<PAGE>   1


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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-KSB

   [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                                    OF 1934
                   For the fiscal year ended December 31, 2000

                                       OR

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

          For the transition period from _____________ to _____________

                           Commission File No. 0-24073

                              IBS INTERACTIVE, INC.
                 (Name of Small Business Issuer in Its Charter)

                   DELAWARE                              13-3817344
       (State or other jurisdiction of               (I.R.S. Employer
       incorporation or organization)               Identification No.)


            400 NORTH ASHLEY DRIVE, SUITE 2600, TAMPA, FLORIDA 33602
          (Address of principal executive offices, including zip code)

                                 (813) 221-0024
              (Registrant's telephone number, including area code)


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

                                               Name of Each Exchange on
          Title of Each Class                      Which Registered
COMMON STOCK, $.01 PAR VALUE PER SHARE      THE BOSTON STOCK EXCHANGE, INC.

    Securities registered pursuant to Section 12(g) of the Act: common stock,
                            par value $.01 per share

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

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

      State issuer's revenues for its most recent fiscal year: $23,363,000.

      The aggregate market value of voting and non-voting common equity held by
non-affiliates of the Registrant as of June 4, 2001 was $6,787,129. As of June
4, 2001, 6,787,129 shares of the Registrant's common stock, $.01 par value per
share, were outstanding.

      DOCUMENTS INCORPORATED BY REFERENCE. None.


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<PAGE>   2




            Cautionary Statement Regarding Forward-Looking Statements

         Statements in this Annual Report on Form 10-KSB that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding our (as hereinafter defined) expectations,
hopes, intentions or strategies regarding the future. Forward-looking statements
include: the plans and objectives of the Company for future operations and
trends affecting our financial condition and results of operations. All
forward-looking statements in this Report are based on information available to
the Company as of the date this Report is filed with the Securities and Exchange
Commission (the "SEC"), and the Company assumes no obligation to update any such
forward-looking statements. Factors that could cause actual results to differ
materially from those expressed or implied by such forward-looking statements
include, but are not limited to, (i) a decline in general economic conditions or
a loss of major customers, (ii) the unavailability or material increase in the
price of telecommunications services and facilities, (iii) an adverse judgment
in pending or future litigation and (iv) technological developments and
increased competitive pressure from current competitors and future market
entrants. See "Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors Which May Affect the
Company's Future Performance." The Company undertakes no obligation to release
publicly the results of any future revisions it may make to forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

         We (as used herein, "we," "us," "our" and the "Company" refer to IBS
Interactive, Inc.) are a leading provider of e-Business and Information
Technology (IT) professional services to businesses, organizations and public
sector institutions in the Eastern and Midwestern United States.

         We represent an emerging breed of e-Business and IT professional
services firm: one that provides total solutions by transforming technology into
value for clients through our integrated, multi-disciplinary service offerings.
We utilize advanced technologies to provide our clients with business
application development and integration, network services, IT consulting and
training. To summarize, we build business applications.

         We provide the following services either individually or as part of a
comprehensive package custom designed for a client's individual needs. Service
offerings include strategy services, component-based solutions, business
application development, network services, IT consulting services, and desktop
support and integration.

         We market our e-Business and IT professional services to mid-sized
businesses (including mid-sized departments of larger enterprises) and public
sector institutions.

         Our customers during the year ended December 31, 2000 included, among
others: Aetna US Healthcare, Commerce Bank, Deutsche Bank, McKinsey, Harcourt
and State of Tennessee.

         We were incorporated in February 1995 as Internet Broadcasting Systems,
Inc. and changed our name to IBS Interactive, Inc., when we went public in May
1998. We trade on the Boston exchange under the symbol of IBSX. During late
2000, the Company began doing business as Digital Fusion. The Company will
propose to the shareholders a name change to Digital Fusion, Inc. at the
Company's annual shareholder meeting. IBS, a Delaware corporation, has its main
administrative office in Tampa, Florida, along with regional offices throughout
New Jersey, New York, Florida and Alabama. Our Web site is
http://www.digitalfusion.com.

COMPANY SERVICES

         We provide the following services to meet our customer's needs.

                  -     Strategy services




                                       -1-
<PAGE>   3

                 -     Component based solutions
                 -     Business application development
                 -     Network services
                 -     IT Consulting services
                 -     Desktop support and integration

(a)      STRATEGY SERVICES

         Our strategy services assist our clients in identifying business
processes that support their key business objectives, defining information
system requirements that support those business processes, and helping our
customers prioritize information technology initiatives that support these
objectives.

(b)      COMPONENT BASED SOLUTIONS

         Business buyers need business solutions. We have a number of components
that support business solutions. They generally meet 80% of the customer's
requirements without customization. We license these software solutions to our
customers, and customize them to their specific business requirements. This
allows our customers to gain strategic business advantage more quickly than is
possible using a completely custom solution, and more completely than is
possible by customizing off-the-shelf packages. Currently available components
include:

         -   Customer Relationship Management (CRM) - This component, built on
             scalable architecture provides a comprehensive sales, marketing and
             customer support service offering.

         -   Financials - This component enables everyone to gain instant
             access to current accounts payable and accounts receivable,
             up-to-the-minute client financial standings, current customer
             credit limits, and more.

         -   Distance Learning - We have a distance learning infrastructure
             that is used to support many U.S. Army distance learning programs.
             This award-winning application allows businesses and organizations
             to distribute course material, administer training evaluations and
             manage employee-student status from a single (or multiple) location
             via the Internet or an Intranet.

(c)      BUSINESS APPLICATIONS DEVELOPMENT

         We maintain a full range of applications programming expertise to: (i)
ensure that clients' applications and networks are specifically tailored to meet
their requirements, (ii) develop and maintain clients' Web sites, (iii) provide
clients with technical assistance and (iv) provide consulting services

         -   Customized application development to customer specifications
             including Web portals, e-commerce, intranets, customer
             relationship management (CRM), distance learning, financials,
             online databases, interactive communications and purchasing
             systems.

         -   Web-Site Development and Maintenance - Web-site development
             involves the design and development of a client's Web-site
             production. Working with clients and outside graphic designers and
             programmers, the Company designs, creates and maintains
             multi-media, interactive Web-sites for its clients, using the
             latest applications and development tools.

         -   Content management to help move responsibility for web content to
             business units within organizations.

         -   Intranet, Extranet, and Internet site development and maintenance
             requires knowledge of several different programming languages,
             including Sybase, Oracle, UNIX, Windows NT, C++, JAVA, HTML, Cold
             Fusion and customized database and applications programming.

         -   Shrink-Wrapped Package Selection - when standard off-the-shelf
             packages will meet customers' requirements, we help customers
             select and implement standard packaged offerings.




                                      -2-
<PAGE>   4


(d)      NETWORK SERVICES

         We maintain a highly skilled and experienced team of professionals that
provide network systems consulting on a wide variety of platforms

         -    Network Assessments -- We perform a complete analysis of existing
              network infrastructure and data flows to identify stress points. A
              strategy is then devised for improvements related to scalability,
              performance, optimal management and security.

         -    Network Architecture and Design -- Our senior engineers work with
              our clients to create detailed plans for single site or WAN/VPNs
              spanning large geographies. Our designs leverage existing
              components and effectively implement the latest network products
              to create highly secure, scalable and reliable infrastructures.

         -    Network Implementation -- We have a team of experts that can
              implement all aspects of the designs we create. We maintain a
              full-team of engineers and technicians who are familiar with our
              core partner technologies and experienced in the most complex
              installations.

(e)      IT CONSULTING SERVICES

         Consulting services are provided to businesses and organizations
seeking information, guidance and staffing in order to effectively build
business applications, analyze and utilize information technology prior to the
time such businesses make investments of capital, time and/or personnel. The
consulting services we provide include: (i) desktop and other network server
support; (ii) business analysis and software design (iii) computer programming,
(iv) security audits and protocol recommendations, (v) disaster recovery plan
audit and protocol recommendations, (vi) network cost audits and (vii) strategic
plan development. Representative skill sets include:

         -    Customer Relationship Management
         -    ERP
         -    Microsoft technologies
         -    Allaire Technologies
         -    Sybase technologies and training
         -    Desktop and network server support
         -    On-site business applications development
         -    Disaster recovery plans and protocol recommendation
         -    Strategy and advisory services

(f)      DESKTOP SUPPORT AND INTEGRATION

         We are committed to maximizing the value of distributed computing
investments with services that optimize system availability, performance,
technology utilization, and end-user productivity. We have demonstrated our
expertise and efficiency in the following areas:

         -    Management/Support of 50,000 Desktops
         -    Multi-Core Team Implementations
         -    Enterprise Network Infrastructure
         -    New Technology Migration/Rollout
         -    Onsite Move/Add/Change
         -    Lease Management

         Each service line described above has a specific target market and
customer size. Overall, we market our e-Business and IT professional services to
mid-sized businesses (including mid-size departments of larger enterprises) and
public sector institutions. Our comprehensive suite of services enables our
clients to capitalize on the wide variety of critical business and data
communication opportunities made possible by the Internet and Internet-related
technologies while maximizing their investment in their legacy systems when
appropriate.




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<PAGE>   5


GENERAL DEVELOPMENT OF BUSINESS - STRATEGIC VISION

         During 2000, the Company's strategic vision was to become more focused
on being an IT professional services company to mid-tier market customers. To
this end, in March 2000 the Company purchased digital fusion, inc. (DFI), an
e-business professional services company to complement its existing web
development, network services and desktop support and integration groups.

         In order to focus on the IT professional services business, the Company
decided to discontinue providing internet access and web hosting to customers.
These businesses require a certain level of size to be competitive and require
large capital commitments. In August 2000, the Company sold its dial-up internet
access providing business to Earthlink, Inc. and in April 2001, the Company sold
its web hosting and non-dial-up business to Veraciti, Inc.

GENERAL DEVELOPMENT OF BUSINESS - ACQUISITIONS AND DIVESTITURES

         During April 2001, we sold our web hosting and non-dial-up business to
Veraciti, Inc. for $200,000 cash and $60,000 worth of services to complete
certain customer projects. In addition, Veraciti assumed certain lease
obligations of the Company related to the web hosting and non-dial-up business.
We recorded a $211,000 loss in connection with this sale.

         On March 1, 2000 the Company acquired all of the outstanding stock of
DFI in exchange for 975,000 shares of unregistered common stock valued at $13.00
per share (50,000 shares of which are reserved pending settlement of certain
matters), a $500,000 three-year subordinated note accruing 6% interest per annum
and the assumption of debt totaling approximately $4.2 million. DFI is a Tampa,
Florida-based provider of e-Business professional services. The value ascribed
to the consideration of stock, equity instruments, debt and related costs was
$19.1 million resulting in goodwill of $12.8 million. This was accounted for
under the purchase accounting method.

         On June 30, 1999 we acquired Spencer Analysis, Inc. ("Spencer"), for
approximately 260,005 shares of common stock, subject to certain adjustments.
The common stock was valued at $23.08 per share. Spencer is a New York
City-based computer consulting firm. The combination has been accounted for as
a pooling of interests. Accordingly, our financial statements have been restated
for 1999 to include the results of operations and financial position of Spencer.

         On March 31, 1999, we acquired Spectrum Information Systems, Inc.
("Spectrum"), for approximately 145,456 shares of common stock, subject to
certain adjustments, in exchange for all of the issued and outstanding capital
stock of Spectrum. The common stock was valued by the parties at $22.00 per
share. Spectrum is a Huntsville, Alabama-based provider of network services. The
combination has been accounted for as a pooling of interests. Accordingly, our
financial statements have been restated for 1999 to include the results of
operations and financial position of Spectrum.

         During 1999, the Company purchased several Internet access businesses.
These businesses were sold to Earthlink, Inc, a large internet service
provider (ISP) during August 2000. The company received $2.8 million cash in
2000 and recorded a $3.5 million loss related to this sale. On October 18, 1999,
we sold our dial-up internet access services business in Huntsville, Alabama to
HiWAAY, a local ISP. We incurred a loss of $350,000 in connection with this sale
during 1999.

         On December 10, 1998, we entered into a Membership Interest Acquisition
Agreement (the "Acquisition Agreement") with Halo Network Management, LLC
("Halo"), an Eatontown, New Jersey-based network management company that offers
full-service network solutions including planning, installation and maintenance.
Pursuant to the terms of the Acquisition Agreement, we acquired all of the
issued and outstanding membership interests of Halo in exchange for 219,231
shares of common stock (subject to certain adjustments) valued by the parties at
$6.50 per share. The combination has been accounted for as a pooling of
interests.

         On September 24, 1998, we entered into a Membership Interest Purchase
Agreement with all of the members of DesignFX Interactive, LLC ("DesignFX"), a
Web-design, programming and hosting company located in Cherry Hill, New Jersey,
whereby we acquired all of the issued and outstanding membership interests of
DesignFX in exchange for 200,160 shares of common stock (subject to certain




                                      -4-
<PAGE>   6

adjustments) valued by the parties at $6.25 per share. The combination has been
accounted for as a pooling of interests.

SALES AND MARKETING

         Our sales and marketing strategy is driven by our ability to offer
solutions specific to our customer's needs, then we cross-sell additional
services to that customer when appropriate. In this way, we are able to increase
awareness of our comprehensive e-Business and IT professional services, network
solutions, and desktop support and integration. Our marketing efforts are
primarily focused on mid-sized businesses and organizations for our strategic
services, and large-sized organizations for its staffing, application
development, and desktop support services. We utilize a direct sales model for
marketing and selling our services. To a lesser extent, we obtain sales leads
through our partner relationships.

         Our marketing efforts principally involve tradeshows, direct mailing,
and telesales in areas within the geographic scope of our network. We believe
that it is critical to increase the brand recognition of the name, "Digital
Fusion" then when clients have expressed interest in our services, focus on
converting the interest to closed business in one of our service offerings.

         We also generate sales leads through referrals from clients,
consultants, responses to requests for proposals, referrals from other
e-Business and IT professional service businesses and ISPs, our own Web site and
associated links and industry seminars and trade shows. We are focusing our
marketing efforts on increasing our brand awareness and on those services (e.g.
IT Consulting, training) that benefit from high-volume marketing approaches. We
are also focusing on developing solution-focused service lines such as CRM and
Distance Learning. We use these service lines to proactively drive business
opportunities, then we offer our clients a wider range of solutions from our
capabilities as our relationship with that customer expands.

         We currently employ 11 full-time sales people. We have a team approach
to proposal development that leverages the best skills of our salespeople and
our technical professionals. This enables us to develop sales proposals meeting
the specific needs and budgets of our prospective clients. We are developing
internal business processes to continually refresh the sales & marketing
employees' understanding of our service offerings and service lines. In many
cases, our salespeople specialize on a specific service offering instead of
selling all services. This allows our salespeople to become more knowledgeable
on the offerings they sell.

CLIENTS

         Our client base consists primarily of businesses and organizations with
IT Consulting, business application development, and component-based solution
needs. We intend to expand our client base in all of our business lines through
internal growth to lessen our dependence on any one particular client or group
of clients.

         We are dependent on a limited number of clients for a substantial
portion of our revenues. For the years ended December 31, 2000 and 1999, our
largest client, Aetna, accounted for approximately 20% and 17%, respectively, of
our revenues. Revenues derived from our consulting contracts are generally
non-recurring in nature; however, we have implemented a CRM system and business
processes internally to better capitalize on repeat business with customers. Our
contract with Aetna provides that we render services pursuant to purchase
orders, each of which constitutes a separate contractual commitment by Aetna.
Non-renewal or termination of our contract with Aetna or the failure by Aetna to
issue additional purchase orders to us under the existing contract would have a
material adverse effect on us. There can be no assurance that we will obtain
additional contracts for projects similar in scope to those previously obtained,
that we will be able to retain existing clients or attract new clients or that
we will not remain largely dependent on a limited client base which may continue
to account for a substantial portion of our revenues. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Certain Factors Which May Affect the Company's Future Performance -- Dependence
on Key Customer; Non-Recurring Revenue."



                                      -5-

<PAGE>   7


COMPETITION

         The markets for our services are highly competitive, but are specific
to each individual service line. With limited barriers to entry we believe the
competitive landscape will continue to grow both from new entrants to the market
as well as from existing players, such as CRM Software vendors, or ERP vendors
expanding the breadth of their services into the mid-level market that we serve.

         We believe that competition in the component-based solution area comes
from product vendors, who sell out-of-the-box solutions, and Application Service
Providers (ASP) such as salesforce.com, or sales.oracle.com. When selling
against a product vendor, we differentiate based on our ability to quickly
develop a solution completely customized to our customers needs, in technologies
compatible with our customers IT skill sets. When selling against an ASP
solution, we differentiate based on our ability to integrate our component
extensively with their internal business systems.

         We believe that competition in the Business Application Development/IT
professional services market is based upon the following factors:

         -    Speed of response to customer request
         -    Flexibility and willingness to adapt to client needs
         -    Responsiveness to client demands
         -    Number and availability of qualified engineers and programmers
         -    Project management capability
         -    Breadth of service offerings
         -    Technical expertise
         -    Size and reputation
         -    Brand recognition and geographic presence
         -    Price

         Traditional professional services firms (e.g. management consultants),
traditional IT service providers and advertising firms, have created divisions
within their organizations that focus on the e-Business needs of their clients.
Many of these service providers, however, do not provide the breadth of services
needed to offer comprehensive, integrated e-Business solutions and services.
Management consulting firms focus on overall business strategies and the
remodeling of business processes for use in an Internet environment. The more
traditional IT service providers are focused on systems integration and the
development and implementation of enterprise software applications. Advertising
agencies and pure Web design shops have focused on the marketing and creative
development of services, but typically lack deep technical capabilities and the
ability to provide complete, integrated solutions.

         We compete with numerous large companies that have substantially
greater market presence and financial, technical, marketing and other resources
than we have, including (i) large information technology consulting and service
providers and application software firms; (ii) international, national, regional
and commercial ISPs who have consulting services divisions; (iii) established
on-line services companies; (iv) computer hardware and software and other
technology companies; (v) Application Service Providers. and (vi) major
accounting firms. Many of our competitors expanded their service offerings last
year and increased their focus on e-Business and IT professional services
markets, thus increasing the number of organizations that were providing similar
services to ours. This competition increased just prior to when the pure-play
dotcom market collapsed. Companies heavily dependent on the dotcom market for
their primary source of revenue downsized extensively. The downsizing of these
players will lessen competition for skilled technical resources, however, it
doesn't have much of an effect on our primary market, since our core competency
is building business applications. We need to remain focused on delivering
better service than our competitors who also focus their services on business
application development.

         As a result of continued competition, we also expect to encounter
significant pricing pressure, which in turn could result in significant
reductions in the average selling price of our services. There can be no
assurance that we will be able to offset the effects of any such price
reductions through an increase in the number of clients, higher revenue from
enhanced services, cost reductions or otherwise. In addition, we believe that
continuing consolidation in the e-Business and IT professional services market
could result in increased price and other competition in the industry. Increased
price or other competition could make it difficult for us to gain additional
clients and could have a material adverse effect on us. There can be no




                                      -6-
<PAGE>   8

assurance that we will be able to compete successfully. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Certain Factors Which May Affect the Company's Future Performance --
Competition."

EMPLOYEES

         As of June 4, 2001, we had 158 full-time employees and 2 part-time
employees, including 5 executive officers, 134 programmers, network engineers
and technicians, 11 persons dedicated to sales and marketing activities and 11
administrative personnel. None of our employees are represented by a labor
union, and we are not a party to any collective bargaining agreements. We
believe that our employee relations are good. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Certain Factors
Which May Affect the Company's Future Performance -- Retaining Key Personnel."

         To maximize the utilization of our resources and evaluate the skills
and knowledge of certain prospective employees, we routinely hire temporary
personnel to satisfy increased demand for personnel in connection with the
commencement of new projects.




                                      -7-

<PAGE>   9



ITEM 2.    DESCRIPTION OF PROPERTY

         We serve our clients through our corporate headquarters, located in
Tampa Florida, and our regional offices located in New Jersey, New York, Florida
and Alabama.

         At December 31, 2000, we did not own any real property and conducted
our operations at the following leased premises:

<TABLE>
<CAPTION>

                                                                                   APPROXIMATE
                                                                   APPROXIMATE       ANNUAL
LOCATION                            DESCRIPTION OF FACILITY       SQUARE FOOTAGE   LEASED COST       LEASE TERM
--------                            -----------------------       --------------   -----------       ----------
<S>                                 <C>                           <C>              <C>             <C>
400 N. Ashley Drive                 Corporate headquarters,            7,012        $112,000       12/01/00-05/31/02
Suite 2600                          sales, administration,
Tampa, FL  33602                    education

Two Greentree Centre                Sales, customer support,           9,168        $165,000       12/20/98-12/31/03
Suite 120                           and programming
Marlton, NJ 08053                   services

Cranberry Commons Bldg C            Sales, customer support,           6,000        $100,000       06/04/99-06/05/04
446 Highway 35                      and programming
Eatontown, NJ 07724                 services

4970 Corporate Drive                Sales, customer support,           3,256         $38,000       1/1/99 - 12/31/01
Suite 100A                          and programming
Huntsville, AL 35805                services

116 John Street                     Sales, customer support,           2,212         $53,000       12/01/99-11/30/02
Suite 620                           and programming
New York, NY 10038                  services

114 Castle Drive                    Network services, sales,          10,000         $39,000       11/01/00-10/31/01
Madison, AL 35758                   customer support
                                    and warehouse

5778 S. Semoran Blvd.               Sales, customer support            4,566         $51,000       3/1/98 - 2/28/03
Orlando, FL  32822                  and programming
                                    services

</TABLE>

         We believe that all of our leased premises are in generally good
condition, are well maintained and are adequate for our current operations.

ITEM 3.    LEGAL PROCEEDINGS

          A complaint was filed on July 25, 2000 in the Circuit Court of Etowah
County, Alabama, captioned Personnel Staffing, Inc., Gregerson Management
Services, Inc., Chynna, Inc., and Luke, Inc., v. IBS Interactive, Inc., Tim
Kielpinski, John Hasty, Bobby Walker, Ed Tubbs, Defendants. The complaint
purports to be a civil action and arises out of a contract negotiated in
September of 1999, between IBS and Personnel Staffing, Inc. ("PSI"). The basic
terms of the contract consist of the following: PSI agreed to pay IBS the sum of
$176,625.39, and in return, IBS agreed to install a wide area network ("WAN")
connecting computers in PSI's offices in Texas, Colorado and Alabama. IBS also
agreed to procure and install most of the necessary hardware for the conversion.
The Company believes the ultimate outcome of this litigation will not have a
material effect on financial position or results of operations. The complaint
alleges, among other things, that the defendants intentionally, wantonly, and
negligently failed to perform the contract as




                                      -8-
<PAGE>   10


agreed by the parties. Plaintiffs argue that IBS, together with four former
employees of IBS, are liable for fraud, negligence, breach of contract, invasion
of privacy, breach of bailment agreement, wantonness, and negligent retention,
supervision and training. IBS has denied these allegations and filed a
counterclaim against plaintiffs alleging that plaintiffs were liable for breach
of contract and fraud. The Company believes the ultimate outcome of this
litigation will not have a material effect on financial position or results of
operations. The defendants deny any wrongdoing and intend to contest the suit
vigorously.

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


         No matters were submitted to a vote of security holders during the
quarter ended December 31, 2000.

                                     PART II

ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Our common stock is traded on the Boston Stock Exchange under the
symbol "IBSX." It was also traded on the NASDAQ SmallCap Market System until
June 7, 2001 when it was delisted due primarily to not being current with the
filings of the Company's periodic reports with the Securities and Exchange
Commission. The following table indicates high and low sales quotations for the
periods indicated. Such quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions.

<TABLE>
<CAPTION>
                     2000                        High               Low
                     ----                        ----               ---
                <S>                             <C>                <C>
                First Quarter                   $14.44             $8.50

                Second Quarter                  $10.75             $4.50

                Third Quarter                   $ 8.25             $2.00

                Fourth Quarter                  $ 2.50             $0.63

</TABLE>

<TABLE>
<CAPTION>

                     1999                        High               Low
                     ----                        ----               ---
                <S>                             <C>               <C>
                First Quarter                   $22.75            $ 8.13

                Second Quarter                  $30.50            $19.00

                Third Quarter                   $26.25            $18.00

                Fourth Quarter                  $22.13            $ 9.50
</TABLE>


         The number of holders of record of our common stock on June 4, 2001 was
106.

         There were no dividends or other distributions made by the Company
during the fiscal year ended December 31, 2000 with respect to our common stock.
It is anticipated that cash dividends will not be paid to the holders of our
common stock in the foreseeable future.




                                      -9-
<PAGE>   11

         Pursuant to the terms of the acquisition agreement dated as of January
31, 1998, related to our acquisition of Entelechy, Inc., on May 4, 1999 we
issued 68,404 shares of our common stock to the former owners of Entelechy. This
issuance of common stock was exempt from registration under the Securities Act
pursuant to Section 4(2).

         Pursuant to the terms of the Membership Interest Purchase Agreement
dated as of September 24, 1998 related to our acquisition of DesignFX, in June
1999, we issued 3,200 shares of our common stock to a former owner of DesignFX.
This issuance of common stock was exempt from registration under the Securities
Act pursuant to Section 4(2).

         Pursuant to the terms of the Membership Interest Acquisition Agreement
dated as of December 10, 1998 related to our acquisition of Halo, in December
1999 we issued 21,923 shares of our common stock to the former owners of Halo.
This issuance of common stock was exempt from registration under the Securities
Act pursuant to Section 4(2).

         In September 1999, in connection with the exercise of options to
purchase shares of common stock, we issued 10,000 shares of common stock to one
of our directors for an aggregate of $60,000. The issuance was exempt from
registration under the Act, pursuant to Section 4(2) of the Act.

         In March, July and October 1999, we issued an aggregate of 48,872
shares of our common stock to holders of certain warrants upon the exercise of
such warrants for an aggregate of $173,000. The issuances were exempt from
registration under the Act, pursuant to Section 3(b) and Regulation D
promulgated thereunder.

         In September and October 1999, we sold approximately $600,000 of the
1999 Debentures. The 1999 Debentures accrued interest at the rate of 12% per
annum and were due in full in October 2001. The 1999 Debentures were convertible
at our option into common stock at a price equal to the price per share we
received in a subsequent equity offering of greater than $3,000,000. In
addition, upon conversion, holders of 1999 Debentures were entitled to receive
13,680 warrants to purchase common stock at $12.50 per share upon conversion.
The 1999 Debentures were converted in December 1999. We recognized a non-cash
charge of $43,000 on the warrants' fair market value upon conversion of the 1999
Debentures in December 1999. The issuance of the 1999 Debentures and of the
common stock upon conversion of the 1999 Debentures was exempt from registration
under the Act, pursuant to Section 3(b) and Regulation D promulgated thereunder.

         On October 29, 1999, we entered into a consulting agreement with EBI
Securities, Inc. ("EBI"), in which we agreed to issue to EBI: (a) warrants to
purchase 50,000 shares of common stock at an exercise price of $10.25 per share
and (b) warrants to purchase 50,000 shares of common stock at an exercise price
of $11.25 per share upon the closing of certain mergers or acquisitions to be
identified (collectively, the "EBI Warrants). We will realize a non-cash charge
to operations for the fair value of these warrants when the EBI Warrants are
earned and issued. The period(s) over which such charges will be recognized will
be determined based upon the nature of the merger or acquisition involved, if
any (that is whether the merger is accounted for as a purchase or a pooling of
interests). The issuance of the EBI Warrants to EBI was exempt from registration
under the Securities Act of 1933, as amended (the "Act"), pursuant to Section
4(2) of the Act.

         In connection with our October 1999 Private Placement, we issued
480,000 shares of common stock and warrants to purchase 120,000 shares of our
common stock at an exercise price of $12.50 per share. The issuance was exempt
from registration under the Securities Act pursuant to Section 3(b) and
Regulation D promulgated thereunder.

         In connection with our December 1999 Private Placement, we issued
100,000 shares of common stock and warrants to purchase 25,000 shares of our
common stock at an exercise price of $12.50 per share. The issuance was exempt
from registration under the Securities Act pursuant to Section 3(b) and
Regulation D promulgated thereunder.

         In connection with our December Private Placement, we issued to LaSalle
Street Securities Corp. ("LaSalle") a five-year warrant to purchase 8,000 shares
of our common stock at $12.50 per share as partial




                                      -10-
<PAGE>   12


payment for LaSalle's services as a placement agent. The issuance was exempt
from registration under the Securities Act pursuant to Section 3(b) and
Regulation D promulgated thereunder.

         In connection with the conversion of the 1999 Debentures, we issued
five-year warrants to purchase 13,680 shares of our common stock at an exercise
price of $12.50 per share. The issuance of the warrants was exempt from
registration under the Act, pursuant to Section 3(b) and Regulation D
promulgated thereunder.

         As part of our acquisition of Entelechy, Inc., in January 1998, on
February 29, 2000 we issued 86,808 shares of common stock to the former
shareholders of Entelechy, Inc. who are also employees of the Company. Because
this issuance did not involve any public offering, it was exempt from
registration under the Securities Act pursuant to Section 4(2) of the Act.

         On January 12, 2000, we entered into a consulting agreement with EBI,
in which we agreed to issue EBI warrants to purchase 50,000 shares of common
stock at an exercise price of $12.50 per share upon the closing of certain
mergers or acquisitions to be identified. The fair value of the warrants were
charged to expense as consulting fees. Because this issuance did not involve any
public offering, it was exempt from registration under the Securities Act
pursuant to Section 4(2) of the Act.

         In connection with the private placement of common stock effected
during 2000, we issued 684,545 shares of our common stock at a price of $11 per
share and three-year redeemable warrants to purchase 171,125 shares of our
common stock at an exercise price of $13.75 per share. In addition, on May 11,
2000 we issued a three-year warrant to purchase 11,945 shares of our common
stock at an exercise price of $13.75 per share to LaSalle St. Securities, LLC in
consideration for their services as placement agent for this private placement.
Because this issuance did not involve any public offering, it was exempt from
registration under the Securities Act pursuant to Section 4(2) of the Act.

         In connection with our merger with DFI on March 1, 2000 we issued
925,000 shares of common stock in exchange for all of the issued and outstanding
common stock of DFI, and may issue an additional 50,000 shares upon settlement
of certain matters, pursuant to the related agreement and plan of merger. In
addition, we issued a $500,000 subordinated note accruing 6% per annum to the
former shareholders of DFI. Because this issuance did not involve any public
offering, it was exempt from registration under the Securities Act pursuant to
Section 4(2) of the Act.

         On March 1, 2000, we granted non-qualified options to purchase 480,000
shares of common stock to certain of the former employees of DFI; 25% of such
options vested upon grant and were considered part of the purchase price and the
remaining options will vest over a period of 3 years of continued employment.
Because this issuance did not involve any public offering, it was exempt from
registration under the Section 4(2) of the Act.

         As part of our acquisition of the Renaissance Internet Access division
of PIVC, LLC on February 22, 1999, on March 1, 2000 we issued 12,585 shares of
common stock that had been held in reserve to PIVC, LLC pursuant to the terms of
the related purchase agreement. Because this did not involve any public
offering, it was exempt from registration under the Section 4(2) of the Act.

         On March 28, 2000, we issued an option to Tekbanc Limited (Tekbanc) to
purchase additional 45.45 units consisting of 454,545 shares of our common stock
at a price of $11.00 per share and three-year warrants to purchase 113,636
shares of common stock at an exercise price of $13.75. Tekbanc's right to
purchase these shares and warrants expired on August 1, 2000. Because this
issuance did not involve any public offering, it was exempt from registration
under the Section 4(2) of the Act.

         As part of our acquisition of Spectrum Information Systems, Inc. on
March 31, 1999, on March 30, 2000 we issued 10,909 shares of common stock that
had been held in reserve to the former shareholders of Spectrum information
Systems, Inc., pursuant to the terms of the related acquisition agreement.
Because this issuance did not involve any public offering, it was exempt from
registration under the Section 4(2) of the Act.




                                      -11-
<PAGE>   13


         As part of our acquisition of Millennium Computer Applications, Inc.,
on April 20, 1999, on May 2, 2000 we issued 3,092 shares of common stock that
had been held in reserve to the former shareholders of Millennium Computer
Applications, Inc., pursuant to the terms of the related acquisition agreement.
Because this issuance did not involve any public offering, it was exempt from
registration under the Section 4(2) of the Act.

         As part of our acquisition of Spencer Analysis, Inc., on June 30, 1999,
on May 2, 2000 we issued 19,500 shares of common stock that had been held in
reserve to the former shareholders of Spencer Analysis, Inc., pursuant to the
terms of the related acquisition agreement. Because this issuance did not
involve any public offering, it was exempt from registration under the Section
4(2) of the Act.

         On June 15, 2000, we entered into a consulting agreement with Tekbanc
in which we agreed to issue Tekbanc warrants to purchase 75,000 shares of our
common stock at an exercise price of $7.00 in exchange for mergers and
acquisitions, marketing, business development and financial advisory services.
These warrants vest ratably over a six-month period ending December 15, 2000 and
vest immediately in the event of a change of control. The fair value of these
warrants was charged to expense during 2000. Because this issuance did not
involve any public offering, it was exempt from registration under the Section
4(2) of the Act.

         On August 24, 2000, the Company issued an aggregate of 5,734 shares to
the stockholders of Planet Access, Inc. in connection with the Company's
acquisition of certain assets of Planet Access in May 1999. Pursuant to the
terms of the asset purchase agreement, these shares were previously held in
escrow. Because this issuance did not involve any public offering, it was exempt
from registration under the Section 4(2) of the Act.

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


         The following discussion and analysis should be read together with the
consolidated financial statements and notes to such statements appearing
elsewhere herein.

OVERVIEW

         We provide a broad range of e-Business and IT professional services,
including strategy services, component-based solutions, business application
development, network services, IT consulting services, and desktop support and
integration to businesses, organizations and public sector institutions in the
Eastern and Midwestern United States. Our revenues are derived principally from
fees earned in connection with the performance of services provided to
customers.

         During 2000, the Company's strategic vision was to become more focused
on being an IT professional services company and concentrate on its profitable
business units. In March 2000, the Company purchased DFI, an e-business
professional services company to complement its existing web development,
network services and desktop support and integration groups.

         In order to focus on the IT professional services business, the Company
decided to discontinue providing internet access and web hosting to customers.
These businesses require a certain level of size to be competitive and require
large capital commitments. In August 2000, the company sold its dial-up internet
access providing business to Earthlink, Inc. and in April 2001, the Company sold
its web hosting and non-dial-up business to Veraciti, Inc.

         The Company restructured its operations in the first quarter of 2000
after the DFI acquisition to reduce its work force and terminate its Microsoft
training business. A charge of $865,000 was recorded related to this
restructure. On July 30, 2000, the Company entered into an Agreement and Plan of




                                      -12-
<PAGE>   14


Reorganization with Infonautics, Inc and First Avenue Ventures, Inc
("Infonautics Merger"). In November 2000, due to the decline in the market
relating to incubator companies, the Company announced the termination of the
Reorganization Agreement with Infonautics and First Avenue Ventures. The Company
had a charge of approximately $750,000 in the fourth quarter in connection with
this termination. During the fourth quarter 2000, approximately 65 employees
were terminated related to a reduction in work force and the sale of its dial-up
internet access business which was sold in 2000 and with the anticipated move
which occurred in January 2001 of the Company's headquarters from Cedar Knolls,
New Jersey to Tampa, Florida. This move was done to consolidate the
administrative offices with its operational office and eliminate corporate
redundancies and reduce corporate overhead. A charge of $1,895,000 was
recognized related to the remaining leases and severance during December 2000.
Also during the fourth quarter 2000, certain goodwill and computers and
equipment were written down due to the reduction in work force and the refocus
of Company business to IT professional services.

       The web hosting and non-dial-up division was sold in April 2001 and the
Company also reduced its work force to help it meet its goal of reaching
profitability with its continuing business units.

       With the April 2001 restructuring, the Company believes it has taken the
steps necessary to become cash flow positive from its continuing operations
during the second half of 2001. However, the Company received a going concern
audit opinion from its auditors because of its previous losses and significant
liabilities related to its discontinued business units, restructuring efforts
and the termination of the Infonautics merger. The ability of the Company to
continue as a going concern is dependent upon restructuring certain liabilities
and obtaining cash flow from external sources. In order for the Company to
execute its current plan to raise additional capital, it will have to negotiate
with certain creditors to reduce these liabilities and this process has already
begun. If the Company is successful in obtaining agreements with its creditors
to reduce these liabilities, the Company believes it will be able to raise
capital to pay down the restructured liabilities as well as fund the Company's
ongoing capital needs. If the Company cannot restructure the liabilities related
to its discontinued operations, restructuring and Infonautics merger
termination, it will be required to re-examine its current business and
capitalization plans as it may not have sufficient liquidity to service ongoing
operations and those liabilities.

         On June 7, 2001, IBS was delisted from the NASDAQ SmallCap Market
System primarily due to not being current with the filings of the Company's
periodic reports with the Securities Exchange Commission. The 10K and 10Q
Company filings were not filed on time primarily due to an investigation into a
former New Jersey controller's misappropriation of funds from the Company. The
misappropriation of funds was approximately $220,000 and the Company has
subsequently recovered approximately $150,000 from the former employee. In
addition to actively pursuing collections of all remaining outstanding funds,
the Company has insurance covering $500,000 in losses plus $50,000 for
investigation fees. The investigation was directed by two of the Company's
outside board members and assisted by an outside forensic auditing firm. Whereas
this misappropriation was not a material event, the investigation had to be
completed in order that the 2000 audit could be finalized. The 10K has been
filed and the first quarter 10Q is anticipated to be filed by June 29, 2001.
Upon completion of the 10Q filing, the Company will be current in its filings.
The Company is vigorously appealing the delisting with the NASDAQ.

RESULTS OF OPERATIONS.

         REVENUES. Revenues increased by $8,069,000, or 53%, from $15,294,000
for the year ended December 31, 1999, to $23,363,000 for the year ended December
31, 2000. This increase is primarily due to the acquisition of DFI, which was
included in the 2000 revenues beginning in March but are not reflected in the
1999 revenues since it was accounted for as a purchase acquisition. Revenues
from our largest customer also increased by $2,169,000 from $2,547,000 in 1999
to $4,716,000 in 2000. Our largest customer was responsible for 20% of our
revenue from continuing operations in 2000.

COST OF SERVICES.

         Cost of services for Professional Services consists primarily of
salaries and expenses of engineering, programming and technical personnel,
expenses relating to cost of equipment and applications sold to clients and
equipment costs for Web-site hosting and fees paid to outside consultants
engaged for client projects. Cost of services increased by $6,364,000, or 56%,
from $11,307,000 for 1999 to





                                      -13-
<PAGE>   15


$17,671,000 for 2000. This 56% increase in cost of services is mainly due to the
53% increase in revenues, which was related primarily to the acquisition of DFI.

GROSS PROFIT.

         Our gross profit was $3,987,000 or 26% of revenues in 1999 and
$5,692,000 or 24% of revenues in 2000. The decrease in gross profit as a
percentage of sales was primarily due to a decrease in the profitability of our
network services projects and consulting, offset by an increase in the
profitability of our e-Business and IT professional services projects and
consulting.

SELLING, GENERAL AND ADMINISTRATIVE.

         Selling, general and administrative expenses consist primarily of
salaries and costs associated with marketing literature, advertising, direct
mailings, accounting, finance and sales and marketing, administrative, as well
as professional fees and other costs associated with being a public company and
the administration of the Company. Selling, general and administrative expenses
increased by $4,663,000, or 60%, from $7,782,000 in 1999 to $12,445,000 for
2000. This increase was primarily attributable to the Company's expanded
promotional and marketing activities, the hiring of additional marketing and
sales personnel and the increased personnel and related overhead costs
associated with our acquisitions. In December 2000 and January 2001, the
company reduced its administrative staff significantly in conjunction with its
fourth quarter 2000 restructuring and the administrative headquarters move from
New Jersey to Florida.

AMORTIZATION OF INTANGIBLE ASSETS.

         Amortization of intangible assets increased by $3,030,000, from
$130,000 for 1999 to $3,160,000 for 2000. This increase is primarily
attributable to the amortization of intangible assets (customer lists and
goodwill), related to the various acquisitions throughout 1999 and with ten
months of amortization related to goodwill originating from the DFI acquisition.

NON-CASH COMPENSATION EXPENSE.

         Non-cash compensation expense decreased from $332,000 in 1999 to
$244,000 in 2000. This decrease is due to the non-cash compensation that was
recorded to restructuring during first quarter 2000 relating to a certain
employee's termination agreement and offset by the non-cash compensation of
$214,000 charged to expense during the first quarter of 2000 as the shares of
common stock related to the 1998 acquisition of Entelechy, Inc. were released
since the condition of continued employment had been waived. Non-cash
compensation expense is expected to be -0 during 2001.

SEVERANCE AND RESTRUCTURING.

         During the first quarter of 2000, the Company enacted a reduction in
force and, as a result, recognized a charge of $567,000 related to severance,
benefits and entitlements. In addition, the Company decided to terminate its
Microsoft training business and recognized a charge of $298,000, which is
comprised of the exit costs of this business. During the fourth quarter 2000,
the Company recorded a $1,895,000 expense related to reduction in work force and
closing certain non-essential offices. This expense was comprised of $1,328,000
related to leases and various expenses related to office closings, $230,000
related to write-downs on equipment, $143,000 related to write-off of goodwill
and customer lists and $194,000 related to severance, benefits and entitlements
from downsizing and moving the administrative headquarters to Tampa, Florida
from Cedar Knolls, New Jersey. This move was done to consolidate the
administrative offices with its operational office and eliminate corporate
redundancies and reduce corporate overhead.

         During 1999 we did not incur any such charges.




                                      -14-
<PAGE>   16


MERGER RELATED EXPENSES.

         During 2000 the Company incurred charges of $750,000 in connection with
the termination of the Agreement and Plan of Reorganization with Infonautics,
Inc. and First Venue Ventures, Inc. which the Company entered into on July 30,
2000. In November 2000, the Reorganization Agreement with Infonautics and First
Avenue Ventures was terminated by all parties. During 1999 the Company incurred
charges of $232,000 for fees and costs associated with the acquisitions of
Spencer Analysis, Inc. Such 1999 amounts, for transactions accounted for as a
pooling of interests, are expensed as services are rendered and costs are
incurred.

INTEREST EXPENSE.

         Interest expense in 2000 consisted of interest payments and accruals on
indebtedness in connection with the DFI acquisition, and to a lesser extent
interest payments and accruals on capital leases. Interest expense was $81,000
and $296,000, respectively for 1999 and 2000.

INTEREST INCOME.

         Interest income increased from $116,000 in 1999 to $184,000 in 2000 due
to an increase in our cash position in 2000 relative to 1999, as a result of the
timing of our private placement financings.

LOSS ON DISPOSAL OF ASSETS.

         On October 18, 1999, we sold our dial-up internet access Services
business in Huntsville, Alabama. We incurred a loss of $350,000 in connection
with this sale.

DISCONTINUED OPERATIONS AND LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS.

         During 2000, the Company sold its dial-up internet access business to
Earthlink for $2.8 million. We recorded a $3.5 million loss related primarily to
the write-off of goodwill, certain equipment leases, and severance costs related
to the discontinuance of this business. The results from this business unit were
recorded in discontinued operations until it was sold.

LIQUIDITY AND CAPITAL RESOURCES.

         In February 2000, we commenced a $9.9 million private placement
consisting of units of common stock and warrants (the "2000 Private Placement").
Each unit is offered at a price of $110,000 and consisted of 10,000 shares of
common stock and three-year warrants to purchase 2,500 shares of common stock at
a price of $13.75 per share. The Company raised approximately $7.0 million. In
connection with this 2000 private placement we issued 684,545 shares of our
common stock at a price of $11 per share.

         In the second and third quarters of 2000, some of the 2000 Private
Placement proceeds were used to pay off the DFI line of credit totaling $3.4
million.

         On July 30, 2000, the Company entered into an Agreement and Plan of
Reorganization with Infonautics, Inc. and First Venue Ventures, Inc. In November
2000, due to the decline in the market relating to incubator companies, the
Reorganization Agreement with Infonautics and First Avenue Ventures was
terminated by all parties.

         In the third quarter, the Company sold its dial-up internet access
business to Earthlink for $2.8 million. These proceeds were used to fund the
loss of $3.5 million recorded on the sale of the business as well as its
operating losses.

         In November 2000, the Company executed a term sheet relating to a $4
million accounts receivable factoring credit line. During the first quarter of
2001, this credit line agreement was not executed as the Company determined it
needed to raise equity rather than debt to finance its operating cash
requirements.

         The Board of Directors approved a $3 million to $4 million private
placement in March 2001 (2001 Private Placement). During March, the Company had
raised $2 million of the total placement when it was discovered that a




                                      -15-
<PAGE>   17

former employee from the Cedar Knolls office had misappropriated some monies.
The Board of Directors appointed two board members to head up the investigation
into this misappropriation of funds and an independent forensic auditing firm
was hired. See the "Overview" discussion above for further details. The 2001
Private Placement was terminated due to this investigation. The investigation
has been completed and the amounts are not material to the financial statements.
The Company has insurance that will cover all of the funds that were
misappropriated less the funds directly recovered.

         In April 2001, the Company received $200,000 of cash from the sale of
its web hosting and non-dial-up division. This was used to fund operations.

         The net cash used in operating activities remained approximately the
same from $6,893,000 in 1999 compared to $6,837,000 in 2000. The net cash used
in operating activities decreased from $7,851,000 reported for the nine month
ended September 30, 2000 to $6,837,000 reported for the year-end December 31,
2000. The reason for this decrease in cash used in operations was the decrease
in accounts receivable due to an early payment for services of approximately
$0.8 million at year-end.

         Net cash provided by investing activities was $2.3 million in 2000 of
which $2.8 million was received from the sale of the Company's dial-up internet
access businesses which was offset by $0.6 million of capital expenditures. This
compares to net cash used in investing activities of $1.3 million in 1999. This
was comprised of $1.8 million invested in various acquisitions during 1999, $0.8
million received from the sale of the dial-up internet access business based in
Alabama and $0.3 million of capital expenditures.

         Financing activities provided cash and cash equivalents of $3.2 million
in 2000 compared to $5.6 million in 1999. In 2000, the net proceeds from our
2000 Private Placement totaled $7.0 million. This was offset by $3.6 million
spent to repay debt obligations. In 1999, the net proceeds from private
placements of common stock totaled $5.0 million, from warrants totaled $0.7
million and from notes payable, net of repayments totaled $0.2 million. This was
offset by distributions to owners of Spencer and Spectrum totaling $0.3 million.

         Our working capital at December 31, 2000 was $(0.8) million. With the
April 2001 restructuring, the Company believes it has taken the steps necessary
to become cash flow positive from its continuing operations during the second
half of 2001. Currently the Company is funding its cash needs through $200,000
received from the sale of the web hosting and non-dial-up business, $150,000
received from the former employee who misappropriated funds from the Company,
consistent collections of accounts receivable, curtailment of payments of
certain debts associated with discontinued business units, restructuring efforts
and the termination of the Infonautics Merger and continued improvements in the
operational performance of our ongoing business lines. The improved performance
of our continuing operations is primarily due to the restructurings that the
Company did in fourth quarter 2000 and April 2001. This included reduction of
personnel, closing of offices, moving the administrative headquarters to Tampa
and focusing on our profitable ongoing business units.

         However, the Company received a going concern audit opinion from its
auditors because of its previous losses and significant liabilities related to
its discontinued business units, restructuring efforts and the termination of
the Infonautics merger. The ability of the Company to continue as a going
concern is dependent upon restructuring certain liabilities and obtaining cash
flow from external sources. In order for the Company to execute its current plan
to raise additional capital, it will have to negotiate with certain creditors to
reduce these liabilities and this process has already begun. If the Company is
successful in obtaining agreements with its creditors to reduce these
liabilities, the Company believes it will be able to raise capital to pay down
the restructured liabilities as well as fund the Company's ongoing capital
needs. If the Company cannot restructure the liabilities related to its
discontinued operations, restructuring and Infonautics merger termination, it
will be required to re-examine its current business and capitalization plans and
may not have sufficient liquidity to service the approximately $4.0 million of
liabilities associated with the discontinued business units, restructuring and
Infonautics Merger termination. No assurance can be given that these liabilities
can be restructured and if additional capital can be raised.





                                      -16-
<PAGE>   18


FLUCTUATIONS IN OPERATING RESULTS

         Our operating results may fluctuate significantly from period to period
as a result of the length of our sales cycle, as well as from client budgeting
cycles, the introduction of new products and services by competitors, the timing
of expenditures, pricing changes in the industry, technical difficulties, and
general economic conditions. Our business is generally subject to lengthy sales
cycles that require the Company to make expenditures and use significant
resources prior to receipt of corresponding revenues.

INFLATION

         Inflation has not had a significant impact on our results of
operations.

RECENT EVENTS

         During April 2001, the Company sold its web hosting and non-dial-up
business to Veraciti, Inc. for $200,000 cash and $60,000 worth of services to
complete certain customer projects. In addition, Veraciti assumed certain lease
obligations of the Company related to the web hosting and non-dial-up business
and subleased 4,000 square feet of the Cedar Knolls, New Jersey office space.

         During April 2001, the Company took additional cost reduction and
restructuring steps to become profitable. It closed its Detroit facility and
reduced its sales and general and administrative management headcount. As a
result, the Company recognized a severance and restructuring expense of $518,000
in April 2001. This is comprised of $339,000 relating to the closing of the
office, $62,000 relating to severance, benefits and entitlements and $117,000 of
other costs.

         On June 7, 2001, IBS was delisted from the NASDAQ SmallCap Market
System primarily due to not being current with the filings of the Company's
periodic reports with the Securities and Exchange Commission. These were not
filed on time primarily due to the investigation into a former New Jersey
controller's misappropriation of funds from the Company. To insure that this was
not a material event, the investigation had to be completed so that the 2000
audit could be finalized. The 10K has been filed and the first quarter 10Q is
anticipated to be filed by June 29, 2001. Upon completion of the 10Q filing, the
Company will be current in its filings. The Company is vigorously appealing the
delisting with the NASDAQ.

CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S FUTURE PERFORMANCE.

LIMITED OPERATING HISTORY.

         We have only been in operation since 1995 and many of our services have
only been offered since 1997 or later. In addition, we have only been a publicly
reporting company since May 1998. Accordingly, we have a limited operating
history on which you may evaluate us. You should consider the risks and
difficulties frequently encountered by early stage companies in new, rapidly
evolving and technology-dependent markets. If we fail to adequately address
these risks, our business will be materially and adversely affected.

PRIOR OPERATING LOSSES; LACK OF PROFITABILITY; FUTURE OPERATING RESULTS.

         We have recently experienced significant losses in our operations. We
may continue to incur losses for the foreseeable future. For the year ended
December 31, 2000 our loss from continuing operations was $13.8 million. Our
expenses may increase as we seek to grow our business and as our business
expands. Even if we become profitable, we may be unable to sustain our
profitability. We may not generate sufficient cash flow from operations or be
able to raise capital in sufficient amounts to enable us to continue to operate
our business. An inability to sustain profitability may also result in an
impairment loss in the value of our long-lived assets, principally goodwill,
property and equipment, and other tangible and intangible assets. If we are
unable to generate sufficient cash flow from operations or raise capital in
sufficient amounts, our business will be materially and adversely affected.





                                      -17-
<PAGE>   19

GOING CONCERN.

         We may be unable to continue as a going concern. We have suffered
recurring losses and negative cash flow from operations. During 2000, we
incurred a loss from continuing operations of $13.8 million, a net loss of $18.1
million and used net cash of $6.8 million in operations. We will need to
restructure certain liabilities associated with our discontinued businesses,
restructurings and Infonautics Merger termination in order to then be able to
get additional equity financing and continue as a going concern. See the
auditor's opinion which includes an emphasis paragraph about our ability to
continue as a going concern in the financial statement section of this report
(Page F-2). We can give you no assurance that we will be able to restructure our
liabilities and that such equity financing will be available to us on
commercially reasonable terms, or at all.

DEPENDENCE ON KEY CUSTOMER; NON-RECURRING REVENUE.

         For the year ended December 31, 2000, our largest client, Aetna
accounted for approximately 20% of our revenues. In December 1998, we entered
into a contractual agreement with Aetna to provide certain IT services. This
contractual agreement expired in December 2000 and we entered into a new
contractual agreement to provide certain IT professional services to Aetna until
December 31, 2001. Non-renewal or termination of our contract with Aetna would
have a material adverse effect on us. Revenues derived from our consulting
contracts are generally non-recurring in nature. There can be no assurance that
we will obtain additional contracts for projects similar in scope to those
previously obtained from Aetna or any other client, that we will be able to
retain existing clients or attract new clients or that we will not remain
largely dependent on a limited client base, which may continue to account for a
substantial portion of our revenues. In addition, we generally will be subject
to delays in client funding; lengthy client review processes for awarding
contracts; non-renewal; delay, termination, reduction or modification of
contracts in the event of changes in client policies or as a result of budgetary
constraints; and increased or unexpected costs resulting in losses in the event
of "fixed-price" contracts.

         Our revenues are difficult to forecast. We may increase our
operating expenses to increase the number of our sales, marketing and technical
personnel to sell, provide and support our products and services. We may not be
able to adjust our spending quickly enough to offset any unexpected revenue
shortfall. In addition, at any given point in time, we may have significant
accounts receivable balances with customers that expose us to credit risks if
such customers are unable to settle such obligations. If we have an unexpected
shortfall in revenues in relation to our expenses, or significant bad debt
experience, our business will be materially and adversely affected.

EMERGING AND EVOLVING MARKETS.

         The markets for some of our services are relatively new and evolving,
and therefore the ultimate level of demand for our services is subject to a high
degree of uncertainty. Any significant decline in demand for programming and
applications development, networking services, IT consulting services could
materially adversely affect our business and prospects.

         Our success is dependent on our ability to continually attract and
retain new clients as well as to replace clients who have not renewed their
contracts. Achieving significant market acceptance will require substantial
efforts and expenditures on our part to create awareness of our services.

LIMITED MARKETING, SERVICE AND SUPPORT CAPABILITIES.

         To effectively market and sell our services, we will need to expand our
client service and support capabilities to satisfy increasingly sophisticated
client requirements. We currently have limited marketing experience and limited
marketing, service, client support and other resources, which may not be
adequate to meet client needs.

COMPETITION.

         Competition for the Internet and IT professional services that we
provide is significant, and we expect that competition will continue to
intensify. We may not have the financial resources, technical expertise, sales
and marketing or support capabilities to successfully meet this competition. If
we are unable to compete successfully against such competitors, our business
will be adversely affected. We compete against numerous large companies that
have substantially greater market presence, longer



                                      -18-
<PAGE>   20

operating histories, more significant customer bases, and financial, technical,
facilities, marketing, capital and other resources than we have.

         Our competitors include national, regional and local IT consulting and
networking service providers, software development firms and major accounting
and consulting firms such as Accenture, iXL Enterprises, Scient, Viant,
Proximcon, Applied Theory Corporation, Interliant, Appnet, and Breakway
Solutions.

         In addition, we also encounter competition from numerous other
businesses that provide one or more similar goods or services, including
numerous resellers of Internet-related hardware and software and Web-site
development companies.

         Our competitors may respond more quickly than we can to new or emerging
technologies and changes in customer requirements. Our competitors may also
devote greater resources than we can to the development, promotion and sale of
their products and services. They may develop Internet products and services
that are superior to or have greater market acceptance than ours. Competitors
may also engage in more extensive research and development, undertake more
extensive marketing campaigns, adopt more aggressive pricing policies and make
more attractive offers to our existing and potential employees and strategic
partners. In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties.

         New competitors, including large computer hardware, software,
professional services and other technology and telecommunications companies, may
enter our markets and rapidly acquire significant market share. As a result of
increased competition and vertical and horizontal integration in the industry,
we could encounter significant pricing pressures. These pricing pressures could
result in significantly lower average selling prices for our products and
services. We may not be able to offset the effects of any price reductions with
an increase in the number of customers, higher revenue from professional
services, cost reductions or otherwise. In addition, professional services
businesses are likely to encounter consolidation in the near future, which could
result in decreased pricing and other competition.

RAPID TECHNOLOGICAL CHANGE.

         The market for Internet and IT professional services has only recently
begun to develop and is rapidly evolving. Significant technological changes
could render our existing products and services obsolete. To be successful, we
must adapt to this rapidly changing market by continually improving the
responsiveness, functionality and features of our products and services to meet
customers' needs. If we are unable to respond to technological advances and
conform to emerging industry standards in a cost-effective and timely basis, our
business will be materially and adversely affected.

SYSTEMS FAILURE RISK.

         Our business depends on the efficient and uninterrupted operation of
our computer and communications hardware systems and infrastructure. We
currently maintain most of our computer systems in our facilities in Tampa,
Florida. While we have taken precautions against systems failure, interruptions
could result from natural disasters as well as power loss, telecommunications
failure and similar events. We also lease telecommunications lines from local
and regional carriers, whose service may be interrupted. Any damage or failure
that interrupts or delays our network operations could materially and adversely
affect our business.

SECURITY ISSUES.

         We have taken measures to protect the integrity of our infrastructure
and the privacy of confidential information. Nonetheless, our infrastructure is
potentially vulnerable to physical or electronic break-ins, viruses or similar
problems. If a person circumvents our security measures, he or she could
jeopardize the security of confidential information stored on our systems,
misappropriate proprietary information or cause interruptions in our operations.
We may be required to make significant additional investments and efforts to
protect against or remedy security breaches. Security breaches that result in
access to confidential information could damage our reputation and expose us to
a risk of loss or liability.




                                      -19-
<PAGE>   21


         The security services that we offer in connection with customers' use
of the networks cannot assure complete protection from computer viruses,
break-ins and other disruptive problems. Although we attempt to limit
contractually our liability in such instances, the occurrence of these problems
may result in claims against us or liability on our part. These claims,
regardless of their ultimate outcome, could result in costly litigation and
could have a material adverse effect on our business and reputation and on our
ability to attract and retain customers.

DEPENDENCE ON HARDWARE AND SOFTWARE SUPPLIERS.

         We rely on outside vendors to supply us with computer hardware,
software and networking equipment. These products are available from only a few
sources. We cannot assure you that we will be able to obtain the products and
services that are needed on a timely basis and at affordable prices.

         We have in the past experienced delays in receiving shipments of
equipment purchased for resale. We may not be able to obtain computer equipment
on the scale, at the times required by us or at an affordable price. Our
suppliers may enter into exclusive arrangements with our competitors or stop
selling their products or services to us at commercially reasonable prices. If
our sole or limited source suppliers do not provide us with products or
services, our business may be materially and adversely affected.

IDENTIFYING SUITABLE ACQUISITION CANDIDATES.

         A key element of our expansion strategy has been to grow through
acquisitions. If we do identify suitable candidates, we may not be able to make
investments or acquisitions on commercially acceptable terms. Acquisitions may
cause a disruption in our ongoing business, distract our management and other
resources and make it difficult to maintain our standards, controls and
procedures. We may not be able to successfully integrate the services, products
and personnel of any acquired business into our operations. We may not be able
to retain key employees of the acquired companies or maintain good relations
with their customers or suppliers. We may be required to incur additional debt,
and we may be required to issue equity securities, which may be dilutive to
existing stockholders, to fund acquisitions.

UNSUCCESSFUL ACQUISITIONS.

         We may acquire and integrate complementary businesses, products,
services or technologies, but we have limited experience in these activities. If
we seek to make investments or acquisitions, it will be subject to the following
risks:

         -    The difficulty of assimilating the operations and personnel of
              acquired companies.

         -    The potential disruption of our business.

         -    The inability of our management to maximize our financial and
              strategic position by the incorporation of an acquired technology
              or business into our service offerings.

         -    The difficulty of maintaining uniform standards, controls,
              procedures and policies.

         -    The potential loss of key employees of acquired businesses, and
              the impairment of relationships with employees and customers as a
              result of changes in management.

         We cannot assure you that any completed acquisition will enhance our
business. If we proceed with one or more significant acquisitions in which the
consideration consists of cash, a substantial portion of our available cash
could be used to consummate the acquisitions. If we were to consummate one or
more acquisitions in which the consideration consisted of stock, our
stockholders could suffer significant dilution of their interest in us. In
addition, we could incur or assume significant amounts of indebtedness in
connection with acquisitions. Acquisitions required to be accounted for under
the purchase method could result in significant goodwill and/or amortization
charges. In addition, an inability to sustain profitability



                                      -20-
<PAGE>   22


may also result in an impairment loss in the value of our long-lived assets,
principally goodwill, property and equipment, and other tangible and intangible
assets.

RETAINING KEY PERSONNEL.

         There is intense competition for qualified personnel in the sectors in
which we operate. The loss of existing personnel or the failure to recruit
additional qualified technical, managerial and sales personnel, as well as
expenses in connection with hiring and retaining personnel, would adversely
affect our business. We also depend on the performance of our executive officers
and key employees, some of whom have not entered into employment agreements with
us.

         As we continue to increase the scope of our operations, our workforce
has grown significantly. As of June 4, 2001, the Company had 158 full-time and
two part-time employees. We will need to attract, train and retain more
employees for management, engineering, programming, sales and marketing, and
customer support technician positions. Competition for qualified employees,
particularly engineers, programmers and technicians, is intense. Consequently,
we may not be successful in attracting, training and retaining the people we
need to continue to offer solutions and services to present and future clients
in a cost effective manner or at all.

 NEED FOR CAPITAL.

         Our future capital uses and requirements will depend on numerous
factors, including:

         -   The extent to which our solutions and services gain market
             acceptance.

         -   The level of revenues from our present and future solutions and
             services.

         -   The expansion of operations.

         -   The costs and timing of product and service developments and sales
             and marketing activities.

         -   Costs related to acquisitions of technology or businesses.

         -   Competitive developments; and

         -   Costs related to downsizing and discontinuation or sale of business
             units.

         In order to continue to increase sales and marketing efforts, continue
to expand and enhance the solutions and services we are able to offer to present
and future clients and fund potential acquisitions, we will require additional
capital that may not be available on terms acceptable to us, or at all. In
addition, if unforeseen difficulties arise in the course of these or other
aspects of our business, we may be required to spend greater-than-anticipated
funds. As a consequence, we will be required to raise additional capital through
public or private equity or debt financings, collaborative relationships, bank
facilities or other arrangements. There can be no assurances that such
additional capital will be available on terms acceptable to us, or at all. Any
additional equity financing is expected to be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants and increased
interest costs. We have financed our operations to date primarily through
private sales of equity securities, proceeds from our initial public offering in
May 1998 and loan facilities.

         We cannot assure you that additional funding will be available for us
to finance our ongoing operations when needed or that adequate funds for our
operations, whether from financial markets, collaborative or other arrangements
with corporate partners or from other sources, will be available when needed, if
at all, or on terms acceptable to us. Our inability to obtain sufficient funds
may require us to delay, scale back or eliminate some or all of our expansion
programs, to limit the marketing of our products, or to license to third parties
the rights to commercialize products or technologies that we would otherwise
seek to develop and market ourselves. This would have a material adverse effect
on our business.



                                      -21-
<PAGE>   23

FLUCTUATION IN QUARTERLY OPERATING RESULTS MAY NEGATIVELY IMPACT OUR STOCK
PRICE.

         Our revenues and operating results vary significantly from quarter to
quarter due to a number of factors, not all of which are in our control. You
should not rely on quarter-to-quarter comparisons of our results of operations
as an indication of future performance. It is possible that in some future
periods our results of operations may be below the expectations of public market
analysts and investors. In that event, the market price of our common stock may
fall.

         Factors that could cause quarterly results to fluctuate include:

         -    Customer demand for products and services.

         -    The timing of the expansion of operations.

         -    Seasonality in revenues, principally during the summer and
              year-end holidays.

         -    The mix of products and services revenues from our operating
              divisions.

         -    Changes in pricing by us or competitors.

         -    The introduction of new products or services by us or competitors.

         -    Costs related to acquisitions of technology or businesses; and

         -    Recession or slow-down in economy.


CHANGES IN GOVERNMENT REGULATIONS.

         There are an increasing number of laws and regulations pertaining to
the Internet. These laws and regulations relate to liability for information
received from or transmitted over the Internet, online content regulation, user
privacy, taxation and quality of products and services. The government may also
seek to regulate some segments of our activities as basic telecommunications
services. Moreover, the applicability to the Internet of existing laws governing
intellectual property ownership and infringement, copyright, trademark, trade
secret, obscenity, libel, employment, personal privacy and other issues is
uncertain and developing. We cannot predict the impact, if any, that future
regulation or regulatory changes may have on our business.

LIMITED INTELLECTUAL PROPERTY PROTECTION.

         We rely on a combination of copyright and trademark laws, trade secrets
laws and license and nondisclosure agreements to protect our proprietary
information, particularly the computer software applications that we have
developed. We currently have no registered copyrights or patents or patent
applications pending. It may be possible for unauthorized third parties to copy
aspects of, or otherwise obtain and use, our proprietary information without
authorization. The majority of our current contracts with our clients contain
provisions granting to the client intellectual property rights to certain of our
work product, including the customized programming that we create for such
client. We anticipate that contracts with future clients will contain similar
provisions. Other existing agreements to which we are a party are, and future
agreements may be, silent as to the ownership of such rights. To the extent that
the ownership of such intellectual property rights is expressly granted to a
client or is ambiguous, our ability to reuse or resell such rights will or may
be limited.

         Our policy is to execute confidentiality agreements with our employees
and consultants upon the commencement of an employment or consulting
relationship with us. These agreements generally require that all confidential
information developed or made known to the individual by us during the course of
the individual's relationship with us be kept confidential and not disclosed to
third parties. These agreements




                                      -22-
<PAGE>   24


also generally provide that inventions conceived by the individual in the course
of rendering services to us shall be our exclusive property. There can be no
assurance that such agreements will not be breached, that we would have adequate
remedies for any breach or that our trade secrets will not otherwise become
known to or be independently developed by competitors.

POTENTIAL LIABILITY TO CLIENTS.

         Our services involve development, implementation and maintenance of
computer systems and computer software that are critical to the operations of
our clients' businesses. Our failure or inability to meet a client's
expectations in the performance of our services could harm our business
reputation or result in a claim for substantial damages against us, regardless
of our responsibility for such failure or inability. In addition, in the course
of performing services, our personnel often gain access to technologies and
content that includes confidential or proprietary client information. Although
we have implemented policies to prevent such client information from being
disclosed to unauthorized parties or used inappropriately, any such unauthorized
disclosure or use could result in a claim for substantial damages. We attempt to
limit contractually our damages arising from negligent acts, errors, mistakes or
omissions in rendering services and, although we maintain general liability
insurance coverage, including coverage for errors and omissions, there can be no
assurance that such coverage will continue to be available on reasonable terms
or will be available in sufficient amounts to cover one or more large claims.
The successful assertion of one or more large claims against us that are
uninsured, exceed available insurance coverage or result in changes to our
insurance policies, including premium increases or the imposition of a large
deductible or co-insurance requirements, would adversely affect us.

LIABILITY FOR MATERIAL DISTRIBUTED OVER THE INTERNET.

         The law relating to the liability of online service providers, private
network operators and Internet service providers for information carried on or
disseminated through their networks is currently unsettled. We may become
subject to legal claims relating to the content in the web sites we host or in
email messages that we transmit. For example, lawsuits may be brought against us
claiming that material inappropriate for viewing by young children can be
accessed from the web sites we host. Claims could also involve matters such as
defamation, invasion of privacy and copyright infringement. Providers of
Internet products and services have been sued in the past, sometimes
successfully, based on the content of material. If we have to take costly
measures to reduce our exposure to these risks, or are required to defend
ourselves against such claims, our business may be materially adversely
affected.

FUTURE SALES OF COMMON STOCK BY EXISTING STOCKHOLDERS.

         The market price of our common stock could decline as a result of sales
by our existing stockholders of a large number of shares of common stock in the
market after this offering, or the perception that these sales may occur. These
sales also might make it more difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate.

         We have granted options to purchase 711,280 shares under our 1998, 1999
and 2000 Stock Option Plans. We have granted 660,000 of nonqualified stock
options during 2000. These were granted to certain management to retain key
personnel during this restructuring and refocusing the Company's strategic
vision to be focused on being an IT professional services firm and sell or shut
down unprofitable units. If the holders of these options were to exercise their
rights and sell the shares issued to them, it could have an adverse effect on
the market price of our common stock.

         In addition, the Company has reserved up to approximately 65,000 shares
for issuance in connection with certain acquisitions (including 50,000 shares to
be reserved in connection with the DFI merger) and has agreed to issue warrants
to purchase up to 667,510 shares in connection with the consulting agreements,
private placement financings, the conversion of the 1999 Debentures and other
agreements. If and when these shares are issued by the Company and sold by the
various holders, sale of these shares could have an adverse effect on the market
price of our common stock.



                                      -23-
<PAGE>   25


EFFECT OF DELISTING BY THE NASDAQ SMALLCAP MARKET.

         Our common stock was listed on the Nasdaq SmallCap Market. On June 7,
2001, IBS was delisted from the Nasdaq SmallCap market primarily due to not
being current with the filings of the Company's periodic reports with the
Securities and Exchange Commission. The Company has filed its 10K and will file
its 10Q by June 29, 2001. The Company will file an immediate appeal to NASDAQ
regarding this delisting and plans to vigorously seek reinstatement as soon as
possible. We are currently listed on the Boston Exchange Market. The Company
does not know what affect this delisting form the Nasdaq Small Cap Market will
have on its trading. As a result of this delisting, an investor could find it
more difficult to dispose of, or to obtain accurate quotations of the market
value of, our common stock.

         In addition, the trading price of our common stock continues to be
below $5.00 per share, trading in the common stock would also be subject to the
requirements of certain rules promulgated under the Exchange Act, which require
additional disclosure by broker-dealers in connection with any trades involving
a stock defined as a penny stock (generally, any non-Nasdaq equity security that
has a market price of less than $5.00 per share, subject to certain exceptions).
These rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith and impose various sales practice requirements on broker-dealers who
sell penny stocks. For these types of transactions, the broker-dealer must make
a special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to the sale. The
broker-dealer also must disclose the commissions payable to the broker-dealer,
current bid and offer quotations for the penny stock and, if the broker-dealer
is the sole market-maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. This information must be
provided to the customer orally or in writing before or with the written
confirmation of trade sent to the customer. Monthly statements must be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. The additional burdens
imposed upon broker-dealers by such requirements could, in the event our common
stock was deemed to be a penny stock, discourage broker-dealers from effecting
transactions in our common stock which could severely limit the market liquidity
of our common stock and the ability of our stockholders sell our common stock in
the secondary market.

COMMON STOCK VOLATILITY.

         The market price of our common stock has fluctuated in the past and is
likely to continue to be highly volatile and could be subject to wide
fluctuations. In addition, the stock market has experienced extreme price and
volume fluctuations. The market prices of the securities of Internet-related
companies have been especially volatile. Investors may be unable to resell their
shares of our common stock at or above the offering price.

LACK OF DIVIDENDS.

         We have never paid cash dividends on our capital stock and do not
anticipate paying cash dividends in the foreseeable future. Instead, we intend
to retain future earnings for reinvestment in our business.

ANTI-TAKEOVER PROVISIONS.

         Provisions of our Restated Certificate of Incorporation, our Amended
and Restated By-laws, and Delaware law, could make it more difficult for a third
party to acquire us, even if doing so would be beneficial to our stockholders.

ITEM 7.    FINANCIAL STATEMENTS

         Financial Statements are attached hereto following page F-2.

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

         None.




                                      -24-
<PAGE>   26


                                    PART III

ITEM  9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
           COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT


DIRECTORS AND EXECUTIVE OFFICERS

NICHOLAS R. LOGLISCI, JR., 39. Mr. Loglisci, a founder of IBS, has served as our
Chief Executive Officer and as a director since inception in February 1995.
Prior to founding us, Mr. Loglisci headed the New York Metropolitan Area Sales
of Allen Telecom Group. From 1990 to 1994, Mr. Loglisci was employed in a
variety of sales, marketing and management positions with Motorola, Inc. Prior
to his corporate experience, Mr. Loglisci served as an officer in the U.S. Army
from 1985 to 1990. Mr. Loglisci is a graduate of both the U.S. Army's Airborne
and Ranger schools. Mr. Loglisci holds a BS degree in Engineering from the
United States Military Academy and an MBA degree from New York University's
Stern School of Business.

ROY E. CRIPPEN, III, 42. Mr. Crippen became our President in December 2000. He
has been our Chief Operating Officer and a director since March 2000. Prior to
joining us, he was Chief Operating Officer and a director of digital fusion,
inc., an IT consulting and Web programming firm that IBS Interactive acquired in
March 2000. Before co-founding digital fusion in March 1999, Mr., Crippen was
the Executive Vice President and Chairman of PowerCerv Technologies Corporation,
an enterprise resource planning software company. Between 1992 and March 1999,
Mr. Crippen held several positions with PowerCerv, including Executive Vice
President, Chief Operating Officer, Chief Technology Officer, and Vice Chairman.
In 1996, Mr. Crippen was a co-recipient of the Ernst & Young/USA Today/NASDAQ
Florida Entrepreneur of the Year award in the technology division. Mr. Crippen
holds a BS degree in computer engineering from the University of South Florida.

KAREN SURPLUS, 41. Ms. Surplus has served as our Chief Financial Officer since
January 2001. She became our Vice President of Administration in March 2000.
Prior to joining us, she was the Vice President of Finance of digital fusion,
inc. Prior to her position with digital fusion, Ms. Surplus was Chief Accounting
Officer of PowerCerv Corporation, whom she helped take public in 1996. Before
her time at PowerCerv, she spent ten years at Florida Progress Corporation and
its subsidiaries, the last position held being Controller and Assistant
Treasurer with the Financial Services subsidiary. Ms. Surplus spent four years
with Arthur Andersen public accounting firm where she received her Certified
Public Accounting license. Ms. Surplus holds a BA degree in Business from Kansas
State University and an MBA degree from the University of Tampa.

AHMAD AL-KHALED, 34. Mr. Al-Khaled has served as a director since April 2000.
Mr. Al-Khaled has been the Chief Operating Officer of Tekbanc Limited since
March 2000. Mr. Al-Khaled is also the Assistant Deputy Director and head of the
Investment Funds Division at the Kuwait Fund for Arab Economic Development's
Investment Department, which he joined in September 1995. He also serves on the
board of directors of incuVest LLC, a U.K.-based creator and operator of
leading-edge technology companies, Brask Management, a U.K.-based sports
management firm, and Tech Pacific, a Hong Kong-based technology services
company. Mr. Al-Khaled holds a BA degree from California State University.

FRANK R. ALTIERI, JR., 33. Mr. Altieri has served as a director since April
1996. He served as our Chief Information Officer from April 1996 to November
2000. From 1993 to 1996, Mr. Altieri was the President of Interactive Networks,
Inc., an Internet service provider that we acquired in April 1996. From 1989 to
1993, Mr. Altieri served as the Management Information Systems Director for
Nutronic Circuit Co., Inc.

O. G. GREENE, 59. Mr. Greene has served as a director since January 2001. Mr.
Greene has served as the Chief Executive Officer of CareeRx, a provider of
automated solutions to the recruiting and career management industry since
October 1999. From January 1998 to April 1999, Mr. Greene served as the Chief
Executive Officer of Speer Communications (now DSM Networks), a Nashville,
Tennessee based provider of information and media services to the broadcast and
network industries. In 1995, Mr. Greene co-founded Atlanta, Georgia based
GridNet International, a provider of TCP-IP networks to large telecommunications
companies and corporations such as BellSouth, PACBell, and Mindspring, and
served



                                      -25-
<PAGE>   27

as its President and Chief Executive Officer from June 1995 to January 1998.
Prior to Gridnet, Mr. Greene served as Executive Vice President and Chief
Operating Officer of First Financial Management, a provider of payment system
services to the credit card, health care and checking industries. Mr. Greene
also is a past Chief Executive Officer of National Data Corporation (NDC), one
of the largest providers of payment system services to the credit card and
healthcare industries. Prior to his leadership at NDC, Mr. Greene enjoyed a
twenty-five year career at Burroughs Corporation. Mr. Greene also is on the
board of directors of PowerCerv Corporation in Tampa, Florida; The National
Registry Inc. in St. Petersburg, Florida and Auburn University.

BRUCE E. FIKE, 56. Mr. Fike has served as a director since April 2000. Since
1991, Mr. Fike has served as Chairman of Aldenshire Ltd., an investment
corporation. Mr. Fike serves on the Investment Board and as Senior Advisor to
the Chairman of Greystone Capital Group, LLC, a private equity firm, and is a
director of InSITE Services, LLC, and Peachtree Franchise Finance group, LLC.
Mr. Fike is a director of the Center for Puppetry Arts, a not-for-profit
organization. He holds a BS degree in Mathematics and Management Science from
the University of Akron and studied corporate law at the University of Tennessee
College of Law.


ITEM 10.   EXECUTIVE COMPENSATION

         The following table sets forth compensation paid to IBS Interactive's
Chief Executive Officer and its other most highly compensated executive officers
for the three years ended December 31, 2000.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                         Annual Compensation                 Long-Term Compensation
                                                         -------------------                 ----------------------
                                                                             Other                          Securities
                                                                             Annual          Restricted     Underlying
Name and Principal Position        Year        Salary        Bonus       Compensation(1)    Stock Awards     Options
---------------------------        ----        ------        -----       ---------------    ------------     -------
<S>                                <C>        <C>           <C>          <C>                <C>              <C>
Nicholas R. Loglisci, Jr.          2000       $125,294      $     0         $ 7,200            $ 0           50,000
  Chief Executive                  1999       $115,000      $15,000         $ 7,200            $ 0            5,000
  Officer.                         1998       $ 75,133      $     0         $ 5,200            $ 0                0

Roy E. Crippen, III                2000       $ 83,333      $     0         $     0            $ 0          150,000
  President and Chief
  Operating Officer (2)

Frank R. Altieri, Jr.              2000       $114,932      $     0         $ 5,500            $ 0           50,000
  Chief Information                1999       $115,000      $15,000         $ 4,800            $ 0            5,000
  Officer (3)                      1998       $ 75,133      $     0         $ 4,800            $ 0                0

Howard B. Johnson                  2000       $125,294      $     0         $ 6,000            $ 0          150,000
  Former Chief Financial           1999       $ 71,875      $     0         $18,200            $ 0          150,000
  Officer (4)

Karen L. Surplus                   2000       $ 91,667      $     0         $     0            $ 0           65,000
  Chief Financial Officer (5)

</TABLE>

(1)   Represents payment of automobile allowance and, in the case of Mr.
      Johnson, reimbursement of $15,000 in relocation expenses during 1999.
(2)   Mr. Crippen's employment with IBS Interactive commenced on March 1, 2000
      when DFI was acquired.
(3)   Mr. Altieri terminated his employment on November 15, 2000.
(4)   Mr. Johnson's employment with IBS Interactive commenced on May 7, 1999 and
      he terminated his employment with the company on February 1, 2001.
(5)   Ms. Surplus's employment with IBS Interactive commenced on March 1, 2000
      when DFI was acquired.



                                      -26-
<PAGE>   28

         The following table summarizes options granted during the year ended
December 31, 2000, to the executive officers named in the Summary Compensation
Table above.

                        Option Grants In Last Fiscal Year
                               (Individual Grants)

<TABLE>
<CAPTION>

                                 Number of
                                 Securities        Percent of Total Options  Exercise
                             Underlying Options    Granted to Employees in   Price Per
Name                           Granted (1)(2)         Fiscal Year (3)         Share        Expiration Date
----                           --------------         ---------------         -----        ---------------
<S>                           <C>                  <C>                       <C>           <C>
Nicholas R. Loglisci, Jr.          40,000                  3.51%             $ 6.0625         July 6, 2010
                                   10,000                  0.88%             $10.1875       January 13, 2010

Roy E. Crippen III.               150,000                 13.15%             $  10.49        March 1, 2010

Frank R. Altieri, Jr (2)           40,000                  3.51%             $ 6.0625      February 15, 2004
                                   10,000                  0.88%             $10.1875      February 15, 2004

Howard B. Johnson (2)              25,000                  2.19%             $  0.938      February 15, 2004
                                   50,000                  4.38%             $ 6.0625         Expired (2)
                                   75,000                  6.57%             $10.1875         Expired (2)

Karen L. Surplus                   25,000                  2.19%             $  0.938      November 29, 2010
                                   40,000                  3.51%             $  10.49        March 1, 2010
</TABLE>


(1)   The options to purchase an aggregate of 50,000 shares of common stock
      granted to Mr. Loglisci vest over a three-year period at the rate of 33.3%
      on each anniversary of the date of grant. The options granted to Mr.
      Crippen and Ms. Surplus of 150,000 and 40,000 respectively, vest 25% on
      3/1/00 and the remainder vest ratably each month over a 36-month period.
      The option to purchase 25,000 shares of common stock granted to Mrs.
      Surplus vest over a five-year period at the rate of 20% on each
      anniversary of the date of grant.

(2)   Messrs. Altieri and Johnson terminated their employment with the Company.
      As per their termination agreement with the Company, their options
      terminated except for 50,000 options for Mr. Altieri, which expire on
      February 15, 2004 and 25,000 options for Mr. Johnson, which expire on
      February 15, 2004.

(3)   During the year ended December 31, 2000, IBS Interactive granted employees
      options to purchase 1,140,825 shares of common stock under our Stock
      Option Plans.

           Aggregated Option Exercises in Fiscal 2000 and Fiscal 2000
                             Year-End Option Values

       The following table shows the number of shares underlying both
exercisable and unexercisable stock options held by the executive officers named
in the Summary Compensation Table as of the year ended December 31, 2000, and
the values for exercisable and unexercisable options. No options were exercised
during the year ended December 31, 2000 by these executive officers.

<TABLE>
<CAPTION>

                                Number of Securities Underlying              Value of Unexercised
                                     Unexercised Options                     In-The-Money Options
                                      at December 31,2000                   at December 31, 2000 (1)
                                -------------------------------         ------------------------------
Name                              Exercisable     Unexercisable         Exercisable      Unexercisable
----                              -----------     -------------         -----------      -------------
<S>                             <C>               <C>                   <C>              <C>
Nicholas R. Loglisci, Jr...          5,000            50,000                 $0               $0

Roy E. Crippen, III........         65,625            84,375                 $0               $0

Frank R. Altieri, Jr.......         50,000               0                   $0               $0

Howard B. Johnson..........         25,000               0                   $0               $0

Karen L. Surplus...........         17,500            47,500                 $0               $0
</TABLE>



                                      -27-
<PAGE>   29


(1) Options are in-the-money if the market value per share of the shares
    underlying the options is greater than the option exercise price. This
    calculation is based on the fair market value at December 31, 2000 of $0.75
    per share, less the exercise price.

                            COMPENSATION OF DIRECTORS

         Directors who are officers or employees of the Company receive no
additional compensation for service as members of the Board of Directors or
committees thereof. Directors are reimbursed for their reasonable expenses in
connection with attendance at meetings of the Board of Directors. All directors
who are not employees (the "Eligible Directors") may participate (as directors)
in our 2000 Stock Option Plans. Upon the initial election of an Eligible
Director, such director is granted an option to purchase 10,000 shares of common
stock (the "Initial Options"). The Initial Options become exercisable in full on
the first anniversary of the date of grant if such person is then serving as a
director. In addition, immediately after each Annual Meeting of Stockholders,
each Eligible Director reelected will receive an option to purchase 3,000
additional shares of common stock (the "Annual Options"). The Initial Options
and Annual Options have a term of ten years and an exercise price payable in
cash or shares of common stock. The exercise price of Initial Options and Annual
Options will be equal to the fair market value of our common stock on the date
of grant. Eligible Directors will receive such additional compensation for their
service as the Board of Directors may determine from time to time. Two
directors, O.G. Green and Bruce Fike receive $1,000 per Board of Director's
meeting.

         In May 2001, we purchased an aggregate of $3,000,000 of directors and
officers liability insurance for indemnification of all of our directors and
officers at a cost of approximately $70,000.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-OF-CONTROL
ARRANGEMENTS

EMPLOYMENT AGREEMENTS

         In May 1999, we entered into a four-year employment agreement with Mr.
Loglisci, pursuant to which Mr. Loglisci is employed as our Chief Executive
Officer. Mr. Loglisci is entitled to compensation consisting of an annual
base salary in the amount of $115,000. In addition, Mr. Loglisci is entitled
to a base salary increase of 10% per year, a bonus based on the achievement of
certain performance criteria, including our profitability, and a monthly
automobile allowance. In the event that we terminate Mr. Loglisci, without
cause, we will be required to pay to him his annual base salary for a period of
two years after termination and options and restricted stock then held by such
executive will automatically vest. Mr. Loglisci is also subject to certain
non-competition, confidentiality and non-disclosure of invention obligations
pursuant to his employment agreement.

         In March 2000, we entered into a three-year employment agreement with
Mr. Crippen, pursuant to which Mr. Crippen is employed as our Chief Operating
Officer. Mr. Crippen is entitled to compensation consisting of an annual base
salary in the amount of $100,000. In addition, Mr. Crippen is entitled to a
base salary increase of 20% per year, a bonus based on the achievement of
certain performance criteria, including our profitability, and a monthly
automobile allowance. In the event that we terminate Mr. Crippen, without cause,
we will be required to pay to him his annual base salary for a period of two
years after termination and options and restricted stock then held by such
executive will automatically vest. Mr. Crippen is also subject to certain
non-competition, confidentiality and non-disclosure of invention obligations
pursuant to his employment agreement.

         Each of the employment agreements entered into between us and Messrs.
Loglisci and Crippen contains a change of control provision. In each employment
agreement, a change of control (hereinafter, an "Employment Agreement Change of
Control") is defined as either (1) a transaction that results in a person other
than Messrs. Loglisci or Crippen (or any person or entity related to or
controlled by them) becoming the owner of more than 50% of the total aggregate
voting power of our outstanding voting stock; or (2) a period of two consecutive
years, during which individuals who at the beginning of such period constituted
our Board of Directors (together with any new directors whose election by
stockholders was approved by a vote of at least two-thirds of the directors then
still in office who either were directors at the beginning of such period or
whose election or nomination for election was previously so approved) ceasing
for any reason to constitute a majority of the directors than in office unless
such majority of the directors then in office has been elected or nominated for
election by Messrs. Loglisci or Crippen (or any person or entity related to or
controlled by them).


                                      -28-

<PAGE>   30
         The employment agreements of Messrs. Loglisci and Crippen provide that
if, upon an Employment Agreement Change of Control, or at any time within one
year thereafter, the executive is no longer employed by us for any reason other
than for cause or the executive's death, disability or legal incapacity, the
executive shall be entitled to receive a lump sum payment equal to two times the
amount of his annual base salary then in effect plus any other amounts to which
he is entitled under our employee compensation plans and policies as of the date
of termination.

         During 2000, Mr. Johnson was employed as our Chief Financial Officer.
Mr. Johnson tendered his resignation effective February 1, 2001 and his
employment agreement was terminated by mutual agreement of Mr. Johnson and us.
The Company agreed to vest 25,000 of Mr. Johnson's options, which expire on
February 15, 2004.

         During 2000, Mr. Altieri was employed as our Chief Information Officer.
Mr. Altieri resigned from the Company effective November 15, 2000 and his
employment agreement was terminated by an Employment Termination Agreement. The
Company agreed to vest 50,000 of Mr. Altieri's options, which expire on February
15, 2004.

         Mr. Brenner was our Chief Operating Officer through May 2000. Mr.
Brenner's employment agreement was terminated by a termination agreement
effective May 31, 2000. Mr. Brenner and the Company agreed that Mr. Brenner
would receive seven monthly payments of $12,853.81 for certain consulting
services. Mr Brenner's family medical and dental coverage would continue through
December 31, 2001, he would be granted an additional 25,000 options and all
options including the additional 25,000 which totals 122,500 would be completely
vested and remain exercisable until May 31, 2005. Mr. Brenner has been paid five
of the monthly payments and the other two are being held due to a disagreement
between Mr. Brenner and the Company.

1998, 1999 AND 2000 STOCK OPTION PLANS

         Effective as of March 10, 1998, we adopted the 1998 IBS Interactive,
Inc. Stock Option Plan (the "1998 Stock Option Plan") and effective as of May 7,
1999 we adopted the 1999 IBS Interactive, Inc. Stock Option Plan (the "1999
Stock Option Plan"). Effective as of June 9, 2000, we adopted the 2000 IBS
Interactive, Inc. Stock Option Plan (the "2000 Stock Option Plan"). Stock
options granted under the 1998 Stock Option Plan, the 1999 Stock Option Plan and
the 2000 Stock Option Plan become exercisable in certain situations, including
termination of employment without cause, after a change of control as defined in
each of the 1998 Stock Option Plan, 1999 Stock Option Plan and 2000 Stock Option
Plan (a "Stock Option Change of Control").

         A Stock Option Change of Control is deemed to occur if any of the
following events occur:

                  (i) Any "person" or "group" within the meaning of Sections
         13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended
         (the "Exchange Act"), (a) becomes the "beneficial owner," as defined in
         Rule 13d-3 under the Exchange Act, of 50% or more of the combined
         voting power of IBS Interactive's then outstanding securities,
         otherwise than through a transaction or series of related transactions
         arranged by, or consummated with the prior approval of, the Board of
         Directors of IBS Interactive; or (b) acquires by proxy or otherwise the
         right to vote 50% or more of the then outstanding voting securities of
         IBS Interactive, otherwise than through an arrangement or arrangements
         consummated with the prior approval of the Board for the election of
         directors, for any merger or consolidation of IBS Interactive or for
         any other matter or question.

                  (ii) During any period of 24 consecutive months, Present
         Directors and/or New Directors (each as defined in the 1998, 1999 or
         2000 Stock Options Plan) cease for any reason to constitute a majority
         of the Board.

                  (iii) Consummation of (a) any consolidation or merger of IBS
         Interactive occurs in which IBS Interactive is not the continuing or
         surviving corporation or pursuant to which shares of our stock would be
         converted into cash, securities or other property, other than a merger
         of IBS Interactive in which the holders of IBS Interactive's stock
         immediately prior to the merger have the same proportion and ownership
         of common stock of the surviving corporation immediately after the
         merger; or (b) any sale, lease, exchange or other transfer (in one
         transaction or a series of related transactions) of all, or
         substantially all, of the assets of IBS Interactive occurs.



                                      -29-
<PAGE>   31




ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information regarding the
beneficial ownership of our common stock as of December 31, 2000 by: (i) each
person or entity who is known by IBS Interactive to own beneficially 5% or more
of the outstanding shares of common stock, (ii) each of the executive officers
named in the Summary Compensation Table above, (iii) each director, and (iv) all
of our executive officers and directors as a group.

<TABLE>
<CAPTION>
                                                                  Amount and Nature
                                                                    of Beneficial     Percentage of
Name and Address of Beneficial Owner(13)                             Ownership(1)       Class(2)
                                                                     -------------      --------
<S>                                                                <C>                <C>
Nicholas R. Loglisci, Jr.(3)  .....................................     388,091           5.7%
Roy Crippen III(4).................................................     565,721           8.3%
Karen L. Surplus (5)...............................................      18,000              *
Susan Holloway Torricelli(6).......................................      15,000              *
Frank R. Altieri, Jr.(7)...........................................     423,435           6.2%
Ahmed Al-Khaled(8).................................................      60,000              *
Bruce Fike.........................................................           0              *
O. G. Greene.......................................................           0              *
Tekbanc Limited(9).................................................     643,181           9.2%
Clark and Carla Frederick(10)(11)..................................     380,735           5.6%
Sean Mann(12)......................................................     329,013           4.8%
All executive officers and directors as a group (8 persons)........   1,473,247          21.1%
</TABLE>

-----------

*     Indicates beneficial ownership of less than one percent of the total
      outstanding common stock.
(1)   Beneficial ownership is determined in accordance with the rules of the
      Securities and Exchange Commission. In computing the number of shares
      beneficially owned by a person and the percentage ownership of that
      person, shares of common stock subject to options and warrants held by
      that person that are currently exercisable or are exercisable within 60
      days of December 31, 2000 are deemed outstanding. Such shares, however,
      are not deemed outstanding for the purpose of computing the percentage
      ownership of any other person. Except as indicated in the footnotes to
      this table, the stockholder named in the table has sole voting and
      investment power with respect to the shares set forth opposite such
      stockholder's name
(2)   6,787,129 shares of common stock are outstanding as of April 17, 2001.
(3)   Includes 5,000 shares of common stock Mr. Loglisci has the right to
      acquire through the exercise of stock options.
(4)   Includes 65,625 shares of common stock Mr. Crippen has the right to
      acquire through the exercise of stock options.
(5)   Includes 17,500 shares of common stock Ms. Surplus has the right to
      acquire through the exercise of stock options.
(6)   Includes 10,000 shares of common stock Ms.Torricelli has the right to
      acquire through the exercise of stock options.
(7)   Includes 50,000 shares of common stock Mr. Altieri has the right to
      acquire through the exercise of stock options.
(8)   Includes 60,000 shares of common stock Mr.Al-Khaled has the right to
      acquire through the exercise of warrants.
(9)   Includes 188,636 shares of common stock that Tekbanc Limited has the right
      to acquire through the exercise of warrants.
(10)  Mr. Frederick and Carla Frederick own these shares as joint tenants.
(11)  Includes 15,000 shares of common stock that Mr. Frederick has the right to
      acquire through the exercise of stock options.
(12)  Includes 45,938 shares of common stock that Mr. Mann has the right to
      acquire through the exercise of stock options.
(13)  Unless otherwise indicated, the address of each beneficial owner is 400 N.
      Ashley, Suite 2600, Tampa, FL 33602.



                                      -30-
<PAGE>   32

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         In September and October 1999, Mr. Stephen Loglisci, the brother of
Nicholas R. Loglisci, Jr., the President, Chief Executive Officer and Chairman
of the Company, purchased $300,000 in convertible debentures issued by the
Company (the "1999 Convertible Debentures"). The 1999 Convertible Debentures
paid an interest rate of 12% per year and were convertible into a subsequent
equity offering by the Company with proceeds of at least $3 million. The 1999
Convertible Debentures were converted in December 1999 in connection with a $4.8
million private placement of units consisting of common stock and warrants
offered by the Company (including $600,000 of proceeds from the conversion of
the 1999 Convertible Debentures). In connection with the conversion, Mr. Stephen
Loglisci received three units consisting of an aggregate 30,000 shares of common
stock and warrants to purchase 7,500 shares of common stock at $12.50 per share.
In addition, Mr. Stephen Loglisci received warrants to purchase an additional
6,840 shares at $12.50 per share.

         In April 2000, Tekbanc purchased $5 million in equity securities issued
by the Company in 45.45 units consisting of 454,545 shares of common stock at a
price of $11.00 per share and three-year warrants to purchase 13,636 shares of
common stock at $13.75 per share. Ahmed Al-Khaled, Chief Operating Officer of
Tekbanc joined the Board of Directors of the Company in April 2000 and received
thee-year warrants to purchase 60,000 shares of common stock at $13.75 per
share. Mr. Al-Khaled was named to the Executive Committee of the Board of
Directors of the Company in April 2000. Tekbanc has the right to purchase an
additional 45.45 units consisting of 454,545 shares of common stock at a price
of $11.00 per share and three-year warrants to purchase 113,636 shares of common
stock at an exercise price of $13.75 per share. Tekbanc's right to purchase
these shares and warrants expires on August 1, 2000.

         In September 2000, the Company purchased the original equipment
manufacturing rights to a financial accounting software package developed by
PowerCerv Technologies Corporation ("PowerCerv"). The purchase price was
$350,000, which approximates fair market value, of which $140,000 was paid in
the third quarter of 2000, $105,000 was paid on December 31, 2000 and
$105,000 will be paid in 2001. Roy Crippen, III, the Company's President and
"Chief Operating Officer, is a member of the Board of Directors of PowerCerv.

         On October 13, 2000, the Company entered into a consulting services
agreement with PowerCerv. The Company will provide consulting services to
PowerCerv at $130 per hour for a total of $350,000. PowerCerv paid IBS a
$150,000 deposit, the next $50,000 is to be paid by PowerCerv and the remaining
$150,000 of services will be offset by reducing the PowerCerv Note discussed in
the Notes to Consolidated Financial Statements Note 6(a). The total amount of
this agreement is due and payable in 2001 and all unused paid services must be
used by December 31, 2001.

         During April 2001, the Company sold its web hosting and non-dial-up
business to Veraciti, Inc. for $200,000 cash and $60,000 worth of services to
complete certain customer projects. In addition, Veraciti assumed certain leases
obligations of the Company related to the web hosting and non-dial-up business
and subleased 4,000 square feet of the Cedar Knolls office space. The Company
recorded a $211,000 loss related to this sale. Veraciti is owned by Frank
Altieri, a current member of the Board of Directors of IBS.

ITEM 13.   EXHIBITS LIST AND REPORTS ON FORM 8-K

(a)      Exhibits

         The following is a list of Exhibits filed as a part of this Report.

<TABLE>
<CAPTION>

Exhibit No.                         Description
-----------                         -----------
<S>         <C>
   *3.1     Restated Certificate of Incorporation of the Company (filed as
            Exhibit 3.1 to our Registration Statement on Form SB-2, File No.
            333-47741, filed on April 23, 1998 (the "Registration Statement")).
   *3.2     Amended and Restated By-Laws of the Company (filed as Exhibit 3.2 to
            our Quarterly Report on Form 10-QSB for the quarter ended September
            30, 1999).
    4.1     See Exhibit numbers 3.1 and 3.2 for provisions of the Restated
            Certificate of Incorporation and Restated By-Laws of the Company, as
            amended, defining the rights of the holders of common stock.

   *4.2     Specimen form of certificate evidencing the shares of common stock
            of the Company (filed as Exhibit 4.1 to our Registration Statement).

  *10.1     Form of Registration Rights Agreement, dated as of May 6, 1997,
            between the Company and the holders of certain shares of common
            stock (filed as Exhibit 10.2 to our Registration Statement).

  *10.2     Form of Warrant to Purchase Shares of Stock, dated as of October 31,
            1997 (filed as Exhibit 10.4 to our Registration Statement).
</TABLE>



                                      -31-
<PAGE>   33


<TABLE>

<S>         <C>
  *10.3     Employment Agreement, dated as of May 3, 1999, by and between IBS
            and Nicholas R. Loglisci, Jr. (filed as Exhibit 10.1 to our
            Quarterly Report on form 10-QSB for the quarter ended June 30,
            1999).+
  *10.4     Employment Agreement, dated as of May 3, 1999, by and between IBS
            and Frank R. Altieri, Jr. (filed as Exhibit 10.3 to our Quarterly
            Report on form 10-QSB for the quarter ended June 30, 1999).+
  *10.5     Employment Agreement, dated as of May 3, 1999, by and between IBS
            and Jeffrey E. Brenner (filed as Exhibit 10.4 to our Quarterly
            Report on form 10-QSB for the quarter ended June 30, 1999).+
  *10.6     Employment Agreement, dated as of May 7, 1999, by and between IBS
            and Howard Johnson (filed as Exhibit 10.6 to our Annual Report on
            form 10-KSB for the fiscal year ended December 31, 1999).+
  *10.7     Stock Purchase Agreement, dated as of January 31, 1998, between the
            Company and Entelechy, Inc. and the stockholders of Entelechy, Inc.
            named therein (filed as Exhibit 10.12 to our Registration
            Statement).
  *10.8     Membership Interest Purchase Agreement, dated September 24, 1998, by
            and among the Company and Peter Bowman, Lawrence Rafkin, Robert
            Gillespie, Steven Rotella, Steven Swartz, Joseph Calabro, Febe
            Dwyer, Barbara Glass-Seran, Clifford Seran, Stanley Lerner, Annette
            Monti, Christina Monti, Jack Monti, Rogelio Valencia, Linda Valencia
            and Phyllis Wood (filed as Exhibit 2.1 to our Report on Form 8-K,
            filed on October 9, 1998).
  *10.9     Membership Interest Acquisition Agreement dated December 10, 1998,
            by and among the Company, Carl Broadbent, Keith Lowy, Stephen Lowy
            and Halo Network Management, LLC (filed as Exhibit 2.1 to our Report
            on Form 8-K, filed on December 22, 1998).
  *10.10    IBS Interactive, Inc. 1998 Stock Option Plan (filed as Exhibit
            10.14 to our Registration Statement).+
  *10.11    IBS Interactive, Inc. 1999 Stock Option Plan (filed as part of our
            Proxy Statement for the Annual Meeting of Stockholders held on June
            4, 1999).+
  *10.12    Second Lease Modification Agreement, dated as of March 3, 1998, by
            and among the Company and EI Realty, 2 Ridgedale Avenue, Inc. and
            Hanover Park for Industry, in connection with our premises in Cedar
            Knolls, New Jersey (filed as Exhibit 10.17 to our Registration
            Statement).
  *10.13    Letter Agreement, dated as of October 21, 1997, between the Company
            and EI Realty in connection with our premises in Cedar Knolls, New
            Jersey (filed as Exhibit 10.18 to our Registration Statement).
  *10.14    Lease Agreement, dated as of May 1, 1997, by and between the
            Company and Iron Investment Corp. and Hanover Park for Industry, in
            connection with our premises in Cedar Knolls, New Jersey (filed as
            Exhibit 10.19 to our Registration Statement).
  *10.15    Network Services Contract, dated as of December 27, 1996, between
            the Company and the Catholic Healthcare Network (filed as Exhibit
            10.20 to our Registration Statement).
  *10.16    Professional Service Agreement Consulting, dated as of October 23,
            1997, between Aetna Life Insurance Company and the Company (filed as
            Exhibit 10.21 to our Registration Statement).
  *10.17    Lease Agreement, dated as of January 31, 1998, between the Company
            and R&G International, in connection with our premises in
            Huntsville, Alabama (filed as Exhibit 10.22 to our Registration
            Statement).
  *10.18    Loan Agreement, dated October 30, 1998, by and between the Company
            and First Union National Bank (filed as Exhibit 10.18 to our Annual
            Report on Form 10-KSB for the fiscal year ended December 31, 1998).
  *10.19    IBS Interactive, Inc. Deferred Compensation Plan, effective May 1,
            1999 (filed as Exhibit 10.5 to our Quarterly Report on Form 10-QSB
            for the quarter ended June 30, 1999). +
  *10.20    Amendment 1 to IBS Interactive, Inc. Deferred Compensation Plan,
            effective August 1, 1999 (filed as Exhibit 10.1 to our Quarterly
            Report on Form 10-QSB for the quarter ended September 30, 1999). +
  *10.21    Exchange Agreement, dated as of March 31, 1999, by and among IBS,
            Dan E. Spencer, Raymond Deep, Michael Bayless, Michael Ivy, Billy
            Lenox and Spectrum Information Services, Inc. (filed as Exhibit 2.1
            to our Report on Form 8-K filed on April 15, 1999).
  *10.22    Agreement and Plan of Merger dated as of June 30, 1999, among
            Arnold Schron, Spencer Analysis, Inc., IBS and SAI Acquisition Corp.
            (filed as Exhibit 2.1 to our Report on Form 8-K, filed on July 15,
            1999).

</TABLE>



                                      -32-
<PAGE>   34

<TABLE>

<S>         <C>
*10.23    Agreement and Plan of Merger dated as of February 10, 2000, among
          Sean D. Mann, Roy E. Crippen III, Michael E. Mandt, Ali A. Husain,
          Robert E. Siegmann, digital infusion, inc., IBS, and Digital Fusion
          Acquisition Corp. (filed as Exhibit 2.1 to our Report on 8-K, filed
          March 24, 2000).
*10.24    Employment Agreement dated as of March 1, 2000 by and between IBS
          and Roy E. Crippen, III (filed as Exhibit 10.24 to our Annual Report
          on Form 10-KSB for the fiscal year ended December 31, 1999).+
*10.25    Employment Agreement dated as of March 1, 2000 by and between IBS
          and Sean D. Mann (filed as Exhibit 10.25 to our Annual Report on
          Form 10-KSB for the fiscal year ended December 31, 1999).+
*10.26    IBS Interactive, Inc. 2000 Stock Option Plan (filed as part of our
          Proxy Statement for the Annual Meeting of Stockholders held June 9,
          2000).
**10.27   Professional Service Agreement Consulting, dated as of December 15,
          2000, between Aetna Life Insurance Company and the Company which
          amended the initial Agreement dated October 23, 1997.
**21.1    Subsidiaries of the Company.
**23.1    Consent of BDO Seidman, LLP
**24.1    Power of Attorney (appears on signature page).
</TABLE>

-------------
*   Incorporated by reference.
**  Filed herewith.
+   Management contract or compensatory plan or arrangement.

(b)      Reports on Form 8-K


         On March 24, 2000, the Company filed a Report with the SEC on Form 8-K
under Item 2, to report that it had entered into an Agreement and Plan of Merger
with Sean D. Mann, Roy E. Crippen III, Michael E. Mandt, Ali A. Husain, Robert
E. Siegmann, DFI, a Florida corporation, and Digital Fusion Acquisition Corp., a
Delaware corporation and a wholly owned subsidiary of IBS (DFAC). Pursuant to
the terms of this agreement, DFI merged with DFAC and became the surviving
entity. In exchange for all of the issued and outstanding shares of DFI, IBS
issued 925,000 shares of its Common Stock, par value $.01 per share, and
reserved an additional 50,000 shares of Common Stock for potential later
issuance. DFI provides e-Business services and is based in Tampa, Florida.

         On May 16, 2000, the Company filed an amended Current Report on Form
8-K/A, amending the Current Report on Form 8-K filed March 24, 2000, to include
the financial statements required pursuant to Items 7(a) and (b) with respect to
the Item 2 event reported on such form 8-K.

         On August 8, 2000, the Company filed a Current Report on Form 8-K
reporting in Item 5 thereof the execution of the Reorganization Agreement by and
among the Company, Infonautics and First Avenue Ventures. The Reorganization
Agreement provided for a business combination to be accomplished by the
formation of a holding company and the merger of subsidiaries of the holding
company with and into the Company, Infonautics and First Avenue Ventures so
that, after completion of the business combination, the Company, Infonautics and
First Avenue Ventures would be wholly-owned subsidiaries of a new holding
company named Digital Fusion, Inc.

         On August 8, 2000, the Company filed a Current Report on Form 8-K
reporting in Item 5 thereof the sale of the Company's dial-up internet access
business to Earthlink.



                                      -33-
<PAGE>   35


SIGNATURES

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

                                              IBS INTERACTIVE, INC.




Dated:  June 15, 2001                         By:  /s/ Nicholas R. Loglisci, Jr.
                                                  ------------------------------
                                                  Nicholas R. Loglisci, Jr.

                                                  Chief Executive Officer

                                                  (Principal Executive Officer)


         KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints both Nicholas R. Loglisci, Jr. and Roy E.
Crippen, III. his true and lawful attorney-in-fact and agent, with full power of
substitution and re-substitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-KSB, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or their or his substitutes
or substitute, may lawfully do or cause to be done by virtue hereof.



                                      -34-

<PAGE>   36


         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
indicated on the 15th day of June 2001.

<TABLE>
<CAPTION>

         Signature                                 Title(s)
         ---------                                 --------

<S>                                      <C>

/s/ Nicholas R. Loglisci, Jr.            Chief Executive Officer and Director
------------------------------------     (Principal Executive Officer)
Nicholas R. Loglisci, Jr.



/s/Roy E. Crippen III                    Chief Operating Officer and Director
------------------------------------
Roy E. Crippen III



/s/ Karen L. Surplus                     Chief Financial Officer
------------------------------------     (Principal Financial and Accounting Officer)
Karen L. Surplus



/s/ Ahmad Al-Khaled                      Director
------------------------------------
Ahmad Al-Khaled



/s/ Frank R. Altieri, Jr.                Director
------------------------------------
Frank R. Altieri, Jr.




/s/ Bruce E. Fike                        Director
------------------------------------
Bruce E. Fike



/s/ O.G. Greene                          Director
------------------------------------
O.G. Greene

</TABLE>


                                      -35-
<PAGE>   37



FINANCIAL STATEMENTS AND EXHIBITS

The following are the consolidated financial statements and exhibits of IBS
Interactive, Inc. and Subsidiaries, which are filed as part of this report.

<TABLE>
<CAPTION>

                                                                          PAGE
                                                                          ----
<S>                                                                       <C>

Report of Independent Certified Public Accountants........................ F-2

Consolidated Balance Sheets as of December 31, 2000 and 1999.............. F-3

Consolidated Statements of Operations for the years ended
      December 31, 2000 and 1999.......................................... F-4

Consolidated Statements of Stockholders' Equity for the years
      ended December 31, 1999 and 2000.................................... F-5

Consolidated Statements of Cash Flows for the years
      ended December 31, 2000 and 1999.................................... F-6

Notes to Consolidated Financial Statements................................ F-7
</TABLE>






                                      F-1
<PAGE>   38



               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board Of Directors and Stockholders
IBS Interactive, Inc.
Cedar Knolls, New Jersey

We have audited the accompanying consolidated balance sheets of IBS Interactive,
Inc. and Subsidiaries as of December 31, 2000 and 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of IBS Interactive,
Inc. and Subsidiaries as of December 31, 2000 and 1999 and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has incurred significant losses for the years ended
December 31, 2000 and 1999 and its ability to continue as a going concern is
contingent upon its ability to raise additional funds and restructure its
liabilities. These factors 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 that might result from the outcome of this uncertainty.

BDO Seidman, LLP

Woodbridge, New Jersey
May 30, 2001, except for Note 18(c)
for which the date is June 15, 2001



                                      F-2

<PAGE>   39

                             IBS INTERACTIVE, INC.
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2000 AND 1999
<TABLE>
<CAPTION>

                                                                     2000                1999
                                                                     ----                ----
 <S>                                                             <C>                <C>
                     ASSETS
 Current Assets:
     Cash and cash equivalents                                   $  1,557,000       $  2,892,000
     Accounts receivable (net of allowance for doubtful
       accounts of $1,000,000 in 2000 and $261,000 in 1999)         3,802,000          4,117,000
     Prepaid income taxes                                              86,000            164,000
     Prepaid expenses and other current assets                        185,000            279,000
                                                                 ------------       ------------
          Total current assets                                      5,630,000          7,452,000
 Property and equipment, net                                        1,424,000          1,012,000
 Intangible assets, net                                            14,819,000          4,794,000
 Other assets                                                         136,000            217,000
                                                                 ------------       ------------
          Total Assets                                           $ 22,009,000       $ 13,475,000
                                                                 ============       ============

     LIABILITIES AND STOCKHOLDERS' EQUITY

 Current Liabilities:
    Current maturities of long-term debt                         $    210,000       $    130,000
    Accounts payable                                                  622,000            527,000
    Deferred revenue                                                  213,000            102,000
    Accrued salaries and related expenses                             420,000                 --
    Accrued professional fees                                         857,000            164,000
    Accrued liabilities on sale of discontinued operations          1,769,000                 --
    Accrued severance and restructuring expenses                    1,375,000                 --
    Customer deposits                                                 333,000             25,000
    Other current liabilities                                         608,000            210,000
                                                                 ------------       ------------
         Total current liabilities                                  6,407,000          1,158,000

Long-term debt, less current maturities                             1,083,000            142,000
Pension obligation                                                    148,000            267,000
Deferred compensation                                                      --            590,000
Acquisition liabilities                                               945,000            546,000
                                                                 ------------       ------------
          Total liabilities                                         8,583,000          2,703,000
                                                                 ------------       ------------

 Commitments and contingencies

 Stockholders' Equity:
     Preferred Stock - $.01 par value; authorized
        1,000,000 shares, no shares issued and outstanding                 --                 --
     Common Stock - $.01 par value; authorized
        11,000,000 shares, issued and outstanding
        6,787,129 - 2000 and 5,025,532 shares - 1999                   68,000             50,000
     Additional paid in capital                                    38,883,000         18,185,000
     Accumulated deficit                                          (25,525,000)        (7,463,000)
                                                                 ------------       ------------
          Total Stockholders' Equity                               13,426,000         10,772,000
                                                                 ------------       ------------
          Total Liabilities and Stockholders' Equity             $ 22,009,000       $ 13,475,000
                                                                 ============       ============

</TABLE>

          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                      F-3
<PAGE>   40
                              IBS INTERACTIVE, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999

<TABLE>
<CAPTION>
                                                   2000            1999
                                               ------------    ------------
<S>                                            <C>             <C>
Revenues                                       $ 23,363,000    $ 15,294,000
Cost of services                                 17,671,000      11,307,000
                                               ------------    ------------
        Gross profit                              5,692,000       3,987,000

Operating expenses:
  Selling, general and administrative            12,445,000       7,782,000
  Amortization of intangible assets               3,160,000         130,000
  Non-cash compensation expenses                    244,000         332,000
  Severance and restructuring                     2,760,000              --
  Merger related expenses                           750,000         232,000
                                               ------------    ------------
        Total operating expenses                 19,359,000       8,476,000
                                               ------------    ------------
        Operating loss                          (13,667,000)     (4,489,000)
Other income (expense):
  Interest expense                                 (296,000)        (81,000)
  Interest income                                   184,000         116,000
  Loss on disposal of assets                             --        (350,000)
  Other income (expense), net                       (11,000)        (26,000)
                                               ------------    ------------
        Total other income (expense)               (123,000)       (341,000)
                                               ------------    ------------
        Loss before income taxes                (13,790,000)     (4,830,000)

Income tax provision                                     --         (45,000)
                                               ------------    ------------
        Loss from continuing operations         (13,790,000)     (4,875,000)
                                               ------------    ------------
Discontinued operations                            (798,000)     (1,363,000)
Loss on disposal of discontinued operations      (3,474,000)             --
                                               ------------    ------------
        Net loss                               $(18,062,000)   $ (6,238,000)
                                               ============    ============
Loss per share from continuing operations:
  Basic and diluted                            $      (2.16)   $      (1.13)
                                               ============    ============
Loss per share from discontinued operations:
  Basic and diluted                            $      (0.67)   $      (0.32)
                                               ============    ============
Loss per share from operations:
  Basic and diluted                            $      (2.83)   $      (1.45)
                                               ============    ============
Weighted average common stock outstanding
    Basic and diluted                             6,374,805       4,310,458
                                               ============    ============
</TABLE>


          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.






                                      F-4
<PAGE>   41

                              IBS INTERACTIVE, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 1999 AND 2000


<TABLE>
<CAPTION>
                                             Common stock
                                         -------------------   Additional
                                          No. of                 Paid-in     Accumulated     Stockholders'
                                          shares      Amount     Capital       Deficit          Equity
---------------------------------------------------------------------------------------------------------
<S>                                      <C>         <C>       <C>           <C>             <C>
Balance, January 1, 1999                 4,002,541   $39,000   $ 9,280,000   $   (896,000)   $  8,423,000
Shares issued in connection with
  acquisition                              138,045     2,000     2,216,000             --       2,218,000
Shares issued upon conversion of debt       60,000     1,000       599,000             --         600,000
Shares issued in connection with
  private placements, net of expenses      520,000     5,000     5,021,000             --       5,026,000
Distribution to Spectrum & Spencer
  shareholders                                  --        --            --       (329,000)       (329,000)
Issuance and amortization of
  directors' options                            --        --        59,000             --          59,000
Issuance and amortization of options
  and warrants                             136,656     1,000       657,000             --         658,000
Interest expense for warrants in
  connection with debt offering                 --        --        43,000             --          43,000
Additional shares issued in connection
  with acquisitions                        163,290     2,000       310,000             --         312,000
Net loss                                        --        --            --     (6,238,000)     (6,238,000)
---------------------------------------------------------------------------------------------------------
Balance, December 31, 1999               5,020,532    50,000    18,185,000     (7,463,000)     10,772,000
Shares issued in connection with
  acquisition                              925,000     9,000    12,749,000             --      12,758,000
Shares issued in connection with
  private placement                        684,545     7,000     6,944,000             --       6,951,000
Additional shares issued in connection
  with acquisitions                        124,352     2,000       531,000             --         533,000
Shares issued in connection with
  options exercised                            200        --            --             --              --
Shares issued to a former officer           32,500        --       309,000             --         309,000
Warrants in connection with
  professional services                         --        --       165,000             --         165,000
Net loss                                        --        --            --    (18,062,000)    (18,062,000)
---------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000               6,787,129   $68,000   $38,883,000   $(25,525,000)   $ 13,426,000
=========================================================================================================
</TABLE>


          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.




                                      F-5
<PAGE>   42

                              IBS INTERACTIVE, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                                 2000           1999
                                                                             ------------    -----------
<S>                                                                          <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                                 $(18,062,000)   $(6,238,000)
    Adjustments to reconcile net loss to net cash used in operating
         activities:
          Depreciation and amortization                                         3,945,000      1,388,000
          Provision for uncollectible accounts                                    539,000        188,000
          Non-cash interest expense                                                12,000         43,000
          Non-cash restructuring                                                2,041,000             --
          Warrant expense                                                         165,000             --
          Compensation expense - Entelechy                                             --        197,000
          Non-cash compensation                                                   244,000        136,000
          Deferred income tax provision (benefit)                                      --         47,000
          Loss on disposal of assets                                            3,474,000        350,000
          Changes in operating assets and liabilities (net of effects of
             purchase acquisitions and divestitures):
                 Accounts receivable                                            1,039,000     (1,517,000)
                 Prepaid expenses and other assets                                248,000       (125,000)
                 Accounts payable and accrued expenses                           (209,000)    (1,094,000)
                 Deferred revenue                                                 (27,000)        57,000
                 Income taxes                                                      78,000       (110,000)
                 Deposits and other                                              (205,000)      (274,000)
                 Pension Obligation                                              (119,000)        59,000
                                                                             ------------    -----------
                       Net cash used in operating activities                   (6,837,000)    (6,893,000)
                                                                             ------------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures - property and equipment                                (570,000)      (277,000)
    Asset acquisitions and related costs                                           30,000     (1,857,000)
    Proceeds from assets sold                                                   2,800,000        835,000
                                                                             ------------    -----------
                       Net cash provided by (used in) investing activities      2,260,000     (1,299,000)
                                                                             ------------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Net proceeds from private placements of common stock                        6,951,000      5,026,000
    Capital distribution                                                               --       (329,000)
    Repayments of notes payable                                                  (251,000)      (352,000)
    Proceeds from warrants                                                             --        658,000
    Payments of line of credit, net                                            (3,437,000)            --
    Proceeds from notes payable                                                        --        600,000
    Payments of capital lease obligations                                         (21,000)       (51,000)
                                                                             ------------    -----------
                       Net cash provided by financing activities                3,242,000      5,552,000
                                                                             ------------    -----------
Net decrease in cash and cash equivalents                                      (1,335,000)    (2,640,000)
Cash and cash equivalents, at beginning of year                                 2,892,000      5,532,000
                                                                             ------------    -----------
Cash and cash equivalents, at end of year                                    $  1,557,000    $ 2,892,000
                                                                             ============    ===========
</TABLE>


           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                                      F-6
<PAGE>   43

                              IBS INTERACTIVE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999

(1)    ORGANIZATION, BACKGROUND AND BASIS OF PRESENTATION

       IBS Interactive, Inc. (the "Company" or "IBS") and its subsidiaries are a
       leading provider of e-Business and Information Technology (IT)
       professional services to businesses, organizations and public sector
       institutions primarily in the Eastern United States. Services are
       primarily rendered to mid-sized businesses (including mid-sized
       departments of larger enterprises) and public sector institutions. The
       Company was incorporated under the name Internet Broadcasting System,
       Inc. and changed its name to IBS Interactive, Inc. when it went public in
       May 1998. During late 2000 the Company began doing business as Digital
       Fusion. The Company will propose to the shareholders a name change to
       Digital Fusion, Inc. at the Company's annual shareholder meeting. IBS, a
       Delaware corporation, has its main administrative office in Tampa,
       Florida, along with regional offices throughout New Jersey, New York,
       Florida and Alabama.

       The accompanying financial statements have been prepared on the
       assumption that the Company will continue as a going concern. The Company
       has incurred losses of $18,062,000 and $6,238,000 in 2000 and 1999,
       respectively and cash flow deficiencies from operations of $6,837,000 and
       $6,893,000 in 2000 and 1999, respectively. These factors raise
       substantial doubt about the ability of the Company to continue as a going
       concern. The ability of the Company to continue as a going concern is
       dependent upon obtaining cash flow from external sources and
       restructuring liabilities. Management is currently negotiating with
       certain of its vendors to restructure certain liabilities. In addition,
       management plans to seek additional capital through a private placement
       of securities. The financial statements do not include any adjustments
       that may result from the outcome of this uncertainty.

       On March 1, 2000, the Company acquired all of the outstanding stock of
       digital fusion, inc. (see Note 3).

       During August 2000, the Company sold its consumer dial up business to
       Earthlink (see Note 16).

       During April 2001, the Company sold its web hosting and non-dial-up
       business to Veraciti (see Note 18).

(2)    SIGNIFICANT ACCOUNTING POLICIES

       (a)    PRINCIPLES OF CONSOLIDATION

              The accompanying consolidated financial statements include the
              accounts of the Company and all of its wholly-owned subsidiaries.
              All significant intercompany accounts and transactions are
              eliminated in consolidation.

       (b)    REVENUE RECOGNITION

              Revenue is recognized as services are provided to customers
              primarily on a time and materials basis. In the event that there
              are significant performance obligations yet to be fulfilled on
              consulting, design and installation projects, revenue recognition
              is deferred until such conditions are removed. A small portion
              of our contracts are on a fixed fee basis. Revenues on these
              contracts are recognized on a percentage of completion basis. For
              projects that the customer has prepaid, but the services have not
              been performed, deferred revenue is recorded on the balance sheet.

              For the years ended December 31, 2000 and 1999, the Company
              recognized unbilled revenues of $209,000 and $436,000,
              respectively, on projects in process. Such unbilled amounts are
              included in accounts receivable on the balance sheet.

       (c)    STOCK BASED COMPENSATION

              The Company accounts for its stock option awards to employees
              under the intrinsic value based method of accounting prescribed by
              Accounting Principles Board Opinion No. 25, "Accounting for Stock
              Issued to Employees." Under the intrinsic value based method,
              compensation cost is the excess, if any, of the




                                      F-7
<PAGE>   44

              quoted market price of the stock at grant date or other
              measurement date over the amount an employee must pay to acquire
              the stock. The Company provides pro forma disclosures of net loss
              and loss per share as if the fair value based method of accounting
              had been applied, as required by Statement of Financial Accounting
              Standards ("SFAS") No. 123, "Accounting for Stock-Based
              Compensation" ("SFAS 123").

              The values ascribed to restricted stock awards are based on the
              fair value of the Company's common stock at the date of the grant.
              The intangible asset related to the value of the stock awards is
              amortized on a straight-line basis over the required service
              periods. The Company's liability related to such awards will be
              converted to common stock and additional paid in capital upon the
              formal issuance of the common stock.

       (d)    WARRANTS

              The fair values ascribed to warrants that are used in connection
              with financing arrangements and professional services agreements
              (see Note 8) are amortized over the expected life of the
              underlying debt or the term of the agreement.

       (e)    INCOME TAXES

              The Company accounts for income taxes using the liability method.
              Deferred income taxes are recognized for the tax consequences of
              "temporary differences" by applying enacted statutory rates
              applicable to future years to differences between the financial
              statement carrying amounts and the tax bases of existing assets
              and liabilities. Valuation allowances are established against
              deferred tax assets when management concludes that the realization
              of such deferred tax assets cannot be considered more likely than
              not.

              Through their acquisition dates, the owners of Spectrum and
              Spencer elected, under the applicable provisions of the Internal
              Revenue Code and applicable state code, to report their respective
              income for federal and state income tax purposes as a limited
              liability or "S" corporation. Under those regulations, the owners
              individually received the income tax provision or benefit of their
              respective share of Spectrum's and Spencer's net income or loss.
              Accordingly, the Company is only able to record a provision or
              benefit for federal and state income taxes for the periods from
              the respective acquisition dates forward.

              In future periods, the Company's consolidated income tax provision
              or benefit will include the operating results of Spectrum and
              Spencer. As such, the historical tax provision of the Company, as
              reflected in the accompanying consolidated 1999 statements of
              operations, is not necessarily indicative of the tax provision or
              benefit that would have been recorded had Spectrum and Spencer
              been acquired at the beginning of 1999.

              Valuation allowances have been established against the Company's
              deferred tax assets due to uncertainties in the Company's ability
              to generate sufficient taxable income in future periods to make
              realization of such assets more likely than not. The Company's
              income tax receivable at December 31, 1999 and 2000 represents net
              operating loss carrybacks to previous periods.

       (f)    CASH EQUIVALENTS

              The Company considers all highly liquid debt instruments and other
              short-term investments with an initial maturity date of three
              months or less from the purchase date to be cash equivalents.

       (g)    CONCENTRATIONS OF CREDIT RISK

              Financial instruments which potentially subject the Company to
              credit risk consist primarily of a concentration of unsecured
              trade accounts receivables. At December 31, 1999, one customer
              accounted for 12% of total net accounts receivable. No customers
              were greater than 10% of total net accounts receivable at December
              31, 2000.

              The Company performs ongoing credit evaluations of its customers
              and generally does not require collateral on accounts receivable.
              The Company monitors the allowance for potential credit losses and
              adjusts the allowance accordingly. During the years ended December
              31, 2000 and 1999 the Company's



                                      F-8
<PAGE>   45

              allowance for doubtful accounts was increased by $1,054,000 and
              $188,000, respectively (for bad debt provisions) and was decreased
              by $315,000 and $0, respectively, for balances written off.

              Cash equivalents at December 31, 2000 and 1999 of $1,442,000 and
              $2,892,000 respectively are comprised of money market fund
              investments and overnight deposits.

       (h)    SOURCES OF SUPPLIES AND VENDORS

              The Company is dependent on third-party manufacturers of hardware
              components to be used for resale. Failure by manufacturers to
              deliver this equipment on a timely basis, or any inability to
              obtain alternative sources, could have an adverse effect on
              operating results.

       (i)    PROPERTY AND EQUIPMENT

              Property and equipment are stated at cost. Depreciation and
              amortization are computed primarily under the straight-line method
              over the assets estimated useful lives, generally three years for
              computer equipment, five years for office equipment and seven
              years for furniture and fixtures. Leasehold improvements are
              amortized over the term of the related lease, generally three to
              five years. Equipment under capital leases is amortized on a
              straight-line basis over the terms of the leases, generally three
              years.

       (j)    LONG-LIVED ASSETS

              The Company follows SFAS No. 121, "Accounting for Impairment of
              Long-Lived Assets and for Long-lived Assets to be Disposed of"
              ("SFAS 121"). In accordance with SFAS 121, the carrying values of
              long-lived assets are periodically reviewed by the Company and
              impairments would be recognized if the expected future operating
              non-discounted cash flows derived from an asset were less than its
              carrying value.

              There were no impairment losses recorded in the year ended
              December 31, 1999. See Notes 16 and 17 for write-offs related to
              restructuring and the sale of the consumer dial-up business.

       (k)    INTANGIBLE ASSETS

              Intangible assets are comprised primarily of goodwill, customer
              lists and other intangibles arising from various acquisitions and
              deferred compensation arrangements. Such asset values are
              amortized over periods of five to ten years, and for deferred
              compensation arrangements over the period that such services are
              rendered.

       (l)    PENSION ACCOUNTING

              The Company has adopted SFAS No. 132 "Employers' Disclosures about
              Pensions and Other Post-retirement Benefits" as it relates to a
              Spencer pension plan. Subsequent to the acquisition of Spencer in
              1999, the plan was amended to no longer require the Company to
              accrue future service benefits. The provisions of SFAS No. 132
              revise employers' disclosures about pension and other
              post-retirement benefit plans. It does not change the measurement
              or recognition of these plans. It standardizes the disclosure
              requirements for pensions and other post-retirement benefits to
              the extent practicable.

       (m)    ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS

              The carrying amounts reported in the consolidated balance sheets
              for cash and cash equivalents, accounts receivable, accounts
              payable, accrued liabilities and notes payable approximate the
              instruments' fair values due to the immediate or short-term
              maturity of these financial instruments.

       (n)    LOSS PER SHARE

              Basic loss per share has been computed using the weighted average
              number of shares of common stock outstanding for the period. The
              Company's diluted loss per share includes the effect, if any, of
              unissued shares under options, warrants and stock awards computed
              using the treasury stock method. In all periods



                                      F-9
<PAGE>   46

              presented, there were no differences between basic and diluted
              loss per common share because the assumed exercise of common share
              equivalents was antidilutive. The assumed exercise of stock
              options and warrants, as well as the issuance of common stock
              under compensation and acquisition agreements (aggregating 732,129
              and 910,223 shares at December 31, 2000 and 1999, respectively),
              could potentially dilute basic earnings per share.

       (o)    USE OF ESTIMATES

              The preparation of financial statements in conformity with
              generally accepted accounting principles requires management to
              make estimates and assumptions that affect the reported amounts of
              assets and liabilities and disclosure of contingent assets and
              liabilities at the date of the financial statements and the
              reported amounts of revenues and expenses during the reporting
              period.

              Actual results could differ from these estimates. Significant
              estimates include the assumptions utilized in the development of
              the Company's allowance for doubtful accounts, given its
              concentration of accounts receivable balances with a limited
              number of customers. In addition, many of the Company's estimates
              and assumptions used in the consolidated financial statements
              relate to the Company's continued ability to deliver
              state-of-the-art technical services, which are subject to
              competitive market and technology changes.

              It is reasonably possible that changes may occur in the near term
              that would affect management's estimates with respect to the
              values of accounts receivable, intangibles and fixed assets.

       (p)    RECLASSIFICATIONS

              The 1999 financial statements have been reclassified to conform to
              the 2000 presentation.

(3)    BUSINESS COMBINATIONS

       (a)    POOLINGS-OF-INTERESTS

              On March 31, 1999 and June 30, 1999 the Company acquired Spectrum
              and Spencer respectively, in business combinations accounted for
              as poolings-of-interests. Spectrum, which is a full-service
              provider of network and systems integration solutions, became a
              wholly-owned subsidiary of the Company through the exchange of
              156,365 shares of the Company's common stock for all of the
              outstanding shares of Spectrum. Spencer, which is a provider of
              network consulting to a wide array of businesses, became a
              wholly-owned subsidiary of the Company through the exchange of
              260,005 shares of the Company's common stock for all of the
              outstanding shares of Spencer. The Company reached an agreement on
              the ultimate number of shares issued to Spectrum and Spencer
              during 2000.

              The accompanying financial statements are based on the assumption
              that the Company, Spectrum and Spencer were combined as of the
              earliest period presented and, accordingly, financial statements
              of prior years have been restated to give effect to the
              combinations. Such restated financial statements were initially
              filed with the Securities & Exchange Commission on Form 8-K on
              December 20, 1999.

              Summarized unaudited results of operations of the Company and
              Spectrum for the three months ended March 31, 1999 (the date of
              the acquisition) are as follows:

<TABLE>
<CAPTION>
                                                Three Months Ended
                                                  March 31, 1999
                                             Company         Spectrum
                                           -----------      ----------
<S>                                        <C>              <C>
                     Net revenues          $ 2,601,000      $  672,000
                     Net income (loss)        (280,000)        117,000
</TABLE>



                                      F-10
<PAGE>   47

              Summarized unaudited results of operations of the Company and
              Spencer for the six months ended June 30, 1999 (the date of
              acquisition) are as follows:

<TABLE>
<CAPTION>
                                                 Six Months Ended
                                                  June 30, 1999
                                             Company         Spectrum
                                           -----------      ----------
<S>                                        <C>              <C>
                     Net revenues          $ 7,076,000     $ 1,677,000
                     Net income (loss)      (1,578,000)        135,000
</TABLE>

              There were no material adjustments to conform the accounting
              policies of Spectrum and Spencer to the accounting policies used
              by the Company.

              In 1999 the Company incurred charges of $232,000 for fees and
              costs associated with the acquisitions of Spectrum and Spencer.
              Such amounts, for transactions accounted for as a
              pooling-of-interests, are expensed as services are rendered and
              costs are incurred.

       (b)    PURCHASES

              DIGITAL FUSION

              On March 1, 2000 the Company acquired all of the outstanding stock
              of digital fusion, inc. (DFI) in exchange for 975,000 shares of
              unregistered common stock (50,000 shares of which are reserved
              pending settlement of certain matters), a $500,000 three-year
              subordinated note accruing 6% interest per annum and the
              assumption of debt totaling approximately $4.2 million. DFI is a
              Tampa, Florida-based provider of professional services. Of the
              assumed $4.2 million of debt, at December 31, 2000, $3.4 has been
              repaid.

              The following summarized, unaudited pro forma information for the
              years ended December 31, 2000 and 1999 assumes that the
              acquisition of DFI had occurred on January 1, 1999:

<TABLE>
<CAPTION>
                                                           2000          1999
                                                       -----------   -----------
<S>                                                    <C>           <C>
                Net revenues                           $25,033,000   $27,638,000
                Operating income (loss)                (15,532,000)   (7,633,000)
                Loss from continuing operations        (16,255,000)   (8,295,000)
                Loss per share from continuing
                  operations
                Basic and diluted                      $     (2.55)  $     (1.57)
</TABLE>

              The pro forma operating results reflect estimated pro forma
              adjustments for the amortization of intangibles arising from the
              acquisition ($281,000 in 2000 and $3,167,000 in 1999) reduced
              interest expense from the conversion of DFI debt prior to closing
              ($60,000 in 2000 and $203,000 in 1999) and the pro forma operating
              results of DFI in April 1999. Pro forma results of operations
              information is not necessarily indicative of the results of
              operations that would have occurred had the acquisition been
              consummated at the beginning of 1999 or 2000 or of future results
              of the combined operations.

              The value ascribed to the consideration of stock, equity
              instruments, debt and related costs ($19.1 million) less the fair
              market value of net assets acquired ($2.7 million) resulted in
              goodwill of $16.4 million. Goodwill is amortized over a five-year
              life.

              As part of this acquisition, the Company granted non-qualified
              options to purchase 480,000 shares of common stock to certain of
              the former employees of DFI 25% of such options vested
              immediately, and as such, have been treated as consideration in
              determining the purchase price of DFI and the remaining options
              will vest over a period of 3 years of continued employment. These
              options vest immediately upon change of control and have an
              exercise price of $10.49 per share.



                                      F-11
<PAGE>   48

(4)    PROPERTY AND EQUIPMENT

       Major classes of property and equipment, net, consist of the following at
       December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                           2000          1999
                                                       -----------   -----------
<S>                                                    <C>           <C>
              Computer equipment                       $ 3,195,000   $ 2,194,000
              Office equipment, fixtures and vehicles      325,000       485,000
              Leasehold improvements                        81,000        96,000
                                                       -----------   -----------
                                                         3,601,000     2,775,000
              Less: accumulated depreciation            (2,177,000)   (1,763,000)
                                                       -----------   -----------
                                                       $ 1,424,000   $ 1,012,000
                                                       ===========   ===========
</TABLE>

       At December 31, 2000 and 1999 equipment subject to capital leases, less
       accumulated depreciation, amounted to $-0- and $22,000, respectively.
       Depreciation expense for the years ended December 31, 2000 and 1999
       amounted to $785,000 and $600,000, respectively, which includes
       depreciation of equipment subject to capital lease agreements of $38,000
       during the year ended 1999.

(5)    INTANGIBLE ASSETS

       Intangible assets, net, are comprised of the following at December 31,
       2000 and 1999:

<TABLE>
<CAPTION>
                                                           2000          1999
                                                       -----------   -----------
<S>                                                    <C>           <C>
              Intangibles - IS Acquisitions            $        --   $ 3,915,000
              Goodwill                                  18,016,000     1,010,000
              Deferred compensation                             --       900,000
              Trademarks                                    75,000            --
              Customer lists                                    --        69,000
                                                       -----------   -----------
                                                        18,091,000     5,894,000
              Less: accumulated amortization            (3,272,000)   (1,100,000)
                                                       -----------   -----------
                                                       $14,819,000   $ 4,794,000
                                                       ===========   ===========
</TABLE>

       Amortization expense was $3,160,000 and $788,000 for the years ended
       December 31, 2000 and 1999, respectively.

       During 2000, $3,559,000 was written off as a result of the sale of our
       consumer dial up business and the discontinuation of our Microsoft
       training unit. See Notes 16 and 17.

       During 2000, $244,000 of deferred compensation was expensed. This was a
       result of shares of common stock related to the employment of a former
       officer of the Company and the 1998 acquisition of Entelechy, Inc. being
       released. Since the condition of continued employment for the release of
       such shares has been waived, the Company included the remaining deferred
       compensation of $178,000 in a restructuring charge during 2000. During
       1999, $332,000 of deferred compensation was expensed.

(6)    BORROWINGS

       At December 31, 2000 and 1999, the Company's outstanding borrowings were
       comprised of the following:



                                      F-12
<PAGE>   49
<TABLE>
<CAPTION>
                                                           2000          1999
                                                       -----------   -----------
<S>                                                    <C>           <C>
              PowerCerv Note                           $   828,000   $        --
              Digital Fusion Shareholders' Note            465,000            --
              DesignFX - development loan                       --       142,000
              Promissory Notes                                  --       109,000
              Capital leases                                    --        21,000
                                                       -----------   -----------
                                                         1,293,000       272,000
              Less: current portion                       (210,000)     (130,000)
                                                       -----------   -----------
              Total-long term borrowings               $ 1,083,000   $   142,000
                                                       ===========   ===========
</TABLE>

       (a)    POWERCERV NOTE

              In connection with the DFI acquisition described in Note 3, the
              Company assumed DFI's $827,500 secured note. The assets of DFI
              secured this note. The note bears interest at a 4.56% annual rate
              with quarterly principal and interest payments due through 2004.
              Interest expense on this note totaled $68,000 during 2000.

       (b)    DIGITAL FUSION SHAREHOLDERS NOTE

              In conjunction with the DFI acquisition, the Company entered into
              unsecured promissory notes with the former DFI shareholders
              totaling $500,000. These notes bear interest at 6% and the
              interest and principal are due in 2003. The interest rate was
              below the market rate and a discount of $46,000 was recorded to be
              amortized to interest expense over the period of the notes.
              Interest expense on these notes totaled $36,000 during 2000.

       (c)    DFI LINE OF CREDIT

              DFI had a line of credit from a bank at the time IBS acquired DFI.
              This line of credit was secured by all of DFI's assets and
              guaranteed by certain DFI shareholders. On February 29, 2000, the
              terms of the line of credit were amended and the borrower was
              changed to IBS with no personal guarantees. This new facility was
              then secured by IBS' assets and had a rate of prime plus 2%. The
              $3.4 million of debt was paid in full during 2000.

       (d)    CONVERTIBLE DEBT

              In the third and fourth quarter of 1999, the Company raised
              $600,000 through sales of 12% convertible debt instruments (the
              "Convertible Debt"). The Convertible Debt was converted at the
              option of the Company at the established price of $10.00 per share
              in December of 1999. Holders of the Convertible Debt received
              warrants to purchase common stock equal to 25% of any unpaid
              principal and accrued interest divided by the defined value of the
              Company's common stock. During 1999, the Company incurred a
              non-cash interest charge of $43,000 relating to the fair value of
              the warrants issued in connection with the sale of the Convertible
              Debt. The effective interest rate on the Convertible Debt over the
              two months they were outstanding approximated 115% per annum.

       (e)    DESIGNFX - DEVELOPMENT LOAN

              Through the Company's acquisition of DesignFX it acquired an
              outstanding loan. This loan provided for advances from a bank
              customer to be repaid in monthly installments equal to 50% of
              defined revenues received through the bank's web site. During
              2000, $34,000 was paid by IBS and the remainder was satisfied from
              services provided to a third party who repaid the loan.



                                      F-13
<PAGE>   50

      (f) PROMISSORY NOTES

          In connection with two acquisitions in 1999, the Company entered
          into agreements to pay the former owners approximately $307,000 in
          the form of unsecured promissory notes. The remaining $109,000 on
          the December 31, 1999 balance sheet was paid off in 2000.

      (g) LINE OF CREDIT

          In October 1998, the Company entered into a promissory note
          agreement with a bank for a line of credit. Borrowings were limited
          to the lower of $1,500,000 or defined accounts receivable, and
          outstanding amounts are secured by the Company's assets. At the
          Company's option, the interest rate was based on the London Interbank
          Offering Rate ("LIBOR") plus 2% or the bank's prime rate plus .25%.
          The agreement required the Company to comply with certain
          operational and financial covenants. The agreement expired on
          September 30, 1999. Interest expense related to this line of credit
          totaled $10,000 during 1999.

      (h) CAPITAL LEASES

          The Company leases certain equipment in the normal course of
          operations, which are accounted for as capital leases. Outstanding
          obligations at December 31, 1999 totaled $21,000. Interest expense
          related to such agreements was $-0- and $7,000 for the years ended
          December 31, 2000 and 1999, respectively.

      (i) DEBT MATURITIES

          At December 31, 2000, aggregate required principal payments of
          long-term debt are as follows:

<TABLE>
<CAPTION>

                            Year Ending
                           December 31,                      Amount
                           ------------                      ------
                           <S>                           <C>
                               2001                      $   210,000
                               2002                          226,000
                               2003                          701,000
                               2004                          156,000
                               2005                               --
                                                         -----------
                                     Total               $ 1,293,000
                                                         ===========
</TABLE>

(7)   BENEFIT PLANS

      (a) DEFINED BENEFIT PLAN

          Substantially all Spencer employees who met certain requirements of
          age and length of service are covered by Spencer sponsored
          non-qualified, non-contributory defined benefit pension plan. The
          benefits become fully vested upon the employees' retirement. Benefits
          paid to retirees are based upon age at retirement, compensation
          levels and years of credited service. Subsequent to the acquisition
          of Spencer in 1999, the plan was amended to no longer require the
          Company to accrue future service benefits. Plan assets are stated at
          fair value and are comprised of stocks and bonds.

          Net periodic pension cost at December 31, 2000 and 1999 for this plan
          includes the following components:
<TABLE>
<CAPTION>
                                                               2000          1999
                                                               ----          ----
               <S>                                         <C>           <C>
               Components of net periodic pension cost:
                  Service cost                             $       --    $  148,000
                  Interest cost                                31,000        46,000
                  Actual return on plan assets                (47,000)       (8,000)
                  Recognized net actuarial (gain) loss         (6,000)       (7,000)
                                                           ----------    ----------
               Net periodic pension cost (income)          $  (22,000)   $  179,000
                                                           ==========    ==========
</TABLE>




                                      F-14
<PAGE>   51



          The following provides a reconciliation of benefit obligations, plan
          assets, the funded status of the plan and the amounts recorded in
          the December 31, 2000 and 1999 Company's balance sheets:

<TABLE>
<CAPTION>

                                                                2000         1999
                                                                ----         ----
              <S>                                             <C>          <C>
              Changes in benefit obligation:
                Benefit obligation, beginning of year         $ 524,000    $ 769,000
                Service cost                                       --        148,000
                Interest cost                                    31,000       46,000
                Actuarial loss                                     --       (439,000)
                                                              ---------    ---------
              Benefit obligation, end of year                   555,000      524,000
                                                              ---------    ---------

              Changes in plan assets:
                Fair value of plan assets, beginning of year    428,000      299,000
                Actual return on plan assets                     47,000        9,000
                Employer contribution                           100,000      120,000
                                                              ---------    ---------
                Fair value of plan assets, end of year          575,000      428,000
                                                              ---------    ---------

                Unfunded status                                  20,000      (96,000)
                Unrecognized prior service cost                (214,000)    (231,000)
                Unrecognized net actuarial loss                  46,000       60,000
                                                              ---------    ---------
                Accrued benefit cost
                                                              $(148,000)   $(267,000)
                                                              =========    =========
      </TABLE>

          Assumptions used in these actuarial valuations at December 31,
          2000 and 1999 were:

<TABLE>
<CAPTION>
                                                            2000          1999
                                                            ----          ----
              <S>                                           <C>          <C>
              Discount rate                                 6.00%        7.00%
              Expected long-term rate of return             7.50%        7.50%
</TABLE>


      (b) 401(K) PLAN

          The Company sponsored a defined contribution benefit plan covering
          the IBS Interactive employees and a second plan that covered the DFI
          employees. Eligible employees are allowed to contribute up to 12% of
          their compensation. In the IBS plan, Company contributions are at
          the sole discretion of management. There were no contributions for
          the years ended December 31, 2000 and 1999. In the DFI plan, the
          Company matched 30% of participant contributions to a maximum
          matching amount of 6% of participant base compensation which totaled
          $43,000 for the year ended December 31, 2000.

(8)   STOCKHOLDERS' EQUITY

      (a) CAPITAL STOCK

          The Company's Board of Directors designated 1,000,000 of the
          12,000,000 authorized shares as "blank check" preferred stock and
          11,000,000 shares as common stock. During March 2001, the Company's
          Board of Directors designated 60,000 of the preferred shares as
          Series A Convertible Preferred Stock par value $.01 per share and
          45,000 of the preferred shares as Series B Preferred Stock, par
          value of $.01. No shares of the preferred stock have been issued.

      (b) PRIVATE PLACEMENTS

          In November 1999, the Board of Directors of the Company approved
          private placements of up to $10 million of defined units, which
          consist of 1,000,000 shares of common stock and, 250,000 warrants to
          purchased common stock. The Company raised $5.2 million in connection
          with this private placement and




                                      F-15
<PAGE>   52

          issued 520,000 shares of common stock (which excludes the convertible
          debt subsequently exchanged for units) in connection with this
          private placement.

          In February 2000, the Board of Directors of the Company approved a
          private placement of up to $9.9 million of defined units which
          consisted of 900,000 shares of common stock and 225,000 warrants to
          purchase common stock. The Company raised approximately $7.0 million.
          In connection with this private placement we issued 684,545 shares of
          our common stock at a price of $11 per share.

      (c) WARRANTS

          At December 31, 2000, 667,510 shares of common stock were reserved
          for the exercise of stock warrants comprised of the following:

<TABLE>

                   <S>                                              <C>
                   Initial IPO Underwriter's Warrants                32,760
                   1999 Private Placement                           166,680
                   2000 Private Placement                           183,070
                   Investment advisory firms                        285,000
                                                                    -------
                         Total                                      667,510
                                                                    =======

</TABLE>
          In connection with the Company's initial public offering, we
          registered 120,000 shares of common stock underlying warrants, which
          were sold to the underwriter ("Underwriter Warrants"). These warrants
          are exercisable for a four-year period commencing on May 14, 1999 at
          a price of $8.10 per share.

          In October 1999, the Company entered into a consulting agreement
          with an investment advisory firm in which the Company agreed to
          issue: (a) four-year warrants to purchase 50,000 shares of Common
          Stock at an exercise price of $10.25 per share and (b) four-year
          warrants to purchase 50,000 shares of Common Stock at an exercise
          price of $11.25 per share upon the closing of certain mergers or
          acquisitions to be identified. The exercise prices were at least the
          fair market value of the Company's common stock at the date of the
          agreement. In the event that the requisite services are rendered and
          the warrants are issued, the Company will realize a non-cash charge
          to operations for the fair value of these warrants. The period(s)
          that such charge will be recognized over will be determined based
          upon the nature of the merger or acquisition involved, if any (that
          is whether the merger is accounted for as a purchase or a pooling of
          interests). The fair value of these warrants was recorded as purchase
          price of the related acquisitions. On January 12, 2000, the Company
          entered into an additional consulting agreement with this same firm
          in which the Company agreed to issue four-year warrants to purchase
          50,000 shares of Common Stock at an exercise price of $12.50 per
          share upon the closing of certain mergers or acquisitions to be
          identified. The fair value of these warrants was charged to expense
          as consulting fees in 2000.

          In connection with the 1999 private placement, the Company issued
          five-year redeemable warrants to purchase 166,680 shares of our
          common stock at an exercise price of $12.50 per share.

          In connection with the 2000 private placement, the Company issued
          three-year redeemable warrants to purchase 171,125 shares of our
          common stock at an exercise price of $13.75 per share. In addition, on
          May 11, 2000 we issued a three-year warrant to purchase 11,945 shares
          of our common stock at an exercise price of $13.75 per share to
          LaSalle St. Securities, LLC in consideration for their services as
          placement agent for the private placement, the fair value of which was
          reflected as a reduction to the proceeds of the private placement.

          The Chief Operating Officer of Tekbanc Limited joined our Board of
          Directors in April 2000 and, in that capacity, received three-year
          warrants to purchase 60,000 shares of common stock at $13.75 per
          share. On June 15, 2000, the Company entered into a consulting
          agreement with Tekbanc in which we agreed to issue Tekbanc three
          year warrants to purchase 75,000 shares of our common stock at an
          exercise price of $7.00 in exchange for mergers and acquisitions,
          marketing, business development and financial advisory services.
          These warrants vested ratably over a six-month period ending
          December 15, 2000. The fair value of these warrants was charged to
          expense during 2000.



                                      F-16
<PAGE>   53

      (d) SHARES ISSUED FOR ACQUISITIONS

          See Note 3 for a discussion of shares issued for 1999 and 2000
          acquisitions.

          The Company issued 124,352 and 163,290 shares of reserved common
          stock during 2000 and 1999, respectively in connection with the
          resolution of contingencies in prior acquisitions. 130,124 of these
          shares issued during 1999 and 2000 were in conjunction with the 1998
          acquisition of Entelechy, Inc. These shares were issued to former
          Entelechy stockholders based upon remaining in the continuous employ
          of the Company. Since the condition of continued employment for the
          release of such shares was waived, the Company recognized a non-cash
          compensation charge of $214,000 in the first quarter of 2000. The
          non-cash compensation charge for the year ended December 31, 1999
          was $197,000.

          The acquisition liability of $546,000 at December 31, 1999 was
          reduced by $251,000 due to the issuance of the reserve shares in
          2000 and increased $650,000 related to the 50,000 DFI reserve shares.
          The December 31, 2000 acquisition liability balance of $945,000
          relates to 64,619 of acquisition reserve shares remaining, which
          will be issued during 2001.

      (e) STOCK AWARDS

          The Company issued 32,500 shares of restricted stock to an officer
          during 2000. These shares were fully vested in conjunction with the
          termination agreement of the former officer. The $309,000 value
          ascribed to the stock awards was based on the fair market values of
          the Company's common stock on the award dates. Compensation expense
          for these agreements for the years ended December 31, 2000 and 1999
          totaled $30,000 and $77,000, respectively. The remaining $178,000 of
          non-cash compensation was included in the first quarter severance
          and restructuring charge.

      (f) STOCK OPTION PLAN

          The Company maintains three qualified stock option plans. Under the
          terms of these plans, the Company has reserved 1,380,000 shares of
          common stock for future grants. The Company also granted 660,000 of
          nonqualified stock options during 2000. These were granted to certain
          management to retain key personnel during this restructuring and
          refocusing the Company's strategic vision to be focused on being an
          IT professional services firm and sell or shut down unprofitable
          units.

          Under the Company's Stock Option Plans, the Company may grant
          incentive stock options to certain officers, employees and directors.
          The options expire five or ten years from the date of grant.
          Accelerated vesting occurs following a change in control of the
          Company and under certain other conditions. At December 31, 2000,
          the Company could grant an aggregate of 453,583 shares under these
          plans.

          During the year ended December 31, 1998, the Company issued options
          to outside members of their Board of Directors, which vest over a
          one-year period. The exercise prices of such options were based on
          the fair market values of the Company's stock at the grant dates. The
          related compensation charge totaled $59,000 in 1999.

          The following table summarizes information about qualified and
          non-qualified stock options outstanding at December 31, 2000:

<TABLE>
<CAPTION>

                                                         Weighted
                                                          Average        Weighted                      Weighted
                                                         Remaining       average                       Average
                                          Number        contractual      exercise      Number          Exercise
                   Exercise Price       Outstanding    life (years)       price     exercisable         Price
                   --------------       -----------    ------------       -----     -----------         -----
                  <S>                  <C>             <C>            <C>           <C>               <C>
                   $0.94 to $2.22         116,400          9.89       $    1.08        33,834         $  1.09
                   $4.31 to $5.78         134,726          9.58            5.50        31,232            5.20
                   $6.00 to $8.18         307,350          8.28            8.02       175,180            7.13
                  $10.19 to $10.49        577,000          9.08           10.44       132,500           10.44
                  $16.00 to $23.44        235,804          8.63           21.28        99,464           21.12
                                        ---------                                     -------
                                        1,371,280          8.94       $   10.47       472,210         $ 11.22
                                        =========                                     =======
</TABLE>




                                      F-17
<PAGE>   54

          Transactions under various qualified and non-qualified option plans
          for 1999 and 2000 are summarized as follows:


<TABLE>
<CAPTION>
                                                                          Weighted
                                                                          average
                                                                          exercise
                                                           Options         price
                                                           -------         -----
             <S>                                         <C>            <C>
             Outstanding at January 1, 1999                 267,150     $   6.14
             Granted                                        294,942        21.00
             Exercised                                           --           --
             Canceled                                       (52,542)        7.53
                                                         ----------

             Outstanding at December 31, 1999               509,550        14.62
             Granted                                      1,140,825         7.98
             Exercised                                         (200)        6.00
             Canceled                                      (278,895)        9.27
                                                         ----------

             Outstanding at December 31, 2000             1,371,280     $  10.47
                                                         ==========

             Options exercisable at December 31, 2000       472,210     $  11.22
                                                         ==========

             Options available for grant at December
                  31, 2000                                  453,583
                                                         ==========

</TABLE>

          Under the accounting provisions of SFAS 123, the Company's 2000 and
          1999 pro forma net loss and loss per share would have been:

<TABLE>
<CAPTION>

                                                             2000           1999
                                                             ----           ----
              <S>                                       <C>             <C>
              Net loss                                  $(20,285,000)   $(6,909,000)
              Net loss per share; basic and diluted     $      (3.18)   $     (1.60)
</TABLE>

          The Company estimates the fair value of each stock option at the
          grant date by using the Black-Scholes option-pricing model with the
          following assumptions:

<TABLE>
<CAPTION>
                                                                2000        1999
                                                                ----        ----
              <S>                                             <C>         <C>
              Dividend yield                                      0%           0%
              Expected volatility                              70.5%       45.80%
              Risk-free interest rate                          6.31%        5.25%
              Expected life - years                              10           10
              Weighted average fair value of options granted  $7.98       $ 6.22
</TABLE>




                                      F-18
<PAGE>   55

 (9)   TAXES

       Provisions (benefits) for federal and state income taxes consist of the
       following:

<TABLE>
<CAPTION>

                                                     December 31,
                                                2000            1999
                                                ----            ----
              <S>                             <C>            <C>
              Current:
              Federal                         $     --       $(133,000)
              State                                 --         131,000
                                              --------       ---------
                                                    --          (2,000)

              Deferred:
              Federal                               --         111,000
              State                                 --         (64,000)
                                              --------       ---------
                                                    --          47,000
                                              --------       ---------
              Total income tax provision      $     --       $  45,000
                                              ========       =========
</TABLE>

          Deferred tax assets (liabilities) arise from the following temporary
          differences and are classified as follows:

<TABLE>
<CAPTION>

                                                                      December 31,
                                                                  2000             1999
                                                              ------------    ------------
              <S>                                             <C>              <C>
              Deferred Tax Asset, Current:
              Accounts receivables                            $    400,000     $   104,000
              Accrued compensation                                      --          94,000
              Change in tax status of Spencer                           --         (90,000)
              Other, net                                           (81,000)             --
              Valuation allowance                                 (319,000)       (108,000)
                                                              ------------    ------------
                                                              $         --       $     --
                                                              =============   ============

              Deferred Tax Asset (Liabilities), Non-Current:
              Intangible assets                               $         --    $  1,092,000
              Property and equipment                               219,000              --
              Other                                                     --         228,000
              Tax benefit of state income tax net
                operating loss carryforwards                     1,344,000         304,000
              Tax benefit of federal income tax, net
                operating loss carryforwards                     6,953,000       1,668,000
              Change in tax status of Spencer                           --         (90,000)
              Valuation allowance                               (8,516,000)     (3,202,000)
                                                              ------------    ------------
                                                              $         --    $         --
                                                              ============    ============
</TABLE>




                                      F-19
<PAGE>   56
       Differences between the federal benefit computed at a statutory rate and
       the Company's effective tax rate and provision are as follows:

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                       2000          1999
                                                                   -----------   -----------
<S>                                                                <C>           <C>
              Statutory benefit                                    $(6,141,000)  $(2,106,000)
              State tax benefit, net of federal effect              (1,082,000)     (384,000)
              Results attributed to DesignFX, Halo, Spectrum
                  and Spencer owners                                        --       254,000
              Amortization of non-deductible goodwill                  878,000        99,000
              Write-off of non-deductible goodwill                     791,000
              Non-deductible expenses                                   29,000        36,000
              Increase in deferred income tax valuation allowance    5,525,000     2,125,000
              Other, net                                                    --        21,000
                                                                   -----------   -----------
                                                                   $        --   $    45,000
                                                                   ===========   ===========
</TABLE>

       Based on an assessment of all available evidence, including 1999 and 2000
       operating results, management does not consider realization of the
       deferred tax assets generated from operations to be more likely than not,
       and has established a valuation allowance against the gross deferred tax
       asset.

       As of December 31, 2000, the Company had available federal and state net
       operating loss carryforwards of approximately $20,450,000 and
       $21,780,000, which begin expiring in 2019 and 2006, respectively.

(10)   COMMITMENTS AND CONTINGENCIES

       (a)    OPERATING LEASES

              The Company leases facilities and equipment under operating leases
              and subleases expiring through December 2005. Some of the leases
              have renewal options and most contain provisions for passing
              through certain incremental costs. At December 31, 2000 future net
              minimum annual rental payments under non-cancelable leases are as
              follows:

<TABLE>
<CAPTION>
                           Year Ending
                           December 31,                       Amount
                           ------------                    -----------
<S>                                                       <C>
                               2001                        $ 2,109,000
                               2002                          1,329,000
                               2003                            511,000
                               2004                            186,000
                               2005                            113,000
                                                           -----------
                                            Total          $ 4,248,000
                                                           ===========
</TABLE>


              Total rental and lease expense for the years ended December 31,
              2000 and 1999 was approximately $2,227,000 and $1,219,000,
              respectively. In conjunction with the restructuring during 2000
              and the sale of the IS business unit, leases totaling $2,158,000
              have been accrued for at December 31, 2000.

              In conjunction with the sale of the Company's web hosting and
              non-dial-up business, Veraciti, Inc. assumed leases with total
              payments of $134,000. These leases are included in the totals
              above.



                                      F-20
<PAGE>   57

       (b)    EMPLOYMENT AGREEMENTS

              The Company has entered into employment and consulting contracts
              with certain officers and employees, which provide for minimum
              annual salaries to be paid over specified terms. Future
              commitments for such payments were as follows:

<TABLE>
<CAPTION>
                           Year Ending
                           December 31,                       Amount
                           ------------                    -----------
<S>                                                       <C>
                              2001                         $   462,000
                              2002                             234,000
                              2003                              64,000
                                                           -----------
                                          Total            $   760,000
                                                           ===========
</TABLE>

       (c)    LITIGATION

              A complaint was filed on July 25, 2000 in the Circuit Court of
              Etowah County, Alabama, captioned Personnel Staffing, Inc.,
              Gregerson Management Services, Inc., Chynna, Inc., and Luke, Inc.,
              v. IBS Interactive, Inc., Tim Kielpinski, John Hasty, Bobby
              Walker, Ed Tubbs, Defendants. The complaint purports to be a civil
              action and arises out of a contract negotiated in September of
              1999, between IBS and Personnel Staffing, Inc. ("PSI"). The basic
              terms of the contract consist of the following: PSI agreed to pay
              IBS the sum of $176,625.39, and in return, IBS agreed to install a
              wide area network ("WAN") connecting computers in PSI's offices in
              Texas, Colorado and Alabama. IBS also agreed to procure and
              install most of the necessary hardware for the conversion. The
              complaint alleges, among other things, that the defendants
              intentionally, wantonly, and negligently failed to perform the
              contract as agreed by the parties. Plaintiffs argue that IBS,
              together with four former employees of IBS, are liable for fraud,
              negligence, breach of contract, invasion of privacy, breach of
              bailment agreement, wantonness, and negligent retention,
              supervision and training. IBS has denied these allegations and
              filed a counterclaim against plaintiffs alleging that plaintiffs
              were liable for breach of contract and fraud. The Company believes
              the ultimate outcome of this litigation will not have a material
              effect on financial position or results of operations.


(11)  RELATED PARTY TRANSACTIONS

      (a)     OTHER TRANSACTIONS

              During 1999, an outstanding advance to a former employee of
              $70,000 was charged to operations in the form of employee
              compensation.

              In 1999 Spencer and Spectrum distributed an aggregate $329,000,
              respectively, of cash to its shareholders.

              See Note 8 for a discussion of warrants given to Tekbanc and to
              the Chief Operating Officer of Tekbanc Limited who joined our
              Board of Directors in April 2000.

              See Note 18 for a discussion of the sale of the web hosting
              business to Veraciti, Inc. Veraciti, Inc is owned by Frank Altieri
              who is a current board of director of IBS.

       (b)    PURCHASE OF ORIGINAL EQUIPMENT RIGHTS

              In September 2000, the Company purchased the original equipment
              manufacturing rights to a financial accounting software package
              developed by PowerCerv Technologies Corporation ("PowerCerv"). The
              purchase price was $350,000, which approximates fair market value,
              of which $140,000 was paid in the



                                      F-21
<PAGE>   58

              third quarter of 2000, $105,000 was paid on December 31, 2000 and
              $105,000 will be paid in 2001. Roy Crippen, III, the Company's
              President and Chief Operating Officer, is a member of the Board
              of Directors of PowerCerv.

       (c)    CONSULTING AGREEMENT

              On October 13, 2000, the Company entered into a consulting
              services agreement with PowerCerv. The Company will provide
              consulting services to PowerCerv at $130 per hour for a total of
              $350,000. PowerCerv paid IBS a $150,000 deposit, the next $50,000
              is to be paid by PowerCerv and the remaining $150,000 of services
              will be offset by reducing the PowerCerv Note discussed in Note
              6(a). The total amount of this agreement is due and payable during
              2001 and all unused paid services must be used by December 31,
              2001.

(12)   CASH FLOW INFORMATION

       As disclosed in Note 3, the Company has consummated various asset
       acquisitions in 2000 and 1999. In conjunction with such acquisitions,
       liabilities were assumed as follows:

<TABLE>
<CAPTION>
                                                     2000        1999
                                                 -----------  ----------
<S>                                              <C>          <C>
              Fair value of assets acquired      $19,119,000  $5,670,000
              Cash proceeds                               --   1,857,000
              Fair value of issued common stock   12,758,000   2,765,000
                                                 -----------  ----------
              Liabilities assumed                $ 6,361,000  $1,048,000
                                                 ===========  ==========
</TABLE>

       Cash paid for interest and income taxes are as follows:


<TABLE>
<CAPTION>
                                                     2000        1999
                                                 -----------  ----------
<S>                                              <C>          <C>
              Interest                      $        211,000  $   38,000
              Income Taxes                                --      50,000
</TABLE>

       During 2000, the Company issued 32,500 shares of common stock valued at
       $309,000 to a former officer as part of his termination compensation. See
       Note 8(e).

       As disclosed in Note 8(d), the deferred compensation accrual was reduced
       by $281,000 and $381,000 during 2000 and 1999, respectively for the
       issuance of shares of common stock to former Entelechy shareholders.

       In 1999, the carrying values of IS acquisitions were increased and a
       liability established by $546,000 to reflect common stock likely to be
       issued. During 2000, the Company reduced its acquisition liability by
       $251,000 for the issuance of shares of common stock that were reserved
       for various acquisitions as discussed in Note 8(d) and increased the
       liability by $650,000 to reflect the DFI reserved common stock of 50,000
       which will likely be issued in 2001.

       During 1999, the Company converted $600,000 of debt into common stock
       (see Note 6).

(13)  MAJOR CLIENTS OF THE COMPANY

       One client accounted for 20% and 17% of the Company's revenues for the
       years ended December 31, 2000 and 1999, respectively.

(14)  TERMINATION OF POTENTIAL MERGER DISCUSSIONS

       On July 30,2000, the Company entered into an Agreement and Plan of
       Reorganization with Infonautics, Inc. and First Venue Ventures, Inc. In
       November 2000, the Company announced the termination of the



                                      F-22
<PAGE>   59

       Reorganization Agreement with Infonautics and First Avenue Ventures. The
       Company had a charge of approximately $750,000 in the fourth quarter of
       2000 in connection with this termination.

(15)  SEGMENT INFORMATION

       During 1999, the Company operated two segments: Professional Services and
       IS. The Professional Services segment consists primarily of custom
       programming for Intranet and Internet applications (including distance
       learning and e-commerce), web-site development and maintenance,
       programming and hosting services. Professional Services also provides
       full service network solutions including planning, consulting,
       installation and maintenance. The IS Segment provides dedicated lease
       line, frame relay and digital subscriber line communications, dial-up
       access and mail services. All segments provide services to customers
       located in the United States. The Corporate segment provides internal
       administrative, marketing and treasury services. There are no revenues
       generated by the Corporate segment.

       The accounting policies of the segments are the same as those described
       in the summary of significant accounting policies in Note 2. The Company
       evaluates segment performance based on net income or loss.

       There were no intersegment sales and transfers during the year ended
       December 31, 1999.

       The Company's 1999 reportable segments were strategic business units that
       offer different products and services. They have been managed separately
       because each business requires different technological and marketing
       strategies.

       Segment information as of and for the year ended December 31, 1999 is as
       follows (in thousands):

<TABLE>
<CAPTION>
                                        Professional
                                          Services     IS     Corporate   Total
                                          --------   -------  ---------  --------
<S>                                     <C>          <C>      <C>        <C>
       Revenues                           $ 14,706   $ 4,068   $    --   $ 18,774
       Cost of services                      9,676     3,172       155     13,003
                                          --------   -------   -------   --------
       Gross profit                          5,030       896      (155)     5,771
       Selling, general & administrative     5,328     1,543     3,674     10,545
       Amortization of intangible assets       218       296        --        514
       Non-cash compensation expense           197        --       135        332
       Merger expenses                          --        --       232        232
                                          --------   -------   -------   --------
       Operating income (loss)                (713)     (943)   (4,196)    (5,852)
       Interest expense                         --        --       (81)       (81)
       Interest income                          --        --       116        116
       Loss on disposal of assets               --      (350)       --       (350)
       Other income (expense), net              --        --       (26)       (26)
       Income tax (provision) benefit          (45)       --        --        (45)
                                          --------   -------   -------   --------
       Net income (loss)                      (758)   (1,293)   (4,187)    (6,238)
                                          ========   =======   =======   ========
       Allocated assets                   $  4,512   $ 4,301   $ 4,662   $ 13,475
                                          ========   =======   =======   ========
       Expenditures for allocated assets  $     --   $    --   $   277   $    277
                                          ========   =======   =======   ========
</TABLE>




                                      F-23
<PAGE>   60

(16)   DISCONTINUED OPERATIONS

       On August 8, 2000, the Company sold its IS division to Earthlink, Inc.
       ("Earthlink"). Pursuant to the terms of the agreement with Earthlink, the
       Company received $2.8 million. A loss on disposal of $3.5 million was
       recorded during 2000 related primarily to the write-off of goodwill,
       certain equipment leases, and severance costs related to the sale of this
       business.

(17)   SEVERANCE AND RESTRUCTURING EXPENSES

       During first quarter 2000, the Company reduced its work force by 19
       employees and, as a result, recognized a charge of $567,000 related to
       severance, benefits and entitlements. In addition, the Company decided to
       terminate its Microsoft training business and recognized a charge of
       $298,000, which is comprised of the exit costs of this business and
       impairment losses on the value of related assets. As of December 31,
       2000, $26,000 remained of the total accrual of $865,000.

       During the fourth quarter 2000, the Company recorded a $1,895,000 expense
       related to a reduction in work force of approximately 65 employees and
       closing certain non-essential offices. This expense was comprised of
       $1,328,000 related to leases and various expenses related to office
       closings, $230,000 related to write-downs on equipment, $143,000 related
       to write-off of goodwill and customer lists and $194,000 related to
       severance, benefits and entitlements from downsizing and moving the
       administrative headquarters to Tampa, Florida from Cedar Knolls, New
       Jersey. This move was completed to consolidate the administrative offices
       with its operational office and eliminate corporate redundancies and
       reduce corporate overhead. $1,349,000 remained accrued in the Accrued
       Severance and Restructuring Expense account on the December 31, 2000
       balance sheet primarily related to remaining lease costs. The Company is
       attempting to negotiate a reduction in these remaining leases. The
       outcome of these negotiations cannot be determined at this time.

(18)  SUBSEQUENT EVENT

       (a) During April 2001, the Company sold its web hosting and non-dial-up
           business to Veraciti, Inc. for $200,000 cash and $60,000 worth of
           services to complete certain customer projects. In addition, Veraciti
           assumed certain lease obligations of the Company related to the web
           hosting and non-dial-up business and subleased 4,000 square feet of
           the Cedar Knolls office space. The Company recorded a $211,000 loss
           related to this sale. Veraciti is owned by Frank Altieri, a current
           member of the Board of Directors.

       (b) During April 2001, the Company took additional cost and restructuring
           steps to become profitable. It closed its Detroit facility and
           reduced its sales and general and administrative management headcount
           by 21 employees. As a result, the Company recognized a severance and
           restructuring expense of $518,000 in April 2001. This is comprised of
           $339,000 relating to the closing of the office, $62,000 relating to
           severance, benefits and entitlements and $117,000 of other costs.

       (c) On June 15, 2001, the Company reached a settlement agreement in
           principle with several shareholders resolving a contractual dispute
           with such shareholders. The Company has agreed to issue 350,000
           shares of common stock to these shareholders to effect that
           resolution.


                                      F-24