Alternative Technology Resources Inc – ‘10KSB’ for 6/30/98

As of:  Tuesday, 9/22/98   ·   For:  6/30/98   ·   Accession #:  1001277-98-99   ·   File #:  0-20468

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Annual Report — Small Business   —   Form 10-KSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB       Annual Report -- Small Business                       38    169K 
 2: EX-10       Ex-10.33                                               9     40K 
 3: EX-10       Ex-10.34                                               1      6K 
 4: EX-23       Consent of Experts or Counsel                          1      6K 
 5: EX-27       Financial Data Schedule                                1      8K 

10KSB   —   Annual Report — Small Business
Document Table of Contents

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SECURITIES AND EXCHANGE COMMISSION  
Washington, D.C. 20549  

Form 10-KSB 
(Mark One)                                                            
    [X]   ANNUAL  REPORT  UNDER  SECTION  13  OR  15(d)  OF  THE  SECURITIES
EXCHANGE ACT OF 1934                                    

FOR THE FISCAL YEAR ENDED JUNE 30, 1998                 

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

Commission file number   0-20468                        

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

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

629 J Street,  Sacramento,  CA 95814
(Address of principal executive offices, including zip code)
(916) 325-9370  
(Issuer's telephone number, including area code)  

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

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

Common Stock, par value $0.01 per share 
(Title of Class)  

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X No__                                   

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-B 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-KSB or any  amendment to
this Form 10-KSB. [ ]                                                           

State issuer's revenue for its most recent fiscal year.  $5,250,002             

Aggregate  market  value  of  the  Registrant's  common  voting  stock  held  by
non-affiliates  of the Registrant on September 15, 1998 was $2,729,643 (based on
the final trading price on that date).                                          

Number of shares of common stock outstanding at September 15, 1998:             
26,120,499                                                                      

DOCUMENTS INCORPORATED BY REFERENCE 

Portions of the Company's  definitive  Proxy Statement for the Company's  Annual
Meeting of  Stockholders  to be held on  November  17, 1998 (which will be filed
within 120 days of the Company's  fiscal year end) are incorporated by reference
into Part III.                                                                  

    Exhibit index is located on page 14.

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PART I                                                                          

Item 1.  Description of Business                                                

General                                                                         

Alternative  Technology Resources,  Inc. ("ATR" or the "Company"),  a Delaware  
corporation,  was  founded in 1989 to  develop  and sell  computer  integrated  
laboratory  systems  ("LIS").   The  Company  operated  under  the  name  3Net  
Systems,  Inc.  and was never  successful  in the LIS  market.  Therefore,  in  
fiscal 1996, the Company  stopped new system  development and later decided to  
exit LIS entirely.                                                              

During  fiscal  1997,  the Company  changed its name to  Alternative  Technology
Resources,  Inc.  ("ATR").  It has since  focused its efforts  entirely upon its
computer  programmer  placement  business,   whereby  it  recruits  experienced,
qualified computer  programmers  primarily from the former Soviet Union, obtains
necessary visas, and places them for assignment in the United States.  Recently,
the  Company  has begun to  recruit  programmers  from  South  Korea for  future
placement.                                                                      

Based  upon  its  experience  in the  market  thus  far  and  critical  industry
forecasts,  the  Company  believes  that  its  current  focus  offers  the  best
opportunity  for  financial  recovery and the  development  of a viable  ongoing
enterprise.  The Company has begun to generate  new revenues and has reduced its
operating  losses but did not generate  sufficient  cash flow in fiscal 1998 and
1997 to support operations.                                                     

The Company has incurred operating losses since inception which have resulted in
an accumulated deficit of $35,099,830 at June 30, 1998. In addition, at June 30,
1998 the Company had a working capital  deficit and a  stockholders'  deficit of
$4,844,274.  Therefore, the Company is pursuing additional funds through private
equity  financing  or  additional  debt  financing.  Although  there  can  be no
assurances that additional  financing can be obtained or that if obtained,  such
financing  will be  sufficient  to prevent  the  Company  from having to further
materially  reduce its level of operations or be forced to seek protection under
federal  bankruptcy  laws,  management of the Company  believes that  sufficient
financing will be available  until  operations  can be funded  through  contract
programming  and  consulting  services.  Ultimately,  the  Company  will need to
achieve  a  profitable  level  of  operations  to fund  growth  and to meet  its
obligations when they become due.                                               

Services                                                                        

Contract Programming, former Soviet Union (FSU)                                 

ATR  provides  contract  computer  programming  and  consulting  services  to an
expanding  base and variety of  industrial  customers by  recruiting,  training,
importing,   and   contractually   deploying  foreign   information   technology
professionals  from  the FSU  for  direct  assignment  to  customer  programming
projects.  The  mechanism  by which such  prospective  foreign  contractors  are
identified and prepared for assignment to U.S. company projects is the Company's
business  relationship  with a technology firm based in the FSU. The Company has
an exclusive  contract with PRIZE-ITM,  LTD.  ("PRIZE"),  a Latvian company that
specializes  in  information  technology   recruiting,   training  and  software
development.  The key  principals  of PRIZE are  former  senior  executives  and
managers of the  Research  Division  of the Riga  Institute  for Civil  Aviation
Automation  and Controls,  Riga,  Latvia.  In the former Soviet Union,  the Riga
Institute provided  information  technology  education and software  development
services to the Ministry of Civil Aviation  (AEROFLOT).  The original nucleus of
PRIZE employees came from the Riga                                              

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Institute after the major functions  supporting AEROFLOT were discontinued.  The
Company pays a monthly fee to PRIZE for the services  they perform in recruiting
and training personnel for U.S. assignments. The process works as follows:      

o  The Company identifies  information  technology personnel requirements with  
 its U.S.  customers,  and provides  PRIZE with a technical job profile that
 describes the specific applications software, computer hardware,  operating
 systems and years  experience  required to qualify  for the  specific  U.S.
 customer-identified  position.  PRIZE uses these  profiles to identify  and
 select appropriate  candidates.  PRIZE has developed a data base of resumes
 of  individuals  from Riga and other parts of the former  Soviet  Union who
 have  technical and language  proficiency  skills  necessary to work in the
 United  States,  and who have  indicated  a desire to work  overseas.  This
 data base is integrated  with the specific job criteria,  and any personnel
 matches  are  further   interviewed  to  ascertain  if  the  individual  is
 technically  qualified for the specific job and has a desire to participate
 in the  Company's  U.S.  placement  program.  PRIZE may also  advertise  in
 local  newspapers  or  industry  periodicals  for  information   technology
 professionals  with specific  technical skills and work  experience.  These
 advertisements  are placed with a specific  U.S.  customer in mind that has
 identified a need within its  organization  which cannot be filled  through
 its normal domestic U.S. personnel selection channels.  In addition,  PRIZE
 has recruiting  representatives  in other cities in the former Soviet Union
 who participate in job fairs, and who recruit potential  candidates through
 educational institutions,  technical companies or on-line services in their
local area.                                                               

o  PRIZE  provides  several types of training  depending  upon the U.S.  based  
 customer needs and the needs of the people who are being  recruited to fill
 positions at the customer  site.  Computer  based or classroom  training is
 provided  in  subjects  such as specific  programming  languages,  specific
 computer  operating  systems,  and  business  subjects  for which  computer
 automation  support is  provided by the  customer to its users.  Additional
 training  is  provided  in  English,   and  U.S.   business   and  personal
 lifestyles.   Not  all  candidates   recruited  by  PRIZE  are  trained  in
 technical  subjects  if they  have  the  requisite  skills  based  on their
 previous work  experience.  Depending on the U.S.  customer,  some specific
 training  may be  provided  by the  customer  either  in  conjunction  with
 PRIZE's  training  program or once the  contractors  are at the  customer's
 site.  This  training is usually  more  detailed  education  regarding  the
customer's business, applications software, and technical environment.    

o  The typical contract  relationship with foreign  contractors  starts with a  
 representation   agreement  which  allows  the  Company  to  represent  the
 candidate  for a fixed  period of time in the U.S.  information  technology
 market.  Further,  this contract  authorizes the Company to process an H1-B
 work visa with the U.S.  Immigration  Service when an  appropriate  job has
 been  found for the  candidate.  This  contract  also  identifies  specific
 training  required to be performed by the  candidate  prior to reporting to
 the U.S.  customer's  work  site.  After  the H1-B  visa is  approved,  the
 Company and the  candidate  sign a three year,  extendable  contract  which
 supports the employment  requirements  of the H1-B visa, and identifies all
 the  services  to be  performed  by the  Company  and the  contractor.  All
 employment and compensation terms are between the Company as employer,  and
the contractor as an employee of the Company.                             

o  The Company  provides all visa  application  support,  including  application
   fees,  and also provides  international  and domestic  transportation  to the
   customer's work-site.  When necessary,  the Company also provides housing and
   other support services, e.g. utilities and telephone, until the contractor is
   capable  of  establishing  credit  in order to  provide  these  services  for
himself.                                                                  

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The Company  believes  it  has  an  opportunity  to  place  many  FSU  computer 
specialists  in  U.S.-based  computing  assignments  providing  "legacy  system"
support  and  maintenance.  A legacy  system is a  business  application  system
developed ten or more years ago in an older  computer  language  (such as COBOL,
PL/1,  or  Assembler  Language)  that  continues  to operate on a  mainframe  or
mid-frame  hardware  platform.  The cost of  maintenance  for such  systems  has
steadily  risen over the years.  Even more  problematic  for the U.S.  companies
operating  legacy  systems today is the  ever-decreasing  domestic labor pool of
programmers  who are  technically  qualified and who desire to perform  software
maintenance tasks.                                                              

The increasing  disparity between the amount of legacy system maintenance demand
and the  supply of  qualified,  motivated  programmers  to perform it is further
escalated by the Year 2000 conversion issue. Also known as the "millennium bug,"
this problem  arises from the widespread use of only two digits to represent the
year in computer  programs  performing  date  computations  and  decision-making
functions.  Unless  these  programs  are  modified,  many  may fail due to their
inability to  interpret  properly  these date fields  (e.g.,  such  programs may
interpret "00" as the year "1900" rather than as "2000").  The Gartner Group, an
information technology market research firm, has estimated that it will cost the
public and private  sectors  between $300 and $600 billion  worldwide to perform
the necessary Year 2000 conversions.                                            

The Company has joint  marketing  agreements  with three  professional  contract
services companies who market the Company's personnel resources.  The Company is
the preferred provider of foreign workers to these companies.                   

At September 15, 1998, the Company had 89 foreign contractors  actively employed
in  U.S.-based  contracts  at 16  different  customer  business  locations in 10
states.                                                                         

Contract Programming, South Korea                                               

As of September  15, 1998,  the Company had begun  recruiting  programmers  from
South Korea.  Because of the recent  business and  economic  difficulties  being
experienced  in  Asia,  many  qualified  computer   programmers  are  under-  or
unemployed in South Korea. The Company is developing  contractual  relationships
with a firm that  represents  many such  programmers.  It is expected  that this
relationship will work in a similar fashion as the Prize relationship  described
in the FSU section above. The major difference is that while FSU programmers are
often specialized in legacy system  programming,  South Korean  programmers have
skills working with more modern  computer  systems  languages and  applications,
including  the  client-server  and  internet   environments.   The  Company  has
experienced  early recruiting  success and it's customers have shown an interest
in the South Korean  programmers.  However,  no customer placements will be made
until  more H1-B  visas  become  available  after  October 1, 1998 (see "Item 1,
Description of Business Government Regulation").                                

System Service                                                                  

Until May 1997, the Company provided software and hardware  maintenance  support
services  to  customers  who  licensed  one or  more of its  proprietary  system
products.  In line with its business  strategy to focus on contract  programming
services, the Company transferred and assigned its right, title, and interest in
and to its LIS  software  and hardware  customer  service  contracts to Omnitech
Migrations  International,  Inc.  ("OMI") and delegated to OMI all the Company's
duties and obligations of performance thereunder.                               

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Customers                                                                       

The Company's  customer base includes  those  companies to which it is providing
services  in  alternative  programming  resource  services.  In fiscal  1998 two
customers provided  approximately 85% of the Company's total revenues. In fiscal
1997 two customers constituted approximately 73% of total revenues. It should be
noted that the two customers cited are third party placement  agencies that work
with the Company to place programmers at several of their customer locations.   

Sales                                                                           

The Company's  executive  officers and certain technical staff members currently
participate  in  selling  efforts  by  directly  contacting  potential  contract
programming and consulting customers.  The Company also relies upon and benefits
from the efforts of third-party  business  partners in the sale and placement of
foreign  contractors  in new  customer  contracts  and  the  management  of such
accounts after the sale.                                                        

Competition                                                                     

Contract Programming                                                            

The information  technology  temporary  services industry is highly  competitive
with limited  barriers to entry.  Within local  markets,  smaller firms actively
compete with the Company for  business,  and in most of these  markets no single
company has a dominant  share of the  market.  The Company  also  competes  with
larger full-service and specialized competitors in national, regional, and local
markets  which  have  significantly  greater  marketing,  financial,  and  other
resources than the Company.                                                     

Due to the niche  definition of its alternative  programming  resources  ("APR")
market  segment and the  growing  general  shortage of legacy and other  systems
maintenance programmers,  the Company does not believe that external competition
represents  the  primary  impediment  to its  placement  of its  programmers  in
customer  contracts.  Rather, the Company's APR business is limited primarily by
its ability to recruit,  train, and present qualified candidates to the customer
and to obtain  acceptance by potential  customers of using foreign  contractors.
Qualification  attributes for placement in U.S.  customer  contracts include the
particular  technical  skills and  experience  corresponding  to the  customer's
requirements and sufficient  English language skills to communicate  effectively
in an American business environment.                                            

Government Regulation                                                           

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

In  connection  with its APR program  using FSU or South Korean  employees,  the
Company  must  comply  with  the  laws  and  regulations  of the  United  States
Immigration and Naturalization  Service (the "INS"). The Company has engaged the
services  of a  business  immigration  lawyer  to  assist  in the  filing of all
appropriate documents necessary for the Company to invite foreign               

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workers to the United  States for contract  programming  assignments.  While the
Company and its immigration  lawyer are very familiar with the current rules and
regulations,  there can be no assurance that the immigration  laws of the United
States will not be changed,  resulting in a potentially  negative  effect on the
Company's  ability to engage  qualified  FSU  employees.  At present  there is a
65,000  person  nationwide  limitation  on the number of H1-B visas which can be
granted  in a fiscal  year.  This  limitation  has been  reached in the last two
years,  and during fiscal year 1998 several  placements were delayed by the lack
of available H1-B visas. The U.S.  Congress is currently  working on legislation
to increase  the H1-B cap.  However,  future visa  limitations  could  adversely
impact the Company's operations.                                                

Year 2000 Issues                                                                

Management  has made an assessment of its computer  programs and has  determined
that it has no Year 2000 impairment in its computer systems  developed  in-house
and is  relying on vendor  declarations  that their  accounting  program  has no
impairment  related  to the Year  2000  issue.  Therefore,  management  does not
currently anticipate that the Company will incur significant  operating expenses
or be required to invest  heavily in computer  systems  improvements  to be year
2000 compliant.                                                                 

Human Resources                                                                 

At September 15, 1998, the Company had 105 employees,  consisting of 2 executive
officers,  93 contract  programming  personnel in the United States on visa from
the former Soviet Union, and 10 administrative  support personnel.  There are 12
employee's located at the Company's  headquarters in Sacramento and 89 employees
located at customer locations as follows: 39 in Massachusetts, 13 in Georgia, 10
in Texas, 10 in Rhode Island, 8 in Connecticut,  5 in California, 3 in Missouri,
2 in Kansas, 2 in Colorado and 1 in Minnesota.  None of the Company's  employees
is represented by a labor union.  Management considers its employee relations to
be good.                                                                        

Insurance                                                                       

The annual  coverage  limits for the Company's  general  premises  liability and
workers' compensation  insurance policies are $2,000,000 for liability insurance
policies  and  $1,000,000  for  workers'  compensation.  The Company  also has a
$1,000,000 policy for errors and omissions  insurance.  Management believes such
limits  are  adequate  for the  Company's  business;  however,  there  can be no
assurance that potential claims will not exceed the limits on these policies.   

Item 2.  Description of Property                                                

The Company's  headquarters are located in Sacramento, California.  The Company 
occupies  approximately  5,400 square feet of office space which it leases from 
James W. Cameron, Jr., a substantial shareholder,  for a monthly rent of $7,157.
The lease expires and is expected to be renewed in December 1998.               

Item 3.  Legal Proceedings                                                      

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

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Item 4.  Submission of Matters to a Vote of Security Holders                    

No matters were  submitted during the quarter  ended June 30, 1998 to a vote of 
security holders.                                                               

PART II                                                                         

Item 5.  Market for Common Equity and Related Stockholder Matters               

Price Range of Common Stock                                                     

The Company's common stock is traded on the OTC Bulletin Board under the symbol 
"ATEK".  Effective  December  2, 1996,  the  Company changed its name from 3Net 
Systems,  Inc., to Alternative  Technology Resources, Inc. Prior to December 2, 
1996,   the  Company's   common  stock  was  traded  under  the  symbol  "TNET."
Transactions  in the  Company's  common  stock are subject to the "penny  stock"
disclosure requirements of Rule 15g-9 under the Exchange Act.                   

Set  forth  below  are the high ask and low bids for the  common  stock of the  
Company for each of the last eight  quarters.  The prices  have been  adjusted  
to  give  effect  to  a  one-for-ten  share  consolidation  of  the  Company's  
outstanding  common stock,  par value $0.01 per share,  which became effective  
on  December  2,  1996.  The  quotations  are  derived  either  from  the  IDD  
Information  Services,  Tradeline  Database  or the  National  Association  of  
Securities  Dealers,  Inc. and reflect  inter-dealer  prices,  without  retail  
mark-up,  mark-down or commissions  and may not necessarily  represent  actual  
transactions  in  the  common  stock.  There  is  no  public  market  for  the  
Company's Preferred Stock.                                                      

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

Quarter ended September 30, 1996                $ 2.50            $ 1.10        
Quarter ended December 31, 1996                 $ 2.20            $ 0.56        
Quarter ended March 31, 1997                    $ 1.25            $ 0.44        
Quarter ended June 30, 1997                     $ 1.25            $ 0.81        
Quarter ended September 30, 1997                $ 1.31            $ 0.91        
Quarter ended December 31, 1997                 $ 1.19            $ 0.45        
Quarter ended March 31, 1998                    $ 1.06            $ 0.38        
Quarter ended June 30, 1998                     $ 1.22            $ 0.75        

The Company had approximately 169 common stockholders of record and 3 preferred 
stockholders  of record as of September 15, 1998. The last reported sales price 
for the Company's common stock was $0.4375 on September 15, 1998.               

Dividend Policy                                                                 

The  Company  has never paid a cash  dividend  on its common  stock and does not
anticipate paying cash dividends on its common stock in the foreseeable  future.
The Company's  Series D Preferred  Stock carries a cumulative  dividend of $0.60
per share per year which has been accrued  beginning July 1, 1994 and is payable
quarterly to the extent permitted by law.                                       

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

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Item 6.  Management's Discussion and Analysis                                   

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

Results of Operation                                                            

Contract programming                                                            

Contract  Programming  Revenue.  Contract  programming revenue results primarily
from sales of programmer services.  To a lesser extent during fiscal 1997, sales
of custom  programming  and software  development  are also included in Contract
Programming Revenue.  These latter categories of sales were immaterial in fiscal
1998.                                                                           

Revenues  increased  $3,232,000  or 160% in fiscal 1998 compared to fiscal 1997.
This  increase  was due to  billing  rate  increases,  growth  in the  number of
contract programmers working at customer sites in fiscal 1998 compared to fiscal
1997, and the length of time contract  programmers were at customer sites during
each of the fiscal years.                                                       

Programmer  Costs.  Programmer  costs are the salary and other wage and benefit 
costs of ATR's programmer employees. These costs increased $2,203,000,  or 133% 
in fiscal 1998  compared to fiscal  1997.  This increase  is due  primarily  to 
increasing  the  number  of  programmers  and to increasing  salaries  for more 
experienced programmers.                                                        

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

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

ATR  expenses  start-up  and other costs as  incurred,  which  results in timing
differences  between the  incurring  of expense  and  recognition  of  resulting
revenue.  Such differences may be particularly  evident in ATR's case because of
its  relatively  small  revenue  base  and  rapid  growth.  The  affect  may  be
particularly  noticeable  whenever  the timing of placement of employees is such
that the  major  start-up  costs  occur  late in one  reporting  period  and the
revenues appear in subsequent periods.  This was the case in the year ended June
30, 1997.                                                                       

Start-up and other costs  increased  $424,000 or 98% in fiscal 1998  compared to
fiscal 1997.  This  increase is due to placing or  relocating  approximately  72
programmers  during fiscal 1998 compared to placing or relocating 39 programmers
during fiscal 1997.                                                             

Contract  Programming Gross Profit (Loss). The gross profit (loss) percentage on
contract programming revenue was 10% for fiscal 1998 compared to (4)% for fiscal
1997.  The lower  billing  rates and the  start-up  and other costs that precede
revenue as discussed above contributed to the negative margins for fiscal 1997. 

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System Service                                                                  

The  discussion  below relates to fiscal year 1997. In fiscal 1998, the Company 
did not provide System Service.                                                 

System Service Gross Margin. Gross margin from this line of business was 68% in 
fiscal 1997. This high margin is due to the  recognition of previously deferred 
service  contract  revenue  in  fiscal  1997  when the  Company  assigned those 
contracts  to OMI in May 1997 (see "Item 1,  Description  of  Business --System 
Service").                                                                      

Selling, General and Administrative Expenses                                    

Selling,  General and Administrative  Expenses ("SG&A"). SG&A expense increased 
$176,000 or 15% in fiscal 1998 compared to fiscal 1997. An increase of $350,000 
in personnel costs was partially offset by a decrease of $174,000 in facilities 
and other costs. The increase in personnel costs is primarily due to increasing 
the average number of employees currently assigned to administrative  functions 
in fiscal  1998 as  compared  to fiscal 1997.  The  facilities  and other costs 
decreased  as a result of  depreciation. Depreciation  decreased in fiscal 1998 
since almost all fixed assets were fully depreciated at the end of fiscal 1997. 

Other Income (Expense)                                                          

Interest  Expense.   Interest  expense  increased   $150,000  in  fiscal  1998  
compared to fiscal 1997 due to a net increase in notes  payable and other debt  
of $1,234,000.                                                                  

Settlement of Dispute with Distributor. Since 1993, the Company and its Canadian
distributor (the "Distributor") disputed several provisions of their Distributor
and  Co-Development  Agreement,  modified certain provisions of the agreement in
1994 and 1995,  and  continued  to dispute  several  provisions  of the modified
agreement  during 1996 and 1997.  In May 1997,  the Company and the  Distributor
signed a Mutual Release and Settlement  Agreement wherein both parties agreed to
the settlement of any and all issues arising from or relating to the Distributor
and  Co-Development  Agreement,  and any of its  modifications,  and any and all
other  matters  arising from or relating to any  relationship  or  agreements(s)
between  the  Company and the  Distributor  by  mutually  agreeing to cancel and
terminate the  agreement(s) and by releasing each other from any and all claims,
demands,  or  liabilities  which  have  arisen  or  which  may  arise  from  the
agreement(s).  As a result of this agreement,  the Company reversed net accounts
payable to the Distributor previously recorded of $189,299.                     

Expiration of Accrued  Customer  Obligations.  During  fiscal 1992,  the Company
recorded an  estimated  liability  in the amount of $242,848  related to certain
software sales  agreements.  After discussion with legal counsel,  management of
the Company  believes  the Company has no further  obligation  to perform  under
these customer  contracts.  Therefore,  in fiscal 1997, the Company reversed its
previously recorded liability of $242,848.                                      

Reimbursement  from Insurance  Company.  During fiscal 1997,  legal expenses and
costs of $201,550 accrued in prior periods by the Company related to a suit from
a former consultant were reimbursed by insurers of Mr. Cameron and the Company. 

Income Taxes                                                                    

The Company  accounts for income taxes under  Statement of Financial  Accounting
Standards  No. 109. As of June 30, 1998,  the Company had a net  operating  loss
carryforward  for federal and state  income tax  purposes of $24 million and $13

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million,  respectively.  The federal net operating loss carryforward expires in 
the  years  2006  through  2013 and the state net  operating loss  carryforward 
expires in 1998 through 2003. In connection with the Company's  initial  public 
offering,  a change of  ownership  (as  defined in Section  382 of the  Internal
Revenue Code of 1986,  as amended),  occurred. As a result,  the  Company's net 
operating loss carryforwards generated through August 10, 1992 are subject to an
annual limitation of $300,000.                                                  

In 1993, a controlling interest of the Company's stock was purchased,  resulting
in a second annual  limitation  of $398,000 on the Company's  ability to utilize
net  operating  loss  carryforwards  generated  between  August  11,  1992,  and
September  13,  1993.  The  Company  expects  that  the  aforementioned   annual
limitations  will result in $3.6 million of net operating loss carryovers  which
may not be utilized prior to the expiration of the carryover period.            

Net Loss                                                                        

Net loss  increased to  $1,243,944 in fiscal 1998 from $648,187 for fiscal 1997,
primarily due to non-recurring other income items in fiscal 1997.               

Net Loss Per Share                                                              

The  Company's  net loss per share has been  computed by dividing net loss after
deducting  Preferred Stock dividends  ($122,500 in each of the fiscal years 1998
and 1997) by the weighted  average number of shares of common stock  outstanding
during the  periods  presented.  Net loss per share  increased  as a result of a
greater  loss  and  only  a  slightly  greater  number  of  shares  used  in the
calculation in fiscal 1998 compared to fiscal 1997.                             

Liquidity and Capital Resources                                                 

The Company has used a  combination  of equity and debt  financing  and internal
cash flow to fund  operations and finance  accounts  receivable but has incurred
operating losses since its inception.                                           

As a result,  the report of independent  auditors on the Company's June 30, 1998
financial  statements  includes an  explanatory  paragraph  indicating  there is
substantial  doubt about the Company's  ability to continue as a going  concern.
The  financial  statements  do  not  include  any  adjustments  to  reflect  the
uncertainties  related to the recoverability and classification of assets or the
amounts and  classification of liabilities that may result from the inability of
the Company to continue as a going  concern.  Based on the steps the Company has
taken to reduce its expenses and refocus its  operations,  the Company  believes
that it has developed a viable plan to address the Company's ability to continue
as a going  concern  and that this plan will enable the Company to continue as a
going concern through the end of fiscal year 1999. However,  considering,  among
other things, the Company's historical operating losses and its short history in
the contract computer programming industry,  there can be no assurance that this
plan will be successfully  implemented.  The Company expects to begin generating
positive  cash  flow  from  operations  during  fiscal  1999,  but not at levels
sufficient  to pay off  current  obligations  and fund  growth  of its  contract
computer   programming   and  consulting   services;   therefore,   the  Company
contemplates  needing to raise  additional  financing  during  fiscal 1999,  the
receipt of which cannot be assured.                                             

The  Company  received  short-term,  unsecured  financing  in the  form of notes
payable of  approximately  $1.3 million,  $1.0 million,  and $0.7 million during
fiscal  years 1998,  1997 and 1996,  respectively,  from two  stockholders,  Mr.
Cameron and Dr. Max Negri  ("Negri"),  to fund its operations.  These notes bear

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interest at 10.25%.  In December  1997,  Cameron and Negri extended the maturity
date on all notes payable originally  maturing December 31, 1997, to the earlier
of December 31, 1998, or such time as the Company obtains equity financing.     

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

The Company must obtain additional funds during fiscal 1999 in order to meet its
obligations  while  attempting to grow revenues to a level necessary to generate
cash from  operations.  Although  the Company  has not entered  into any written
agreements with Cameron or Negri, management believes, based on discussions with
these two individuals, that they will continue to fund operations and extend the
maturity  dates of the various  notes  payable  until at least June 30, 1999, or
until such time as the  Company  can repay the notes.  However,  there can be no
assurance that events may arise which may affect these stockholders'  ability to
finance  the  Company  or  that  the  Company  may  experience  significant  and
unanticipated  cash flow  problems  which may cause  these two  stockholders  to
reconsider their investment.  Further,  if the Company  experiences  significant
cash flow  problems,  the  Company  may be  required  to reduce the level of its
operating  activities  or  be  forced  into  seeking  protection  under  federal
bankruptcy laws.                                                                

On December 31, 1996,  the Board of Directors  named Mr. W. Robert Keen as Chief
Executive  Officer of the  Company.  In  exchange  for his  services,  Mr.  Keen
initially  received  225,000  shares of common stock with a fair market value on
the date of issuance of  $168,750,  and on November  18, 1997 Mr. Keen  received
275,000  shares of common stock with a fair market value on the date of issuance
of  $154,688.  Both the  275,000  shares and the  225,000  shares are subject to
forfeiture in the event Mr. Keen voluntarily leaves the Company prior to January
1, 1999.                                                                        

During fiscal 1997, the Company  issued  303,871 shares of the Company's  common
stock in  settlement  of  approximately  $237,000  in  accrued  legal  costs and
approximately $158,000 in other claims accrued in prior years.                  

Effects of Inflation                                                            

The Company's most significant cost is personnel.  To the extent personnel costs
increase,  management of the Company believes that customer billing rates can be
increased to cover such personnel increases.                                    

Item 7.  Financial Statements                                                   

The financial statements of the Company,  including the notes thereto and report
of the independent  auditors thereon,  are attached hereby as exhibits.         

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Item 8.  Changes in and  Disagreements  with  Accountants  on  Accounting  and  
Financial Disclosure                                                            

Not applicable.                                                                 

PART III                                                                        

Item  9.  Directors,   Executive  Officers,  Promoters  and  Control  Persons,  
Compliance with Section 16(a) of the Exchange Act.                              

The  information  required  by this item is  incorporated  by  reference  to the
Company's  definitive  Proxy Statement for the Annual Meeting of Stockholders to
be held on  November  17,  1998  under the  Captions  "Election  of  Directors",
"Further  Information  concerning  the Board of  Directors"  and "Section  16(a)
Information." The Proxy Statement will be filed within 120 days of the Company's
fiscal year end.                                                                

Item 10.  Executive Compensation                                                

The  information  required  by this item is  incorporated  by  reference  to the
Company's  definitive  Proxy Statement for the Annual Meeting of Stockholders to
be held on November  17, 1998 under the Caption  "Executive  Compensation."  The
Proxy Statement will be filed within 120 days of the Company's fiscal year end. 

Item 11.  Security Ownership of Certain Beneficial Owners and Management        

The  information  required  by this item is  incorporated  by  reference  to the
Company's  definitive  Proxy Statement for the Annual Meeting of Stockholders to
be held on November  17, 1998 under the Caption  "Principal  Stockholders."  The
Proxy Statement will be filed within 120 days of the Company's fiscal year end. 

Item 12.  Certain Relationships and Related Transactions                        

The  information  required  by this item is  incorporated  by  reference  to the
Company's  definitive  Proxy Statement for the Annual Meeting of Stockholders to
be held on  November  17,  1998 under the  Caption  "Certain  Relationships  and
Related  Transactions." The Proxy Statement will be filed within 120 days of the
Company's fiscal year end.                                                      

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Item 13.  Exhibits and Reports on Form 8-K                                      

Exhibit                                                             
Number      Description of Document                                 

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

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

     3.3        Amended and Restated  Certificate  of  Incorporation  of the
Registrant.                                 

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

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

      10.2        Form of  Reimbursement  Agreement,  dated  February  28, 1994,
                  between the Registrant and James W. Cameron, Jr. (incorporated
                  by  reference  to Exhibit  10.29 to Form 10-KSB for the fiscal
year ended June 30, 1994).                  

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

      10.4        Form of Stock Purchase  Warrant issued April 22, 1993 (Class B
                  Warrant)  (incorporated  by reference to Exhibit 10.32 to Form
    10-KSB for the fiscal year ended June 30, 1994).

    10.5+       Stock  Purchase  Warrant issued to William T. Manak on April
                6, 1994 for the  purchase  of  57,286  shares  [restated  to
                reflect   one-for-ten   consolidation   of   the   Company's
                outstanding  common stock effective December 2, 1996] of the
                Registrant's  common  stock  (incorporated  by  reference to
                Exhibit  10.34 to Form 10-KSB for the fiscal year ended June
30, 1994).                                  

    10.6        Stock  Purchase  Warrant  issued to Dennis L.  Montgomery on
                April 6, 1994 for the  purchase of 12,500  shares  [restated
                to  reflect  one-for-ten   consolidation  of  the  Company's
                outstanding  common stock effective December 2, 1996] of the
                Registrant's  common  stock  (incorporated  by  reference to
                Exhibit  10.35 to Form 10-KSB for the fiscal year ended June
30, 1994).                                  

    10.7        Stock  Purchase  Warrant  issued to Dennis L.  Montgomery on
                April 6, 1994 for the  purchase of 58,000  shares  [restated
                to  reflect  one-for-ten   consolidation  of  the  Company's
                outstanding  common stock effective December 2, 1996] of the
                Registrant's  common  stock  (incorporated  by  reference to
                Exhibit  10.36 to Form 10-KSB for the fiscal year ended June
30, 1994).                                  

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Exhibit                                                             
Number      Description of Document                                 

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

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

    10.10       Form of Stock  Purchase  Warrant to Jeff Buckner as designee
                for James W.  Cameron,  Jr.  (incorporated  by  reference to
                Exhibit  10.40 to Form 10-KSB for the fiscal year ended June
30, 1994).                                  

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

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

      10.13       Contractor   Agreement,   dated  June  3,  1996,  between  the
                  Registrant and Technical  Directions,  Inc. [formerly known as
                  The Systems Group, Inc.] (incorporated by reference to Exhibit
           10.42 to Form 10-KSB for the year ended June 30, 1996).

    10.14       Lease,  dated  November 6, 1995,  between the Registrant and
                James W. Cameron,  Jr. (incorporated by reference to Exhibit
           10.46 to Form 10-KSB for the year ended June 30, 1996).

    10.15       Agreement with Technical Directions,  Inc.  (incorporated by
                reference  to  Exhibit  10.47  to Form  10-KSB  for the year
ended June 30, 1996).                       

      10.16       First Addendum to Lease between James W. Cameron, Jr., and the
                  Registrant,  dated October 1, 1996  (incorporated by reference
           to Exhibit 10.52 to Form SB-2 filed December 18, 1996).

      10.17       Agreement  between  Liberty Mutual  Insurance  Company and the
                  Registrant,  dated October 9, 1996  (incorporated by reference
           to Exhibit 10.53 to Form SB-2 filed December 18, 1996).

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

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

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

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

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Exhibit                                                             
Number      Description of Document                                 

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

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

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

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

      10.26       Agreement   between  the  Registrant  and  Adept,  Inc.  dated
                  February 1997  (incorporated  by reference to Exhibit 10.68 to
      Form 10-QSB for the quarter ended March 31, 1997).

      10.27       Sale of Cortex between the Registrant and Omnitech  Migrations
                  International,  Inc.  (formerly  known as Centre de  Traitment
                  I.T.I.  Omnitech,  Inc.),  dated May 2, 1997  (incorporated by
                  reference  to Exhibit  10.69 to Form  10-QSB  for the  quarter
ended March 31, 1997).                      

      10.28       Mutual Release and Settlement Agreement between the Registrant
                  and Omnitech Migrations International, Inc. (formerly known as
                  Centre de Traitment I.T.I. Omnitech,  Inc.), dated May 6, 1997
                  (incorporated by reference to Exhibit 10.70 to Form 10-QSB for
the quarter ended March 31, 1997).          

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

      10.30       Second  Addendum to Lease between  James W. Cameron,  Jr., and
                  the Registrant,  dated June 3, 1997 (incorporated by reference
                  to  Exhibit  10.30 to Form  10-KSB for the year ended June 30,
1997).                                      

      10.31       Joint Services Agreement between the Registrant and Prize-ITM,
                  Ltd.,  dated  August 1, 1997  (incorporated  by  reference  to
                  Exhibit  10.31  to Form  10-KSB  for the year  ended  June 30,
1997).                                      

      10.32       Third Addendum to Lease between James W. Cameron, Jr., and the
                  Registrant,  dated January 5, 1998  (incorporated by reference
                  to Exhibit 10.32 to Form 10-QSB for the quarter ended December
31, 1997).                                  

    10.33+      Alternative  Technology  Resources,  Inc.  1997 Stock Option
Plan                                        

      10.34       Memorandum  regarding  rent  reduction  on that Lease  between
                  James W.  Cameron,  Jr.,  and the  Registrant,  dated July 15,
1998.                                       

23.1        Consent of Independent Auditors                         

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

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Reports on Form 8-K                                                 

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

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SIGNATURES  

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

 Dated:      September 22, 1998           ALTERNATIVE TECHNOLOGY RESOURCES, INC.

                     By       /S/ W. ROBERT KEEN
                                            ------------------------
                                  W. Robert Keen
                                             Chief Executive Officer

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

Signature                   Title                               Date          

/S/  W. ROBERT KEEN         Chief Executive Officer       September 22, 1998  
W. Robert Keen              and Director                                      
       (Principal Executive Officer)

/S/  EDWARD L. LAMMERDING    Chairman of the Board,       September 22,  1998 
Edward L. Lammerding         Chief Financial Officer                          
and Director        
         (Principal Financial Officer)

/S/  THOMAS W. O'NEIL, JR.   Director                     September 22, 1998  
Thomas W. O'Neil, Jr.                                                         

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         INDEX TO FINANCIAL STATEMENTS

          Alternative Technology Resources, Inc.

                                                              Page

Report of Independent Auditors.....................................F-1          
Balance Sheet at June 30, 1998.....................................F-2          
Statements of Operations for the Years Ended June 30, 1998                      
and 1997 .........................................................F-3         
Statements of Stockholders' Deficit for the Years Ended                         
June 30, 1998 and 1997............................................F-4         
Statements of Cash Flows for the Years Ended June 30, 1998                      
and 1997..........................................................F-5         
Notes to Financial Statements......................................F-7          

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F-1

          Report of Independent Auditors

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

We have audited  the  accompanying  balance  sheet  of  Alternative  Technology 
Resources, Inc. as of June 30, 1998, and the related  statements of operations, 
stockholders'  deficit, and cash flows for the years  ended  June 30,  1998 and 
1997.  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  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.          

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,   the  financial  position  of  Alternative  Technology
Resources, Inc. at June 30, 1998, and the results of its operations and its cash
flows for the years ended June 30, 1998 and 1997 in  conformity  with  generally
accepted accounting principles.                                                 

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

Sacramento, California                                                          
August 17, 1998                                                                 

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F-2

Alternative Technology Resources, Inc.

 Balance Sheet
 June 30, 1998

Assets
------- 

Current assets:                                                                 
Cash                                        $    89,696                         
Accounts receivable, net of allowance for                                       
doubtful accounts of $5,516                     639,357                         
Accounts and notes receivable from employees                                    
and officers                                    104,737                         
Other current assets                              3,563                         
                         -------------
Total current assets                            837,353                         

Property and equipment:                                                         
Equipment                                        12,908                         
Furniture and fixtures                          148,445                         
                         -------------
                       161,353
Accumulated depreciation and amortization      (161,353)                        
                         -------------
Property and equipment, net                           -                         
                         -------------

                  $    837,353
                         =============

Liabilities and Stockholders' Deficit                                 
-------------------------------------                                 

Current liabilities:                                                            
Notes payable to stockholders              $  4,006,565                         
Notes payable to officers                        37,919                         
Accounts payable to stockholders                562,245                         
Accounts payable                                130,174                         
Accrued payroll and related expenses            346,502                         
Accrued preferred stock dividends               490,001                         
Other current liabilities                       108,221                         
Other notes payable                                   -                         
                     -------------
Total current liabilities                     5,681,627                         

Commitments and contingencies                                                   

Stockholders' deficit:                                                          
Preferred stock, $6.00 par value--1,200,000                                     
shares authorized, 204,167 shares designated                                    
Series D issued and outstanding;liquidation                                     
preference value of $1,715,003                1,225,002                         
Common stock, $0.01 par value--100,000,000                                      
shares authorized, 26,120,499 shares issued                                     
and outstanding                                 261,205                         
Unearned compensation                           (77,343)                        
Additional paid-in capital                   28,846,692                         
Accumulated deficit                         (35,099,830)                        
                     -------------
Total stockholders' deficit                  (4,844,274)                        
                     -------------
                   $     837,353
                     =============

See accompanying notes.                                                       

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Alternative Technology Resources, Inc.

Statements of Operations

                                           Year ended June 30,
                                         1998             1997
                                           ---------------------------
Contract Programming:                                                           
Contract programming revenue                  $  5,250,002   $ 2,018,064        
Programmer costs                                (3,860,641)   (1,657,701)       
Start-up and other costs                          (858,982)     (434,638)       
                                           ---------------------------
Contract programming gross profit (loss)            530,379       (74,275)      
                                           ---------------------------

System service:                                                                 
Service revenue                                          -        360,870       
Cost of service                                          -       (117,159)      
                                           ---------------------------
System service gross profit                                       243,711       
                                           ---------------------------

Selling, general and administrative               1,336,342     1,160,015       
                                           ---------------------------

Loss from operations                               (805,963)     (990,579)      

Other income (expense):                                                         
Interest expense                                   (437,981)     (287,830)      
Settlement of dispute with distributor                    -       189,299       
Expiration of accrued customer obligations                -       242,848       
Reimbursement from insurance company                      -       201,550       
Other, net                                                -        (3,475)      
                                           ---------------------------
                                             (437,981)     342,392
                                           ---------------------------

Net loss                                        $ (1,243,944)   $(648,187)      
                                           ===========================

Preferred stock dividends in arrears                (122,500)    (122,500)      
                                           ---------------------------

Net loss applicable to common stockholders      $ (1,366,444)   $(770,687)      
                                           ===========================

Basic and diluted net loss per share            $      (0.05)       (0.03)      
                                           ===========================

Shares used in per share calculations             25,964,142    25,369,315      
                                           ===========================

See accompanying notes.                                                         

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Alternative Technology Resources, Inc.
 Statements of Stockholders' Deficit

Years ended June 30, 1998 and 1997

                                                        [Enlarge/Download Table]


                                                                     Common                Additional                   Total    
                            Preferred Stock      Common Stock       Stock to    Unearned   Paid-In     Accumulated  Stockholders'
                            Shares   Amount    Shares    Amount     Be Issued  Compensation Capital       Deficit       Deficit  
                        ---------------------------------------------------------------------------------------------------------

                                                                                                                                 
Balance, June 30, 1996   204,167  $1,225,002  20,000,000 $ 200,000 $ 680,101    $      - $ 27,847,081 $ (33,207,699) $(3,255,515)
Issuance of common                                                                                                               
 stock from common                                                                                                               
 stock to be issued            -           -   5,218,676    52,186  (521,867)          -      469,681             -            - 
Issuance of common                                                                                                               
 stock in settlement of                                                                                                          
 accounts payable and                                                                                                            
 other claims                  -           -     303,871     3,039  (158,234)          -      391,807             -      236,612 
Issuance of common                                                                                                               
 stock for future                                                                                                                
 compensation                  -           -     225,000     2,250         -    (168,750)     166,500             -            - 
Amortization of                                                                                                                  
 unearned compensation         -           -           -         -         -      84,375            -             -       84,375 
Warrants and options                                                                                                             
 exercised                     -           -      36,379       364         -           -       16,338             -       16,702 
Preferred stock                                                                                                                  
dividends                      -           -           -         -         -           -     (122,500)            -     (122,500)
Net loss                       -           -           -         -         -           -            -      (648,187)    (648,187)

                        ---------------------------------------------------------------------------------------------------------
Balance, June 30, 1997   204,167   1,225,002  25,783,926    257,839        -     (84,375)  28,768,907   (33,855,886)  (3,688,513)

Issuance of common                                                                                                               
 stock in settlement of                                                                                                          
 accounts payable and                                                                                                            
 other claims                  -          -        5,712        57         -          -        5,265             -         5,322 
Issuance of common                                                                                                               
 stock for future                                                                                                                
 compensation                  -          -      275,000     2,750         -   (154,688)     151,938             -             - 
Amortization of                                                                                                                  
 unearned compensation         -          -            -         -         -    161,720            -             -       161,720 
Options exercised              -          -        55,861      559         -          -       43,082             -        43,641 
Preferred stock                                                                                                                  
 dividends                     -          -             -        -         -          -     (122,500)            -      (122,500)
Net loss                       -          -             -        -         -          -            -    (1,243,944)   (1,243,944)

                        -------------------------------------------------------------------------------------------------------- 
Balance, June 30, 1998   204,167 $1,225,002    26,120,499 $261,205     $   -  $ (77,343) $28,846,692  $(35,099,830  $ (4,844,274)
                        ======================================================================================================== 

See accompanying notes.                                                         

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Alternative Technology Resources, Inc.

Statements of Cash Flows
 Increase (Decrease) in Cash

                                     Year ended June 30,
                                      1998          1997
                                      --------------------------

Cash flows from operating activities:                                           
Net loss                                      $(1,243,944)  $  (648,187)        
Adjustments to reconcile net loss to net cash                                   
used in operating activities:                                                 
Depreciation and amortization                     8,525       133,392       
Non-cash employee compensation                  161,720        84,375       
Settlement of dispute with distributor                -      (189,299)      
Expiration of accrued customer obligations            -      (242,848)      
Reimbursement from insurance company                  -      (201,550)      
Changes in operating assets and liabilities:                                
Accounts receivable                           (420,099)     (108,752)     
Other current assets                           (99,746)       45,037      
Accounts payable to stockholders               286,016       169,129      
Accounts payable                               (38,545)      (21,650)     
Accrued payroll and related expenses            70,755       132,100      
Deferred revenue                                     -      (180,254)     
Other current liabilities                       25,884        19,838      
                                          --------------------------
Net cash used in operating activities          (1,249,434)   (1,008,669)        
                                          --------------------------

Cash flows from investing activities:                                           
Disposal of property and equipment                 2,062        6,165         
                                          --------------------------
Net cash provided by investing activities           2,062        6,165          
                                          --------------------------

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Alternative Technology Resources, Inc.

Statements of Cash Flows
 Increase (Decrease) in Cash
 (continued)

                                             Year ended June 30,
                                           1998         1997
                                             ---------------------------

Cash flows from financing activities:                                           
Proceeds from exercise of warrants and options $   43,642    $   16,702       
Proceeds from notes payable to stockholders     1,494,303     1,048,510       
Payments on notes payable to stockholders        (275,000)            -       
Notes payable to officers                          37,919             -       
Payments on other notes payable                   (23,539)      (44,912)      
Payments on capital lease obligations                   -       (10,159)      
                                           ---------------------------
Net cash provided by financing activities         1,277,325     1,010,141       
                                           ---------------------------

Net increase in cash                                29,953         7,637        
Cash at beginning of year                           59,743        52,106        
                                           ---------------------------
Cash at end of year                             $   89,696     $  59,743        
                                           ===========================

Supplemental disclosure of cash flow                                            
information:                                                                    
Cash paid during the year for interest         $   73,448     $ 153,198       

See accompanying notes.                                                         

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

June 30, 1998 and 1997

1. Summary of Significant Accounting Policies                                   

Description of Business                                                         

The  Company  was  founded  in 1989 to  develop  and  sell  computer  integrated
laboratory  systems  ("LIS").  The Company operated under the name 3Net Systems,
Inc. and was never successful in the LIS market.  Therefore, in fiscal 1996, the
Company  stopped  new  system  development  and  later  decided  to exit the LIS
software market entirely.                                                       

During  fiscal  1997,  the Company  changed its name to  Alternative  Technology
Resources,  Inc.  ("ATR").  It has since  focused its efforts  entirely upon its
computer  programmer  placement  business,   whereby  it  recruits  experienced,
qualified computer  programmers  primarily from the former Soviet Union, obtains
necessary visas, and places them in the United States as contract employees.    

Basis of Presentation                                                           

The Company has incurred operating losses since inception which have resulted in
an accumulated deficit of $35,099,830 at June 30, 1998. In addition, at June 30,
1998 the Company had a working capital  deficit and a  stockholders'  deficit of
$4,844,274.                                                                     

The report of  independent  auditors on the  Company's  June 30, 1998  financial
statements  includes an explanatory  paragraph  indicating  there is substantial
doubt about the Company's ability to continue as a going concern.  The financial
statements do not include any adjustments to reflect the  uncertainties  related
to  the   recoverability  and  classification  of  assets  or  the  amounts  and
classification  of liabilities that may result from the inability of the Company
to  continue  as a going  concern.  Based on the steps the  Company has taken to
reduce its expenses and refocus its operations, the Company believes that it has
developed a viable plan to address the Company's  ability to continue as a going
concern  and that this plan will  enable  the  Company  to  continue  as a going
concern through the end of fiscal year 1999. However,  considering,  among other
things, the Company's  historical  operating losses and its short history in the
contract computer programming industry, there can be no assurance that this plan
will be  successfully  implemented.  The  Company  expects  to begin  generating
positive  cash  flow  from  operations  during  fiscal  1999,  but not at levels
sufficient  to pay off  current  obligations  and fund  growth  of its  contract
computer   programming   and  consulting   services;   therefore,   the  Company
contemplates  needing to raise  additional  financing  during  fiscal 1999,  the
receipt of which cannot be assured.                                             

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

June 30, 1998 and 1997

1. Summary of Significant Accounting Policies (continued)                       

Property and Equipment                                                          

Property and equipment are recorded at cost and are  depreciated or amortized on
a straight-line basis over the estimated useful lives of the assets or the lease
term,  whichever is shorter. The estimated useful lives range from three to five
years. The Company's assets were fully depreciated at June 30, 1998.            

Revenue Recognition                                                             

Contract programming revenue represents work performed for customers,  primarily
on a time and materials  basis,  and is recorded  when the related  services are
rendered.  System  service  revenues are derived  from  support and  maintenance
contracts  which are  deferred  when  billed  and  recognized  ratably  over the
contract term. In connection with its business strategy to exit the LIS products
market,  the  Company  entered  into  an  agreement  with  Omnitech   Migrations
International,  Inc.  ("OMI") on May 2, 1997 to transfer its LIS product and its
software and hardware  customer service  contracts to OMI. Under this agreement,
the Company  transferred and assigned to OMI all of the Company's right,  title,
and interest in and to these  customer  agreements  and delegated to OMI all the
Company's duties and obligations of performance  thereunder.  As  consideration,
the  Company  retained  all  fees  previously  paid to it  under  these  service
agreements.  As a result of this agreement,  the Company recognized  $131,181 in
service revenue in fiscal year 1997 previously recorded as deferred revenue.    

Income Taxes                                                                    

The Company  accounts for income taxes under  Statement of Financial  Accounting
Standards No. 109,  "Accounting  for Income Taxes" ("SFAS No. 109").  Under SFAS
No. 109, the liability method is used to account for income taxes.  Deferred tax
assets and liabilities are determined based on differences between the financial
reporting  and tax bases of assets and  liabilities  and are measured  using the
enacted  tax rates and laws that  will be in  effect  when the  differences  are
expected to reverse.                                                            

Stock-Based Compensation                                                        

As permitted under the provisions of Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based  Compensation" ("SFAS No. 123"), the Company
has                                                                             

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

June 30, 1998 and 1997

1. Summary of Significant Accounting Policies (continued)                       

Stock-Based Compensation (continued)                                            

elected to account for stock-based compensation using the intrinsic value method
prescribed by Accounting  Principles Board Opinion No. 25, "Accounting for Stock
Issued  to  Employees"  ("APB  No.  25").  Under  the  intrinsic  value  method,
compensation  cost is the  excess,  if any, of the quoted  market  price or fair
value of the stock at the grant date or other  measurement  date over the amount
an employee must pay to acquire the stock.  Disclosures  required under SFAS No.
123 are included in Note 6 to the financial statements.                         

Concentration of Credit Risk                                                    

The Company's  accounts  receivable are primarily with companies in the contract
placement  and  consulting  industry.   The  Company  performs  periodic  credit
evaluations   of  its  customers  and  believes  that  adequate   provision  for
uncollectable  accounts  receivable has been made in the accompanying  financial
statements. The Company maintains substantially all of its cash at one financial
institution.                                                                    

Net Loss Per Share                                                              

The  Company's  net loss per share has been  computed by dividing net loss after
deducting  preferred stock dividends  ($122,500 in each of the fiscal years 1998
and 1997) by the weighted  average number of shares of common stock  outstanding
during the periods presented,  including common stock to be issued. Common stock
issuable  upon  conversion of preferred  stock,  common stock options and common
stock  warrants have been excluded from the net loss per share  calculations  as
their inclusion would be anti-dilutive.                                         

In February 1997, the Financial  Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("SFAS 128"). SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share.  Unlike primary earnings per share, basic earnings per share excludes any
dilutive  effects of  options,  warrants  and  convertible  securities.  Diluted
earnings  per share is very similar to the  previously  reported  fully  diluted
earnings per share. All loss per share amounts for all                          

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

June 30, 1998 and 1997

1. Summary of Significant Accounting Policies (continued)                       

Net Loss Per Share (continued)                                                  

periods  have been  presented  in  accordance  with SFAS 128. As the Company has
reported net losses in all periods  presented,  basic and diluted loss per share
have been calculated on the basis of net loss applicable to common  stockholders
divided  by the  weighted  average  number of common  stock  shares  outstanding
without  giving  effect  to  outstanding  options,   warrants,  and  convertible
securities whose effects are anti-dilutive.  As of June 30, 1998 and 1997, there
were stock options,  stock warrants and a convertible  note payable (Notes 3 and
6) which could  potentially  dilute  basic  earnings per share in the future but
were not included in the  computation  of diluted loss per share as their effect
was anti-dilutive in the periods presented.                                     

Significant Customers                                                           

During the year ended June 30, 1998,  two customers  individually  accounted for
51% and 34% of  total  revenues.  During  the year  ended  June  30,  1997,  two
customers individually accounted for 37% and 36% of total revenues.             

Use of Estimates in Preparation of Financial Statements                         

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

Reclassifications                                                               

Certain  reclassifications  have been made to amounts reported as of and for the
year ended June 30, 1997 to conform with the June 30, 1998 presentation.        

2. Investor Group Transactions                                                  

In fiscal 1994,  the Company  entered into a series of agreements  with James W.
Cameron,  Jr. ("Cameron")  pursuant to which Cameron and Dr. Max Negri ("Negri")
became  principal  stockholders  of the  Company,  holding  more  than 5% of the
Company's common stock and Preferred Stock, Series D.                           

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

June 30, 1998 and 1997

2. Investor Group Transactions (continued)                                      

As of June 30, 1998,  Cameron  beneficially  owned  19,881,315  shares of common
stock, which includes 63,980 shares issuable upon conversion of 76,167 shares of
Preferred Stock,  Series D, which are currently  convertible.  Also included are
213,250  shares  held by the Cameron  Foundation,  for which  Cameron  disclaims
beneficial ownership.                                                           

As of June 30, 1998, Negri  beneficially owned 2,608,500 shares of common stock,
which  includes  69,740  shares  issuable  upon  conversion  of 83,000 shares   
of Preferred Stock, Series D, which are currently convertible.                  

During fiscal 1998 and 1997, the Company did not generate  sufficient cash flow 
from  operations  and borrowed  from these two  stockholders.  Notes payable to 
stockholders  were  $4,006,565  at June 30, 1998 (Note 3). Accrued interest of  
$220,628 on these notes is included in accounts  payable to stockholders at June
30, 1998. The Company also leases its office  facilities from Cameron (Note 5). 
Accrued  rent  expense of  $341,617  is also  included  in accounts  payable to 
stockholders at June 30, 1998.                                                  

3. Financing Arrangements                                                       

Since its  inception,  the  Company  has used a  combination of equity and debt 
financing  and  internal  cash  flow to fund  operations  and  finance accounts 
receivable.  The Company  expects to begin  generating  positive cash flow from 
operations  during fiscal 1999, but not at levels  sufficient to pay off current
obligations and fund growth of its contract computer  programming and consulting
services;  therefore,  the  Company  contemplates  needing  to raise additional 
financing during fiscal 1999, the receipt of which cannot be assured.           

The  Company  received  short-term,  unsecured  financing  in the  form of notes
payable of  approximately  $1.3 million,  $1.0 million,  and $0.7 million during
fiscal years 1998, 1997 and 1996, respectively,  from two stockholders,  Cameron
and Negri,  to fund its  operations.  These notes bear  interest  at 10.25%.  In
December  1997,  Cameron and Negri  extended the maturity date on all originally
maturing December 31, 1997, to the earlier of December 31, 1998, or such time as
the Company obtains equity financing.                                           

On April 21, 1997, the Company issued an unsecured note payable (the"Straight   
Note")to Cameron for $1,000,000 in accordance with the Reimbursement Agreement  

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

June 30, 1998 and 1997

3. Financing Arrangements (continued)                                           

the  Company  signed on  February  28,  1994.  Terms of the note  provide for an
interest rate of 9.5% and monthly interest payments.  No maturity date is stated
in the  note;  however,  under the terms of the  Reimbursement  Agreement,  upon
written  demand by Cameron,  the Straight Note will be replaced by a convertible
note (the  "Convertible  Note") in a principal amount equal to the Straight Note
and bearing  interest at the same rate. The conversion  ratio of the Convertible
Note is equal to 20%,  multiplied by the average  trading price of the Company's
common  stock over the period of ten trading days ending on the trading day next
preceding the date of issuance of such Convertible Note.                        

The Company must obtain additional funds during fiscal 1999 in order to meet its
obligations  while  attempting to grow revenues to a level necessary to generate
cash from  operations.  Although  the Company  has not entered  into any written
agreements with Cameron or Negri, management believes, based on discussions with
these two individuals, that they will continue to fund operations and extend the
maturity  dates of the various  notes  payable  until at least June 30, 1999, or
until such time as the  Company  can repay the notes.  However,  there can be no
assurance that events may arise which may affect these stockholders'  ability to
finance  the  Company  or  that  the  Company  may  experience  significant  and
unanticipated  cash flow  problems  which may cause  these two  stockholders  to
reconsider their investment.  Further,  if the Company  experiences  significant
cash flow  problems,  the  Company  may be  required  to reduce the level of its
operating  activities  or  be  forced  into  seeking  protection  under  federal
bankruptcy laws.                                                                

4. Income Taxes                                                                 

Significant  components of the Company's deferred tax assets and liabilities for
federal and state income taxes as of June 30, 1998 are as follows:              

Net operating loss carryforwards                         $ 8,748,000            
Research credits                                             123,000            
Common stock options                                       2,543,000            
Common stock warrants                                        789,000            
Other - net                                                  406,000            
                                              --------------
Total deferred tax assets                                 12,609,000            
Valuation allowance for deferred tax assets              (12,609,000)           
                                              ==============

Net deferred tax assets                                 $          -            
                                              ==============

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

June 30, 1998 and 1997

4. Income Taxes (continued)                                                     

The Company's valuation allowance as of June 30, 1997 was $12,220,000, resulting
in a net change in the valuation allowance of $389,000.                         

As of June 30, 1998 the Company has net operating loss carryforwards for federal
and state  income tax  purposes of  approximately  $24 million and $13  million,
respectively.  The  federal  net  operating  loss  carryforward  expires in 2006
through  2013 and the state net  operating  loss  carryforward  expires  in 1998
through 2003. The Company also has approximately $98,000 and $25,000 of research
and  development  tax credit  carryforwards  for  federal  and state  income tax
purposes,   respectively.  The  federal  research  and  development  tax  credit
carryforwards expire in 2005.                                                   

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

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

The Company expects that the  aforementioned  annual  limitations will result in
approximately  $3,600,000  of net  operating  loss  carryovers  which may not be
utilized prior to the expiration of the carryover period.                       

5. Commitments                                                                  

In November  1995,  the Company  entered into a lease  agreement for its current
facility  under a one year lease with  Cameron.  The lease has been  extended to
December  31,  1998.  At June 30,  1998,  $341,617 of rent owed for fiscal years
1998,  1997  and  1996  is  included  in the  balance  of  accounts  payable  to
stockholders.  Rental expense for all operating  leases was $181,589 and $96,710
for the years ended June 30, 1998 and 1997, respectively.  Annual minimum rental
payments for all non-cancelable                                                 

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

June 30, 1998 and 1997

5. Commitments (continued)                                                      

operating  leases  for  fiscal  years  1999,  2000,  and 2001 are $151,126,     
$97,823, and $21,747, respectively.                                             

6. Stockholders' Deficit                                                        

On December 31, 1996,  the Board of Directors  named Mr. W. Robert Keen as Chief
Executive  Officer of the  Company.  In  exchange  for his  services,  Mr.  Keen
initially  received  225,000  shares of common stock with a fair market value on
the date of issuance of  $168,750,  and on November  18, 1997 Mr. Keen  received
275,000  shares of common stock with a fair market value on the date of issuance
of  $154,688.  Both the  275,000  shares  and  225,000  shares  are  subject  to
forfeiture in the event Mr. Keen voluntarily leaves the Company prior to January
1, 1999.                                                                        

During fiscal 1997, the Company  issued  303,871 shares of the Company's  common
stock in  settlement  of  approximately  $237,000  in  accrued  legal  costs and
approximately $158,000 in other claims accrued in prior years.                  

Series D Preferred Stock                                                        

In June  1994,  existing  stockholders  purchased  204,167  shares  of  Series D
Convertible  Preferred  Stock for  $1,225,002.  The  Company is  required to pay
cumulative  preferential  dividends to holders of Series D Preferred  Stock on a
quarterly  basis  beginning July 1, 1994, at a rate of $0.60 per year per share.
As of June 30, 1998, cumulative unpaid, undeclared dividends were $490,001. Each
share  of  Series  D  Preferred  Stock  is  convertible  at  the  option  of the
stockholder  into such number of fully paid and  nonassessable  shares of common
stock as is  determined  by dividing the sum of $6.00 and the accrued but unpaid
dividends  by the Series D conversion  price,  as defined in the  agreement,  in
effect on the  conversion  date.  The  Series D  conversion  price is $10.00 per
share. Additionally,  the Series D Preferred Stock is redeemable at any time, at
the  Company's  option,  at a price of $6.00 per share plus  accrued  but unpaid
dividends. The liquidation preference is $6.00 per share plus accrued but unpaid
dividends.                                                                      

Series E Preferred Stock                                                        

On December 1, 1995, the holders of all the outstanding shares of the Company's 
Series E Preferred  Stock tendered those shares for conversion into  22,335,932 

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

June 30, 1998 and 1997

6. Stockholders' Deficit (continued)                                            

Series E Preferred Stock (continued)                                            

shares of the  Company's  common  stock  pursuant  to the terms of the  Series E
Preferred Stock purchase agreement. As of the conversion date, 20,000,000 common
shares were authorized; therefore 5,218,677 shares were recorded as common stock
to be issued.  During fiscal 1997 the number of authorized  shares was increased
and the previously unissued shares were then issued.                            

Warrants                                                                        

Warrant activity during the periods indicated is as follows:                    

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

Balance at June 30, 1996         1,443,251     $0.00-$50.00    $16.30           

Granted                             14,400        $0.75         $0.75           
Exercised                          (15,000)       $0.00         $0.00           
Expired/Canceled                  (265,236)    $30.00-$50.00   $40.00           
                          ------------------------------------------

Balance at June 30, 1997         1,177,415      $0.01-$28.80   $10.87           

Expired/Canceled                  (471,832)     $13.75-$28.80  $21.94           
                          ------------------------------------------

Balance at June 30, 1998           705,583      $0.01-$28.80    $3.47           
                          ==========================================

At June 30, 1998 and 1997, the  weighted-average  remaining  contractual life of
outstanding  warrants  was 4.2 years and 4.3 years,  respectively.  All warrants
were immediately exercisable for common stock at June 30, 1998.                 

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

June 30, 1998 and 1997

6. Stockholders' Deficit (continued)                                            

1993 and 1997 Stock Option/Stock Issuance Plans (continued)                     

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

The 1997 Stock Option Plan (the "1997  Plan"),  pursuant to which key  employees
(including officers) and consultants of the Company and the non-employee members
of the Board of Directors  may acquire an equity  interest in the  Company,  was
adopted by the Board of Directors  on November 18, 1997 and became  effective at
that time.                                                                      

An  aggregate  of  3,000,000  shares of common stock may be issued over the five
year term of the 1997 plan.  Subject to the oversight and review of the Board of
Directors,  the 1997 Plan  shall  generally  be  administered  by the  Company's
Compensation  Committee  consisting  of at least two  non-employee  directors as
appointed  by the Board of  Directors.  The  grant  date,  the  number of shares
covered by an option and the terms and conditions for exercise of options, shall
be determined by the Committee, subject to the 1997 Plan requirements. The Board
of Directors  shall determine the grant date, the number of shares covered by an
option and the terms and  conditions  for  exercise  of options to be granted to
members of the Committee.                                                       

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

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

June 30, 1998 and 1997

6. Stockholders' Deficit (continued)                                            

1993 and 1997 Stock Option/Stock Issuance Plans (continued)                     

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

Balance at June 30, 1996          312,622      $0.78-$13.10      $1.19          
Granted                           166,000      $0.75- $0.91      $0.83          
Exercised                         (21,380)        $0.78          $0.78          
Forfeited                         (41,462)        $0.78          $0.78          
                          ------------------------------------------

Balance at June 30, 1997          415,780      $0.75-$13.10      $1.11          
Granted                           240,000         $0.75          $0.75          
Exercised                         (55,861)        $0.78          $0.78          
Expired/Canceled                  (30,000)        $0.78          $0.78          
                          ------------------------------------------
Balance at June 30, 1998          569,919      $0.75-$13.10      $1.01          
                          ==========================================

The following table summarizes  information  about stock options outstanding at 
June 30, 1998:                                                                  
          Weighted
                    Weighted     Average                Weighted
Range of                   Average     Remaining               Average      
Exercise      Options    Exercise    Contractual  Options    Exercise     
Prises      Outstanding    Price        Life     Exercisable   Price      
-------------  ------------ ----------- ----------- ----------- -----------     

$0.75-$0.78     469,919    $ 0.76        8.47      145,919      $ 0.78      
$0.91-$1.62      90,000    $ 0.95        8.43        8,333      $ 1.37      
$     13.10      10,000    $13.10        5.90       10,000      $13.10      
============                         ===========  
569,919                            164,252  
============                         ===========  

SFAS No.123 requires presentation of pro forma information regarding net income 
(loss) and earnings per share as if the Company had  accounted for its employee 
stock options under the fair value method of that Statement. The fair value for 
ATR options was estimated at the date of grant using the binomial option pricing
model with the following  weighted average assumptions for both fiscal 1998 and 
1997: dividend yield of 0%, an expected life of three years from grant date,    

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

June 30, 1998 and 1997

6. Stockholders' Deficit (continued)                                            

1993 Stock Option/Stock Issuance Plan (continued)                               

risk-free  interest rate of 6.6%;  and an expected  volatility of .955 and 1.104
for fiscal 1998 and 1997, respectively.                                         

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

                                             1998         1997
                                               ---------------------------
Net loss applicable to common stockholders:                                     
As reported                                     $ (1,366,444)   (770,687)   
Pro forma                                       $ (1,477,071)  $(924,327)   

Basic and diluted net loss per share:                                           
As reported                                     $      (0.05)  $   (0.03)   
Pro forma                                       $      (0.06)  $   (0.04)   

The weighted  average fair value of options  granted during the years ended June
30,  1998 and 1997 was $0.47 and $0.66,  respectively.  Because  SFAS No. 123 is
applicable  only to options  granted  subsequent to June 30, 1995, its pro forma
effect will not be fully reflected until 1999.                                  

In addition to options granted pursuant to the 1993 and 1997 Stock  Option/Stock
Issuance  Plans,  the Company has granted  options  outside these plans.  In    
fiscal year 1994, the Company  granted to its then-new Chief  Executive  Officer
and director,  stock options for 400,000  shares of common stock  exercisable at
$0.10 per share, and recorded compensation expense of $1,400,000.  The option is
fully vested as of June 30, 1998 and expires on August 10, 2003.  In April 1996,
the Company's  former  Chief  Executive  Officer  exercised  options for 10,000 
Shares.                                                                         

In September  1996,  the Board of Directors  granted a  non-statutory  option to
purchase  20,000  shares of the Company's  common stock at an exercise  price of
$2.00 per share to Edward L. Lammerding, Chairman of the Board. The option vests
over 3 years and expires in September 2001.                                     

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

June 30, 1998 and 1997

6. Stockholders' Deficit (continued)                                            

Stock Reserved for Issuance                                                     

As of June 30, 1998,  the Company has  reserved a total of  4,608,175  shares of
common stock pursuant to outstanding warrants,  options,  conversion of Series D
Preferred  Stock,  and future issuance of options to employees and  non-employee
directors.                                                                      

7. Settlement of Dispute with Distributor                                       

Since 1993, the Company and its Canadian  distributor (the  "Distributor")  have
disputed several provisions of their Distributor and  Co-Development  Agreement,
modified certain  provisions of the agreement in 1994 and 1995, and continued to
dispute several  provisions of the modified  agreement  during 1996 and 1997. In
May 1997, the Company and the Distributor signed a Mutual Release and Settlement
Agreement  wherein both parties  agreed to the  settlement of any and all issues
arising from or relating to the Distributor and  Co-Development  Agreement,  and
any of its modifications, and any and all other matters arising from or relating
to any relationship or agreements(s)  between the Company and the Distributor by
mutually agreeing to cancel and terminate the agreement(s) and by releasing each
other from any and all  claims,  demands,  or  liabilities  which have arisen or
which may arise from the  agreement(s).  As a result of this  agreement,  during
fiscal  1997 the  Company  reversed  net  accounts  payable  to the  Distributor
previously recorded of $189,299.                                                

8. Expiration of Accrued Customer Obligations                                   

During fiscal 1992, the Company recorded an estimated liability in the amount of
$242,848 related to certain software sales  agreements.  After  discussions with
legal  counsel,  management  of the  Company  believes  that the  Company has no
further  obligation to perform under these  customer  contracts.  Therefore,  in
fiscal 1997, the Company reversed its previously recorded liability of $242,848.

9. Reimbursement from Insurance Company for Suit from Former Consultant         

The  Company  is not  currently  a party to any  pending  legal  proceedings.  A
previously  reported  action  between the Company  and a former  consultant  was
resolved during fiscal 1997 in favor of the Company. In addition,  during fiscal

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

June 30, 1998 and 1997

1997,  legal  expenses  and costs of  $201,550  accrued in prior  periods by the
Company  related to this  litigation  were reimbursed by insurers of Mr. Cameron
and the Company.                                                                

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