Consumers and
businesses may delay adoption of advanced technologies for a number of reasons,
including:

o inability to implement and sustain profitable business models
using advanced technologies;

o inadequate network infrastructure or bandwidth;

o delays in the development or adoption of new technical
standards and protocols required to handle increased levels of
usage;

o delays in the development of security and authentication
technology necessary to effect secure transmission of
confidential information; and

o failure of companies to meet their clients' expectations in
delivering goods and services using advanced technologies.

WE COULD BECOME SUBJECT TO LAWSUITS OR INVESTIGATIONS THAT COULD RESULT IN
MATERIAL LIABILITIES TO US OR CAUSE US TO INCUR MATERIAL COSTS.

From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We are not currently a party to
any material litigation, except for the legal matters currently pending as
described below and in Item 3 of this document entitled "Legal Proceeding."

The Company was notified by the SEC Staff that the SEC is conducting an
investigation into (1) the trading activity of certain individuals and entities
in the Company's securities and the securities of other companies during the
period 1999 and 2000, and (2) certain actions of the Company during that same
period. The Company intends to fully cooperate with the SEC to the extent it
requests information. At this time, management is unable to predict the outcome
of this investigation with certainty. The Company could become subject to an
order enjoining the Company from unlawful conduct and/or incur civil monetary
penalties as a result of the investigation. Such penalties could have a material
adverse effect on the Company and its operations or financial condition.

While the outcome of these and other legal matters cannot be predicted
with certainty, we believe that they will not have a material adverse effect on
our financial statements. However, an unfavorable outcome of any of these
matters could have a material adverse effect. In addition, any failure in a
client's system could result in a claim against us for substantial damages,
regardless of our responsibility for such failure. We cannot guarantee that the
limitations of liability set forth in our service contracts will be enforceable
or will otherwise protect us from liability for damages.

Our general liability insurance coverage, as well as coverage for errors
or omissions, may not continue to be available on reasonable terms or in
sufficient amounts to cover one or more claims, and the insurer may disclaim
coverage as to any future claim. The successful assertion of one or more claims
against us that exceed available insurance coverage or changes in insurance
policies, including premium increases or the imposition of large deductible or
co-insurance requirements, would adversely affect our business.

25

OUR COMMON STOCK WAS RECENTLY DELISTED FROM THE AMERICAN STOCK EXCHANGE, (THE
"AMEX",) AND IS NOW TRADING IN THE PINK SHEETS. THE MARKET PRICE OF THE COMMON
STOCK COULD DECLINE POTENTIALLY TO ZERO AND YOU COULD LOSE YOUR INVESTMENT.

As a result of our delay in filing Form 10-KSB for 2000 and the first
and second quarter 10-Q of 2001, the AMEX suspended the trading of our common
stock. Upon review of these items once they were filed, they reinstated trading
in our stock. On May 28, 2002, we received notice from the AMEX indicating that
we were not in compliance with certain of the AMEX's continued listing
standards. Specifically, our shareholders' equity fell below $2 million and we
incurred losses from continuing operations and/or net losses in the two of our
three most recent fiscal years, as set forth in Section 1003(a)(i) of the AMEX
Company Guide. We were afforded an opportunity to submit a plan of compliance to
the AMEX and on June 26, 2002 we presented our plan. On July 30, 2002, the AMEX
notified us that it accepted our plan of compliance and granted us an extension
of time to regain compliance with the continued listing standards until March
31, 2003. The AMEX also notified us that we would be subject to periodic reviews
by the AMEX during the extension period and that failure to make progress
consistent with the plan or to regain compliance with the continued listing
standards by the end of the extension period would result in our being delisted
from the AMEX.

During February 2003, the AMEX requested a report on our compliance with
the plan submitted in June 2002. Based upon this information, the AMEX informed
us that it would commence the steps required to delist our common stock. On
February 28, 2003, we received a formal notice from the AMEX Staff, indicating
that we no longer comply with the AMEX's continued listing standards. We
informed the AMEX that we would not appeal and consented to the AMEX's decision
to remove the listing of our common stock. We have not complied with Section
1003(a)(i) of the AMEX Company Guide, because our shareholders' equity is less
than $2,000,000 and we have had losses from continuing operations and/or net
losses in two of our three most recent fiscal years. Also, in light of our
inability to meet the continued listing requirements of the AMEX, we have
elected not to pay portions of the AMEX's applicable listing fees in accordance
with Section 1003(f)(iv). We have also been informed by the AMEX that we do not
comply with Section 1003(b)(i)(C), which states that the AMEX will normally
consider suspending dealings in, or removing from the list, a security if the
aggregate market value of shares publicly held is less than $l,000,000 for more
than 90 consecutive days. Finally, under Section 1003(f)(v), our common stock
has been selling for a substantial period of time at a low share price. On March
12, 2003, the AMEX suspended trading in our common stock and has submited an
application to the SEC to strike our common stock from listing and registration
on the AMEX. The SEC granted approval of the application on March 24, 2003.

On March 12, 2003, our common stock began trading on the Pink Sheets
under the trading symbol "EPED." The Pink Sheets have historically been a
limited public market providing lower trading volume than the NYSE, AMEX and
Nasdaq and no assurance can be given that an active market on the Pink Sheets or
any other market will develop or that a shareholder ever will be able to
liquidate his or her investment without considerable delay, if at all. If a
market should develop, the price may be highly volatile. Additionally, some
investors view low-priced stocks trading on the Pink Sheets as unduly
speculative and therefore as not appropriate for investment. Many institutional
investors have internal policies prohibiting the purchase or maintenance of
positions in low-priced stocks. This has the effect of limiting the pool of
potential purchasers of our common stock at present price levels. Shareholders
may find greater percentage spreads between bid and asked prices, and more
difficulty in completing transactions and higher transaction costs when buying
or selling our common stock than they would if our stock were listed on a NYSE,
AMEX or the Nasdaq.

TRADING OF OUR COMMON STOCK MAY BE RESTRICTED BY THE SEC'S PENNY STOCK
REGULATIONS WHICH MAY LIMIT A SHAREHOLDER'S ABILITY TO BUY AND SELL OUR STOCK.

The SEC has adopted regulations which generally define "penny stock" to be any
equity security that has a market price (as defined in the regulations) that is
less than $5.00 per share, subject to certain exceptions. Such exceptions
include any equity security listed on the AMEX, Nasdaq National Market or Small
Cap Market and any equity security issued by an issuer that has (i) net tangible
assets of more than $2,000,000, if such issuer has been in continuous operation
for at least three years, (ii) net tangible assets of more than $5,000,000, if
such issuer has been in continuous operation for less than three years, or (iii)
average annual revenue of at least $6,000,000 for the past three years. Our
common stock is covered by the penny stock rules, which impose additional sales
practice requirements on broker-dealers who sell to persons other than
established customers and "accredited investors." The term "accredited investor"
refers generally to institutions with assets in excess of $5,000,000 or
individuals with a net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouse. The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document in a form prepared
by the SEC which provides information about penny stocks and the nature and
level of risks in the penny stock market. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. The bid and offer quotations, and the broker-dealer and
salesperson compensation information, must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer's confirmation. In addition, the penny stock
rules require that prior to a transaction in a penny stock not otherwise exempt
from these rules, the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability or the willingness of
broker-dealers to trade our common stock. We believe that the penny stock rules
discourage investor interest in and limit the marketability of our common stock.

26

OUR BUSINESS IS DEPENDENT ON OUR ABILITY TO KEEP PACE WITH THE LATEST
TECHNOLOGICAL CHANGES.

Our market and the enabling technologies used by our clients are
characterized by rapid technological change. Failure to respond successfully to
these technological developments, or to respond in a timely or cost-effective
way, will result in serious harm to our business and operating results. We
expect to derive a substantial portion of our revenues from creating e-business
systems that are based upon today's leading technologies and that are capable of
adapting to future technologies. As a result, our success will depend, in part,
on our ability to offer services that keep pace with continuing changes in
technology, evolving industry standards and changing client preferences as well
as being first to market new services in this market. There can be no assurance
that we will be successful in addressing these developments on a timely basis or
that if addressed we will be successful in the marketplace. Our failure to
address these developments could have a material adverse effect on our business,
financial condition and results of operations.

WE FACE SIGNIFICANT COMPETITION IN MARKETS THAT ARE NEW, INTENSELY COMPETITIVE
AND RAPIDLY CHANGING.

The markets for the services we provide are highly competitive. We
believe that we currently compete principally with large accounting and
consulting firms and systems consulting and implementation firms. We compete to
a lesser extent with specialized e-business consulting firms, strategy
consulting firms, other package technology vendors, and our clients' own
internal information systems groups. Some of our competitors are Accenture Ltd.,
Maximus, Inc., Lante Corporation, IBM Global Services, Braxton Consulting
(formerly Deloitte), Intelligroup, Inc. and KPMG Consulting, Inc. Many of the
companies that provide such services have significantly greater financial,
technical and marketing resources than we do and generate greater revenues and
have greater name recognition. These firms may attempt to gain a competitive
advantage by offering large pricing concessions. In addition, there are
relatively low barriers to entry into our markets and we have faced, and expect
to continue to face, additional competition from new entrants into our markets.
Increased competition may result in price reductions, fewer client projects,
underutilization of our technical staff, reduced operating margins and loss of
market share, any of which could have a material adverse effect on our business,
operating results and financial condition. We believe that the major competitive
factors in our market relate to a company's distinctive technical capabilities,
successful past contract performance, reputation for quality and pricing.

WE SOMETIMES ENTER INTO FIXED-PRICE CONTRACTS.

Some of our projects are based on fixed-price, fixed-timeframe
contracts, rather than contracts in which payment to us is determined on a time
and materials basis. We recognize revenues when defined milestones are reached.
For the year ended December 31, 2002, approximately 30% of our revenues were
from fixed-price, fixed time frame contracts. Our failure to accurately estimate
the resources required for a project or our failure to complete our contractual
obligations in a manner consistent with the project plan upon which our
fixed-price, fixed-timeframe contract was based would adversely affect our
overall profitability and could have a material adverse effect on our business,
financial condition and results of operations. We have at times been required to
commit unanticipated additional resources to complete certain projects, which
has resulted in losses on certain contracts. We recognize that we may experience
similar situations in the future. In addition, for certain projects we may fix
the price before the design specifications are finalized, which could result in
a fixed price that turns out to be less than our expenses on the project and
therefore adversely affects our profitability.

OUR FAILURE TO DELIVER ERROR-FREE PRODUCTS AND SERVICES COULD RESULT IN REDUCED
PAYMENTS, SIGNIFICANT FINANCIAL LIABILITY OR ADDITIONAL COSTS TO US, AS WELL AS
NEGATIVE PUBLICITY.

Many of our engagements involve projects that are critical to the
operations of our clients' businesses and provide benefits that may be difficult
to quantify. The failure by us to meet a client's expectations in the
performance of the engagement could damage our reputation and adversely affect
our ability to attract new business. We have undertaken, and may in the future
undertake, projects in which we guarantee performance based upon defined
operating specifications or guaranteed delivery dates. Unsatisfactory
performance or unanticipated difficulties or delays in completing such projects
may result in client dissatisfaction and a reduction in payment to us, payment
of penalties or damages by us as a result of litigation or otherwise. In
addition, unanticipated delays could necessitate the use of more resources than
we initially budgeted for a particular project, which could increase our costs
for that project.

CERTAIN SHAREHOLDERS CAN CONTROL MATTERS REQUIRING SHAREHOLDER APPROVAL BECAUSE
THEY OWN A LARGE PERCENTAGE OF OUR COMMON STOCK, AND THEY MAY VOTE THIS COMMON
STOCK IN A WAY WITH WHICH OTHER SHAREHOLDERS MAY NOT AGREE.

Certain shareholders Edgewater Private Equity Fund III and Fleck
T.I.M.E. Fund, LP and affiliates of Fleck own approximately 68% and 17%,
respectively, of the voting power of our common stock. As a result, if these
persons act together, they will have the ability to exercise substantial control
over our affairs and corporate actions requiring shareholder approval, including
the election of directors, a sale of substantially all our assets, a merger with
another entity or an amendment our certificate of incorporation. The ownership
position of these shareholders could delay,

27

deter or prevent a change in control and could adversely affect the price that
investors might be willing to pay in the future for shares of our common stock.

OUR REVENUES AND OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO FORECAST, WHICH
MAY CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE.

Our revenues and operating results are subject to significant variation
from quarter to quarter due to a number of factors, including:

o the number, size and scope of projects in which we are
engaged;

o demand for our services generated by strategic relationships
and certain prime contractors;

o economic conditions in the vertical and geographic markets we
serve;

o our employee utilization rates and the number of billable
days in a particular quarter;

o the contractual terms and degree of completion of projects;

o any delays or costs incurred in connection with a project or
early termination of a project;

o the accuracy of estimates of resources required to complete
ongoing projects;

o our ability to staff projects with salaried employees versus
hourly employees, hourly independent contractors and
subcontractors;

o start-up costs including software license fees incurred in
connection with the initiation of large projects; and

o the adequacy of provisions for losses.

The timing and realization of opportunities in our sales pipeline make the
timing and variability of revenues difficult to forecast. Because of the
variability of our quarterly operating results, we believe that period-to-period
comparisons of our operating results are not necessarily meaningful, should not
be relied upon as indications of future performance and may result in volatility
and declines in the price of our common stock. In addition, our operating
results may from time to time be below the expectations of analysts and
investors. If so, the market price of our common stock may continue to decline.

THE TRADING PRICE OF OUR STOCK HAS BEEN, AND IS EXPECTED TO BE, HIGHLY VOLATILE.
THE PRICE OF OUR COMMON STOCK IS SUBJECT TO SIGNIFICANT FLUCTUATION.

In addition, the trading price of our common stock could be subject to
wide fluctuations in response to:

o general economic or stock market conditions unrelated to our
operating performance;

o quarterly variations in operating results;

o changes in earnings estimates by analysts;

o any differences between reported results and analysts'
published or unpublished expectations;

o announcements of new contracts or service offerings by us or
our competitors; and

o other events or factors.

28

INCREASING GOVERNMENT REGULATION COULD AFFECT OUR BUSINESS.

We are subject not only to regulations applicable to businesses
generally, but also laws and regulations directly applicable to electronic
commerce. Although there are currently few such laws and regulations, state,
federal and foreign governments may adopt a number of these laws and
regulations. Any such legislation or regulation could dampen the growth of the
Internet and decrease its acceptance as a communications and commercial medium.
If such a decline occurs, companies may decide in the future not to use our
services to create an electronic business channel. This decrease in the demand
for our services could seriously harm our business and operating results.

LEGISLATIVE ACTIONS, HIGHER INSURANCE COST AND POTENTIAL NEW ACCOUNTING
PRONOUNCEMENTS ARE LIKELY TO IMPACT OUR FUTURE FINANCIAL POSITION AND RESULTS OF
OPERATIONS.

There have been regulatory changes, including the Sarbanes-Oxley Act of
2002, and there may be potential new accounting pronouncements or regulatory
rulings which will have an impact on our future financial position and results
of operations. The Sarbanes-Oxley Act of 2002 and other rule changes and
proposed legislative initiatives following the Enron bankruptcy are likely to
increase general and administrative costs. In addition, insurers are increasing
rates as a result of high claims rates over the past year and our rates for our
various insurance policies have increased and may continue to increase. Further,
proposed initiatives may result in changes in accounting rules, including
legislative and other proposals to account for employee stock options as an
expense. These and other potential changes could materially increase the
expenses we report under generally accepted accounting principles, and adversely
affect our operating results.

OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR
PROPRIETARY TECHNOLOGY.

Our success depends, in part, upon our proprietary methodologies and
other intellectual property rights. We rely upon a combination of trade secret,
nondisclosure and other contractual arrangements to protect our proprietary
rights. We enter into confidentiality agreements with our employees; generally
require that our consultants and clients enter into such agreements; and limit
access to distribution of our proprietary information. We currently do not have
any trademark or copyright protection on any of our intellectual property. There
can be no assurance that the steps taken by us in this regard will be adequate
to deter misappropriation of our proprietary information or that we will be able
to detect unauthorized use and take appropriate steps to enforce our
intellectual property rights. In addition, although we believe that our services
and products do not infringe on the intellectual property rights of others,
there can be no assurance that such a claim will not be asserted against us in
the future, or that if asserted any such claim will be successfully defended. A
successful claim against us could have material adverse affect on our business,
financial condition and results of operations.

WE MAY NOT HAVE THE RIGHT TO RESELL OR REUSE APPLICATIONS DEVELOPED FOR SPECIFIC
CLIENTS.

A portion of our business involves the development of Internet and
software applications for specific client engagements. Ownership of such
software is the subject of negotiation and is frequently assigned to the client,
although we may retain a license for certain uses. Issues relating to the
ownership of and rights to use software applications can be complicated and
there can be no assurances that disputes will not arise that affect our ability
to resell or reuse such applications. Any limitation on our ability to resell or
reuse an application could require us to incur additional expenses to develop
new applications for future projects.

WE COULD SUFFER MATERIAL LOSSES IF OUR SYSTEMS OR OPERATIONS FAIL OR ARE
DISRUPTED.

Any system failure, including network, software or hardware failure,
whether caused by us, a third party service provider, unauthorized intruders and
hackers, computer viruses, natural disasters, power shortage or terrorist
attacks, could cause interruptions or delays in our business or loss of data. In
addition, if our mail, communications or utilities are disrupted or fail, our
operations, including our transaction processing, could be suspended or
interrupted and our business could be harmed. Our property insurance and
business interruption insurance may not be adequate to compensate us for all
losses that may occur as a result of any system failure or disruption.

THE ISSUANCE OF ADDITIONAL COMMON STOCK UPON THE CONVERSION OR EXERCISE OF OUR
OUTSTANDING DERIVATIVE SECURITIES WILL RESULT IN DILUTION TO EACH SHAREHOLDER'S
PERCENTAGE OWNERSHIP INTEREST AND COULD MATERIALLY AFFECT THE MARKET PRICE OF
OUR COMMON STOCK.

As of December 31, 2002, there were approximately 18,200,333 shares of
our common stock issued and outstanding. Approximately 11,698,000 shares of
common stock are issuable upon exercise of employee and director stock options
under our current stock option plans and will become eligible for sale in the
public markets at prescribed times in the future. We also have outstanding
warrants, which are exercisable into an aggregate of 2,022,000 shares of common
stock. Also, the outstanding and issuable shares of preferred stock are
convertible into an aggregate of

29

19,215,837 additional shares of our common stock. In addition, 2,667,000 shares
of convertible preferred stock are issuable upon conversion of the remaining
$2,000,000 principal balance plus interest on the June Convertible Notes issued
to Edgewater, which could convert into approximately 8,000,000 shares of our
common stock. Lastly, the number of shares issuable upon the conversion of each
of our series of preferred stock is subject to adjustment upon the occurrence of
certain dilutive events, which could result in the issuance of additional shares
of common stock.

The issuance and sale of a significant number of shares of common stock
upon the exercise of stock options and warrants, the conversion of our
outstanding preferred stock, or the sales of a substantial number of shares of
common stock pursuant to Rule 144 or otherwise, could adversely affect the
market price of the common stock.

OUR ISSUANCE OF PREFERRED STOCK COULD MAKE IT DIFFICULT FOR ANOTHER COMPANY TO
ACQUIRE US, WHICH COULD DEPRESS THE PRICE OF OUR COMMON STOCK.

We currently have two series of preferred stock authorized and
outstanding and have entered into a term sheet that would require the
authorization of a third series. In addition, our board of directors has the
authority to create additional classes of preferred stock (subject to certain
protective provision of our current outstanding preferred stock). The preferred
stock has voting rights, liquidation preferences, and other rights superior to
the rights of our common stock. The potential issuance of additional preferred
stock may delay or prevent a change in control of us, discourage bids for the
common stock at a premium over the market price and adversely affect the market
price and the voting and other rights of the holders of our common stock.

30

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks relating to our operations result primarily from changes in
interest rates as well as credit risk concentrations. All of our contracts are
denominated in US$ and, therefore, we have no foreign currency risk.

INTEREST RATE RISK

Our exposure to market risk for changes in interest rates relates
primarily in our convertible debt obligations and term loan. These obligations
are currently all fixed rate instruments and therefore our risk is related to
our inability to lower the applicable interest rate in the event interest rates
decrease in the future. In the event interest rates increase in the future, we
may not be able to secure additional debt obligations or may be required to pay
substantially higher interest rates than we currently pay.

In addition, we have exposure to market risk for changes in interest
rates in our line of credit facility. The line of credit is priced at prime plus
1% on a fully-floating basis. Therefore our risk is related to rising interest
rates in the future.

CREDIT RISKS

Our financial instruments that are exposed to concentrations of credit
risk consist primarily of trade receivables. Concentrations of credit risk with
respect to receivables are a result of a limited number of clients and their
significant percentage of total accounts receivable. We perform periodic credit
evaluations of our clients' financial condition and generally do not require
collateral. Two customers account for 41% and 53% of total accounts receivable
as of December 31, 2002 and 2001, respectively. At December 31, 2002, two other
customers accounted for 13% and 11% of accounts receivable. No other single
group or customer represents greater than 10% of total accounts receivable for
2002 or 2001.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is included in the Financial
Statements found within this Annual Report on Form 10-K beginning on page F-1.

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

None.

31

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Our business, property and affairs are managed under the direction of
our Board of Directors. Members of our Board are kept informed of our business
through discussions with our Chairman and Chief Executive Officer and other
officers, by reviewing materials provided to them, by visiting our offices, and
by participating in meetings of the Board and its committees.

Shareholders elect our directors annually. Our bylaws provide that the
number of our directors will be determined by the Board of Directors but shall
not be less than three.

Our current directors and officers are as follows:

Eric Loeffel has served on our Board since October 2002 and was elected
Chairman in December 2002. Mr. Loeffel has served as the President and Chief
Executive Officer of Isochron Data Corporation, an Austin, Texas based provider
of data management solutions for companies with remote equipment from 2001 to
the present. Mr. Loeffel has more than fifteen years of business strategy,
product marketing, product development, and executive-level operations
experience with companies such as Intuit Inc., Deloitte & Touche and onQ
Technology, where he served as President, CEO and Director. He is a Certified
Public Accountant.

Panna Sharma has served on our Board since August 2001. Mr. Sharma is
the founder, CEO and Managing Partner of The Sharma Group, a privately held,
specialty investment banking firm focused on emerging technology and emerging
services companies with presence in New York, Atlanta and Los Angeles. Prior to
founding The Sharma Group in 2001, Mr. Sharma spent three and one-half years at
iXL Inc. (later merged with Scient) in the roles of Senior Vice President of
E-Business Solutions and Chief Strategy Officer. For the six years prior to his
being at iXL Inc., Mr. Sharma helped successfully found, manage and sell or take
public two other consulting and professional services firms.

Mark McManigal has served on our Board since October 2001. Mr. McManigal
is a Partner of The Edgewater Funds, a private equity and venture capital fund.
Mr. McManigal has been involved with Edgewater since 1991 and focuses primarily
on the firm's information technology sector investments. Prior to joining
Edgewater, he was a partner in a law firm where he specialized in transactional
law, securities law and real estate transactions. Mr. McManigal also served as
Vice President and General Counsel for Krause Gentle Corporation.

John A. Svahn has served on our Board since November 2001. Mr. Svahn is
the Chairman of the Board of Directors of Capital Associates, Inc. and has held
such position since November 1994. Mr. Svahn has also served on the Board of
Directors of Logisticare, Inc. since July 2001. Prior to assuming his current
position at Capital Associates, Inc., he was the Chairman and President of
Government Services of Maximus, Inc.

Robert A. Jensen has served as our Chief Operating Officer and Chief
Financial Officer since June 17, 2002. Mr. Jensen has worked extensively with
technology companies and emerging growth businesses. Prior to joining EpicEdge,
he served as President and Chief Executive Officer of onQ Technology, Inc., a
global provider of backend services to the semiconductor industry, from May 2000
to October 2001. Mr. Jensen served as Chief Financial Officer of onQ from June
1999 to April 2000. He negotiated the sale of onQ before joining EpicEdge.
Before joining onQ, he served first as Chief Financial Officer, then Chief
Operating Officer and finally Chief Executive Officer of MINC Incorporated, an
Electronic Design Automation software development company, from May 1996 to
February 1999. He supervised the sale of MINC before joining onQ. Mr. Jensen
received a B.A. in Mathematics and Economics from the University of Kansas and
an M.B.A. from Indiana University. He is a Certified Public Accountant.

Rob Cohan has served as our Executive Vice President, Enterprise
Solutions since December 1999. Mr. Cohan brings more than 12 years of experience
in information technology, enterprise application consulting and business
operations to EpicEdge. He has served in a consulting and engagement management
capacity to governmental and commercial clients on enterprise business
application solutions, including the ERP and e-solution areas, for more than
five years. Rob was a co-founding partner of Dynamic Professional Services, LLC,
a professional services firm acquired by EpicEdge that provided PeopleSoft
consulting services to governmental and commercial clients, from 1996 to 1999.
Rob earned a Bachelors degree in Business Administration from the University of
Texas in San Antonio and is a Certified Public Accountant.

Mark Slosberg has served as our Vice President of eSolutions since
December 1999. He has more than twenty years experience in information
technology and e-business, with special focus on integrating business
imperatives with technological opportunities. Previously, Mr. Slosberg was the
founder and president of NET Information Systems, before its acquisition by
EpicEdge in 1999. At NET he planned, sold and delivered complex and innovative
information technology projects to commercial, government and non-profit
organizations from 1981 to 1999. He has been responsible for implementations
that include internal and external websites, directory servers, large server
farms, LAN and WAN network and security designs, custom application development,
customer service applications, product data management, job costing, accounting
and distribution. Mr. Slosberg received two Bachelor's of Science degrees from
the University of Washington.

32

Directors serve until the expiration of their term at the annual meeting
of shareholders. All officers serve at the discretion of the Board of Directors.
There is no family relationship between or among any executive officers and
directors.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities and Exchange Act of 1934 requires our
directors and executive officers, and persons who own beneficially more than ten
percent (10%) of our common stock, to file reports of ownership and changes of
ownership with the Securities and Exchange Commission. Copies of all filed
reports are required to be furnished to us pursuant to Section 16(a). Based
solely on the reports received by us and on written representations from
reporting persons, we believe that the directors, executive officers, and
greater than ten percent (10%) beneficial owners complied with all applicable
filing requirements during the fiscal year ended December 31, 2002, except as
follows: Robert A. Jensen failed to timely file a Form 3 upon joining the
Company.

33

ITEM 11. EXECUTIVE COMPENSATION AND OTHER MATTERS

EXECUTIVE COMPENSATION

The following table sets forth certain information regarding
compensation we paid to our chief executive officer and our five most highly
compensated executive officers other than our chief executive officer who each
earned more than $100,000 during 2002. These executives are referred to as the
named executive officers elsewhere in this report.

SUMMARY COMPENSATION TABLE

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

(1) Other Annual Compensation is comprised of sales commissions.

(2) Richard Carter was CEO as of December 31, 2002 and accepted that position
on 4/24/01. Carter resigned as CEO on 2/12/03 and the Company is currently
searching for a new CEO.

(3) Peter Davis became an EpicEdge employee on 3/1/00 and resigned on 1/30/03.

(4) Peter B. Covert became an EpicEdge employee on 12/11/00 and resigned on
10/15/02.

(5) Sam DiPaola became an EpicEdge employee on 4/15/00 and resigned on
8/31/02.

34

STOCK OPTIONS

Our 1999 Stock Option Plan and 2002 Stock Option Plan for Employees
provides for the issuance of an aggregate 17,817,311 shares of our common stock
upon exercise of options granted under the plans. As of December 31, 2002,
options to purchase an aggregate 11,698,474 shares of our common stock were
outstanding under the plans.

STOCK OPTIONS GRANTED IN 2002

The following table provides the specified information concerning grants
of options to purchase our common stock made during 2002 to our named executive
officers:

(1) Potential gains are net of exercise price, but before taxes associated
with exercise. These amounts represent certain assumed rates of
appreciation only, based on SEC rules. Actual gains, if any, on stock
option exercises are dependent on the future performance of the Common
Stock, overall market conditions and the option holders' continued
employment through the vesting period. The amounts reflected in this
table may not necessarily be achieved.
(2) All options granted in 2002 under the 1999 and 2002 Stock Option Plans
vest over a three-year life and expire ten years after the date of
grant. Terminated employees' options expire 90 days after termination
date.

(3) All options were granted at market value on the date of grant.

35

AGGREGATED OPTION EXERCISES IN 2002 AND YEAR-END OPTION VALUES

The following table provides information concerning exercises of options
to purchase our common stock in 2002, and unexercised options held as of
December 31, 2002, by our named executive officers. [A portion of the shares
subject to these options are not yet vested, and thus would be subject to
repurchase by EpicEdge at a price equal to the option exercise price, if the
corresponding options were exercised before those shares had vested.] There were
no exercises of options by any of the named executive officers during 2002.

COMPENSATION OF DIRECTORS

Non-employee directors are reimbursed for their reasonable travel
expenses in attending meetings of our Board of Directors. Both employee and
non-employee directors are eligible to receive options under our 1999 Employee
Stock Option Plan and our 2002 Stock Option Plan. Directors who are also
employees do not receive any additional compensation for their service on the
Board of Directors. In connection with our offering a position on our Board of
Directors to John A. Svahn, Eric Loeffel and Panna Sharma, each was issued a
warrant to purchase 30,000 shares of our common stock at $0.28 per share.
Additionally, beginning on April 25, 2002, each non-employee director will
receive cash compensation of $1,000 per meeting for board meetings that they
attend in person.

Consulting Agreement with Eric Loeffel.

In January 2003, we entered into a consulting agreement with Mr.
Loeffel, whereby Mr. Loeffel is to provide consulting services to us, including
the development of marketing and sales plans for each of our business areas. In
addition to general consulting agreement provisions, Mr. Loeffel's consulting
agreement includes:

o a base consulting term ending on June 30, 2003;

o a base consulting fee for services of $15,000 per month;

o a one time bonus fee of $30,000 upon completion of certain
consulting services;

36

CHANGE OF CONTROL ARRANGEMENTS/CERTAIN EMPLOYMENT AGREEMENTS

Option Acceleration

The terms of our 1999 Employee Stock Option Plan and our 2002 Employee
Stock Option Plan provide that in the event that we are merged or consolidated
with another corporation and we are not the surviving corporation, or if we are
liquidated or sell or otherwise dispose of all or substantially all of our
assets while unexercised options remain outstanding under such plan, each
outstanding option that is not assumed or replaced by the successor corporation
will automatically accelerate in full and become immediately exercisable.

Employment Agreements with Named Executive Officers

We have entered into employment agreements with each of the named
executive officers. In general and except as provided below, each of the
employment agreements with the named executive officers is substantially similar
and provides for a salary, at-will employment and entitles the respective
officer to the following perquisites: (1) participation in our employee benefit
plans, (2) reimbursement for all business travel and other out-of-pocket
expenses reasonably incurred by the officer in the performance of his duties,
and (3) other executive perquisites as determined by the Board. Each of the
agreements also provides that the respective officer's employment with us is on
an at-will basis, provided that if either party terminates the officer's
employment, such party must provide at least sixty (60) days advance written
notice. In any event, upon the termination of the officer's employment with us
for any reason other than for cause or resignation, the officer shall be
entitled to receive as severance such officer's base salary for an additional
sixty (60) days from the date of termination. Otherwise, regardless of the
reasons for termination, all of our obligations under the employment agreement,
as amended, shall cease upon such termination, except our obligation to pay the
officer's base salary and provide the other benefits set forth in the agreement
prorated through the date of such termination and to comply with any and all
state and federal laws and regulations applying to any such benefits. Each of
the agreements also provides that during the respective officer's term and for a
six-month period thereafter, the officer shall not compete with the Company nor
solicit any of its employees or customers.

Employment Agreement with Rob Cohan.

In June of 1999, we entered into an employment agreement with Mr. Cohan,
which agreement was amended on April 16, 2002. In addition to the above general
terms, Mr. Cohan's employment agreement includes:

o base salary of $150,000 per year;

o increases to his base salary and bonuses of up to $75,000 per
year based upon his attainment of certain management bonus
objectives, as determined by the Chief Executive Officer;

o 20.417% of the Bonus Pool (as described above), if it is
approved; and

o a one-time stock option grant for 2,106,451 shares of our common
stock to be issued pursuant to the 2002 Stock Option Plan (as
described above), subject to such plan's approval by the
shareholders.

Employment Agreement with Mark Slosberg.

In November of 1999, we entered into an employment agreement with Mr.
Slosberg, which agreement was amended on April 16, 2002. In addition to the
above general terms, Mr. Slosberg's employment agreement includes:

o base salary of $135,000 per year;

o increases to his base salary and bonuses of up to $67,500 per
year based upon his attainment of certain management bonus
objectives, as determined by the Chief Executive Officer;

o 8.75% of the Bonus Pool (as described above), if it is approved;
and

o a one-time stock option grant for 902,765 shares of our common
stock to be issued pursuant to the 2002 Stock Option Plan (as
described above), subject to such plan's approval by the
shareholders.

37

Former Officers:

Employment Agreement with Richard Carter.

In June of 1999, we entered into an employment agreement with Mr.
Carter, which agreement was amended on April 16, 2002. This agreement was
terminated when Mr. Carter resigned on February 12, 2003. In addition to the
above general terms, Mr. Carter's employment agreement included:

o base salary of $200,000 per year.

o no provision for severance upon his termination for any reason;

o semi-annual review of all bonuses and annualized stock options;

o 21% of the Bonus Pool (as described above), subject to such
pool's final terms receiving Board approval and shareholder
approval at the next shareholder meeting; and

o a one-time stock option grant for 2,166,635 shares of our common
stock to be issued pursuant to the 2002 Stock Option Plan (as
described above), subject to such plan's approval by the
shareholders.

Employment Agreement with Peter Davis.

In February of 2000, we entered into an employment agreement with Mr.
Davis, which agreement was amended on April 16, 2002. This agreement was
terminated when Mr. Davis resigned on January 30, 2003. In addition to the above
general terms, Mr. Davis' employment agreement included:

o base salary of $150,000 per year;

o increases to his base salary and bonuses of up to $67,500 per
year based upon his attainment of certain management bonus
objectives, as determined by the Chief Executive Officer;

o 8.75% of the Bonus Pool (as described above), if it is approved;
and

o a one-time stock option grant for 902,765 shares of our common
stock to be issued pursuant to the 2002 Stock Option Plan (as
described above), subject to such plan's approval by the
shareholders.

Employment Agreement with Sam DiPaola.

In April of 2000, we entered into an employment agreement with Mr.
DiPaola, which agreement was amended on April 16, 2002. This agreement was
terminated when Mr. DiPaola resigned on August 31, 2002. In addition to the
above general terms, Mr. DiPaola's employment agreement included:

o base salary of $151,000 per year;

o increases to his base salary and bonuses of up to $75,000 per
year based upon his attainment of certain management bonus
objectives, as determined by the Chief Executive Officer;

o a one-time stock option grant of 150,000 shares of our common
stock to be issued pursuant to the 1999 Stock Option Plan;

o reimbursement by us of any legal costs associated with his
departure from his position with his former employer

o an optional additional allotment of up to 67,000 shares of our
common stock, at the discretion of our senior management, as a
performance bonus by December 31, 2000

o 9.042% of the Bonus Pool (as described above), if it is approved;
and

o a one-time stock option grant for 932,857 shares of our common
stock to be issued pursuant to the 2002 Stock Option Plan (as
described above), subject to such plan's approval by the
shareholders.

Employment Agreement with Peter B. Covert.

On April 16, 2002, we entered into an employment agreement with Mr.
Covert. This agreement was terminated when Mr. Covert resigned on October 15,
2002. In addition to the above general terms, Mr. Covert's employment agreement
included:

o base salary of $135,000 per year;

o increases to his base salary and bonuses of up to $67,500 per
year based upon his attainment of certain management bonus
objectives, as determined by the Chief Executive Officer;

o 7.583% of the Bonus Pool (as described above), if it is approved;
and

o a one-time stock option grant for 782,396 shares of our common
stock to be issued pursuant to the 2002 Stock Option Plan (as
described above), subject to such plan's approval by the
shareholders.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

None of the directors has a relationship that would constitute an
interlocking relationship with executive officers or directors of another
entity.

For 2002, our Compensation Committee consisted of Panna Sharma and Mark
McManigal. As noted above, Mr. McManigal is a Partner of The Edgewater Funds, a
private equity and venture capital fund which holds a significant number of
shares of our common stock, preferred stock and holds $2 million of our
outstanding secured convertible debt. Information concerning Mr. McManigal's
relationship with The Edgewater Funds and

38

describing certain transactions between The Edgewater Funds and our Company is
set forth under the heading "Certain Relationships and Related Transactions" and
under the heading "Security Ownership of Certain Beneficial Owners and
Management," which information is incorporated herein by reference.

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

The Compensation Committee of the Board of Directors is currently
comprised of two non-employee members of our Board of Directors. For 2002, the
Compensation Committee consisted of Panna Sharma and Mark McManigal. As noted
above, Mr. McManigal is a Partner of The Edgewater Funds, a private equity and
venture capital fund which holds a significant number of shares of our common
stock, preferred stock and holds $2 million of our outstanding secured
convertible debt. Information concerning Mr. McManigal's relationship with The
Edgewater Funds and describing certain transactions between The Edgewater Funds
and our Company is set forth under the heading "Certain Relationships and
Related Transactions" and under the heading "Security Ownership of Certain
Beneficial Owners and Management," which information is incorporated herein by
reference.

The Compensation Committee is responsible for establishing the
compensation package of the Chief Executive Officer. In addition, the
Compensation Committee reviews the recommendations of the Chief Executive
Officer regarding the performance and compensation levels for other executive
officers. In the absence of a Chief Executive Officer, the Compensation
Committee shall establish the compensation package for all executive officers.

The goals of our executive officer compensation policies are to attract,
retain and reward executive officers who contribute to our success, to align
executive officer compensation with our performance and to motivate executive
officers to achieve our business objectives. We use salary, bonus compensation
and option grants to attain these goals. The Compensation Committee has
compensation discussions with its business contacts and performs informal
inquiries of its peer group as well as certain published reference sources to
compare our compensation package with that of similarly sized high technology
companies.

Base salaries of all executive officers are reviewed annually by the
Compensation Committee and adjustments are made based on (i) salary
recommendations from the Chief Executive Officer, (ii) individual performance of
executive officers for the previous fiscal year, (iii) our financial results for
the previous year and (iv) reports to the Board of Directors from the
Compensation Committee concerning competitive salaries, scope of
responsibilities of the officer position and levels paid by similarly sized high
technology companies. We seek to compensate the executive officers at the median
range of compensation levels paid by similarly sized high technology companies.

The Board has approved an executive bonus program to link cash bonuses
for executive officers to our operating performance. Pursuant to this program,
the amount of bonuses paid is dependent upon us meeting appropriate business
targets. The Compensation Committee believes that this type of bonus program, in
which bonuses are based on our attaining established financial targets, properly
align the interests of its executive officers with the interests of
stockholders. Under this program, the Chief Executive Officer or Compensation
Committee establishes individual objectives in order to achieve the maximum
potential bonus award for the other executive officers. Generally, the maximum
potential bonus award is 50% of that executive's annual compensation. The
Compensation Committee establishes the objectives required of the Chief
Executive Officer in order for him to achieve his maximum potential bonus award.
In addition to bonuses paid in connection with corporate performance, the
Compensation Committee, in its discretion, may provide a bonus based on
individual achievement of individual performance goals, established at the
beginning of the year. Despite not meeting performance goals, nominal bonuses
were awarded to the executive officers as follows:

39

We strongly believe that equity ownership by executive officers provides
incentives to build stockholder value and aligns the interests of executive
officers with those of the stockholders, and therefore the Compensation
Committee makes periodic grants of stock options under the Option Plans. The
size of an option grant to an executive officer has generally been determined
with reference to similarly sized high technology companies, the
responsibilities and expected future contributions of the executive officer,
previous grants to that officer, as well as recruitment and retention
considerations. To assist us in retaining and motivating key employees, option
grants generally vest over a three-year period from the date of grant.

During 2002, the Board granted options under the 1999 Option Plan to the
following named executive officers in the following amounts:

During 2002, the Board granted options under the 2002 Option Plan to the
following named executive officers in the following amounts:

We have considered the provisions of Section 162(m) of the Internal
Revenue Code and related Treasury Department regulations which restrict
deductibility of executive compensation paid to our chief executive officer and
each of the four other most highly compensated executive officers holding office
at the end of any year to the extent such compensation exceeds $1,000,000 for
any of such officers in any year and does not qualify for an exception under the
statute or regulations. Income from options granted under the Stock Option Plan
would generally qualify for an exemption from these restrictions so long as the
options are granted by a committee whose members are non-employee directors. We
expect that the Compensation Committee will generally be comprised of
non-employee directors, and that to the extent such Committee is not so
constituted for any period of time, the options granted during such period will
not be likely to result in compensation exceeding $1,000,000 in any year. The
Committee does not believe that in general other components of our compensation
will be likely to exceed $1,000,000 for any executive officer in the foreseeable
future and therefore concluded that no further action with respect to qualifying
such compensation for deductibility was necessary at this time. In the future,
the Committee will continue to evaluate the advisability of qualifying its
executive compensation for deductibility of such compensation. The Committee's
policy is to qualify its executive compensation for deductibility under
applicable tax laws as practicable.

COMPENSATION COMMITTEE
Panna Sharma
Mark McManigal

40

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
ASSUMES INITIAL INVESTMENT OF $100
DECEMBER 2002

(GRAPH)

41

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table and notes thereto set forth certain information
regarding beneficial ownership of our common stock as of March 3, 2003 by (i)
each person known by us to beneficially own more than five percent of our common
stock, (ii) each of our directors, (iii) each named executive officer and (iv)
all of our directors and officers as a group. Unless otherwise noted, the
address for any officer or director is 5508 Two Ninety West, Suite 300, Austin,
Texas 78735. In addition to our common stock, our Series A Preferred Stock and
Series B Preferred Stock are entitled to vote on an as converted basis, and as a
single class with our common stock (collectively, our "Voting Stock"), on any
matter presented to our common stockholders, unless a separate class vote of the
common stock is required by Texas law.

- ----------

* Less than 1%.

(1) This column does not include shares of our common stock which are issuable
upon conversion of the Series A Preferred Stock and Series B Preferred Stock.
Each share of Series A Preferred Stock can vote as and convert into one share of
common stock. Each share of Series B Preferred Stock can vote as and convert
into three shares of common stock. However, these amounts are included in the
Voting Stock column on an as-converted basis.

(2) Pursuant to a Voting Agreement dated April 16, 2002, by and among Edgewater,
Fleck, Charles Leaver, Gerald Allen, John Paul DeJoria, Kelly Knake, Patrick
Loche, Jenta Rose and Carl Rose, all of the parties agreed to vote their shares
in order to elect a Board of Directors consisting of certain designated members.
In addition, Edgewater was given an irrevocable proxy to vote the shares of all
of the parties to the Voting Agreement other than Fleck. The address for the
Edgewater-Fleck Group is 900 North Michigan, Ave, 14th Floor, Chicago, IL 60611.

42

(3) Edgewater with voting control by Jim Gordon / Mark McManigal - Edgewater is
a member of the Edgewater -- Fleck Voting Group described in footnote (2) of
this table. As a result of the irrevocable proxy given to Edgewater in the
Voting Agreement the number of shares listed as beneficially owned by Edgewater
includes 339,700 shares of common stock owned by Charles Leaver, 100,000 shares
of common stock owned by Gerald Allen, 100,000 shares of common stock owned by
John Paul DeJoria, 311,300 shares of common stock owned by Kelly Knake (one of
our former officers), 2,500,000 shares of common stock owned by Jenta Rose and
2,684,150 shares of common stock owned by Carl Rose. The address for Edgewater
and Mr. McManigal is 900 North Michigan, Ave, 14th Floor, Chicago, IL 60611.

(4) Carl Rose -- Includes convertible notes of $900,000, which are convertible
at $.25 per share into 3,832,000 shares. Mr. Rose is a member of the Edgewater
- -- Fleck Voting Group described in footnote (1) of this table. The address for
Mr. Rose is 3200 Wilcrest #370, Houston, TX 77042.

(5) Fleck -- Represents Fleck T.I.M.E. Fund, Fleck Family Partnership and Fleck
T.I.M.E Overseas Fund. Includes 3,581,870 shares of Series A Preferred Stock and
593,185 shares of Series B Preferred Stock, which is convertible into 5,361,426
shares of common stock. Fleck is a member of the Edgewater -- Fleck Voting Group
described in footnote (1) of this table. The address for Fleck is 289 Greenwich
Ave, Greenwich, CT 06830.

(6) Jenta Rose - The address for Ms. Rose is 1013 Oak Knoll Court, Sugar Land TX
77478.

(7) John Paul DeJoria --Mr. DeJoria is included in the table because he is a
member of the Edgewater -- Fleck Voting Group described in footnote (1) of this
table. The address for Mr. DeJoria is 9701 Wilshire Blvd., Suite 1205, Beverly
Hills, CA 90212.

(8) Patrick Loche -- Mr. Loche is included in the table because he is a member
of the Edgewater -- Fleck Voting Group described in footnote (1) of this table.
The address for Mr. Loche is 5100 Westheimer, Suite 115, Houston, TX 77056.

(9) Bahram Nour-Omid -- Includes a warrant to purchase 1,000,000 shares of
common stock with an exercise price of $.01 exercisable at anytime. Also
includes 57,500 shares of common stock owed to Mr. Nour-Omid as part of his
compensation for services as a director. Mr. Nour-Omid is no longer a director.
The address for Mr. Nour-Omid is 289 Greenwich Ave, Greenwich, CT 06830.

(10) Charles H. Leaver - Includes 260,000 options with an exercise price of
$5.00 per share. Mr. Leaver is included in the table because he is a member of
the Edgewater-Fleck Voting Group described in footnote (1) of this table. The
address for Mr. Leaver is 3200 Wilcrest #370, Houston, TX 77042.

(11) Mark Slosberg -- Includes 14,000 shares owned by his father-in-law; 1,500
shares owned by his father; 40 shares owned by his nephew; 45,000 options with
an exercise price of $7.563 per share; 14,111 options with an exercise price of
$1.063 per share; 13,500 options with an exercise price of $1.063 per share;
4,902 options with an exercise price of $0.20 per share; and 350,000 shares held
under the name Hanging Valley Enterprises, Inc. (f/k/a Net Information Systems).

(12) Kelly Knake - Mr. Knake is included in the table because he is a member of
the Edgewater-Fleck Voting Group described in footnote (1) of this table. The
address for Mr. Knake is 522 Mill Place Ct., Sugar Land, TX 77478.

(13) Rob Cohan -- Includes 20,000 options with an exercise price of $3.25 per
share; 15,000 options with an exercise price of 1.063 per share; 20,000 options
with an exercise price of $16.50 per share and 4,902 options with an exercise
price of $0.20 per share.

(14) Gerald Allen -- Mr. Allen is included in the table because he is a member
of the Edgewater -- Fleck Voting Group described in footnote (1) of this table.
The address for Mr. Allen is P.O. Box 3454 D, Las Vegas, NV 89133.

(15) Eric Loeffel -- Comprised of 30,000 warrants with an exercise price of
$0.28 per share.

(16) Panna Sharma -- Comprised of 30,000 warrants with an exercise price of
$0.28 per share. The address for Mr. Sharma is 1920 Ardmore Road, Atlanta, GA
30309.

(17) John Svahn -- Comprised of 30,000 warrants with an exercise price of $0.28
per share. The address for Mr. Svahn is P.O. Box 62, Chester, MD 21619.

43

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During 2002, we received a total of $3,650,000 in additional funding
from Edgewater Private Equity Fund III, L.P. ("Edgewater") under the June 2001
Convertible Notes as follows - February ($610,000), March ($250,000), April
($740,000), May ($500,000) and August ($500,000). Edgewater is a major
shareholder who beneficially owns 56% of our common stock and 68% of our voting
stock. In addition, one of our directors, Mr. McManigal, is a principal of
Edgewater. See Item 12 - "Stock Ownership of Certain Beneficial Owners and
Management." For a more detailed description of the June 2001 Convertible Notes
and the funding, please see Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."

On April 16, 2002, we entered into the Note Agreement with Edgewater,
Fleck T.I.M.E. Fund, L.P. ("Fleck T.I.M.E."), Mr. John Paul DeJoria ("DeJoria")
and Mr. Patrick Loche ("Loche"). Fleck T.I.M.E., DeJoria and Loche are also
major stockholders. See Item 12 - "Stock Ownership of Certain Beneficial Owners
and Management." Pursuant to the Note Agreement, the holders of the July 2000
Convertible Notes and $1,000,000 of the December 2000 Convertible Notes agreed
to convert the outstanding principal balance of such notes and accrued interest
into shares of the our Series A Preferred Stock at the Equity Closing (as
defined in the Note Agreement). In addition, the holders of the June 2001
Convertible Notes agreed to convert most of the outstanding principal balance of
such notes and accrued interest into shares of our Series B Preferred Stock at
the Equity Closing.

On April 16, 2002, in conjunction with the Note Agreement, the November
2000 Convertible Notes in the amount of approximately $958,000 (including
accrued interest) held by Carl Rose, our former Chairman and a major
stockholder, were renegotiated. The new terms are that the November 2000
Convertible Notes still bear an annual interest rate of 8%, are convertible at
the lenders' option into shares of our common stock at $.25 per share and mature
on December 1, 2004. We are making monthly interest-only payments of
approximately $6,400 per month.

On November 6, 2002, we entered into a Loan and Security Agreement with
SVB, whereby SVB agreed to loan us up to $1,400,000. This facility includes a
$1,000,000 revolving line of credit that is an accounts receivable based
operating line of credit to support short-term working capital requirements as
well as a $400,000 term note. Of the $1,400,000 credit facility with SVB,
$1,000,000 was guaranteed by Edgewater. The SVB debt is secured by all of our
assets.

On November 11, 2002 at the Equity Closing, the July 2000 Convertible
Notes and $1,000,000 of the December 2000 Convertible Notes, which were held by
Edgewater and Fleck T.I.M.E., plus accrued interest were converted into
9,695,481 shares of Series A Preferred Stock, resulting in those former debt
holders receiving 6,113,611 (Edgewater) and 3,581,870 (Fleck T.I.M.E.) shares of
Series A Preferred Stock, respectively. Also on November 11, 2002, in accordance
with the Note Agreement, $2,150,000 of convertible debt, which was held by
Edgewater, Fleck, DeJoria and Loche, and the related accrued and unpaid interest
of $230,089, was converted into 3,173,145 shares of Series B Preferred Stock,
resulting in those former debt holders receiving 1,622,681 (Edgewater), 593,185
(Fleck T.I.M.E.), 593,363 (DeJoria) and 364,222 (Loche) shares of Series B
Preferred Stock, respectively.

The amount of the June 2001 Convertible Notes converted into Series B
Preferred Stock represented all but $2,000,000 of the total of those notes which
is held by Edgewater. This $2,000,000, known as the Edgewater Special Debt, can
be converted into Series B Preferred Stock at the sole election of the holder,
Edgewater. However, in November 2002, we entered into a Term Sheet with
intentions of entering into a B-1 Note Agreement with Edgewater whereby
Edgewater will have the option to convert the entire outstanding principal
balance of the Edgewater Special Debt, plus accrued interest into shares of our
Series B-1 Preferred Stock. In March 2003, we reached an agreement on the
$2,000,000 outstanding balance of the June Convertible Notes to extend the due
date to January 31, 2006 through a New Substitute Note. In connection with the
New Substitute Note, we intend to issue Edgewater a warrant to purchase up to
1,333,333 shares of Series B-1 Preferred Stock at an exercise price of $.01 per
share.

However, the holder of the remaining $500,000 of the December 2000
Convertible Notes, Bahram Nour-Omid, one of our former directors and a major
shareholder, demanded payment. In April 2002, we renegotiated the terms of his
December 2000 Convertible Note. Of the remaining $500,000, $300,000 was paid in
April 2002 and the remaining $221,000, consisting of remaining principle and
accrued interest as of April 2002, plus accrued and unpaid interest of $13,000
was paid on January 10, 2003.

For a description of the terms of the Series A Preferred Stock, Series
B Preferred Stock and anticipated terms of the Series B-1 Preferred Stock, see
Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources." Also, for a complete
description of the securities held by these entities and individuals, please see
Item 12 - "Stock Ownership of Certain Beneficial Owners and Management."

On January 9, 2003, we entered into a Loan Modification Agreement with
SVB which amended the Loan and Security Agreement and temporarily increased the
line of credit extended from $1,000,000 to $1,300,000 until July 31, 2003 at
which time the line will be reduced to $1,000,000 for the remaining term of the
agreement. Edgewater agreed to guarantee the amount to which the line of credit
exceeds $1,000,000 on July 31, 2003, up to a maximum of $300,000. We intend to
issue Edgewater a warrant to purchase up to 200,000 shares of our Series B-1
Preferred Stock at an exercise price of $0.01 per share in consideration for
Edgewater entering into the Guarantee, whether or not the Guarantee is required
or called upon by the Bank.

In March 2003, we reached an agreement on the $2,000,000 outstanding
balance of the June Convertible Notes to extend the due date to January 31, 2006
and has a stated interest rate of 8%.

44

PART IV

ITEM 14. CONTROLS AND PROCEDURES

(a) Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we evaluated the effectiveness of
the design and operation of our disclosure controls and
procedures, as such term is defined under Rule 13a-14(c)
promulgated under the Securities Exchange Act of 1934, as
amended, within the 90 day period prior to the filing date of
this report. Based on this evaluation, our principal executive
officer and principal financial officer concluded that our
disclosure controls and procedures were effective as of that
date.

(b) There have been no significant changes (including
corrective actions with regard to significant deficiencies or
material weaknesses) in our internal controls or in other
factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in
paragraph (a) above.

ITEM 15. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K

Upon written request, we will provide, without charge, a copy of our Annual
Report on Form 10-K, including the financial statements and financial statement
schedules for our most recent fiscal year. All requests should be sent to:

EpicEdge, Inc 5508 Two Ninety West Suite 300 Austin, Texas, 78735 Attention:
Robert A. Jensen - COO/CFO

(a) The following documents are filed as part of this report:

1. Financial Statements

Independent Auditors' Report
Balance Sheets at December 31, 2002 and 2001
Statements of Operations for the years ended December 31,
2002, 2001 and 2000
Statements of Stockholders' Equity for the years ended
December 31, 2002, 2001 and 2000
Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000
Notes to Financial Statements

2. Financial Statement Schedule

Independent Auditors' Report
Schedule II--Valuation and Qualifying Accounts

All other schedules are omitted because they are either not
required, not applicable or the required information is
otherwise included.

3. Exhibits

The following exhibits are filed as part of, or incorporated
by reference into, this Form 10-K.

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

2.1 Exchange Agreement, dated December 31, 1998, by and between Loch
Exploration, Inc., Loch Energy, Inc., Design Automation Systems,
Inc. and Carl Rose (Incorporated herein by reference to exhibit
2.1 to our Current Report on Form 8-K filed with the Securities
and Exchange Commission on January 15, 1999)

2.2 Amendment to Exchange Agreement, dated January 27, 1999, effective
December 31, 1998, by and between Loch Exploration, Inc., Loch
Energy, Inc., Design Automation Systems, Inc., Carl Rose, Glen
Loch, Southport Capital Corporation, Carl R. Rose, Trustee,
Charles Leaver and Kelly Knake (Incorporated herein by reference
to exhibit 2.2 to our Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 27, 1999)

2.3 Agreement and Plan of Merger, dated March 31, 1999, by and between
Loch Exploration, Inc., the Shareholders of COAD Solutions, Inc.
and COAD Solutions, Inc. (Incorporated herein by reference to
exhibit 2.2 to our Annual Report on Form 10-KSB for the year ended
December 31, 1998 filed with the Securities Exchange Commission on
April 15, 1999)

45

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

2.4 Articles of Merger of Parent and Subsidiary between Loch
Exploration, Inc. and Design Automation Systems, Inc. filed with
the Texas Secretary of State on April 12, 1999 (Incorporated
herein by reference to exhibit 2.4 to our Annual Report on Form
10-KSB for the year ended December 31, 1998 filed with the
Securities Exchange Commission on April 15, 1999)

2.5 Agreement and Plan of Merger, dated May 1999, by and between
Design Automation Systems, Inc., Dynamic Professional Services,
L.L.C. and COAD Solutions, Inc. (Incorporated herein by reference
to exhibit 2.1 to our Current Report on Form 8-K filed with the
Securities and Exchange Commission on June 14, 1999)

2.6 Agreement and Plan of Merger, dated July 30, 1999, by and between
Design Automation Systems, Inc., Connected Software Solutions,
Inc., COAD Solutions, Inc., Roger Barnes and Lance Dunbar
(Incorporated herein by reference to exhibit 10.1 to our Current
Report on Form 8-K filed with the Securities and Exchange
Commission on August 11, 1999)

2.7 Purchase and Sale Agreement, dated October 29, 1999, by and
between Design Automation Systems, Inc., COAD Solutions, Inc. and
Net Information Systems, Inc. (Incorporated herein by reference to
exhibit 2.1 to our Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 14, 1999)

2.8 Agreement and Plan of Merger, dated February 29, 2000, by and
between Design Automation Systems, Inc., EACQ, LLC, The Growth
Strategy Group, Inc., Peter Davis, Jean Albert and Michael McCahey
(Incorporated herein by reference to exhibit 2.1 to our Current
Report on Form 8-K filed with the Securities and Exchange
Commission on March 15, 2000)

2.9 Agreement and Plan of Merger, dated June 6, 2000, by and between
the Company, IPS Associates, Inc., EDG Acquisition Corporation,
William Kern, Isabelle Suares, Peter Heinrich and William Johnson
(Incorporated herein by reference to exhibit 2.1 to our Current
Report on Form 8-K filed with the Securities and Exchange
Commission on July 14, 2000)

2.10 Amendment to Agreement and Plan of Merger, dated June 30, 2000, by
and between the Company, IPS Associates, Inc., EDG Acquisition
Corporation, William Kern, Isabelle Suares, Peter Heinrich and
William Johnson (Incorporated herein by reference to exhibit 2.2
to our Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 14, 2000)

2.11 Asset Purchase Agreement, dated July 19, 2000, by and between the
Company, Tumble Interactive Media, Inc. and Charles C. Vornberger
(Incorporated herein by reference to exhibit 2.11 to our Quarterly
Report on Form 10-QSB for the quarter ended September 30,2000
filed with the Securities and Exchange Commission on November 21,
2000)

2.12 Stock Purchase Agreement, dated January 1, 2001, by and between
the Company, RED & BLUE, INC. and IPS Associates, Inc. Employee
Stock Ownership Plan for the sale of all the outstanding stock of
IPS Associates, Inc. (Incorporated herein by reference to exhibit
99.1 to our Current Report on Form 8-K filed with the Securities
and Exchange Commission on March 5, 2001)

3.1 Restated Articles of Incorporation filed with the Texas Secretary
of State on July 18, 2002 (Incorporated herein by reference to
exhibit 3.1 to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002 filed with the Securities and Exchange
Commission on August 14, 2002)

3.2 Second Amended and Restated Bylaws (Incorporated herein by
reference to exhibit 3.7 to our Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002 filed with the Securities and
Exchange Commission on May 20, 2002)

4.1 Specimen Common Stock Certificate (Incorporated herein by
reference to exhibit 4.1 to our Annual Report on Form 10-K for the
year ended December 31, 2001 filed with the Securities and
Exchange Commission on April 17, 2002)

4.2 Specimen Series A Convertible Preferred Stock Certificate
(Incorporated herein by reference to exhibit 4.2 to our Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002 filed
with the Securities and Exchange Commission on November 14, 2002)

46

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

4.3 Specimen Series B Convertible Preferred Stock Certificate
(Incorporated herein by reference to exhibit 4.3 to our Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002 filed
with the Securities and Exchange Commission on November 14, 2002)

4.4 Common Stock Warrant Purchase Agreement, dated December 29, 1999,
by and between the Company and FINOVA Capital Corporation
(Incorporated herein by reference to exhibit 10.29 to our
Quarterly Report on Form 10-QSB for the quarter ended September
30,2000 filed with the Securities and Exchange Commission on
November 21, 2000)

4.5 Common Stock Purchase Warrant issued by the Company to FINOVA
Capital Corporation on December 29, 1999 (Incorporated herein by
reference to exhibit 10.30 to our Quarterly Report on Form 10-QSB
for the quarter ended September 30,2000 filed with the Securities
and Exchange Commission on November 21, 2000)

4.6 Stock Purchase Agreement, dated February 18, 2000, by and between
Design Automation Systems, Inc., Edgewater Private Equity Fund
III, L.P., Aspen Finance Investors I, LLC, Fleck T.I.M.E. Fund,
LP, Fleck Family Partnership II, LP, LJH Partners LP, Wain
Investment, LLC, Gerald C. Allen, and John Paul DeJoria
(Incorporated herein be reference to exhibit 4.1 to our Current
Report on Form 8-K filed with the Securities and Exchange
Commission on February 28, 2000)

4.7 Registration Agreement, dated February 18, 2000, by and between
Design Automation Systems, Inc., Edgewater Private Equity Fund
III, L.P., Aspen Finance Investors I, LLC, Fleck T.I.M.E. Fund,
LP, Fleck Family Partnership II, LP, LJH Partners LP, Wain
Investment, LLC, Gerald C. Allen, and John Paul DeJoria
(Incorporated herein be reference to exhibit 4.2 to our Current
Report on Form 8-K filed with the Securities and Exchange
Commission on February 28, 2000)

4.8 Warrant Certificate issued by Design Automation Systems, Inc. to
Aspen Finance Group on February 18, 2000 (Incorporated herein by
reference to exhibit 4.6 to our Annual Report on Form 10-K for the
year ended December 31, 2001 filed with the Securities and
Exchange Commission on April 17, 2002)

4.9 Form of Warrant issued by Design Automation Systems, Inc. to
Robert Maddocks for 25,000 shares of our Common Stock and to
Robert Heller for 15,000 shares of our Common Stock on March 20,
2000 (Incorporated herein by reference to exhibit 4.7 to our
Annual Report on Form 10-K for the year ended December 31, 2001
filed with the Securities and Exchange Commission on April 17,
2002)

4.10 Warrant to Purchase Common Stock issued by the Company to Reliant
Energy, Inc. on April 30, 2000 (Incorporated herein by reference
to exhibit 4.8 to our Annual Report on Form 10-K for the year
ended December 31, 2001 filed with the Securities and Exchange
Commission on April 17, 2002)

4.11 Warrant issued by the Company to Nicholas L. Reding on May 25,
2000 (Incorporated herein by reference to exhibit 4.9 to our
Annual Report on Form 10-K for the year ended December 31, 2001
filed with the Securities and Exchange Commission on April 17,
2002)

4.12 Amended and Restated Shareholders' Agreement, dated July 21, 2000,
by and between the Company, Carl Rose, Charles Leaver, Jeff
Sexton, Kelly Knake, Edgewater Private Equity Fund III, L.P.,
Aspen Finance Investors I, LLC, Fleck T.I.M.E. Fund, LP, Fleck
Family Partnership II, LP, LJH Partners LP, Wain Investment, LLC,
Gerald C. Allen and John Paul DeJoria (Incorporated herein by
reference to exhibit 4.41 to our Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002 filed with the Securities and
Exchange Commission on May 20, 2002)

4.13 Convertible Bridge Loan Agreement, dated July 21, 2000, by and
between the Company, Edgewater Private Equity Fund III, L.P. and
Fleck T.I.M.E. Fund, LP (Incorporated herein by reference to
exhibit 10.27 to our Quarterly Report on Form 10-QSB for the
quarter ended September 30,2000 filed with the Securities and
Exchange Commission on November 21, 2000)

4.14 Form of Convertible Promissory Note issued by the Company to
Edgewater Private Equity Fund III, L.P. for a principal sum of
$3,750,000 and to Fleck T.I.M.E. Fund, LP for a principal sum of
$1,250,000 on July 21, 2000 (Incorporated herein by reference to
exhibit 4.25 to our Annual Report on Form 10-K for the year ended
December 31, 2001 filed with the Securities and Exchange
Commission on April 17, 2002)

47

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

4.15 Form of Amendment to Convertible Promissory Note, dated July 20,
2001, by and between each of Edgewater Private Equity Fund III and
Fleck T.I.M.E. Fund, LP (Incorporated herein by reference to
exhibit 4.26 to our Annual Report on Form 10-K for the year ended
December 31, 2001 filed with the Securities and Exchange
Commission on April 17, 2002)

4.16 Form of Amendment No. 2 to Convertible Promissory Note, dated
August 1, 2002, by and between each of Edgewater Private Equity
Fund III, L.P. and Fleck T.I.M.E. Fund, L.P. (Incorporated herein
by reference to exhibits 4.43 and 4.44 to our Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002 filed with the
Securities and Exchange Commission on August 14, 2002)

4.17 Stock Purchase Agreement, dated September 29, 2000, by and between
the Company, Edgewater Private Equity Fund III, L.P. and Fleck
T.I.M.E. Fund, LP (Incorporated herein by reference to exhibit
99.2 to our Current Report on Form 8-K filed with the Securities
and Exchange Commission on October 16, 2000)

4.18 Shareholders' Agreement, dated September 29, 2000, by and between
the Company, Carl Rose, Charles Leaver, Jeff Sexton, Edgewater
Private Equity Fund III, L.P., Aspen Finance Investors I, LLC,
Fleck T.I.M.E. Fund, LP and Fleck Family Partnership II, LP
(Incorporated herein by reference to exhibit 99.3 to our Current
Report on Form 8-K filed with the Securities and Exchange
Commission on October 16, 2000)

4.19 Registration Agreement, dated September 29, 2000, by and between
the Company, Edgewater Private Equity Fund III, L.P. and Fleck
T.I.M.E. Fund, LP (Incorporated herein by reference to exhibit
99.4 to our Current Report on Form 8-K filed with the Securities
and Exchange Commission on October 16, 2000)

4.20 Amendment to Registration Agreement, dated April 16, 2002, by and
between the Company, Edgewater Private Equity Fund III, L.P. and
Fleck T.I.M.E. Fund, LP (Incorporated herein by reference to
exhibit 4.32 to our Annual Report on Form 10-K for the year ended
December 31, 2001 filed with the Securities and Exchange
Commission on April 17, 2002)

4.21 Form of Convertible Note issued by the Company to Carl Rose on
November 1, 2000 for a principal amount of $500,000 and on
November 7, 2000 for a principal amount of $400,000 (Incorporated
herein by reference to exhibit 4.13 to our Annual Report on Form
10-K for the year ended December 31, 2001 filed with the
Securities and Exchange Commission on April 17, 2002)

4.22 Form of Amendments to Convertible Notes, dated August 31, 2001, by
and between the Company and Carl Rose, amending the notes issued
by the Company to Carl Rose on November 1, 2000 for a principal
amount of $500,000 and on November 7, 2000 for a principal amount
of $400,000 (Incorporated herein by reference to exhibit 4.14 to
our Annual Report on Form 10-K for the year ended December 31,
2001 filed with the Securities and Exchange Commission on April
17, 2002)

4.23 Form of Amendments to Promissory Notes, dated April 16, 2002, by
and between the Company and Carl Rose, amending the notes issued
by the Company to Carl Rose on November 1, 2000 for a principal
amount of $500,000 and on November 7, 2000 for a principal amount
of $400,000 (Incorporated herein by reference to exhibit 4.39 to
our Annual Report on Form 10-K for the year ended December 31,
2001 filed with the Securities and Exchange Commission on April
17, 2002)

4.24 Form of Convertible Note issued by the Company on December 1, 2000
to Bahram Nour-Omid for a principal amount of $500,000 and to
Fleck T.I.M.E. Fund, LP for a principal amount of $1,000,000
(Incorporated herein by reference to exhibit 4.15 to our Annual
Report on Form 10-K for the year ended December 31, 2001 filed
with the Securities and Exchange Commission on April 17, 2002)

4.25 Amendment to Promissory Note, dated December 21, 2001, by and
between the Company and Fleck T.I.M.E. Fund, L.P. (Incorporated
herein by reference to exhibit 4.42 to our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002 filed with the
Securities and Exchange Commission on May 20, 2002)

4.26 Settlement Agreement, dated April 15, 2002, by and between the
Company, Richard Carter, Sam DiPaola, Carl Rose and Bahram
Nour-Omid (Incorporated herein by reference to exhibit 4.26 to our
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002 filed with the Securities and Exchange Commission on November
14, 2002)

48

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

4.27 Form of Warrant issued by the Company to Bahram Nour-Omid for
1,000,000 shares of our Common Stock (Incorporated herein by
reference to exhibit 4.10 to our Annual Report on Form 10-K for
the year ended December 31, 2001 filed with the Securities and
Exchange Commission on April 17, 2002)

4.28 Warrant Agreement issued by the Company to Brewer & Pritchard,
P.C. on May 15, 2001 (Incorporated herein by reference to exhibit
4.12 to our Annual Report on Form 10-K for the year ended December
31, 2001 filed with the Securities and Exchange Commission on
April 17, 2002)

4.29 Form of Warrant issued by the Company to each of Panna Sharma and
Eric Loeffel, each for 30,000 shares of our Common Stock, on July
31, 2001 and to John A. Svahn for 30,000 shares of our Common
Stock in November 2001 (Incorporated herein by reference to
exhibit 4.11 to our Annual Report on Form 10-K for the year ended
December 31, 2001 filed with the Securities and Exchange
Commission on April 17, 2002)

4.30 Share Return Agreement, dated August 29, 2001, by and between the
Company, Carl Rose, Charles Leaver and Kelly Knake (Incorporated
herein by reference to exhibit 10.33 to our Quarterly Report on
Form 10-Q for the quarter ended September 30,2001 filed with the
Securities and Exchange Commission on November 19, 2001)

4.31 Subordination Agreement, dated February 19, 2002, by and between
Edgewater Private Equity Fund III, L.P. and MRA Systems, Inc.,
d/b/a GE Access (Incorporated herein by reference to exhibit 4.18
to our Annual Report on Form 10-K for the year ended December 31,
2001 filed with the Securities and Exchange Commission on April
17, 2002)

4.32 Security Agreement, dated February 19, 2002, by and between the
Company and Edgewater Private Equity Fund III, L.P. (Incorporated
herein by reference to exhibit 4.19 to our Annual Report on Form
10-K for the year ended December 31, 2001 filed with the
Securities and Exchange Commission on April 17, 2002)

4.33 First Amendment to Security Agreement, dated March 5, 2002, by and
between the Company and Edgewater Private Equity Fund III, L.P.
(Incorporated herein by reference to exhibit 4.22 to our Annual
Report on Form 10-K for the year ended December 31, 2001 filed
with the Securities and Exchange Commission on April 17, 2002)

4.34 Trademark and License Security Agreement, dated February 19, 2002,
by and between the Company and Edgewater Private Equity Fund III,
L.P. (Incorporated herein by reference to exhibit 4.20 to our
Annual Report on Form 10-K for the year ended December 31, 2001
filed with the Securities and Exchange Commission on April 17,
2002)

4.35 First Amendment to Trademark and License Security Agreement, dated
March 5, 2002, by and between the Company and Edgewater Private
Equity Fund III, L.P. (Incorporated herein by reference to exhibit
4.23 to our Annual Report on Form 10-K for the year ended December
31, 2001 filed with the Securities and Exchange Commission on
April 17, 2002)

4.36 Note and Preferred Stock Purchase Agreement, dated April 16, 2002,
by and between the Company, Edgewater Private Equity Fund III,
L.P., Fleck T.I.M.E. Fund, LP, John Paul DeJoria and Patrick Loche
(Incorporated herein by reference to exhibit 4.27 to our Annual
Report on Form 10-K for the year ended December 31, 2001 filed
with the Securities and Exchange Commission on April 17, 2002)

4.37 Amendment No. 1 to The Note and Preferred Stock Purchase
Agreement, dated April 29, 2002, by and between the Company and
Edgewater Private Equity Fund III, L.P. (Incorporated herein by
reference to exhibit 10.53 to our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002 filed with the Securities and
Exchange Commission on August 14, 2002)

4.38 Amendment No. 2 to The Note and Preferred Stock Purchase
Agreement, dated June 14, 2002, by and between the Company and
Edgewater Private Equity Fund III, L.P. (Incorporated herein by
reference to exhibit 10.54 to our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002 filed with the Securities and
Exchange Commission on August 14, 2002)

4.39 Amendment No. 3 to The Note and Preferred Stock Purchase
Agreement, dated July 18, 2002, by and between the Company and
Edgewater Private Equity Fund III, L.P. (Incorporated herein by
reference to exhibit 10.55 to our Quarterly Report on Form 10-Q
for the

49

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

quarter ended June 30, 2002 filed with the Securities and Exchange
Commission on August 14, 2002)

4.40 Amendment No. 4 to The Note and Preferred Stock Purchase
Agreement, dated July 31, 2002, by and between the Company and
Edgewater Private Equity Fund III, L.P. (Incorporated herein by
reference to exhibit 10.56 to our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002 filed with the Securities and
Exchange Commission on August 14, 2002)

4.41 Amendment No. 5 to The Note and Preferred Stock Purchase
Agreement, dated August 21, 2002, by and between the Company and
Edgewater Private Equity Fund III, L.P. (Incorporated herein by
reference to exhibit 4.41 to our Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002 filed with the Securities and
Exchange Commission on November 14, 2002)

4.42 Amendment No. 6 to The Note and Preferred Stock Purchase
Agreement, dated October 22, 2002, by and between the Company and
Edgewater Private Equity Fund III, L.P. (Incorporated herein by
reference to exhibit 4.42 to our Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002 filed with the Securities and
Exchange Commission on November 14, 2002)

4.43 Amendment No. 7 to The Note and Preferred Stock Purchase
Agreement, dated November 1, 2002, by and between the Company and
Edgewater Private Equity Fund III, L.P. (Incorporated herein by
reference to exhibit 4.43 to our Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002 filed with the Securities and
Exchange Commission on November 14, 2002)

4.44 Form of Substitute Secured Convertible Promissory Note, dated
April 16, 2002, issued by the Company to Edgewater Private Equity
Fund III, L.P. for a principal amount of $1,600,000, to John Paul
DeJoria for a principal amount of $400,000, to Patrick Loche for a
principal amount of $250,000 and to Fleck T.I.M.E. Fund, LP for a
principal amount of $400,000 (Incorporated herein by reference to
exhibit 4.28 to our Annual Report on Form 10-K for the year ended
December 31, 2001 filed with the Securities and Exchange
Commission on April 17, 2002)

4.45 Substitute Secured Convertible Promissory Note, dated November 1,
2002 issued by the Company to Edgewater Private Equity Fund III,
L.P. for a principal amount of $3,100,000 (Incorporated herein by
reference to exhibit 4.45 to our Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002 filed with the Securities and
Exchange Commission on November 14, 2002)

4.46 Security Agreement, dated April 16, 2002, by and between the
Company and Edgewater Private Equity Fund III, L.P., on behalf of
itself and certain other lenders (Incorporated herein by reference
to exhibit 4.29 to our Annual Report on Form 10-K for the year
ended December 31, 2001 filed with the Securities and Exchange
Commission on April 17, 2002)

4.47 First Amendment to Security Agreement, dated April 29, 2002, by
and between the Company and Edgewater Private Equity Fund III,
L.P., on behalf of itself and certain other lenders (Incorporated
herein by reference to exhibit 4.47 to our Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002 filed with the
Securities and Exchange Commission on November 14, 2002)

4.48 Subordination Agreement, dated April 16, 2002, by and between
Edgewater Private Equity Fund III, L.P. and MRA Systems, Inc.,
d/b/a GE Access (Incorporated herein by reference to exhibit 4.30
to our Annual Report on Form 10-K for the year ended December 31,
2001 filed with the Securities and Exchange Commission on April
17, 2002)

4.49 Trademark and License Security Agreement, dated April 16, 2002, by
and between the Company and Edgewater Private Equity Fund III,
L.P., on behalf of itself and certain other lenders (Incorporated
herein by reference to exhibit 4.31 to our Annual Report on Form
10-K for the year ended December 31, 2001 filed with the
Securities and Exchange Commission on April 17, 2002)

4.50 First Amendment to Trademark and License Security Agreement, dated
April 29, 2002, by and between the Company and Edgewater Private
Equity Fund III, L.P., on behalf of itself and certain other
lenders (Incorporated herein by reference to exhibit 4.50 to our
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002 filed with the Securities and Exchange Commission on November
14, 2002)

4.51 Waiver Letter, dated April 16, 2002, by and between the Company,
Edgewater Private Equity Fund III, L.P., Fleck T.I.M.E. Fund, LP
and certain other parties (Incorporated herein by reference to
exhibit 4.33 to our Annual Report on Form 10-K for the year ended

50

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

December 31, 2001 filed with the Securities and Exchange
Commission on April 17, 2002)

4.52 Termination Agreement, dated April 16, 2002, by and between the
Company, Carl Rose, Charles Leaver, Jeff Sexton, Edgewater Private
Equity Fund III, L.P., Aspen Finance Investors I, LLC, Fleck
T.I.M.E. Fund, LP, and Fleck Family Partnership II, LP
(Incorporated herein by reference to exhibit 4.34 to our Annual
Report on Form 10-K for the year ended December 31, 2001 filed
with the Securities and Exchange Commission on April 17, 2002)

4.53 Transaction Agreement, dated April 16, 2002, by and between the
Company and Carl Rose (Incorporated herein by reference to exhibit
4.35 to our Annual Report on Form 10-K for the year ended December
31, 2001 filed with the Securities and Exchange Commission on
April 17, 2002)

4.54 Transaction Agreement, dated April 16, 2002, by and between the
Company and John Paul DeJoria (Incorporated herein by reference to
exhibit 4.36 to our Annual Report on Form 10-K for the year ended
December 31, 2001 filed with the Securities and Exchange
Commission on April 17, 2002)

4.55 Transaction Agreement, dated April 16, 2002, by and between the
Company and Patrick Loche (Incorporated herein by reference to
exhibit 4.37 to our Annual Report on Form 10-K for the year ended
December 31, 2001 filed with the Securities and Exchange
Commission on April 17, 2002)

4.56 Transaction Agreement, dated April 16, 2002, by and between the
Company and Fleck T.I.M.E. Fund, LP (Incorporated herein by
reference to exhibit 4.38 to our Annual Report on Form 10-K for
the year ended December 31, 2001 filed with the Securities and
Exchange Commission on April 17, 2002)

4.57 Voting Agreement, dated April 16, 2002, by and between Carl Rose,
Jenta Rose, Charles Leaver, Kelly Knake, Gerald Allen, John Paul
DeJoria, Edgewater Private Equity Fund III, L.P., and Fleck
T.I.M.E. Fund, LP (Incorporated herein by reference to exhibit
4.40 to our Annual Report on Form 10-K for the year ended December
31, 2001 filed with the Securities and Exchange Commission on
April 17, 2002)

4.58 Memorandum of Terms for Series B-1 Convertible Preferred Stock
dated September 20, 2002, by and between the Company and Edgewater
Private Equity Fund III, L.P. (Incorporated herein by reference to
exhibit 4.58 to our Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002 filed with the Securities and Exchange
Commission on November 14, 2002)

4.59 Letter Agreement regarding Series B-1 Convertible Preferred Stock
Warrant, dated November 1, 2002, by and between the Company and
Edgewater Private Equity Fund, III, L.P. (Incorporated herein by
reference to exhibit 4.59 to our Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002 filed with the Securities and
Exchange Commission on November 14, 2002)

4.60 Waiver Letter, dated November 11, 2002, by and between the Company
and Edgewater Private Equity Fund III, L.P. (Incorporated herein
by reference to exhibit 4.60 to our Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002 filed with the Securities
and Exchange Commission on November 14, 2002)

10.1 Design Automation Systems Incorporated 1999 Stock Option Plan
(Incorporated herein by reference to exhibit B to our Definitive
Proxy Statement on Schedule 14C filed with the Securities and
Exchange Commission on March 9, 1999)

10.2 EpicEdge, Inc. 2000 Employee Stock Purchase Plan (Incorporated
herein by reference to exhibit C to our Definitive Proxy Statement
on Schedule 14A filed with the Securities and Exchange Commission
on April 28, 2000)

10.3 Seattle Design Center Lease, dated March 23, 2000, by and between
the Company and Bay West Design Center, LLC (Incorporated herein
by reference to exhibit 10.38 to our Annual Report on Form 10-K
for the year ended December 31, 2001 filed with the Securities and
Exchange Commission on April 17, 2002)

51

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

10.4 Microsystem Products Purchase Agreement, dated February 29, 2000,
by and between the Company and MRA Systems, Inc., d/b/a GE Access
(Incorporated herein by reference to exhibit 10.13 to our Annual
Report on Form 10-KSB for the year ended December 31, 1999 filed
with the Securities and Exchange Commission on March 30, 2000)

10.5 Office Lease Agreement, dated October 4, 2000, by and between the
Company and ASC Management, Inc., as revised on September 14, 2001
and as modified on September 18, 2001 and again on March 28, 2002
for office space in Austin, Texas (Incorporated herein by
reference to exhibit 10.39 to our Annual Report on Form 10-K for
the year ended December 31, 2001 filed with the Securities and
Exchange Commission on April 17, 2002)

10.6 Form of Consent to Settlement of Claim (Incorporated herein by
reference to exhibit 10.32 to our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001 filed with the Securities and
Exchange Commission on August 28, 2001)

10.7 Employment Agreement, dated June 1, 1999, by and between COAD
Solutions, Inc. and Richard Carter (Incorporated herein by
reference to exhibit 10.42 to our Annual Report on Form 10-K for
the year ended December 31, 2001 filed with the Securities and
Exchange Commission on April 17, 2002)

10.8 First Amendment to Employment Agreement, dated April 16, 2002, by
and between the Company and Richard Carter (Incorporated herein by
reference to exhibit 10.48 to Amendment No. 1 to our Annual Report
on Form 10-K for the year ended December 31, 2001 filed with the
Securities and Exchange Commission on April 30, 2002)

10.9 Employment Agreement, dated June 1, 1999, by and between COAD
Solutions, Inc. and Robert Cohan (Incorporated herein by reference
to exhibit 10.43 to our Annual Report on Form 10-K for the year
ended December 31, 2001 filed with the Securities and Exchange
Commission on April 17, 2002)

10.10 First Amendment to Employment Agreement, dated April 16, 2002, by
and between the Company and Robert Cohan (Incorporated herein by
reference to exhibit 10.49 to Amendment No. 1 to our Annual Report
on Form 10-K for the year ended December 31, 2001 filed with the
Securities and Exchange Commission on April 30, 2002)

10.11 Employment Agreement, dated November 30, 1999, by and between COAD
Solutions, Inc. and Mark Slosberg (Incorporated herein by
reference to exhibit 10.44 to our Annual Report on Form 10-K for
the year ended December 31, 2001 filed with the Securities and
Exchange Commission on April 17, 2002)

10.12 First Amendment to Employment Agreement, dated April 16, 2002, by
and between the Company and Mark Slosberg (Incorporated herein by
reference to exhibit 10.50 to Amendment No. 1 to our Annual Report
on Form 10-K for the year ended December 31, 2001 filed with the
Securities and Exchange Commission on April 30, 2002)

10.13 Employment Agreement, dated April 15, 2000, by and between the
Company and Sam DiPaola (Incorporated herein by reference to
exhibit 10.45 to our Annual Report on Form 10-K for the year ended
December 31, 2001 filed with the Securities and Exchange
Commission on April 17, 2002)

10.14 First Amendment to Employment Agreement, dated April 16, 2002, by
and between the Company and Sam DiPaola (Incorporated herein by
reference to exhibit 10.51 to Amendment No. 1 to our Annual Report
on Form 10-K for the year ended December 31, 2001 filed with the
Securities and Exchange Commission on April 30, 2002)

10.15 Employment Agreement, dated February 28, 2000, by and between
Design Automation Systems, Inc. and Peter Davis (Incorporated
herein by reference to exhibit 10.46 to our Annual Report on Form
10-K for the year ended December 31, 2001 filed with the
Securities and Exchange Commission on April 17, 2002)

10.16 First Amendment to Employment Agreement, dated April 16, 2002, by
and between the Company and Peter Davis (Incorporated herein by
reference to exhibit 10.52 to Amendment No. 1 to our Annual Report
on Form 10-K for the year ended December 31, 2001 filed with the
Securities and Exchange Commission on April 30, 2002)

52

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

10.17 Employment Agreement, dated April 16, 2002, by and between the
Company and Peter B. Covert (Incorporated herein by reference to
exhibit 10.47 to Amendment No. 1 to our Annual Report on Form 10-K
for the year ended December 31, 2001 filed with the Securities and
Exchange Commission on April 30, 2002)

10.18 Employment Agreement, dated June 17, 2002 by and between the
Company and Robert A. Jensen (Incorporated herein by reference to
exhibit 10.21 to our Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002 filed with the Securities and Exchange
Commission on November 14, 2002)

10.19 Form of Indemnification Agreement, by and between the Company and
each of its directors (Eric Loeffel, Richard Carter, Mark
McManigal, Panna Sharma and John A. Svahn) and by and between the
Company and each of its executive officers (Robert A Jensen, Sam
DiPaola, Peter Covert, Peter Davis, Mark Slosberg and Robert
Cohan) (Incorporated herein by reference to exhibit 10.57 to our
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002
filed with the Securities and Exchange Commission on August 14,
2002)

10.20 EpicEdge, Inc. 2002 Stock Option Plan (Incorporated herein by
reference to exhibit C to our Definitive Proxy Statement on
Schedule DEF 14A filed with the Securities Exchange Commission on
June 17, 2002)

10.21 EpicEdge, Inc. Bonus Plan (Incorporated herein by reference to
exhibit B to our Definitive Proxy Statement on Schedule DEF 14A
filed with the Securities Exchange Commission on June 17, 2002)

10.22(#) Loan and Security Agreement, dated November 6, 2002, by and
between the Company and Silicon Valley Bank

10.23(#) Loan Modification Agreement, dated January 9, 2003, by and between
the Company and Silicon Valley Bank

10.24(#) Warrant Agreement issued by the Company to Edgewater on January 8,
2003 for Edgewater Guarantee of Additional Bank Debt from Silicon
Valley Bank

10.25(#) Consultant Agreement, dated January 10, 2003, by and between the
Company and Eric Loeffel

99.1(#) Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002

99.2(#) Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002

99.3(#) Certifications Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002

- ----------

(#) Filed herewith.

(b) Reports on Form 8-K

During the quarter ended December 31, 2002, and subsequently to
date, EpicEdge filed the following Current Reports of Form 8-K
with the Securities and Exchange Commission:

o Form 8-K filed on October 11, 2002 announcing the
appointment of a new member of the board of directors and
audit committee.

o Form 8-K filed on January 3, 2003 announcing the
appointment of a new chairman of the board.

53

o Form 8-K filed on February 13, 2003 announcing the
resignation of the Chief Executive Officer.

o Form 8-K filed on March 7, 2003 announcing the delisting
of common stock from American Stock Exchange.

A copy of any exhibit will be furnished (at a reasonable cost) to any of our
shareholders upon receipt of a written request. Such request should be sent to
EpicEdge, Inc. 5508 Two Ninety West, Suite 300 Austin, Texas 78735 Attention:
Robert A. Jensen, Chief Operating Officer/Chief Financial Officer.

54

SIGNATURES

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

EPICEDGE, INC.

Dated March 31, 2003 By: /s/ ROBERT A. JENSEN
------------------------------------
ROBERT A. JENSEN
COO/CFO/SECRETARY

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

55

CERTIFICATIONS

I, Eric Loeffel, Chairman of the Board and Principal Executive Officer, certify
that:

1. I have reviewed this annual report on Form 10-K of EpicEdge, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):

(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Dated: March 31, 2003

/s/ Eric Loeffel
Eric Loeffel
Chairman of the Board

56

I, Robert A. Jensen, Chief Financial Officer of the registrant, certify that:

1. I have reviewed this annual report on Form 10-K of EpicEdge, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):

(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Dated: March 31, 2003

/s/ Robert A. Jensen
Robert A. Jensen
COO/CFO/Secretary

57

EPICEDGE, INC.
INDEX TO FINANCIAL STATEMENTS ITEM 8 IN FORM 10-K

INDEPENDENT AUDITORS' REPORT F-2

FINANCIAL STATEMENTS AND NOTES:

Balance Sheets as of December 31, 2002 and 2001 F-3

Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000 F-4

Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2001 and 2000 F-5

Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 F-6

Notes to Financial Statements F-7

F-1

INDEPENDENT AUDITORS' REPORT

To the Directors and Stockholders of EpicEdge, Inc.:

We have audited the accompanying balance sheets of EpicEdge, Inc. (the
"Company") as of December 31, 2002 and 2001, and the related statements of
operations, stockholders' equity (deficiency), and cash flows for each of the
three years in the period ended December 31, 2002. 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 of America. 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, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2002 and 2001,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for goodwill as of January 1, 2002 upon the adoption of
Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets."

/s/ Deloitte & Touche LLP

Dallas, TX
March 31, 2003

F-2

EPICEDGE, INC.
BALANCE SHEETS
DECEMBER 31, 2002 AND 2001

See notes to financial statements.

F-3

EPICEDGE, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See notes to financial statements.

F-4

EPICEDGE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See notes to financial statements.

F-5

EPICEDGE, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See notes to financial statements.

F-6

EPICEDGE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

BUSINESS - EpicEdge, Inc. (the "Company") provides consulting services
to assist state and local government agencies, as well as commercial
enterprises, meet their business goals through implementation and
support of client/server and Internet-enabled PeopleSoft applications,
custom Web application development, and strategic consulting. The
majority of the Company's revenues was, and is expected to be,
associated with providing project management, consulting services, and
software implementation to state and local governments, including those
in Texas, Washington and California.

FINANCIAL STATEMENTS at December 31, 2000 and for the year then ended
include the accounts of the Company and its wholly owned subsidiary,
IPS Associates, Inc. ("IPS") (referred to collectively as the
"Company"), which was acquired in June 2000 and sold in February 2001.
Significant intercompany balances and transactions were eliminated.

FINANCIAL STATEMENT PREPARATION requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingencies as of the date of the
financial statements and revenues and expenses for the period.
Differences from those estimates are recognized in the period they
become known.

REVENUES are generated from consulting, support and training services
("professional services"). Professional services revenues are
recognized as the services are performed, primarily on a
time-and-materials basis using the number of hours worked by
consultants at agreed-upon rates per hour. Billings that are subject to
be withheld by the customer are included in revenues when the project
completion event has occurred. Fixed price contract revenues are
recognized when defined milestones are achieved. The related costs of
revenues that are determined to be recoverable are deferred as
contracts in progress until the corresponding revenue is recognized.
Out-of-pocket expenses reimbursed by clients are included in
professional services revenues, and the expenses incurred by the
Company are included in cost of professional services revenues. In
2000, revenues were also generated from the value-added reselling of
hardware and software products ("technology integration"). Technology
integration revenues were recognized upon receipt of an executed
agreement and delivery of the products to the customer, if there were
no significant remaining vendor obligations and collection of the
receivable is probable.

CASH EQUIVALENTS represent highly liquid investments with original
maturities at the date of acquisition of three months or less.

FINANCIAL INSTRUMENTS that potentially subject the Company to an
interest and credit risk consist of cash and cash equivalents, accounts
receivable and debt instruments. The fair market values of these items
at December 31, 2002, approximate their carrying amounts.

PROPERTY AND EQUIPMENT is stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are provided using the
straight-line method over the following estimated useful lives:
computer hardware and software, three to five years; office furniture
and fixtures, three to seven years; and leasehold improvements, three
years.

GOODWILL represents the unamortized excess of cost over the estimated
fair value of net assets acquired in business combinations, less
impairment write-offs in 2000. Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"),
which revises the accounting for purchased goodwill and intangible
assets, became effective for the Company on January 1, 2002. Under SFAS
No. 142, goodwill of $460,000 at that date was no longer amortized, but
is tested for impairment annually and in the event of an impairment
indicator. The Company assessed the carrying value of its goodwill
during 2002 and concluded that no further impairment was required as of
December 31, 2002.

F-7

The Company's net loss on a pro forma basis, assuming the cessation of
goodwill amortization as required under SFAS No. 142 had been in effect
from January 1, 2001 is as follows:

STOCK-BASED COMPENSATION arising from stock option grants to employees
is accounted for by the intrinsic value method under Accounting
Principles Board ("APB") Opinion No. 25. SFAS No. 123 encourages (but
does not require) the cost of stock-based compensation arrangements
with employees to be measured based on the fair value of the equity
instrument awarded. As permitted by SFAS No. 123, the Company applies
APB Opinion No. 25 to its stock-based compensation awards to employees
and discloses the required pro forma effect on net income and earnings
per share (Note 14).

BASIC NET LOSS PER SHARE is computed by dividing the net loss by the
weighted average shares of common stock outstanding during the period,
excluding 449,271 shares issued in 2000 to the ESOP that had not yet
been committed to be released. The dilutive effect of the options and
warrants to purchase common stock and convertible preferred stock and
notes are excluded from the computation of diluted net loss per share,
since their effect is anti-dilutive. The anti-dilutive effects excluded
from the diluted net loss per share computation at December 31 were as
follows:

NEW ACCOUNTING STANDARDS - In April 2002, the FASB issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections," which rescinds FASB
Statement No. 4, "Reporting Gains and Losses from Extinguishment of
Debt," and an amendment of that Statement, FASB Statement No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements."
The Statement also rescinds FASB Statement No. 44, "Accounting for
Intangible Assets of Motor Carriers." The Statement amends FASB
Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. The Company will adopt SFAS No. 145 in
January 2003 and will reclassify certain extraordinary items upon
adoption of this statement.

In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities," was issued, which addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." The Company is required to adopt this standard in
January 2003.

In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation --Transition and Disclosure," an amendment of
FASB Statement No. 123, which amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of Statement
123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results. Certain disclosure requirements under SFAS No. 148 became
effective for the Company beginning December 15, 2002 and the Company
has complied with those requirements. The remaining disclosure
requirements under SFAS No. 148 become effective for the Company in the
first quarter of 2003. The Company does not expect these additional
reporting requirements to have a material impact on its financial
statements.

F-8

RECLASSIFICATIONS of certain prior-year amounts have been made to
conform to the current-year presentation.

2. BUSINESS COMBINATION WITH PUBLIC COMPANY AND DISCONTINUED OPERATIONS

Effective January 1, 1999, Loch Exploration, Inc. ("Loch"), a public
company, acquired all of the stock of the Company in a "reverse
merger," whereby the Company was the acquirer for accounting purposes.
In connection with the acquisition, Loch exchanged shares of common
stock with the Company's stockholders. The transaction was accounted
for in a manner similar to a pooling of interests, whereby no goodwill
resulted from this transaction and the Company's equity interest in
Loch's net assets of $70,000 were recorded at Loch's historical cost
basis. Loch's net assets were transferred to a subsidiary, Loch Energy,
Inc. ("LEI"), which was in the oil and gas business.

The Company's 53% equity interest in LEI's operations is reported as
discontinued operations in the accompanying financial statements though
September 2000. In September 2000, the Company irrevocably transferred
its investment in the remaining shares of LEI to a designated trustee.
Since the Company was unable to achieve its original plan of
distributing these shares as registered stock to its stockholders who
were former stockholders of Loch, the Company recorded a write-off of
$384,000 related to the disposal of its remaining equity interest in
LEI, which is included in discontinued operations in 2000. Related
expenses in 2001 and 2000 are also included in discontinued operations.

3. ACQUISITIONS AND GOODWILL IMPAIRMENT LOSSES

In March 2000, the Company acquired all the outstanding common shares
of The Growth Strategy Group, Inc. ("Growth Strategy"), an e-marketing
and strategy consulting firm, for 277,000 unregistered shares of the
Company's common stock valued at $6,076,800 and $375,000 in cash.
Goodwill of $6,100,000 was recorded related to this acquisition.
Accumulated amortization of $643,000 had been recorded related to this
goodwill through December 31, 2000. As a result of a review by
management of the carrying value and recoverability of this goodwill,
management wrote off the unamortized balance of Growth Strategy's
goodwill of $5,457,000 as of December 31, 2000.

In June 2000, the Company acquired all of the issued and outstanding
stock of IPS, a project management firm, for $3,000,000 in cash,
1,472,586 unregistered shares of the Company's common stock, options to
purchase 1,082,060 shares of the Company's common stock and the
assumption of net liabilities of $2,940,000. The aggregate value of the
shares and stock options issued in connection with the transaction was
$36,405,000. The Company also assumed an employee stock ownership plan
("ESOP") from IPS, and 607,023 of the 1,472,586 shares of common stock
related to the transaction were issued to the ESOP. The Company
recorded unearned compensation of $9,445,000 related to 493,220 shares
of common stock issued to the ESOP, but not yet committed to be
released by the ESOP's trustee. This amount was to be amortized over a
period of approximately three to five years as the shares were
committed to be released. In connection with the assumption of the
ESOP, the Company assumed a note payable to a financial institution for
ESOP financing of approximately $5,000,000. Goodwill of $34,240,000 was
recorded related to this acquisition. Accumulated amortization of
$2,558,000 had been recorded related to this goodwill through December
31, 2000. As discussed in Note 4, IPS was sold effective January 1,
2001, at a substantial loss. A goodwill impairment loss of $24,040,000
was recorded in the financial statements as of December 31, 2000,
relating to the sale of IPS.

In connection with the acquisition, the Company paid a commission of
$300,000 in cash to an organization that facilitated the execution of
the transaction and issued 25,065 unregistered shares of the Company's
common stock valued at $576,000 and recorded as part of the cost of the
IPS acquisition.

In July 2000, the Company acquired substantially all of the assets of
Tumble Interactive Media, Inc. ("Tumble"), a creative and design firm,
for 250,000 unregistered shares of the Company's common stock valued at
$4,937,500 and $325,000 in cash. The transaction was accounted for
under the purchase method of accounting and resulted in the recognition
of goodwill of $5,433,000. Accumulated amortization of $307,000 had
been recorded related to this goodwill through December 31, 2000. As a
result of a review by management of the carrying value and
recoverability of this goodwill, management wrote off the unamortized
balance of Tumble's goodwill of $5,126,000 as of December 31, 2000.

In March 1999, the Company acquired all of the issued and outstanding
stock of COAD Solutions, Inc. ("COAD"), an information technology
consulting firm, in exchange for (1) 600,000 shares of the Company's
common stock valued at $2,625,000; and (2) $200,000 cash, payable
$100,000 at closing, and $100,000 payable in quarterly installments of
$25,000 beginning 90 days from the closing date. Goodwill of $3,000,000
was recorded related to this transaction and was fully amortized as of
December 31, 2001.

In May 1999, the Company acquired all of the issued and outstanding
stock of Dynamic Professional Services, LLC ("Dynamic"), an information
technology consulting firm, in exchange for (1) 524,000 shares of the
Company's common stock valued at $2,695,600; and (2) $200,000 cash,
payable $100,000 at closing and $100,000 payable in quarterly
installments of $25,000 beginning 90 days from the closing date; and
(3) additional stock consideration if, on June 1, 2000, the closing
price for the Company's common stock for the prior 15 business days was
less than $5.15 per share, in an amount equal to 5,340 shares for each
$0.01 below $5.15. No additional consideration was required

F-9

during 2000. Goodwill of $2,732,000 was recorded related to this
acquisition. Accumulated amortization of $2,472,000 had been recorded
related to this goodwill as of December 31, 2002.

In July 1999, the Company acquired all of the issued and outstanding
stock of Connected Software Solutions, Inc. ("Connected"), an
electronic-business consulting and training firm, in exchange for (1)
300,000 shares of the Company's common stock valued at $1,545,000; (2)
$300,000 cash payable in six quarterly installments of $50,000
beginning 90 days from the closing date; and (3) additional stock
consideration if, on August 1, 2000, the closing price for the
Company's common stock for the prior 15 business days is less than
$5.15 per share, in an amount equal to 3,000 shares for each $0.01
below $5.15. No additional consideration was required in 2000. Goodwill
of $1,800,000 was recorded related to this acquisition and was fully
amortized as of December 31, 2001.

In November 1999, the Company acquired substantially all of the assets
of NET Information Systems, Inc. ("NET"), an e-Business solutions
provider, in exchange for (1) 350,000 shares of the Company's common
stock valued at $1,093,750; (2) $180,000 cash; (3) a one-year
promissory note in the amount of $50,000 payable quarterly, with the
first payment due 90 days after closing; and (4) the assumption of
NET's debt not to exceed $220,000. Goodwill of $1,500,000 was recorded
related to this acquisition. Accumulated amortization of $1,300,000 had
been recorded related to this goodwill through December 31, 2002.

All of these acquisitions were accounted for under the purchase method,
with the resulting goodwill initially being amortized over eight years
until the goodwill impairment loss was recognized as of December 31,
2000. Beginning January 1, 2001, the original amortization period was
decreased to 32 months. The operations of each acquired entity are
included in the Company's consolidated operations from their respective
acquisition date.

The unaudited results of operations for 2000 on a pro forma basis are
shown below as though the above acquisitions (except for Tumble, which
did not have a material effect on the pro forma information, and IPS)
were made and the related common shares were issued as of January 1,
2000, and as though the IPS acquisition and sale had occurred at that
date (therefore, the IPS results and related goodwill impairment loss
are excluded).

In view of the sale of IPS, at a substantial loss, effective January 1,
2001, management concluded that goodwill related to IPS as of December
31, 2000, was impaired and wrote it down to the amount recoverable in
the sale, which was $7,643,000; accordingly, $24,040,000 was written
off. Management also concluded that the entire amount of goodwill
related to the Tumble and Growth Strategy acquisitions and a portion of
the goodwill related to the COAD and Connected acquisitions, as of
December 31, 2000, was impaired based on evaluations of the related
estimated future undiscounted cash flows and the lack of continuity of
the related key employees; accordingly, $12,400,000 was also written
off, with a remaining goodwill of $5,434,000 related to COAD, Dynamic,
Connected and NET. The total of these goodwill impairment write-offs of
$36,440,000 was reported as an operating expense in 2000. Goodwill of
$460,000 at December 31, 2001 had been related to Dynamic ($260,000)
and NET ($200,000). This balance was tested for impairment in 2002
under SFAS No. 142 at the entity level, and no further impairment was
required.

F-10

4. SALE OF IPS

Effective January 1, 2001, with a closing date of February 5, 2001, the
Company sold all of the issued and outstanding stock of IPS to Red &
Blue, Inc., a Delaware corporation, and to the IPS Associates, Inc.
Stock Ownership Plan. The consideration for the sale was (1) the return
of an aggregate 740,260 shares of the Company's common stock, including
ESOP shares, (2) $5,700,000 in net proceeds and (3) the transfer of the
IPS ESOP plan, along with the note payable to a financial institution
for the ESOP financing of $4,861,000. The stock purchase agreement
provided that 143,323 shares of the 740,260 shares of the Company's
common stock be held in escrow until the earlier of (1) the completion
of audited financial statements of IPS for the year ended December 31,
2000, or (2) six months from the date of closing. In the event that the
net equity, revenues or net earnings of IPS differed by more than
$500,000 from the financial statements disclosed in the purchase
agreement, Red & Blue, Inc. had the right to setoff the difference
against the shares held in escrow at a value based upon the closing
price of the Company's common stock on the day before the setoff. In
the event of a setoff, the Company has agreed to immediately register
the setoff shares. Based on audited financial results of IPS, no such
setoff occurred. As discussed in Note 3, the goodwill related to IPS
was written down as of December 31, 2000, to the amount recoverable in
the sale.

IPS was included in the Company's accompanying results of operations
since IPS's acquisition in June 2000. Pro forma results of operations
for 2000 in Note 3 exclude IPS.

In the first quarter of 2001, the Company received the above-described
proceeds, cancellation of the inter-company payable and receivables
with IPS, along with the return of 740,260 shares now in treasury
stock, in exchange for the transfer of assets of $6,085,000 and
liabilities of $8,028,000. In addition, with the return of the shares
held by the ESOP, a reduction in unearned compensation of $8,979,000
associated with these unreleased ESOP shares was recorded as a charge
against the additional paid in capital arising from the IPS
acquisition. The net proceeds from the sale of IPS were used to pay off
the secured debt for $2,275,000 and the balance was used to fund
working capital needs such as payroll and current accounts payable.

5. GAIN ON RESTRUCTURING OF PAYABLES

In February 2001, the Company adopted a strategy and a plan of
execution to reduce its workforce and other costs in order to stabilize
the organization. The Company hired a consulting group to assist in
designing and executing a repayment plan (the "Plan") with its
unsecured creditors. This Plan, which was executed in June 2001, after
achieving an acceptable percentage of consents from the unsecured
creditors, was designed to repay this group over time either in-full
for those creditors whose balance was $5,000 or less, or who were
willing to accept $5,000 as full payment, or up to 60% of $3,094,000,
which represented the original unsecured accounts payable amount as of
February 1, 2001. The Plan further provided that, if sufficient cash
was available, the Company could pay a total of 30% of the original
unsecured accounts payable amount by December 31, 2001, and this total
amount would fully and completely satisfy the Company's obligations to
the unsecured creditors. Substantial payments were made to the
unsecured creditors of the Company during 2001 in accordance with the
Plan. The then remaining balance of $1,049,000 would be paid quarterly
at four (4%) percent of the original balance through June 2004, unless
the remaining unsecured creditors agree to a lesser amount over a
shorter time. As a result of settlement agreements and other legal
causes of action by the Company's unsecured creditors, during 2002 it
was necessary to reverse some extraordinary gain recognized in previous
quarters. The reversal of extraordinary gain in 2002 of $58,000
resulted in a net extraordinary loss of $1,000 for the year 2002.

6. SIGNIFICANT CUSTOMERS

Accounts receivable and sales from significant customers as a
percentage of the Company's accounts receivable and total revenues are
as follows:

The contract with Customer B, Northrop Grumman, was terminated on March
15, 2003.

F-11

7. PROPERTY AND EQUIPMENT

Property and equipment at December 31 consist of the following:

8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities at December 31 consist
of the following:

9. REVOLVING LINE OF CREDIT AND TERM NOTE FACILITY

On November 6, 2002, the Company entered into a Loan and Security
Agreement with Silicon Valley Bank ("SVB"), whereby SVB agreed to loan
the Company up to $1,400,000. This facility includes a $1 million
revolving line of credit that is an accounts receivable based operating
line of credit to support short-term working capital requirements and a
$400,000 term note. The advance rate on the line is determined by the
defined borrowing base, which is 80% of eligible accounts receivable.
At the closing of the loan, the Company used $400,000 from the term
note facility and $456,000 of current working capital to extinguish the
$856,000 balance and cure its secured loan from GE Access that was in
default. Until January 10, 2003, approximately $234,000 of the
revolving line of credit is restricted. As of March 3, 2003, the
Company has borrowed $752,000 under the SVB line of credit, and has
$548,000 of borrowing ability remaining.

Revolving line of credit and term note at December 31, 2002, consist of
the following:

10. NOTES PAYABLE

Long term notes payable at December 31, 2002 of $443,000 represents the
remaining extended pay-out terms with certain unsecured creditors from
the repayment plan discussed in Note 5. The pay-out terms extend
through September 2006.

Notes payable at December 31, 2001 consist primarily of $1,433,000 due
to GE Access, bearing interest at 10%, principal and interest payable
on a bi-monthly basis and collateralized by all investments, accounts
receivable, inventory and property. In March 2001, the Company
negotiated new terms for $1,933,000 of notes payable from GE Access.
Under these new terms, the Company was required to make equal
bi-monthly payments of $25,000 through January 2002 and bi-monthly
payments of $35,000 from January 2002 until October 2002 at which time
the final balance was due. On November 7, 2002, the Company used
$400,000 from the term note facility (see Note 9) and $456,000 from
current working capital to extinguish the $856,000 balance and cure its
secured loan from GE Access that was in default.

F-12

11. CONVERTIBLE DEBT

Convertible notes payable to stockholders at December 31 consist of the
following:

Convertible notes payable are classified as current or long-term based
on the contractual maturities as amended on April 16, 2002.

In June 2001, the Company began negotiations with certain existing
stockholders and convertible debt holders for additional funding to
provide the ability to execute on the unsecured creditor payment plan,
pay or renegotiate legacy expenses, and provide working capital to
execute on the current operating plan of the Company. Although the
final documents were not executed until April 2002, the Company
received $1,050,000 as of December 31, 2001 as interim bridge financing
in the form of convertible promissory notes ("June Convertible Notes").
The Company received additional funding under the June Convertible
Notes of $3,100,000 during 2002.

On April 16, 2002, the Company entered into a Note and Preferred Stock
Purchase Agreement with Edgewater, Fleck T.I.M.E. Fund, L.P. ("Fleck
T.I.M.E."), DeJoria and Locke (the "Note Agreement") that finalized the
terms on these June Convertible Notes. The total amount to be received
under these June Convertible Notes was to be a minimum of $2,650,000 up
to a maximum of $4,500,000 ($4,150,000 of which had been received as of
November 11, 2002). On November 11, 2002, $2,150,000 of these June
Convertible Notes, and accrued but unpaid interest of $230,000, were
converted to shares of Series B Preferred Stock.

The additional $2,000,000 (the "Edgewater Special Debt") of the June
Convertible Notes could be converted into Series B Preferred Stock at
the sole election of the holder, Edgewater. However, in November 2002,
the Company entered into a Term Sheet with intentions of entering into
a Series B-1 Note and Preferred Stock Purchase Agreement (the "B-1 Note
Agreement") with Edgewater whereby Edgewater will have the option to
convert the entire outstanding principal balance of the Edgewater
Special Debt, plus accrued interest, into shares of the Company's
Series B-1 Convertible Preferred Stock (the "Series B-1 Preferred
Stock"). The Company intends to issue Edgewater a warrant to purchase
up to 1,333,333 shares of Series B-1 Preferred Stock at an exercise
price of $.01 per share. The value of these warrants will be accounted
for as debt discount when issued. In March 2003, the Company reached an
agreement on the $2,000,000 outstanding balance of the June Convertible
Notes to extend the due date to January 31, 2006 pursuant to the Series
B-1 Note Agreement.

In Lieu of entering into the B-1 Note Agreement, the Company has agreed
with Edgewater to issue a new Substitute Secured Convertible Promissory
Note for a principal amount of $2,000,000 in substitution for the
current convertible note held by Edgewater (the "New Substitute Note").
It is anticipated that the New Substitute Note will have a maturity
date of January 31, 2006, a new lower interest rate of 4% per annum and
will allow Edgewater to convert at its option the aggregate principal
amount plus any accrued interest into Series B-1 Convertible Preferred
Stock at any time up to the maturity date. The June Convertible Notes
are secured, until converted, by all investments, accounts receivable,
inventory and property, subject only to a first lien and have demand
registration rights. According to a covenant in the Note Agreement, the
Company may not redeem or repurchase any shares of company capital
stock other than pursuant to equity incentive agreements with employees
and service providers, the Articles of Incorporation and the Note
Agreement.

Also, on April 16, 2002, the terms of $5,000,000 July Convertible Notes
with Edgewater Private Equity Fund III, L.P. and Fleck T.I.M.E. Fund,
L.P. were renegotiated. On November 11, 2002, under the new terms of
the July Convertible Notes, the principal of $5,000,000 and accrued but
unpaid interest of $1,114,000 was converted into Series A Preferred
Stock.

Additionally, on April 16, 2002, the terms of the $1,000,000 December
Convertible Note with Fleck T.I.M.E. was renegotiated and 2,000,000 of
the warrants issued along with the December Convertible Notes were
relinquished. Also, Fleck T.I.M.E. waived any defaults or events of
default under their December Convertible Note. On November 11, 2002,
under the new terms of the Fleck T.I.M.E. December Convertible Note,
the principal of $1,000,000 and accrued but unpaid interest of $158,000
was converted to Series A Preferred Stock.

In conjunction with and as part of the conditions prior to executing
the final documents, the June Convertible Notes required that terms of
the November Convertible Notes be renegotiated. On April 16, 2002, the
Company renegotiated the November Convertible Notes, as amended,

F-13

($958,000 at December 31, 2002) such that the November Convertible
Notes bear annual interest at the rate of 8%, are convertible at the
lender's option into the Company's common stock at $.25 per share and
mature on December 1, 2004. In addition, the June Convertible Notes
required that the 2,000,000 warrants that were issued along with the
November Convertible Notes be relinquished and that the Company enter
into a share return agreement with three stockholders, one of whom is
the former Chairman, a major stockholder, and the holder of the
November Convertible Notes, for the return of a total of 10,295,210
shares. Both of these additional requirements were completed as of
December 31, 2001.

Also in April 2002, $300,000 of the remaining $500,000 under the
December Convertible Notes was paid. The remaining $221,000, consisting
of remaining principle and accrued and unpaid interest as of April
2002, plus additional accrued and unpaid interest of $13,000 was paid
on January 10, 2003. The 1,000,000 warrants for common stock at $0.01
per share issued in conjunction with this portion of the December
Convertible Notes remain outstanding.

As discussed above, on November 11, 2002, in accordance with the Note
Agreement, certain convertible notes were converted into approximately
9,696,000 shares of Series A Preferred Stock and approximately
3,173,000 shares of Series B Preferred Stock. The effect of the debt
conversion was an issuance of additional preferred stock of $9,301,000
as a result of the following:

a) the conversion of current debt of $8,150,000 to
preferred equity,

b) the conversion of accrued and unpaid interest on
the converted debt of $1,502,000, and

c) a reduction for legal and professional fees of
$351,000 relating to the Note Agreement.

Upon completion of the B-1 Note Agreement, Edgewater will have the
option to convert the Edgewater Special Debt of the June Convertible
Notes into Series B-1 Preferred Stock and therefore will remain
outstanding as debt.

The following table summarizes the convertible notes payable at
December 31, 2002 and the pro-forma equivalent of both the convertible
preferred stock, to be issued with the B-1 Note Agreement, and the
potential additional common stock outstanding that would result from
the conversion of the convertible preferred stock:

(1) Includes the shares related to the accrued and unpaid interest on
these notes through December 31, 2002.

(2) The Company anticipates that the Series B-1 Preferred Stock will
have the following terms in summary: a stated value of $0.75 and a
conversion rate equal to one share of common stock for each $.25 of
stated value, as discussed in Note 14.

(3) This note is convertible into shares of the Company's common stock
at the option of the holder at $.25 per share.

(4) This note is convertible into shares of the Company's common stock
at the option of the holder at $.50 per share.

F-14

12. INCOME TAXES

No income tax benefits were recognized for the losses incurred during
the years 2002, 2001, and 2000 due to the uncertainty of the Company to
utilize its net operating loss (NOL) carryforwards. The provision for
income taxes differs from the amount computed by applying the federal
statutory rate to the loss before income taxes as follows:

The components of the deferred tax assets as of December 31 were as
follows:

At December 31, 2002, the Company had federal NOL carryforwards
available to reduce future taxable income of approximately $46 million.
The carryforwards expire beginning in 2020, if not used before such
time to offset future taxable income. For federal tax purposes, the
Company's NOL carryforward may be subject to certain limitations on
annual utilization because of changes in the ownership, as defined by
federal tax law.

13. COMMITMENTS AND CONTINGENCIES

LEASES - The Company leases office space under noncancelable operating
leases. Total rent expense for 2002, 2001 and 2000 was approximately
$684,000, $1,180,000 and $1,328,800, respectively. Minimum future
rental commitments under operating leases at December 31, 2002, are as
follows:

2003 566,000
2004 562,000
2005 401,000
2006 21,000
----------

Total $1,550,000
----------

EMPLOYMENT CONTRACTS - In connection with the reverse merger (Note 2),
the Board of Directors of the Company had approved five-year employment
agreements with three key employees. As of December 2000, each of these
three employees had left the Company. As a result, the Company recorded
an accrued severance amount to reflect the Company's obligations to
these former employees. The Company renegotiated these severance
payments during 2001 and paid in full the renegotiated amounts by the
end of the year. The difference in the amount paid and the amounts
accrued of $316,000 was included in the extraordinary item.

In connection with the acquisitions discussed in Note 3 and other
agreements with new senior management, the Company entered into various
employment agreements, some of which expire on various dates from
November 2002 to December 2004, and continue thereafter on a
year-

F-15

to-year basis. Generally, these agreements include a non-compete
provision for the term of the agreement and one year thereafter. These
agreements also include severance provisions, under which the Company
was contingently liable. In conjunction with the April 2002 financing
discussed in Note 11, the Company renegotiated the severance portion of
these agreements. As of March 31, 2003, the Company is contingently
liable for a total of $315,000, which would become payable if the
employees were terminated under certain conditions.

LEGAL PROCEEDINGS - From time to time, we may be involved in litigation
relating to claims arising out of our ordinary course of business. We
are not currently a party to any material litigation, except for the
legal matters currently pending as described below.

SEC Investigation. The Company has been notified by the SEC Staff
that the SEC is conducting an investigation into (1) the trading
activity of certain individuals and entities in our securities and
the securities of other companies during the period between 1999
and 2000, and (2) certain of our actions during that same period.
The Company intends to fully cooperate with the SEC to the extent
it requests information. As a result of the investigation, the
Company could become subject to an order enjoining us from unlawful
conduct and incur civil monetary penalties. Such penalties could
have a material adverse effect on our operations or financial
condition.

Cause No: GN 103836: David Launey v. EpicEdge, Inc., Jeff Sexton,
Margaret C. Fitzgerald and Brewer and Pritchard, P.C.: In the 201st
Judicial District Court of Travis County, Texas. November 20, 2001.
This suit involves a former employee who alleges the Company
wrongfully prohibited him from selling company stock. Damages
alleged are $2,715,630. The former employee claims that through the
acts and/or omissions of the Company and other named parties of the
suit, the Company and other named parties failed to give correct
and truthful information that he needed before he could sell his
stock. In March 2003, the Company settled this case through
mediation, is awaiting final documentation, and accrued the lawsuit
settlement amount as of December 31, 2002.

Cause No: 2001-28197; EpicEdge, Inc. v. Reliant Energy; In the
133rd Judicial District Court of Harris County, Texas. May 31,
2001. This suit involves breach of contract. We filed suit on May
31, 2001 against Reliant Energy seeking specified damages in the
amount of $973,804 plus costs and attorneys fees. On October 28,
2002, Reliant Resources, Inc. sent a demand letter in connection
with this case stating that the Company breached a written contract
with Reliant Resources, Inc. for the delivery of a system and
demanding payment of $657,000 plus expenses. In March 2003, the
Company settled with Reliant in exchange for mutual release of all
claims.

While the outcome of these and other legal matters cannot be predicted
with certainty, the Company believes that they will not have a material
adverse effect on the Company's financial statements. However, an
unfavorable outcome of any of these matters could have a material
adverse effect. In addition, any failure in a client's system could
result in a claim against the Company for substantial damages,
regardless of the Company's responsibility for such failure. The
Company cannot guarantee that the limitations of liability set forth in
the Company's service contracts will be enforceable or will otherwise
protect the Company from liability for damages. The successful
assertion of one or more claims against the Company that exceed
available insurance coverage or changes in insurance policies,
including premium increases or the imposition of large deductible or
co-insurance requirements, would adversely affect the Company's
business.

BONUS PLAN- In April 2002, the Board voted to establish the EpicEdge,
Inc. Bonus Plan ("Bonus Plan") for the benefit of the Company's
management and employees. The bonus pool payment ("Bonus Pool") will be
equal to 10% of the aggregate proceeds available for distribution to
the preferred and common shareholders (the "Proceeds Available") only
upon a liquidation event and only if the Proceeds Available exceed $12
million (the "Measurement Base"). The applicable percentage will
increase by 1.25% for every additional million dollars of Proceeds
Available up to $20 million. If the Proceeds Available does not equal
or exceed $12 million, the applicable percentage is zero. If the
Proceeds Available equals but is not greater than $20 million, the
applicable percentage is 20%. In addition, the Bonus Pool shall
increase by $200,000 for every $1 million of Proceeds Available for
distribution in excess of $20 million until the Proceeds Available are
greater than $42 million. After the Proceeds Available exceeds $42
million, the Bonus Pool shall be reduced by $150,000 for every $1
million of Proceeds Available until the Bonus Pool is reduced to zero.

An individual who is awarded participation in the Bonus Pool vests 30%
on the date of the award and the remainder vests upon a liquidity event
if the individual is employed by the Company immediately prior to such
liquidity event. However, if an individual voluntarily resigns or is
terminated for cause, all interests in the Bonus Pool granted to such
individual will expire and be forfeited. Similarly, if the individual
is terminated for anything other than cause, all unvested interests in
the Bonus Pool will terminate and be forfeited. Percentages of the
Bonus Pool will be allocated from time to time to management and
employees of the Company at the discretion of the Chief Executive
Officer as approved by the Board of Directors. The entire Bonus Pool
will be allocated in full upon a liquidity event.

Management has determined that this Bonus Plan has a potential
compensation component in that it contains a contingent obligation of
the Company that will be recognized when and if 1) the estimated
Proceeds Available exceeds the Measurement Base, as defined above, and
2) a

F-16

liquidity event, as defined in the Bonus Plan, is judged to be
probable. Management has concluded that neither of these two events has
occurred and therefore no compensation adjustment is required as of
December 31, 2002 under the Bonus Plan.

14. CAPITAL STOCK

COMMON STOCK TRANSACTIONS - During 1999, the Company granted 1,147,500
shares of common stock, valued at $3,549,000 in exchange for consulting
services from various consulting firms, which was recorded by the
Company in its 1999 operating expenses. In 2000, the Company made a
claim for the return of a portion of these shares as one of these
consulting firms failed to fully execute on the original contractual
arrangement as agreed. In March 2001, this issue was settled with the
return and cancellation of 480,000 shares, which was recorded at the
estimated current value of the stock of $0.34 per share as of the return
date.

In July 2001, the Company issued 496 shares out of treasury stock to
stockholders of Loch for previously unexchanged Loch shares. These
original Loch shares were issued prior to 1989 and were not presented
for exchange at the time of the reverse merger in January 1999. The
value of these shares was $10,000 and was charged to discontinued
operations in 2001.

In addition to the cancellation of the 4,000,000 warrants referred to
below under COMMON STOCK WARRANTS, as an additional condition precedent
to the Series A and Series B Preferred Stock financings discussed in
Notes 10 and 16, the Company entered into a share return agreement dated
August 29, 2001, with three original stockholders, one of which is the
Chairman and principal stockholder, for the return of 10,295,210 shares.
In the fourth quarter of 2001, these shares were recorded as treasury
stock and as a capital contribution at the estimated current value of
the stock of $2,883,000.

In 2002, treasury shares of 1,091,963 were retired and transferred to
the unissued status.

In February 2000, the Company sold 2,260,000 unregistered shares of its
common stock to a group of private investors led by Edgewater Private
Equity Fund III, L.P. and Fleck T.I.M.E. Fund, L.P. for $11,300,000
($5.00 per share). The transaction resulted in certain stockholder
rights being granted to the investors, including a right to request
registration of the shares at the Company's expense. In August 2000, the
investor group exercised its right to request registration of the
shares. In connection with the financing discussed in Note 11, these
private investors withdrew their request for the registration of these
shares. In connection with the February 2000 transaction, the Company
paid a commission to an organization that facilitated the execution of
the transaction that consisted of a cash payment of $395,000 and a
warrant to purchase 22,000 shares of the Company's common stock at an
exercise price of $15.00 per share. The warrants were valued at $22,000
based on an independent valuation and are exercisable for a period of
five years from the date of grant.

In June 2000, the Company entered into a severance agreement with one of
its employees that provided for, among other things, the modification of
the employee's stock options allowing a cashless exercise of vested and
unexercised stock options. As a result, the Company accounted for the
stock options as variable options and recorded a stock-based
compensation charge on the exercise date during the three months ended
June 30, 2000, of $475,600 based on the difference between the exercise
price and the quoted market price of the underlying stock. The Company
issued 22,353 shares of its common stock to the former employee as a
result of the cashless exercise.

In September 2000, the Company sold 2,000,000 shares of unregistered
common stock to certain private equity investors, Edgewater Private
Equity Fund III, L.P. and Fleck T.I.M.E. Fund, L.P., for $2,000,000
($1.00 per share). The stock purchase agreement provided for two
additional board members to be appointed by the investors. Such
appointments were made in September and October 2000. The purchase
agreement also required the Company to immediately register the shares
of common stock that were issued. The investors had agreed to a
six-month lockup period, which prevented them from selling the shares of
common stock acquired in this transaction during that period. In
connection with the financing discussed in Note 11, these private
investors terminated their stock purchase agreement relating to these
shares and thereby relinquished their right to require the Company to
immediately register these shares.

In November 1999, the Company reserved 190,000 unregistered shares of
its common stock for grants to two of its board members for their
participation on the Company's Board of Directors. The shares were
issued to each board member in equal installments at the end of each
quarter through December 31, 2000. The Company recorded the value of the
shares issued each quarter at the average quoted market price of the
stock for the period in which the stock was issued, which resulted in
stock-based compensation of $2,936,400 for shares issued to these board
members.

PREFERRED STOCK TRANSACTIONS - On November 11, 2002, in accordance with
the Note Agreement, certain convertible notes payable were converted
into 9,695,481 shares of Series A Preferred Stock and 3,173,451 shares
of Series B Preferred Stock for $9,301,000 as discussed in Note 11. An
amendment to the Company's Articles of Incorporation was approved by the
shareholders at the 2002 Annual Meeting that increased the number of
authorized Preferred Stock shares to 30,000,000, $0.01 par, to permit
the conversion of the notes referred to in the Note Agreement.

F-17

The following table summarizes the preferred stock at December 31, 2002
and the pro-forma equivalent of the potential additional common stock
outstanding that would result from the conversion of the convertible
preferred stock:

The Series A Preferred Stock has the following terms: a conversion rate
equal to one share of common stock for each $.75 of stated value or a
liquidation preference such that in the event of any liquidation,
dissolution or winding up of the Company, the holders thereof shall be
entitled to receive, at their option, either: (a) in preference to the
holders of the common stock and on a pro-rated pari passu basis with the
Series B Preferred Stock, an amount equal to 2.75 times the stated
value, or (b) a ratable share of the distribution of assets and property
with the holders of the common stock, participating on an as converted
basis, if a liquidation event occurs within 24 months. If, however, a
liquidation event occurs after 24 months, the preference multiple
becomes 3 times the stated value. The Series A Preferred Stock shall
have a stated value of $.75. A merger or sale of capital stock in which
the Company's shareholders do not own a majority of the outstanding
shares of the surviving corporation or sale of all or substantially all
of the Company's assets shall be deemed to be a liquidation.

The Series B Preferred Stock has the following terms: a conversion rate
equal to one share of common stock for each $.25 of stated value or a
liquidation preference such that in the event of any liquidation,
dissolution or winding up of the Company, the holders thereof shall be
entitled to receive, at their option, either: (a) in preference to the
holders of the common stock and on a pro-rated pari passu basis with the
Series A Preferred Stock, an amount equal to 2.75 times the stated
value, or (b) a ratable share of the distribution of assets and property
with the holders of the common stock, participating on an as converted
basis, if a liquidation event occurs within 24 months. If, however, a
liquidation event occurs after 24 months, the preference multiple
becomes 3 times the stated value. In addition, if the holders of the
Series B Preferred Stock choose upon a liquidation event to receive the
liquidation preference multiple in effect at the time of the event and
there still remains undistributed new equity value after any debt
obligations and Series A Preferred Stock liquidating preference
payments, then the Series B Preferred Stock will participate in that
additional distribution on an as converted basis at a conversion rate
equal to one share of common stock for each $.75 of stated value. The
Series B Preferred Stock shall have a stated value of $.75. A merger or
sale of capital stock in which the Company's shareholders do not own a
majority of the outstanding shares of the surviving corporation or sale
of all or substantially all of the Company's assets shall be deemed to
be a liquidation.

Series B-1 Preferred Stock may be issued in connection with the June
Convertible Notes. Management anticipates that the Series B-1 Preferred
Stock will have the following terms: a conversion rate equal to one
share of common stock for each $.25 of stated value or a liquidation
preference such that in the event of any liquidation, dissolution or
winding up of the Company, the holders thereof shall be entitled to
receive, at their option, either: (a) senior to the holders of the
Series A Preferred Stock and Series B Preferred Stock and in preference
to common stock, an amount equal to 3.5 times the original Series B-1
Preferred Stock purchase price per share (the "Series B-1 Preference")
and a ratable share of the distribution of assets and property with the
holders of Common Stock at a conversion price of $0.75 per share, or (b)
a ratable share of the distribution of assets and property with the
holders of common stock, participating on an as converted basis at $0.25
per share. The Series B-1 Preferred Stock shall have a stated value of
$.75. The holders of the Series B-1 Preferred Stock will have the right
to convert shares of Series B-1 Preferred Stock, at the option of each
holder thereof, at any time, into shares of common stock at a conversion
price equal to one share of common stock for each $0.25 of stated value
if the holders of the Series B-1 Preferred Stock elect not to take the
Series B-1 Preference. If the holders of the Series B-1 Preferred Stock
take the Series B-1 Preference, the conversion price will be $0.75 per
share. The total number of shares of common stock into which such shares
may be converted initially will be determined by dividing the aggregate
original Series B-1 Preferred Stock purchase price of $.75 plus accrued
interest, by the conversion price. The initial conversion price for the
Series B-1 Stock will be $0.25 or $0.75 (if the holders of the Series
B-1 Stock take the Series B-1 Preference), as the case may be. A merger
or sale of capital stock in which the Company's shareholders do not own
a majority of the outstanding shares of the surviving corporation or
sale of all or substantially all of the Company's assets shall be deemed
to be a liquidation.

ESOP SHARES - In connection with the IPS acquisition in June 2000, the
Company assumed an ESOP from IPS and issued 607,000 shares of common
stock to the ESOP ("ESOP shares"). On the date of acquisition, the
Company recorded unearned compensation of $9,445,000 related to 493,220
ESOP shares issued, but not yet committed to be released by the ESOP's
trustee. During the period from acquisition to December 31, 2000, a
total of $466,000 in compensation expense was recorded for 43,949 ESOP
shares committed to be released at an average share price of $10.60 per
share. ESOP shares not committed to be released are not considered to be
outstanding and were excluded in earnings per share calculations. As a
result of the IPS sale (Note 4), the ESOP shares were returned to the
Company in February 2001, treasury stock increased by $232,000 and
unearned compensation decreased by $8,979,000 related to the unreleased
ESOP shares.

F-18

COMMON STOCK WARRANTS -- In November 2001, the Company issued a warrant
for the purchase of 177,700 shares of its common stock in exchange for
legal services totaling $35,540. The warrant has an exercise price of
$.20 and is exercisable for three years from the date of grant. The
warrants were immediately vested. The Company valued these warrants at
the cost of the services received of $35,540 and recorded legal expense
in the same amount.

In August 2001, the Company issued warrants for the purchase of 30,000
shares of its common stock to each of two new members of the Board of
Directors, and in November 2001, the Company issued warrants for the
purchase of 30,000 shares of its common stock to a third new member of
the Board of Directors. These warrants are for services to be rendered
for one year from the date of appointment to the Board. The warrants
have an exercise price of $0.28 and are exercisable for five years from
the date of grant. The warrants vest in twelve months from the date of
grant. Since the warrants were issued to members of the Board of
Directors for services as a director, and the exercise price equaled the
fair market value of the common stock on the date of issuance, no
compensation expense was recorded related to these warrants.

In November and December 2000, the Company issued in conjunction with
November and December Convertible Notes (Note 11) warrants for the
purchase of 5,000,000 shares of its common stock at an exercise price of
$.01 per share. The Company recorded the initial value of these warrants
based on the Black-Scholes model, totaling $2,400,000, as a discount to
the Convertible Notes. In August 2001, in connection with the
renegotiation of the $1,000,000 Convertible Note, the holder of the
Convertible Note relinquished 2,000,000 warrants and the Company
recorded the forfeiture of these warrants as additional paid in capital
of $675,000 and a reduction of unamortized debt discount of $225,000.
Additionally, on April 16, 2002, as part of the Note and Preferred Stock
Purchase Agreement, the holder of $1,000,000 of the December Convertible
Notes relinquished 2,000,000 warrants. The remaining 1,000,000 warrants
for common stock at $0.01 per share that were issued in conjunction with
the December Convertible Notes are not relinquished and therefore remain
in effect.

In July 2000, the Company issued warrants for the purchase of 17,000
shares of its common stock to the management company that helped the
Company locate its new corporate headquarters. The warrants have an
exercise price of $22.75 per share and are exercisable for five years
from the date of grant. One-third of the warrants vest upon grant, and
the remaining two-thirds vest in one-half increments on the first and
second anniversaries of the grant date. The Company recorded the value
of these warrants based on the Black-Scholes model, totaling $154,000,
as an expense in the period the warrants were issued.

In May 2000, the Company issued warrants for the purchase of 150,000
shares of its common stock to a member of the Board of Directors for
services to be rendered from May 2000 to April 2002. The warrants have
an exercise price of $19.00 and are exercisable for five years from the
date of grant. The warrants vest over the service period as follows:
one-third of the warrants vest upon grant, and the remaining two-thirds
vest in one-half increments on the first and second anniversaries of the
grant date. Since the warrants were issued to a member of the Board of
Directors for services as a director, and the exercise price equaled the
fair market value of the common stock on the date of issuance, no
compensation expense was recorded related to these warrants.

In April 2000, the Company issued to a client's venture capital
affiliate a warrant to purchase 500,000 shares of its common stock at an
exercise price of $22.00 per share. The warrant is exercisable at any
time after the earlier of (i) 60 days after the consummation of a
registered public offering and (ii) October 3, 2001 (such earlier date
being the vesting date), through the third anniversary of the vesting
date. The Company determined the value of the warrant to be $4,843,000
based on the Black-Scholes model. The warrant was issued
contemporaneously with the negotiation of a consulting agreement between
the Company and the client, under which the Company could receive
estimated fees totaling $3,100,000 over the next three years. However,
the agreement provided the client with the right of cancellation for
convenience. At June 30, 2000, there was no assurance that the client
would continue to engage the Company under the agreement or would enter
into any additional agreements in the future; accordingly, the Company
recorded the estimated value of the warrant as stock-based compensation
of $4,843,000 during the three months ended June 30, 2000. The client
canceled the consulting agreement in January 2001.

In March 2000, the Company issued warrants for the purchase of 40,000
shares of its common stock to two advisory board members for services to
be rendered from April 2000 to March 2002. The warrants have an exercise
price of $21.88 and are exercisable for five years from the date of
grant. The warrants vest over the service period as follows: one-third
of the warrants vest upon grant, and the remaining two-thirds vest in
one-half increments on the first and second anniversaries of the grant
date. The Company recorded the initial value of these warrants based on
the Black-Scholes model, totaling $346,000, as unearned compensation on
the date of grant. The Company originally amortized this amount as
compensation expense over the expected consulting period. The Company
revalued the warrants at December 31, 2000, and based on a lower stock
price, it reduced the amount of the unearned compensation to zero. As a
result of the decrease in stock value over the period, the Company has
not recorded any additional stock-based compensation related to these
warrants.

In connection with the February 2000 sale of unregistered shares, the
Company paid a commission to an organization that facilitated the
execution of the transaction that consisted of a cash payment of
$395,000 and a warrant to purchase 22,000 shares of the Company's common
stock at an exercise price of $15.00 per share. The warrants vest
immediately and are exercisable for 5 years from the date of grant. The
warrants were valued at $22,000 based on an independent valuation.

F-19

In December 1999, warrants to purchase 25,000 common shares were granted
with the term loan (Note 10). The shares can be purchased any time prior
to March 31, 2005, at an exercise price of $11.70 per share. The fair
value assigned to these warrants of $115,000 was accounted for as a debt
discount and amortized over the period of the term loan.

STOCK OPTIONS - In February 1999, the Board of Directors approved the
1999 Employee Stock Option Plan (the "1999 Plan"). The Board reserved
3,000,000 shares of common stock for issuance under the 1999 Plan. Under
the terms of the 1999 Plan, options to purchase common stock may be
granted at the discretion of the Company's compensation committee and
may be subject to certain restrictions. In May 2000, the number of
shares reserved was increased to 7,500,000. Under the 1999 Plan, 865,157
options were approved by the Board of Directors and granted to current
executives and key employees at an exercise price range of $0.04 to
$0.33 during 2002.

The Board of Directors adopted the 2002 Stock Option Plan (the "2002
Plan") on April 16, 2002. The 2002 Plan is intended to supplement the
1999 Plan. A total of 10,317,311 shares are reserved under the 2002
Plan. Under the 2002 Plan, 9,672,648 options were approved by the Board
of Directors and granted to current executives and key employees at an
exercise price range of $0.10 to $0.12 during 2002.

The Board of Directors believes that the Company must offer a
competitive equity incentive program if it is to continue to
successfully attract and retain the best possible candidates for
positions of responsibility within the Company. The Board expects that
the 2002 Plan will be an important factor in attracting and retaining
the high caliber members of management and key employees essential to
the Company's success and in motivating these individuals to strive to
enhance the Company's growth and profitability.

Options generally vest over a three-year life. The following table lists
the exceptions:

The 400,000 options granted in December 2000 were granted at an exercise
price of $0.125 per share; accordingly, the Company recorded unearned
compensation of $400,000 based on the market price of the common stock
on the grant date. The Company recorded $67,000 of amortization of the
unearned compensation in December 2000. On January 4, 2001, the employee
left the Company; therefore, in January 2001, the Company reversed the
remaining unearned compensation related to these options. This employee
exercised the vested portion of the options, which were 66,668 options
in January 2001. All other options granted under the Plan were granted
at prices equal to the fair value of the common stock at the grant date
and expire 10 years after the date of grant.

At December 31, 2002 there were 11,698,474 options outstanding and
5,885,078 options available for grant and at December 31, 2001, there
were 1,891,582 options outstanding and 5,374,959 options available for
grant under the Plan.

A summary of the Plans is as follows:

F-20

The following table summarizes information about stock options
outstanding at December 31, 2002:

PRO FORMA STOCK-BASED COMPENSATION - The Company applies APB Opinion No.
25 and related interpretations in accounting for its stock option plans.
Compensation cost was recognized for the Company's stock option plans
only when the options were granted to employees at an exercise price
that was below the fair value of the stock on the grant date. SFAS No.
123 prescribes a method to record compensation cost for stock-based
employee compensation plans at the estimated fair value of the options
at the grant date, but allows disclosure as an alternative. The pro
forma disclosure as if the Company had adopted the cost recognition
requirements under SFAS No. 123 for options granted to employees in
2002, 2001 and 2000 is presented below. The pro forma compensation cost
may not be representative of that expected in future years.

In the pro forma calculations, the weighted average fair value of
options granted to employees in 2002, 2001 and 2000 was estimated at
$0.13, $0.30 and $8.85 per share, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
pricing model with the following assumptions: (i) expected volatility
computed using the monthly average of the Company's common stock market
price as listed on the American Stock Exchange for the period from April
2000 through December 2002, which market price volatility averaged 188%,
146% and 223% in 2002, 2001 and 2000, respectively; (ii) expected
dividend yield of 0%; (iii) expected option term ranging from six months
to three years; and (iv) risk-free interest rate of 3.1%, 4.0% and 5.5%
in 2002, 2001 and 2000, respectively.

IPS OPTIONS - In the IPS acquisition, the Company granted options to
purchase 1,082,060 shares of its common stock, which were valued as part
of the purchase price (Note 3) based on the Black-Scholes model and,
therefore, are not included in the above pro forma amounts. In the sale
of IPS (Note 4), these options were canceled.

OTHER -- In the first quarter 2001, there was a reduction in unearned
compensation of $8,979,000 associated with unreleased ESOP shares and an
increase in treasury stock of $233,000 as a result of the sale of IPS,
as discussed in Note 4 and ESOP SHARES above.

F-21

15. STOCK-BASED COMPENSATION AND COSTS

Stock-based compensation and costs in 2000 is as follows:

16. EMPLOYEE BENEFIT PLAN

The Company has a profit sharing plan under Section 401(k) of the
Internal Revenue Code, which covers substantially all employees. The
Company does not match employee contributions.

17. SUBSEQUENT EVENTS

On January 9, 2003, the Company entered into a Loan Modification
Agreement with SVB which amended the November 6, 2002 Loan and Security
Agreement and increased the line of credit extended from $1,000,000 to
$1,300,000 until July 31, 2003 at which time the line will be reduced
to $1,000,000 for the remaining term of the agreement. Edgewater agreed
to guarantee the amount to which the line of credit exceeds $1,000,000
on July 31, 2003, up to a maximum of $300,000. The Company intends to
issue Edgewater a warrant to purchase a number of shares of the
Company's Series B-1 Preferred Stock having a face value of $150,000 in
consideration for Edgewater entering into the Guarantee, whether or not
the Guarantee is required or called upon by the Bank. The warrant will
be to purchase up to 200,000 shares of Series B-1 Preferred Stock at an
exercise price of $0.01 per share.

During February 2003, the AMEX requested a report on the Company's
compliance with the plan submitted in June 2002. Based upon this
information, the AMEX informed the Company that it would commence the
steps required to delist the Company's common stock. On February 28,
2003, the Company received a formal notice from the AMEX Staff,
indicating that the Company no longer complied with the AMEX's
continued listing standards. The Company informed the AMEX that it
would not appeal and consented to the AMEX's decision to remove the
listing of the Company's common stock. On March 12, 2003, the AMEX
suspended trading in the Company's common stock and submitted an
application to the SEC to strike the Company's common stock from
listing and registration on the AMEX. The SEC granted approval of the
application on March 24, 2003. On March 12, 2003, the Company's common
stock began trading on the Pink Sheets under the trading symbol "EPED."

In March 2003, the Company reached an agreement on the $2,000,000
outstanding balance of the June Convertible Notes to extend the due
date to January 31, 2006 pursuant to the B-1 Note Agreement as
discussed in Note 11.

F-22

INDEPENDENT AUDITORS' REPORT

To the Directors and Stockholders of EpicEdge, Inc.:

We have audited the financial statements of EpicEdge, Inc. (the "Company") as of
December 31, 2002 and 2001, and for each of the three years in the period ended
December 31, 2002, and have issued our report thereon dated March 31, 2003
appearing in this Annual Report on Form 10-K of EpicEdge, Inc. for the year
ended December 31, 2002. Our audits also included the financial statement
schedule of EpicEdge, Inc. listed in Item 14. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.

/s/ Deloitte & Touche LLP

Dallas, Texas
March 31, 2003

F-23

SCHEDULE II --- Valuation and Qualifying Accounts

EpicEdge, Inc.

Allowance for Doubtful Accounts
Years Ended December 31, 2002, 2001 and 2000

- ----------
(1) Doubtful accounts written off, net of recoveries.

(2) Includes $47,000 of Allowance for Doubtful Accounts that was
removed with the sale of IPS as discussed more fully elsewhere
in this Form 10-K.

F-24

INDEX TO EXHIBITS

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(#) Filed herewith.