================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                  FORM 10-KSB
(Mark One)

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

For the fiscal year ended December 31, 1998

                                       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.)

  2 RIDGEDALE AVENUE, SUITE 350
  CEDAR KNOLLS, NEW JERSEY                                          07927
(Address of Principal Executive Offices)                          (Zip Code)

Issuer's Telephone Number, Including Area Code: (973) 285-2600

         Securities registered under Section 12(b) of the Exchange Act:

                     Title of Each Class Name of Each Exchange on
                                Which Registered

COMMON STOCK, $.01 PAR VALUE PER SHARE           THE BOSTON STOCK EXCHANGE, INC.

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

                     COMMON STOCK, $.01 PAR VALUE 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 |X| No
|_|

      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. $9,805,000.

      The aggregate market value of voting and non-voting  common equity held by
non-affiliates  of  the  Registrant  as of  March  26,  1999  was  approximately
$49,077,483.

      As of March 26, 1999,  3,698,004 shares of the Registrant's  common stock,
$.01 par value per share, were outstanding.

      DOCUMENTS  INCORPORATED BY REFERENCE.  The information  called for by Part
III, Items 9-12, is incorporated by reference to the definitive  Proxy Statement
for the Company's 1999 Annual Meeting of Stockholders, which will be filed on or
before April 30, 1999.


================================================================================

<PAGE>

           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 THE COMPANY'S (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 THE COMPANY'S  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  JUDGEMENT 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

BUSINESS OF ISSUER

      IBS Interactive,  Inc. (the "Company") was originally  incorporated in the
state of  Delaware on February  28,  1995 under the name  Internet  Broadcasting
System, Inc. On March 10, 1998, the Company changed its name to IBS Interactive,
Inc.

      The Company  provides a broad range of computer  networking,  programming,
applications  development  and Internet  services  primarily to  businesses  and
organizations.  These  services  are  designed to permit  clients to outsource a
variety of business needs such as computer networking, programming, maintenance,
Internet  connectivity  and  technical  support.  The Company  believes  that by
combining computer  consulting and Internet related services it is positioned to
capitalize  on   increasing   demand  by  businesses   and   organizations   for
comprehensive, cost-effective information technology solutions.

      The systems  integration  services  offered by the Company include network
planning,  design,  implementation,  operations,  optimization,  consulting  and
training.  The  Company's  programming  and  applications  development  services
consist primarily of custom programming for Internet and Intranet  applications,
including   distance   learning,   e-commerce  and  Web-site   development   and
maintenance.  Internet access services offered by the Company include  dedicated
leased line, frame relay and digital  subscriber line ("DSL")  connections,  Web
hosting,  dial-up  access  and  electronic  mail  services.  For the year  ended
December 31, 1998, systems integration, programming and applications development
and  Internet   services   accounted  for   approximately   65%,  22%  and  13%,
respectively, of the Company's revenues.

      The  Company's  principal  sales and  marketing  efforts  are  focused  on
businesses and organizations with systems integration,  applications development
and Internet  connectivity  needs.  The Company's  clients during the year ended
December 31, 1998  included  Aetna/U.S.  Healthcare  Inc.  ("Aetna");  Mobil Oil
Corporation; Black & Decker Corp.; TRW, Inc.; Foster-Wheeler; Unilever; New York
University;  The Wharton School of Business;  Commerce Bank; The  Archdiocese of
New York (Catholic Healthcare  Network);  and the National Aeronautics and Space
Administration.

      The Company's  telecommunications network is comprised of a secure network
operations  center ("NOC") in Cedar Knolls,  New Jersey,  leased high-speed data
lines and 39 Points-of-Presence  ("POPs") serving northern New Jersey, New York,
Virginia and Alabama.  The proximity of a POP to subscribers enables subscribers
in the area in which a POP is  located to access  the  Internet  through a local
telephone call. The Company currently supports 56k and ISDN technologies at each
of its POPs. The Company had approximately 9,500 dial-up subscribers as of March
26,  1999.  For the year  ended  December  31,  1998,  dial-up  access  services
accounted for approximately 7% of the Company's revenues.

                                     - 1 -

<PAGE>
      Because of the growth in its core  consulting and Internet  businesses and
the timing of acquisitions  consummated by the Company in 1998, management is in
the  process  of  developing  a formal  plan to  fully  integrate  the  acquired
businesses  with its core  operations.  As such,  for  purposes of defining  and
reporting  business segments for the years ended December 31, 1997 and 1998, the
Company   considers  its  major  businesses  to  be:  (i)  System   Integration,
Programming and Applications  Development  Consulting;  (ii) Internet  Services;
(iii) Web Design  (principally  the  Design FX  acquisition);  and (iv)  Network
Installation  (principally  the Halo (as hereinafter  defined)  acquisition).  A
Corporate segment also provides  administrative,  marketing and treasury support
services (see note 13 to the consolidated financial statements).

GENERAL DEVELOPMENT OF BUSINESS - ACQUISITIONS

      In April 1996, the Company  acquired all of the outstanding  capital stock
of Interactive Networks, Inc.  ("Interactive") in consideration for the issuance
of 377,536 shares of the Company's  common stock,  $.01 par value per share (the
"Common Stock").  At the time of the combination,  Interactive had approximately
400 dial-up subscribers, two POPs in New Jersey and one POP in New York City.

      In May 1996,  the  Company  acquired  substantially  all of the  assets of
Mordor  International  ("Mordor"),  a  proprietorship,  in  consideration  for a
$20,000 cash payment.  At the time of the acquisition,  Mordor had approximately
400 dial-up subscribers and network equipment valued at $15,000.

      In March 1997,  the Company  acquired  substantially  all of the assets of
AllNet Technology Services, Inc. ("AllNet"),  in consideration for (i) a $75,000
cash payment and (ii) the issuance of 15,883 shares of Common Stock. At the time
of the acquisition,  AllNet had approximately 1,000 dial-up subscribers and five
POPs in the northern New Jersey area.  AllNet's  computer and network  equipment
was valued at $75,000.

      In January 1998,  the Company  acquired all of the issued and  outstanding
capital stock of Entelechy, Inc. ("Entelechy") in consideration for the issuance
of an aggregate of 277,434 shares of Common Stock,  of which 147,310 shares were
issued at the closing and 130,124 shares are to be issued ratably on each of the
first,  second and third anniversary of the acquisition  closing date,  provided
that, the former Entelechy  stockholders to whom such shares are issuable remain
employees of the Company on each respective anniversary.  The Company incurred a
charge of approximately  $180,000  relating to the issuance of such Common Stock
in 1998 and expects to incur charges of $197,000,  $197,000 and $17,000 relating
to the issuance of such Common  Stock in each of the years  ending  December 31,
1999,  2000 and 2001,  respectively.  The  acquisition  was  accounted  for as a
purchase. On November 4, 1998, Entelechy was formally merged into the Company.

      In January 1998, the Company acquired  substantially  all of the assets of
JDT WebwerX LLC  (consisting  primarily  of computer  equipment  and  intangible
assets)  in  consideration  for a $35,000  cash  payment.  The  acquisition  was
accounted for as a purchase.

      On September  24,  1998,  the Company  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 the Company acquired all of the issued and outstanding
membership  interests of DesignFX in exchange for $1,251,000 (subject to certain
adjustments)  of  unregistered  shares of Common  Stock valued by the parties at
$6.25  per  share.  The  combination  has been  accounted  for as a  pooling  of
interests.  Accordingly,  the Company's financial  statements have been restated
for all periods  presented to include the results of  operations  and  financial
position of DesignFX. On December 9, 1998, DesignFX was formally merged into the
Company.

      On December 1, 1998, the Company acquired  substantially all of the assets
of MBS, Inc. ("MBS"), a Huntsville,  Alabama-based Microsoft Certified Technical
Education Provider - Partner Level, for approximately  $50,000,  the issuance of
4,493 shares of Common Stock and the  assumption  of  approximately  $150,000 in
liabilities.

      On December 10,  1998,  the Company  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  and all of the members of Halo.  Pursuant to the
terms of the Acquisition  Agreement,  the Company acquired all of the issued and
outstanding  membership interests of Halo in exchange for $1,425,000 (subject to
certain  adjustments)  of  unregistered  shares  of Common  Stock  valued by the
parties at $6.50 per share.  The combination has been accounted for as a pooling
of interests. Accordingly, the Company's financial statements have been restated
for all periods  presented to include the results of  operations  and  financial
position of Halo.


                                     - 2 -

<PAGE>

GENERAL DEVELOPMENT OF BUSINESS - FINANCINGS

      In August 1995,  the Company  issued twenty $5,000 face amount  promissory
notes with a term of three years in the aggregate  principal  amount of $100,000
(the "1995  Notes").  The 1995 Notes  accrued  interest at a rate of 6% and were
repaid in June 1998. In addition,  each purchaser of the 1995 Notes was entitled
to receive 2,449 shares of Common Stock for every note purchased.

      On October  31,  1997,  the  Company  entered  into a series of  financing
agreements in the aggregate amount of $200,000 (the "1997 Financing") with eight
individual  investors  (collectively,  the "1997 Notes"). The 1997 Notes accrued
interest  at a rate of 8% and  were  payable  in full  upon the  closing  of the
Company's  initial  public  offering of Common Stock.  In June 1998, the Company
repaid the outstanding  principal,  aggregating $200,000,  and accrued interest,
aggregating  $10,000,  on the 1997 Notes. In connection with the issuance of the
1997 Notes,  investors also received  warrants to purchase up to an aggregate of
48,872  shares of the Company's  Common Stock at an exercise  price of $3.54 per
share through  October 2000. The Company  capitalized the fair value ascribed to
the warrants  ($54,000),  which included a value reflective of the excess of the
expected  initial public offering price less the exercise  price,  and amortized
such amount over the life of the 1997 Notes. Interest expense for the year ended
December 31, 1998, including the amortization of the value ascribed to warrants,
totaled $45,000.  The effective  interest rate on the 1997 Notes, which includes
the amortization of the value of the warrants, approximates 68% per annum.

      On May 14, 1998,  the  Company's  registration  statement on Form SB-2, as
amended (file number 333-47741),  relating to the initial offering of its Common
Stock was declared effective by the SEC (the "Offering").  Whale Securities Co.,
L.P.  acted as the  underwriter  in  connection  with  the  Offering  which  was
consummated  on May 20,  1998.  In  connection  with the  Offering,  the Company
registered,  issued and sold 1,380,000 shares of Common Stock, including 180,000
shares of Common  Stock  issued in  connection  with the exercise in full of the
underwriter's over-allotment option at an initial public offering price of $6.00
per share  resulting in proceeds to the Company (net of  underwriting  discount,
commissions  and  other  expenses  payable  by the  Company)  in  the  aggregate
approximate amount of $6,642,000.  Additionally,  the Company registered 120,000
shares of Common Stock underlying  warrants to purchase Common Stock sold by the
Company  to the  underwriter  for  $100.  The  warrants  are  exercisable  for a
four-year period commencing on May 14, 1999 at a price of $8.10 per share.

COMPANY SERVICES

      SYSTEMS INTEGRATION

      The  Company  provides  a broad  range of  systems  integration  services,
including network planning, design,  implementation,  operations,  optimization,
consulting and training.

      NETWORK  PLANNING.  Network  planning  focuses on  providing  clients with
strategic and tactical  analyses of their current network  operations and future
network  requirements.   Network  planning  services  provided  by  the  Company
encompass a number of critical planning elements including:  (i) defining client
business  requirements;  (ii) developing  strategic  information  architectures;
(iii) performing network baseline audits;  (iv) preparing capacity plans for the
physical  network,  logical  transport  and services;  (v)  selecting  preferred
technologies; and (vi) conducting network security audits and planning.

      NETWORK DESIGN. Network design includes services that assist in the design
of physical, logical and operational information infrastructures. These services
involve  detailing  the  network   specifications  and  implementation   tactics
necessary to achieve clients' business objectives.  To accomplish this task, the
Company  generates a set of work papers that identify the specific  technologies
to be used and the  manner in which such  technologies  will be  configured  and
implemented.  These work papers also  provide an analysis of the manner in which
new  technology  will be  integrated  with the  client's  existing  hardware and
software and the manner in which such  integrated  components will be managed on
an ongoing  basis.  Examples of network design  services  offered by the Company
include: (i) life-cycle planning,  (ii) developing future technology integration
plans,  (iii) defining  functional  requirements,  (iv) developing  multi-vendor
integration plans, (v) preparing technical design documentation, (vi) developing
engineering  specifications  and documents,  (vii) preparing  specifications  in
connection  with  requests for proposals or other  make/buy  criteria and (viii)
providing detailed component purchasing lists.


                                     - 3 -

<PAGE>

      NETWORK  IMPLEMENTATION.  Network implementation includes high value-added
network  services such as IP  addressing  and router  configuration,  as well as
traditional   system   integrator   functions  such  as  hardware  and  software
installation  and  procurement.  To serve its  clients'  networking  needs,  the
Company maintains  affiliations and reseller  arrangements with various hardware
and software  vendors,  including  Hewlett Packard Co.,  COMPAQ,  Novell,  Cisco
Systems and a variety of distributors.  The Company customizes an implementation
plan for each client,  which may include the following  activities:  (i) project
management;  (ii)  installing  the  cabling  infrastructure  to support  network
services; (iii) integrating new hardware and software products and systems; (iv)
building  network  operations and management  centers;  (v)  re-configuring  and
upgrading  network  elements,  systems  and  facilities;  and (vi)  implementing
installation documentation, conformance testing and compliance certification. In
addition,  the Company offers Year 2000 Compliance  testing services on customer
network hardware and off-the-shelf vendor software,  and the Company will assist
the customer in correcting any Year 2000 Compliance issues that are identified.

      NETWORK OPERATIONS. Network operations includes ongoing tasks necessary to
keep the  client's  network  fully  operational.  The Company  provides  network
operations  services to a range of clients,  including those with  client/server
networks  running both Internet  (TCP/IP) and workgroup  (Novell and  Microsoft)
protocols  intermingled  with  existing  (SNA)  networks.  The Company  performs
specific operation  activities in accordance with individual client requirements
only after  analyzing the client's  existing  operating  practices.  Examples of
network  operation  activities  undertaken by the Company  include:  (i) network
administration, including management of user accounts, service levels and client
administrative practices;  (ii) network utilization analysis,  involving ongoing
measurement of network activity against  established  network  baselines;  (iii)
ongoing  management of documentation,  including  physical assets,  policies and
procedures; (iv) network trouble shooting, involving fault detection, isolation,
repair and restoration;  (v) alarm  management,  including setting alarm levels,
cross-correlation,  problem  diagnosis and dispatch of service  resources;  (vi)
network  backup,  including  design  and  supervision  of backup  processes  and
policies and exercise of disaster recovery procedures;  and (vii) routine moves,
additions and changes to network elements, infrastructure and services.

      NETWORK OPTIMIZATION.  Network optimization involves maximizing a client's
rate of return  on  network  investments  through  such  means as  reduction  of
operating  costs and increases in network  utilization.  Optimization is closely
related  to  each of the  other  phases  of  network  development.  Optimization
services may be long term in nature, address issues such as cost containment and
utilization   and  are  often   designed   to   optimize   local  area   network
infrastructures.  Network optimization  services offered by the Company can also
be  packaged  as  discrete  projects,   designed  to  present  alternatives  for
optimization of workgroup, departmental, building or campus network investments.
Additionally,  the  Company  can  provide  assistance  to clients in  optimizing
"logical" networks,  by addressing a protocol,  service or application operating
in the larger context of the client's network.  Examples of network optimization
services  provided by the Company  include:  (i)  recommendations  for efficient
allocation  of  bandwidth;  (ii) network  traffic  analysis,  identification  of
bottlenecks   and   recommendations   for   change;    (iii)   network   process
re-engineering;  and (iv) knowledge  transfer to client operations  personnel on
topics such as basic  practices,  or operations of network  management tools and
stations.

      CONSULTING.  Consulting consists of providing businesses and organizations
with detailed reports and recommendations  regarding any or all aspects of their
network  operations,  from a  review  of the  entire  network  to an  audit of a
particular  protocol.  Consulting  services  provided by the Company are closely
related to network  optimization  and include:  (i) security audits and protocol
recommendations, (ii) disaster recovery plan audit and protocol recommendations,
(iii) network  programming  and  applications,  (iv) network cost audits and (v)
strategic plan development.

      TRAINING.  Training  services are provided to businesses and organizations
seeking  information  and  guidance  with  respect  to the  manner in which such
entities  may  effectively  utilize  computer  networks,  the Internet and other
information  technology  prior to the time such businesses  make  investments of
capital, time and/or personnel.  The Company also offers customized  educational
programs  that  are  designed  to  provide  an  opportunity  for  an  entity  to
conceptualize  and determine how computer  networks and the Internet can best be
utilized  to  serve  the  entity's  needs.  Additionally,  the  Company  assists
organizations  that need  technical  support  in  establishing  and  maintaining
internal network  operations.  Training services offered by the Company include:
(i)  Internet  strategy  development,  (ii)  basic  Internet  consulting,  (iii)
one-on-one  Internet  training  for  executives  and  (iv)  group  training  for
non-computer professionals.
                                     - 4 -

<PAGE>
      In addition,  through its 1998  acquisition  of  substantially  all of the
assets of MBS,  the Company is now a  Microsoft  Certified  Technical  Education
Center or "CTEC."  CTECs are training  centers  authorized by Microsoft to offer
instructor led classes,  Web-based training and self-study  programs to computer
professionals on its technical networking and development  products. A CTEC must
use Microsoft  Official  Curriculum and Microsoft  Certified Trainers to provide
education to its customers.  The courses a CTEC teaches prepare students to pass
Microsoft Certification Tests to become Microsoft Certified System Engineers and
Microsoft  Certified  Solution  Developers.  In  Huntsville,  the  Company  is a
Microsoft CTEC "Partner" Level, which is a higher  "nominated"  designation than
the normal  "member"  level  status.  The  Company has two  Microsoft  certified
classrooms and three full-time and two part-time Microsoft Certified Trainers on
staff or under contract.  The Company offers more Microsoft Official  Curriculum
courses then any other CTEC in its Alabama  marketing  area,  teaching 50 to 100
students a quarter,  and has a higher  passing rate for Microsoft  certification
tests then any other CTEC in Alabama.

      PROGRAMMING AND APPLICATIONS DEVELOPMENT

      Programming for Intranet and Internet  applications  requires knowledge of
several different programming languages.  These include PERL scripting and UNIX,
Windows  NT,  C++,  JAVA,   HTML,  Cold  Fusion  and  customized   database  and
applications  programming.  The  Company  maintains  a full range of network and
applications  programming  expertise to: (i) ensure that  clients'  networks and
applications are specifically tailored to meet their requirements,  (ii) develop
and  maintain   clients'   Web-sites,   (iii)  provide  clients  with  technical
assistance,  (iv)  provide  consulting  services  and (v)  ensure the secure and
continuous  running of the  Company's  Internet  hosting  and  access  networks.
Examples of programming and applications  development  services  provided by the
Company include customized  applications  development,  Web-site development and
maintenance and chat-room hosting and development.

      CUSTOMIZED APPLICATIONS  DEVELOPMENT.  Customized applications development
includes  services such as:  E-Commerce  solutions;  Oracle and Microsoft Access
database development of full-featured  "shopping cart" style on-line catalogs to
enhance Web-sites and Intranets; and Distance Learning applications development.
Distance Learning  applications allow 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.
Distance  Learning  also  allows  for  a  globally   deployed,   instantaneously
up-datable,   training   management  system.   Distance  Learning   applications
development   incorporates  the  latest  technologies  in  Internet  programming
development,  including  integration  of  desk-top  virtual  reality,  streaming
audio/video  segments  and  database  applications  that track  employee-student
status and performance.

      WEB-SITE  DEVELOPMENT AND MAINTENANCE.  Web-site  development involves the
design and development of a client's Web-site production.  Working with clients,
the Company designs,  creates and maintains  multi-media,  interactive Web-sites
for its clients,  using the latest  applications and development  tools, such as
Oracle and Cold Fusion.

      INTERNET SERVICES

      The Company  provides a broad range of Internet  services,  including T-3,
T-1 and DSL  service,  dedicated  leased  lines,  dial-up  services  and hosting
services.

      INTERNET ACCESS. The Internet access options offered by the Company to its
subscribers include: (i) 56 Kbps, T-1 and T-3 service;  (ii) integrated services
digital networks  (ISDN);  (iii) DSL; (iv) dedicated modems for SLIP/PPP access;
and (v) dial-up  accounts.  The  Company's  high-speed,  digital  communications
network  provides  business and consumer  subscribers  with direct access to the
full range of Internet  applications and resources,  including global electronic
mail, the Web, USENET news groups, chat-rooms and file transfer protocols.

      HOSTING.  Internet hosting is a multi-media  Internet service that permits
clients to have a continued  presence on the Web directly  through the Company's
high-speed servers and a multi-homed Internet network. Hosting services provided
by the Company include virtual hosting and co-location. Virtual hosting allows a
client's  Web-site (which may be hosted on either a UNIX or NT server  platform)
to be connected to the Internet via the  Company's  NOC.  Co-location  permits a
client's  Internet  content to be hosted on a  dedicated  server  located at the
Company's  NOC,  the  server is  either  owned by the  Company  or leased to the
client.  Co-location  at the Company  eliminates  or  substantially  reduces the
capital investments a client would otherwise be required to make to purchase and
manage  necessary  hardware,  software  and network  operations  and  eliminates

                                     - 5 -

<PAGE>

certain of the client's  security  concerns  associated  with  connection of the
client's private network(s) to a Web server.

NETWORK INFRASTRUCTURE

      The  Company  facilitates  access to the  Internet  by means of a regional
telecommunications network consisting of high-speed dedicated telecommunications
links  (Multiple  T-3 and multiple T-1 links),  computer  hardware and software,
seven physical and 32 virtual POPs in locations throughout New Jersey, Virginia,
Alabama,  New York and the NOC,  which  securely  houses the Company's  back-end
servers and networking equipment.

      The   Company's   POPs,   external   communication   links   and  NOC  are
interconnected  by  a  robust,   router-based  TCP/IP  network,  which  includes
interconnection   of  POPs  via  T-1  rate   facilities.   Physical  local  loop
connectivity  is  provided  over  fault  tolerant  SONET  fiber  facilities  and
diverse-route  conventional  facilities.  The Company  maintains  high-bandwidth
paths to the Internet with UUNet Worldcom,  Winstar, Sprint, ICI/Digex, CRL, Cox
and  Cable  &  Wireless.  Each  physical  POP  includes  network  access  server
(dial-access  terminal  server)  hardware,  a router and  leased-line  interface
equipment.  The virtual POPs are local telephone  numbers  (outside of the local
calling area of the physical POPs) through which calls are aggregated by a local
exchange  carrier or other service provider prior to transfer to the Company via
a dedicated trunk route.

      The Company  operates  numerous  application  specific  server  systems to
provide  functionality  for client  applications and to support Web-site hosting
and other  business  services.  The  Company has made and expects to continue to
make significant  investments in its computing hardware that includes Pentium PC
servers  (running  Windows  NT and BSDI  UNIX) and SUN  UltraSparc  servers.  To
efficiently  and  effectively  serve its  clients and  subscribers,  the Company
utilizes  multiple types of operating  systems.  The Internet  services  network
(dial-access  consumer,  e-mail,  news and consumer  Web)  utilizes UNIX for its
scalability  and security  features,  while business  clients are served through
either UNIX or Microsoft-based technologies.

      The Company is currently  dependent  upon Bell Atlantic,  Bell South,  MCI
WorldCom,   Sprint,   Hyperion,    ICI/Digex   and   KMC   to   provide   leased
telecommunication  lines on a cost-effective  and continuous basis, and on UUNet
Worldcom,  Winstar, Sprint,  ICI/Digex, CRL, Cox and Cable & Wireless to provide
Internet  access.  In  accordance  with  industry  custom,  the Company does not
maintain   interconnect   agreements   with  these   suppliers.   The  temporary
discontinuation  or  termination  of  service  to the  Company  by any of  these
suppliers would result in interruptions in the Company's provision of service to
its  clients,  which would  adversely  affect its  business.  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 Third-Party  Suppliers and Manufacturers;  Possible Service Interruptions and
Equipment Failures."

TECHNICAL SUPPORT

      The  Company  believes  that  reliable  24 hours a day,  seven days a week
technical support is critical to retaining existing, and attracting new, clients
and  subscribers.  Currently,  the Company provides 24 hours a day, seven days a
week (i) live telephone  assistance,  (ii) e-mail-based  assistance,  (iii) help
sites and  Internet  guide  files on the  Company's  Web-site  and (iv)  printed
reference material.

SALES AND MARKETING

      The  Company's  sales and  marketing  strategy is driven by the  Company's
ability to offer its clients  comprehensive  computer  consulting  and  Internet
related  services  ranging  from  Internet  access,   Web-site  programming  and
applications   development   and   hosting  to  computer   networking,   systems
consultation,  integration and management.  The Company's  marketing efforts are
primarily focused on large- and medium-sized  businesses and organizations,  and
to a lesser extent, on small businesses and consumers. The Company utilizes both
direct selling and third-party channels for marketing its services.

      The Company's  marketing  efforts  principally  involve  print,  radio and
direct  mailing in areas within the geographic  scope of the Company's  network.
The  Company  believes  that the  continued  expansion  of its print,  radio and
targeted  direct  mailings are  important  factors in its ability to continue to
expand its business and compete effectively.

                                     - 6 -

<PAGE>
      The Company also  generates  sales leads through  referrals  from clients,
responses to request for proposals,  referrals  from other  computer  consulting
businesses  and  Internet  Service  Providers,  the  Company's  own Web-site and
associated links and industry seminars and trade shows.  Efforts in all of these
areas will continue and will be increased in 1999. As a result of the continuing
extension of services  offered by the Company in all areas,  it is able to offer
its clients a wider range of solutions and capitalize on  opportunities  that it
previously outsourced.

      The Company currently employs 12 full-time sales people, with six assigned
to the northern New Jersey/New York City  metropolitan  area,  three assigned to
central and southern New Jersey and three  assigned to the  Southeast  region of
the United  States.  The Company  believes that the  technical  knowledge of its
executive officers and network engineers enhances the efforts of its sales staff
and enables the Company to develop sales  proposals  meeting the specific  needs
and budgets of its prospective  clients. In addition to increasing its sales and
marketing  staff, a training  effort has been  undertaken to ensure that all new
sales and marketing employees,  as well as current ones, are fully knowledgeable
of the complete spectrum of services the Company offers to clients.

CLIENTS

      The   Company's   client  base  consists   primarily  of  businesses   and
organizations with systems  integration,  applications  development and Internet
connectivity  needs.  The Company's  client base also includes,  as of March 26,
1999,  approximately  9,500  consumer  Internet  dial-up  accounts.  The Company
intends  to  continue  to focus it sales and  marketing  efforts on the needs of
businesses  and  organizations,  while also  continuing  to expand  its  network
operations. The Company intends to expand its client base in all of its business
lines  through  internal  growth as well as through  acquisitions  to lessen its
dependence on any one particular client or group of clients.

      The Company is dependent on a limited  number of clients for a substantial
portion of its  revenues.  For the year ended  December 31, 1998,  the Company's
largest  client,  Aetna,  accounted  for  approximately  35%  of  the  Company's
revenues. Revenues derived from the Company's consulting contracts are generally
non-recurring in nature. The Company's contract with Aetna runs through December
2000 and  provides  for the  Company to render  services  pursuant  to  purchase
orders,  each of which constitutes a separate  contractual  commitment by Aetna.
Non-renewal or  termination of the Company's  contract with Aetna or the failure
by Aetna to issue  additional  purchase orders to the Company under the existing
contract would have a material  adverse  effect on the Company.  There can be no
assurance that the Company will obtain additional contracts for projects similar
in scope to those previously  obtained,  that the Company will be able to retain
existing  clients or attract  new  clients or that the  Company  will not remain
largely  dependent on a limited  client base which may continue to account for a
substantial portion of the Company's 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 Aetna;
Non-Recurring Revenues."

COMPETITION

      The markets for the Company's services are highly competitive. The Company
believes  that  competition  in the  systems  integration  and  programming  and
applications  development  consulting  market is based upon  quality of service,
responsiveness  to client  demands,  the number and  availability  of  qualified
engineers and  programmers,  price,  project  management  capability,  technical
expertise, size and reputation.  Additionally, the Company further believes that
competition in the Internet  services  market is primarily based upon quality of
service,  access  to  local  POPs,  range of  services,  technical  support  and
experience.

      The Company competes with numerous large companies that have substantially
greater market presence and financial,  technical, marketing and other resources
than the Company,  including (i) large  information  technology  consulting  and
service  providers and application  software firms such as Andersen  Consulting,
Cambridge Technology Partners,  Electronic Data Systems Corporation and American
Management  Systems;  (ii)  international,  national,  regional  and  commercial
Internet  Service  Providers such as Performance  Systems  International,  Inc.,
Earthlink,  Mindspring and UUNet Worldcom;  (iii)  established  on-line services
companies such as America Online,  Inc.; (iv) computer hardware and software and
other  technology  companies  such  as IBM and  Microsoft  Corp.;  (v)  national
long-distance carriers such as AT&T Corp., MCI Worldcom and Sprint, and regional
telephone  companies,   including  Bell  Atlantic  and  Bell  South,  and  cable
operators;  and (vi) major accounting firms.  Many of the Company's  competitors
have announced plans to expand their service  offerings and increase their focus
on the computer  networking and Internet related services' markets. As a result,

                                     - 7 -

<PAGE>

competition  is expected to  intensify  for highly  skilled  network  engineers,
programmers and technicians.

      As a  result  of  increased  competition,  the  Company  also  expects  to
encounter   significant  pricing  pressure,   which  in  turn  could  result  in
significant  reductions in the average selling price of the Company's  services.
There can be no assurance that the Company 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, the
Company believes that continuing  consolidation in the Internet  services market
could result in increased price and other competition in the industry. Increased
price or other  competition  could  make it  difficult  for the  Company to gain
additional  clients and subscribers and could have a material  adverse effect on
the Company.  There can be no assurance that the Company 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 March 26, 1999, the Company had 128 full-time  employees,  including
five  executive   officers,   eight   programmers,   63  network  engineers  and
technicians,  20 persons devoted  exclusively to providing  technical support to
clients,  13  persons  dedicated  to  sales  and  marketing  activities  and  19
administrative  personnel;  and five part-time employees.  None of the Company's
employees are  represented  by a labor union,  and the Company is not a party to
any  collective  bargaining  agreement.  The Company  believes that its 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  --  Recruitment  and  Retention  of  Qualified
Personnel."

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

ITEM 2.  DESCRIPTION OF PROPERTY

      The Company serves its clients through its corporate headquarters and NOC,
each located in Cedar Knolls,  New Jersey,  and its regional  offices located in
New Jersey,  Virginia and Huntsville,  Alabama,  as well as its network of seven
physical POPs.

      At  December  31,  1998,  the Company  did not own any real  property  and
conducted its operations at the following leased premises:
<TABLE>
<CAPTION>
                                                       APPROXIMATE
                                                          ANNUAL
                       DESCRIPTION OF         SQUARE      LEASED
LOCATION               FACILITY               FOOTAGE      COST     LEASE TERM
--------               --------------         -------  -----------  ----------  
<S>                    <C>                     <C>      <C>        <C>
2 Ridgedale Ave.,      Corporate               9,830    $ 155,000  5/01/97-3/31/03
Suite 350              headquarters, sales,
Cedar Knolls, NJ       technical support,
07927                  customer support,
                       administration

Two Greentree          Sales, customer         6,715    $ 110,000  12/20/98-12/31/03
Centre,                support, technical
Suite 120              support
Marlton, NJ 08053

143 Highway 35,        Sales, customer         2,325    $ 32,000   month to month
Suite 105              support, technical
Eatontown, NJ 07724    support

4920 C. Corporate      Sales, customer         2,435    $ 27,000   month to month
Dr. Huntsville, AL     support, technical
35805                  support

Vantage Point,         Sales, customer         1,261    $ 16,000   4/1/98-3/31/03
Suite 2A               support, technical
100 Highway 36         support
West Long Branch, NJ
07764

8200 S. Memorial       Sales, customer         1,800    $ 18,000   1/1/98-1/31/01
Pkwy.                  support, technical
Huntsville, AL 35805   support

</TABLE>

                                     - 8 -

<PAGE>
<TABLE>
<CAPTION>
                                                       APPROXIMATE
                                                          ANNUAL
                       DESCRIPTION OF         SQUARE      LEASED
LOCATION               FACILITY               FOOTAGE      COST     LEASE TERM
--------               --------------         -------  -----------  ----------  
<S>                    <C>                     <C>      <C>        <C>
Vantage Point,         Sales, customer         1,261    $ 16,000   4/1/98-3/31/03
Suite 2A               support, technical
100 Highway 36         support
West Long Branch, NJ
07764

8200 S. Memorial       Sales, customer         1,800    $ 18,000   1/1/98-1/31/01
Pkwy.                  support, technical
Huntsville, AL 35805   support
</TABLE>

      The Company believes that all of its leased premises are in generally good
condition, are well maintained and are adequate for its current operations.

      In addition to its office space, the Company currently leases the sites at
which its  physical  POPs are  located.  The Company  believes  that it would be
readily able to locate other space in which to house its corporate  headquarters
and NOC,  regional  offices and its physical POPs if any leased space  currently
being utilized were to become unavailable.

ITEM 3.  LEGAL PROCEEDINGS

      POTENTIAL LITIGATION.  A former employee has threatened to institute legal
action  against the Company for breach of contract and wrongful  termination  on
the  basis of  racial  and  gender  discrimination  and is  seeking  salary  and
attorney's  fees  aggregating  $20,000.   Additionally,   certain  persons  have
threatened to institute legal action against the Company for unspecified damages
and  expenses in  connection  with the  Company's  termination  of service to an
Internet  subscriber.  There can be no assurance that these  matters,  which are
discussed more fully in the succeeding paragraphs,  will be resolved in a manner
favorable to the Company.

      In January 1998, the Company became aware of a threatened  suit for breach
of  contract  and  wrongful   termination  on  the  basis  of  race  and  gender
discrimination in connection with its dismissal of an employee in December 1997.
The claimant filed a complaint  against the Company with the United States Equal
Employment  Opportunity  Commission ("EEOC"). By letter dated July 29, 1998, the
EEOC  informed  the  claimant  and  Company  that it would not be  pursuing  the
complaint.

      In  February  1998,  the Company  became  aware of a  threatened  suit for
damages and  expenses  allegedly  incurred by an  individual  and other  persons
and/or  companies  that the  individual  claims to represent  resulting from the
Company's  termination of a subscriber's  Internet access service.  The claimant
also alleges that the  Company's  termination  of service was a violation of the
claimant's  civil rights.  The claimant seeks an unspecified  amount of expenses
and damages.  There can be no  assurance  that this matter will be resolved in a
manner favorable to the Company. Since the original  communication,  the Company
has received no further correspondence relating to this matter.

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

      None.

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      The Company's  Common Stock is traded on the NASDAQ SmallCap Market System
under the  symbol  "IBSX."  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.


                                     - 9 -

<PAGE>
                1998                    HIGH              LOW
                ----                    ----              ---
                Second Quarter(1)        $9               $8
                Third Quarter            $8 3/4           $3
                Fourth Quarter           $9 1/2           $4 1/4

      The number of holders of record of the Company's Common Stock on March 24,
1999 was 92. The Company believes that it has over 890 beneficial owners.

      There were no dividends or other  distributions made by the Company during
the fiscal year ended December 31, 1998. It is  anticipated  that cash dividends
will not be paid to the holders of the Company's Common Stock in the foreseeable
future.

      On November 11,  1998,  the Company  entered  into an  agreement  with EBI
Securities  Corporation  ("EBI")  whereby  EBI was  retained  by the Company for
mergers,  acquisitions and related matters.  EBI was granted a warrant (the "EBI
Warrant") to purchase  50,000  shares of Common Stock that vests over the period
of service if the requisite number of acquisitions are consummated. The exercise
price of the EBI  Warrants was based,  in part,  on the fair market value of the
Company's Common Stock on the date of the agreement  (25,000 of the EBI Warrants
will vest at an exercise price of $6.00 per share,  and the remaining 25,000 EBI
Warrants will vest at an exercise price of $7.20 per share).  The value ascribed
to the EBI Warrant will be  capitalized.  The issuance of the EBI Warrant to EBI
was exempt from  registration  under the Securities Act of 1933, as amended (the
"Act"), pursuant to Section 4(2) of the Act.

      As part of the acquisition of MBS, on December 1, 1998, the Company issued
to William  Blount and Rebecca  Blount,  2,246 and 2,247 shares of Common Stock,
respectively.  The  issuance of the Common  Stock to the Blounts was exempt from
registration under the Act, pursuant to Section 4(2) of the Act.

      As part of the  acquisition  of Halo,  on  December  10,  1998 the Company
issued to the interest  holders of Halo 180,866  shares of the Company's  Common
Stock in exchange for all of the issued and outstanding  membership interests of
Halo.  The  issuance  of the Common  Stock to the  interest  holders of Halo was
exempt from registration under the Act, pursuant to Section 4(2) of the Act.

      On May 14, 1998,  the  Company's  registration  statement on Form SB-2, as
amended (file number 333-47741) (the "Registration Statement"),  relating to the
Offering was declared  effective by the SEC. Whale Securities Co., L.P. acted as
the underwriter in connection with the Offering which was consummated on May 20,
1998. In connection with the Offering,  the Company registered,  issued and sold
1,380,000  shares of Common  Stock,  including  180,000  shares of Common  Stock
issued  in   connection   with  the  exercise  in  full  of  the   underwriter's
over-allotment  option at an initial  public  offering  price of $6.00 per share
resulting in proceeds to the Company (net of underwriting discounts, commissions
and other expenses payable by the Company) in the aggregate  approximate  amount
of $6,642,000.  Additionally,  the Company  registered  120,000 shares of Common
Stock  underlying  warrants to purchase  Common Stock sold by the Company to the
underwriter  for $100.  The  warrants  are  exercisable  for a four-year  period
commencing on May 14, 1999 at a price of $8.10 per share.

      From the effective date of the Registration Statement through December 31,
1998,  the Company has applied an  aggregate  of $507,000 of the net proceeds of
the Offering for the full repayment of certain  indebtedness;  $278,000  towards
the purchase of  equipment;  $115,000  towards the purchase of assets of, or the
outright  acquisition of,  companies;  and $327,000 towards sales and marketing.
The Company  believes  that none of the proceeds  used in the fourth  quarter of
1998 were paid,  directly or  indirectly,  to (i)  directors  or officers of the
Company or their  affiliates,  (ii)  persons  owning ten  percent or more of the
Common Stock or (iii)  affiliates of the Company.  To date, the Company believes
that it has used the net  proceeds of the Offering in a manner  consistent  with
the use of proceeds  described in the Registration  Statement and the Prospectus
dated May 14, 1998.  The remaining net proceeds of the Offering in the amount of
$5,415,000 remain unused and are invested in short-term assets.

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  AND  NOTES
APPEARING ELSEWHERE HEREIN.

-------
1 Trading in the Company's  Common Stock on the NASDAQ  SmallCap
Market System began on May 18, 1998.

                                     - 10 -

<PAGE>
OVERVIEW

      The Company  provides a broad range of computer  networking,  programming,
applications  development  and Internet  services  primarily to  businesses  and
organizations.  The Company's  revenues are derived  principally from consulting
fees earned in connection with the performance of systems integration  services,
recurring  monthly  Internet  connectivity  fees and  consulting  fees earned in
connection with programming and applications development services.

      The  Company  commenced  operations  in June 1995 as an  Internet  Service
Provider offering  Web-site hosting services.  Since April 1996, the Company has
acquired Interactive,  Mordor, AllNet, Entelechy, JDT WebwerX LLC, DesignFX, MBS
and Halo. The Company began to provide  Systems  Integration and Programming and
Applications  Development services in April 1996 and has increasingly emphasized
such services.

      The Company's  consulting services generally produce higher profit margins
than the  Company's  Internet  services.  For the year ended  December 31, 1998,
Systems  Integration,  Programming  and  Applications  Development  and Internet
Services & Training accounted for approximately 65%, 22% and 13%,  respectively,
of the Company's revenues as compared to 61%, 21% and 18%, respectively, for the
year ended December 31, 1997.

      The Company expects that operating expenses will increase significantly in
connection with expansion  activities that the Company anticipates  undertaking,
including  those  related to:  potential  acquisitions  of systems  integrators,
programming and applications  development firms and Internet Service  Providers,
further development and upgrade of the Company's network and increased marketing
activities.  Utilizing proceeds from the Offering, the Company began, during the
second quarter of 1998, to increase its  expenditures in connection with network
development and marketing efforts that resulted in increased  operating expenses
during subsequent periods.  Accordingly, the Company's future profitability will
depend on corresponding increases in revenues from operations.

      The  Company's  projected  expense  levels  are based on its  expectations
concerning  future  revenues  and are fixed to a large  extent.  Any  decline in
demand for the  Company's  services or increases in expenses that are not offset
by  corresponding  increases in revenue could have a material  adverse effect on
the  Company.  The  Company  also  expects  to incur  charges  of  approximately
$197,000,  $197,000 and $17,000  related to the  acquisition of Entelechy in the
years  ending  December 31, 1999,  2000 and 2001;  and charges of  approximately
$99,000,  $28,000,  $28,000 and $6,000 in the years  ended  December  31,  1999,
2000,2001  and  2002,  respectively,  in  connection  with the  1998  award of a
restricted stock grant to an executive officer and an option grant to directors.
The value of these grants will be expensed  ratably over the respective  periods
that the stock is earned and the options vest.

      The Company anticipates that growth in its client and subscriber base will
increase operating costs (including  expenses related to network  infrastructure
and client  support)  and will  require the Company to hire  additional  network
engineers,  programmers and technical  personnel.  The Company currently has 128
full-time employees.  The Company has entered into employment agreements with 26
of its employees,  including its executive officers, which provide for aggregate
salaries of $4,422,000 through and including year-end December 31, 2002.

ACQUISITIONS

      In January 1998,  the Company  acquired all of the issued and  outstanding
capital stock of Entelechy in  consideration  of the issuance of an aggregate of
277,434  shares of Common  Stock,  of which  147,310  shares  were issued at the
closing and 130,124 shares are to be issued ratably on each of the first, second
and third anniversary of the acquisition closing date, provided that, the former
Entelechy  stockholders to whom such shares are issuable remain employees of the
Company  on each  respective  anniversary.  The  Company  incurred  a charge  of
approximately $180,000 relating to the issuance of such Common Stock in 1998 and
expects to incur  charges of  $197,000,  $197,000  and  $17,000  relating to the
issuance of such Common  Stock in each of the years  ending  December  31, 1999,
2000 and 2001, respectively. The acquisition was accounted for as a purchase. On
November 4, 1998, Entelechy was formally merged into the Company.

      In January 1998, the Company acquired  substantially  all of the assets of
JDT WebwerX LLC  (consisting  primarily  of computer  equipment  and  intangible
assets)  in  consideration  for a $35,000  cash  payment.  The  acquisition  was
accounted for as a purchase.

                                     - 11 -

<PAGE>
      On September  24,  1998,  the Company  entered into a Membership  Interest
Purchase  Agreement  with  all  of  the  members  of  DesignFX,   a  Web-design,
programming and hosting company located in Cherry Hill, New Jersey,  whereby the
Company  acquired  all of the issued and  outstanding  membership  interests  of
DesignFX  in  exchange  for  $1,251,000  (subject  to  certain  adjustments)  of
unregistered  shares of Common  Stock  valued by the parties at $6.25 per share.
The combination  has been accounted for as a pooling of interests.  Accordingly,
the Company's financial  statements have been restated for all periods presented
to include the results of  operations  and  financial  position of DesignFX.  On
December 9, 1998, DesignFX was formally merged into the Company.

      On December 1, 1998, the Company acquired  substantially all of the assets
of MBS, a Huntsville,  Alabama-based  Microsoft  Certified  Technical  Education
Provider - Partner  Level,  for  approximately  $50,000,  the  issuance of 4,493
shares  of  Common  Stock  and  the  assumption  of  approximately  $150,000  in
liabilities.

      On December 10, 1998, the Company entered into the  Acquisition  Agreement
with Halo.  Pursuant  to the terms of the  Acquisition  Agreement,  the  Company
acquired  all of the  issued and  outstanding  membership  interests  of Halo in
exchange for $1,425,000 (subject to certain  adjustments) of unregistered shares
of Common Stock valued by the parties at $6.50 per share.  The  combination  has
been  accounted  for as a  pooling  of  interests.  Accordingly,  the  Company's
financial statements have been restated to include the results of operations and
financial position of Halo.

RESULTS OF OPERATIONS

      The following table sets forth, for the periods indicated,  the percentage
of  the  Company's  revenues  represented  by  certain  items  reflected  in the
Company's consolidated statement of operations data:

                                                        YEARS ENDED DECEMBER 31,
                                                        ------------------------
                                                             1997         1998
                                                             ----         ----
Revenues.............................................       100.0%       100.0%
Cost of services.....................................        54.6         65.7
Gross Profit.........................................        45.4         34.3
Selling, general and administrative expense..........        54.4         30.6
Amortization expense.................................         0.2          1.8
Non-cash compensation expenses.......................         0.8          3.0
Merger expenses......................................          --          1.1
Operating loss.......................................       (10.0)        (2.1)
Interest and other expenses..........................        (1.8)         1.6
Loss before income taxes.............................       (11.8)        (0.5)
Income tax provision.................................        (1.6)        (0.1)
Net loss.............................................       (13.4)        (0.6)

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998

      REVENUES.  Revenues  increased by $4,644,000,  or 90%, from $5,161,000 for
the year ended  December 31, 1997, to $9,805,000 for the year ended December 31,
1998. Of the increase,  $1,117,000,  or 24%, was generated by the  operations of
DesignFX and Halo. The Company's  evolving  consulting  relationship  with Aetna
accounted for $1,969,000, or 42%, of the increase in revenues.  Expansion of the
Company's network and the corresponding  increase in dial-up accounts  accounted
for $310,000, or 7%, of the increase in revenues.  The remaining $1,241,000,  or
27%, of the increase in revenues was  attributable  to an increase in the number
of clients of the Company and the revenue generated as a result of the Entelechy
acquisition  in 1998,  as well as an  increase  in the scope of  consulting  and
network integration projects undertaken during 1998 as compared with 1997.

      Halo's  revenues for 1998 were  $1,952,000 as compared with $1,848,000 for
1997, an increase of $104,000. The increase of $104,000 is principally due to an
increase  in new 1998  business  volume  and  customer  growth of  approximately
$748,000  offset by the loss of three  customers  whose revenues in 1997 totaled
approximately  $700,000.  Management  believes  that  it  will  be  able to grow
revenues  derived from the  provision of systems  information  services  through
cross-selling  opportunities  created  by  its  other  businesses,  as  well  as
increased sales and marketing efforts.

                                     - 12 -

<PAGE>
      DesignFX's revenues for 1998 were $1,585,000 as compared with $572,000 for
1997, an increase of $1,013,000.  This increase was due mainly to an increase in
clients;  an increase in the number,  size and  complexity of new projects;  and
increased  revenues  from the  further  development  of a  significant  Web-site
project.  Management believes that it will be able to continue the growth of its
Web-site design and  programming  services  through cross selling  opportunities
created  by its other  businesses,  as well as  increased  sales  and  marketing
efforts.

      COST OF SERVICES. Cost of services consists primarily of expenses relating
to the  operation  of the  network,  including  telecommunications  and Internet
access costs,  costs associated with monitoring  network traffic and quality and
providing  technical  support to clients and subscribers,  cost of equipment and
applications  sold  to  clients  and  subscribers,   salaries  and  expenses  of
engineering,  programming  and  technical  personnel  and fees  paid to  outside
consultants  engaged  for  client  projects.   Cost  of  services  increased  by
$3,621,000,  or 129%, from $2,817,000 for 1997 to $6,438,000 for 1998. Growth in
the Company's  direct payroll expense  accounted for $1,626,000,  or 45%, of the
increase  in  cost  of  services.  Additional  expenses  (largely  depreciation)
relating to the expansion of the Company's  network  accounted for $504,000,  or
14%, of the  increase  in cost of  services.  Halo and  DesignFX  accounted  for
$587,000,  or 16%, of the increase in cost of services.  The remaining $904,000,
or 24%, of the increase in cost of services was  attributable to the increase in
the number of engineers  employed by the Company due to the growth in its client
base and an increase in the cost of equipment sold to such clients.

      Costs of  services  for Halo were  $1,379,000  for 1998 as  compared  with
$1,153,000 for 1997, an increase of $226,000. This increase was due mainly to an
increase  in the value of  equipment  sales to clients and  subcontracted  labor
costs.

      Cost of services for  DesignFX  were  $926,000  for 1998 as compared  with
$565,000 in 1997,  an  increase  of  $361,000.  This  increase  was due to costs
associated  with new revenue growth and increases in the cost of equipment sales
to clients.

      GROSS PROFIT.  The Company's gross profit decreased from 45.4% to 34.3% of
revenues.  In addition to the  increased  rates of spending for cost of services
when  measured  against  the  increase  in  revenues,  gross  profits  were also
negatively impacted by a decrease in negotiated billing rates on major long term
consulting projects.

      SELLING,  GENERAL AND ADMINISTRATIVE.  Selling, general and administrative
expenses  consist  primarily of salaries  and costs  associated  with  marketing
literature,   advertising,   direct  mailings  and  the  Company's   management,
accounting,   finance  and  administrative   functions.   Selling,  general  and
administrative expenses increased by $191,000, or 7%, from $2,810,000 in 1997 to
$3,001,000 for 1998.  Such increase was primarily  attributable to the Company's
expanded  promotional  and  marketing  activities,   the  hiring  of  additional
marketing  personnel,  the  hiring of  additional  administrative  personnel  to
support  the  increase  in the  Company's  professionals  and client  base,  and
additional  administrative and professional costs associated with operating as a
public company.

      Selling,  general  and  administrative  expenses  for Halo  for 1998  were
$303,000 as compared to $704,000 in 1997, a decrease of $401,000.  This decrease
was due mainly to reduced facility costs and lower depreciation expenses.

      Selling,  general and  administrative  expenses for DesignFX for 1998 were
$454,000 as compared to $850,000 in 1997, a decrease of $396,000.  This decrease
was  due  mainly  to  lower  marketing  and  advertising   expenses,   decreased
professional fees and decreased depreciation expenses.

      AMORTIZATION  OF INTANGIBLE  ASSETS.  Amortization  of  intangible  assets
increased by $161,000, from $12,000 for 1997 to $173,000 for 1998. This increase
is primarily  attributable to the  amortization of intangible  assets  (customer
lists and goodwill), related to the purchase of Entelechy and MBS.

      NON-CASH COMPENSATION EXPENSE. The Company expects to incur charges in the
amount of  approximately  $197,000,  $197,000  and  $17,000 in each of the years
ending  December 31, 1999, 2000 and 2001,  respectively,  in connection with the
issuance of 130,124 shares of Common Stock to the former Entelechy stockholders.
The  acquisition  of Entelechy  occurred in January  1998;  there was no related
non-cash  compensation expense for 1997. An April 1998 restricted stock award to
an officer and 1998 option grants to outside directors  resulted in compensation
charges of $24,000 and $79,000,  respectively.  Assuming continued employment by
these individuals,  the Company expects charges of $99,000, $28,000, $28,000 and
$6,000 in the years  ending  December  31,  1999,  2000,  2001 and 2002 for such
awards and  grants.  Non-cash  compensation  expense  of $40,000  and $7,000 was
recognized  in 1997  and 1998  under  terms of a  restricted  stock  grant to an
employee that vested through February 1998.

                                     - 13 -

<PAGE>
      MERGER RELATED EXPENSES. The Company incurred charges of $109,000 for fees
and costs  associated with the  acquisitions of DesignFX and Halo. Such amounts,
for  transactions  accounted  for as a pooling of  interests,  are  expensed  as
services are rendered and costs are incurred.

      INTEREST  EXPENSE.  Interest  expense consists of interest on indebtedness
and capital leases and financing  charges in connection with the issuance of the
1997 Notes. Interest expense was $84,000 for the year ended December 31, 1998 as
compared  to  $79,000  for the year  ended  December  31,  1997.  Excluding  the
nonrecurring  interest  charge of $35,000  associated  with the  amortization of
warrants   granted  to  the  1997  Note  holders,   interest  expense  for  1998
approximated $49,000, compared to $79,000 for 1997. This decrease is due to debt
repayments totaling $558,000 in 1998 with proceeds from the Company's Offering.

      INTEREST  INCOME.  Interest  income of $185,000 for fiscal 1998 relates to
investment  income  generated by the  Company's  increased  cash position due to
proceeds  from the  Offering in May of 1998.  The Company  has  invested  excess
proceeds from the Offering in short term  commercial  paper and U.S.  government
obligations.

      OTHER (INCOME) EXPENSE,  NET. In 1997, Halo recorded  impairment losses on
disposals of fixed assets of $45,000 offset by miscellaneous  income of $32,000.
In 1998,  the  Company  recognized,  as a change in  estimate,  the  effects  of
reducing $55,000 of liabilities accrued in previous years.

      NET LOSS. As a result of the foregoing, the Company achieved a net loss of
$60,000 for the year ended  December 31, 1998 compared to a net loss of $694,000
for the year ended December 31, 1997.

LIQUIDITY AND CAPITAL RESOURCES

      The  Company's  primary  operating  cash  requirements  have  been to fund
expenses  in  connection  with  providing  consulting  services  to clients  and
Internet  access to  subscribers.  The Company has  historically  satisfied  its
working capital requirements principally through the issuance of debt and equity
securities. At December 31, 1998, the Company had working capital of $6,398,000,
compared to a working capital deficit of $48,000 at December 31, 1997.

      During  the period  from May to August  1995,  the  Company  received  net
proceeds in the amount of $100,000 in  connection  with the issuance and sale of
48,980  shares  of Common  Stock  and the 1995  Notes.  The 1995  Notes  accrued
interest  at a rate of 6% and were  payable in July 1998.  Interest  expense for
each of the years ended December 31, 1996 and 1997 amounted to $6,000.  Interest
expense for 1998 amounted to $2,000.  All principal and accrued  interest on the
1995 Notes were paid in full in June 1998.  The  proceeds of the 1995 Notes were
used for working capital and general corporate purposes.

      The Company  received  net  proceeds of  $200,000 in  connection  with the
issuance  and sale of the 1997 Notes and  warrants to purchase an  aggregate  of
48,872 shares of Common Stock at an exercise price of $3.54 per share.  The 1997
Notes  accrued  interest  at the rate of 8% and were  payable  in full  upon the
closing  of the  Offering.  In June 1998,  the  Company  repaid the  outstanding
principal,  aggregating $200,000, and accrued interest,  aggregating $10,000, on
the 1997 Notes. The proceeds of the 1997 Notes were used for working capital and
general corporate purposes.

      On May 14, 1998,  the  Company's  registration  statement on Form SB-2, as
amended (file number 333-47741), relating to the Offering was declared effective
by the SEC. Whale  Securities  Co., L.P. acted as the  underwriter in connection
with the Offering which was  consummated on May 20, 1998. In connection with the
Offering,  the Company  registered,  issued and sold 1,380,000  shares of Common
Stock,  including  180,000 shares of Common Stock issued in connection  with the
exercise in full of the underwriter's over-allotment option at an initial public
offering  price of $6.00 per share  resulting in proceeds to the Company (net of
underwriting discount, commissions and other expenses payable by the Company) in
the  aggregate  approximate  amount of  $6,642,000.  Additionally,  the  Company
registered 120,000 shares of Common Stock underlying warrants to purchase Common
Stock  sold by the  Company  to the  underwriter  for  $100.  The  warrants  are
exercisable  for a  four-year  period  commencing  on May 14, 1999 at a price of
$8.10 per share.

      Further,  upon  consummation  of the  Offering,  $150,000 in debt that the
Company assumed in its acquisition of Entelechy was converted into 25,000 shares
of Common Stock.

                                     - 14 -

<PAGE>
      From the effective  date of the Offering  through  December 31, 1998,  the
Company  incurred  expenses in connection with the issuance and  distribution of
securities  in the Offering in the actual  amount of  $1,638,000.  Such expenses
include  underwriting  discounts  and  commissions  in the  amount of  $828,000,
expenses  paid to or for the  underwriter  in the amount of  $248,400  and other
expenses  in the amount of  $561,600.  The Company  believes  that none of these
payments were made, directly or indirectly,  to (i) directors or officers of the
Company or their affiliates, (ii) persons owning 10% or more of the Common Stock
or (iii) affiliates of the Company.

      Net cash  provided  by  (used  in)  operating  activities  increased  from
$(559,000) for 1997 to $168,000 for 1998. This change was primarily attributable
to (i) improved operating results, a loss of $60,000 for 1998 compared to a loss
of $694,000 for 1997, (ii) increased  depreciation and  amortization  expense of
$348,000,  (iii)  decreases in accounts  receivable in the amount of $1,970,000,
offset by (iv) decreases in accounts  payable of $1,117,000 and deferred revenue
in the amount of $734,000.

      Net cash used in investing  activities increased from $347,000 for 1997 to
$843,000  for 1998.  The change was  attributable,  in part,  to an  increase in
capital  expenditures  of $496,000,  principally  related to the  expansion  and
enhancement  of the  Company's  NOC,  as  well  as to  expenditures  for  office
equipment to support additional employees hired during 1998.

      Net cash provided by financing  activities increased from $855,000 in 1997
to $5,999,000 in 1998. This change is primarily attributable to the net proceeds
of $6,642,000 received in connection with the Offering offset by debt repayments
of $558,000.

      From the effective  date of the Offering  through  December 31, 1998,  the
Company has applied an aggregate of $507,000 of the net proceeds of the Offering
for the full repayment of debt and $115,000 for acquisitions.

      In May 1998, the Company paid in full all of its outstanding  indebtedness
to Interchange State Bank, consisting of $9,000 in principal.

      In October 1998 the Company repaid $200,000 of outstanding indebtedness of
DesignFX,  and exercised the purchase  option on an equipment lease for $186,000
with Equity National Bank and Commerce Bank.

      In  December  1998,  the  Company  paid  in  full  all of the  outstanding
principal  and  interest  of Halo in the  aggregate  amount of $35,000 to Tinton
Falls National Bank.

      At December  31,  1998,  the Company had  obligations  pursuant to capital
lease  obligations  in the  aggregate  amount of $72,000.  These  capital  lease
obligations  are  secured  by  the  personal  guarantees  of  Messrs.  Loglisci,
Frederick  and  Altieri  and,  in  addition,  certain  of  these  capital  lease
agreements  are  secured by the  equipment  that is the  subject of the  capital
lease.

      In May 1998,  the Company  secured  equipment  lines of credit from Ascend
Credit Corp.,  Cisco Systems Capital Corp. and PAM Financial Corp.,  each in the
amount of $500,000.

      In June 1998,  the  Company  obtained a $1.5  million  line of credit from
First Union National Bank. The line of credit is for a one-year period effective
July  1,  1998.  As of  December  31,  1998,  the  Company  had  no  outstanding
indebtedness under such line of credit.

LIQUIDITY AND CAPITAL REVENUES

      The  Company's  working  capital at December  31, 1998  approximated  $6.4
million.  The  Company  believes  that  operating  cash flow  generated  through
existing customers and business  activities,  current cash and cash equivalents,
funds available from a $1.5 million line of credit, and available credit through
equipment vendor  arrangements are sufficient to fund operating cash flow needs,
capital expenditures  (principally network  improvements) and acquisitions.  The
Company current  estimate of capital  expenditures  for the year ending December
31, 1999 approximates $2.3 million.  For the period from January 1, 1999 through
March 26, 1999, the Company has utilized cash of approximately  $836,000 to fund
acquisitions.

FLUCTUATIONS IN OPERATING RESULTS

      The Company's operating results may fluctuate significantly from period to
period as a result of the length of the Company's  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. The Company's 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.  Historically,  the Company's  revenues have been higher in the fourth
quarter as a result of client budgeting and expenditure  cycles. See "-- Certain
Factors  Which  May  Affect  the  Company's   Future   Performance  --  Possible
Fluctuations in Operating Results; Lengthy Sales Cycle."

                                     - 15 -

<PAGE>
INFLATION

      Inflation  has not had a significant  impact on the  Company's  results of
operations.

YEAR 2000

      The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the  applicable  year.  Computer  programs
that have  time-sensitive  software may  recognize a date using "00" as the year
1900 rather than the year 2000.  This situation could result in a system failure
or miscalculations  causing  disruptions of operations,  including  inability to
process transactions or engage in normal business activities.

      Management  has  evaluated the  Company's  computer  software and hardware
systems,  and, based on currently available  information,  believes that it will
not have to replace or modify any of its  hardware  but has,  and will have,  to
modify its software so that its systems will  function  properly with respect to
dates in the year 2000 and thereafter.  It is believed that the greatest risk to
the  Company  will be from  outside  firms  that the  Company  relies on for its
operations as well as the legacy computer systems of its clients. The failure by
outside  firms  and/or  clients'  failure  to  address  Year 2000  issues  could
interfere  with the  Company's  ability to provide its  services,  and therefore
impact future revenues.  As of March 26, 1999, the Company has contingency plans
in place to remedy these types of problems. Estimated costs associated with such
plans are not expected to exceed $100,000, which are likely to be funded through
the use of available internal employees and resources. At this time, the Company
believes  that  the  most  likely  "worst  case"  scenario  involves   potential
disruptions  in areas in which the  Company's  operations  must rely on  outside
firms or clients whose systems may not function  properly after January 1, 2000.
While such failures  could affect  important  operations of the Company,  either
indirectly or directly,  in a significant  manner, the Company cannot at present
estimate either the likelihood or the potential cost of such failures.

RECENT EVENTS

      On January 29, 1999, the Company acquired  substantially all of the assets
of  Mainsite  Communications  ("Mainsite")  for  approximately  $53,000 in cash.
Mainsite is an Internet Service Provider based in Bridgeport, New Jersey.

      On February 22, 1999, the Company acquired substantially all of the assets
of the Renaissance Internet Services Division  ("Renaissance") of PIVC, LLC, for
$912,377 in cash, a promissory note and Common Stock. Renaissance is an Internet
Service Provider headquartered in Huntsville, Alabama.

      On March 1, 1999, the Company acquired  substantially all of the assets of
EZ  Net,  Inc.,  a  Yorktown,  Virginia-based  Internet  Service  Provider  with
approximately 3,100 consumer dial-up and 40 corporate accounts,  in exchange for
$800,000 in cash and Common Stock, subject to certain adjustments.

      On March 25, 1999, the Company acquired substantially all of the assets of
the ADViCOM division of Multitronics,  Inc., for approximately  $193,000 in cash
and Common Stock.  ADViCOM is an Internet  Service Provider based to Huntsville,
Alabama.

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

      LIMITED OPERATING HISTORY.  The Company commenced  operations in June 1995
as an  Internet  Service  Provider  and  began  to  offer  systems  integration,
programming and applications  services in April 1996.  Accordingly,  the Company
has a limited  operating  history upon which an  evaluation of its prospects and
performance can be made. The Company's  prospects must be considered in light of
the risks, uncertainties, expenses, delays, problems and difficulties frequently
encountered  in the  establishment  of a new  business  enterprise  in a rapidly
evolving  industry  characterized  by intense  competition and an increasing and
substantial  number of new market entrants and  technologies  and services.  The
Company is subject to the risks  associated  with an evolving  business  and the
management of both internal and acquisition based growth.

      PRIOR  OPERATING  LOSSES;  LACK  OF  SUBSTANTIAL   PROFITABILITY;   FUTURE
OPERATING  RESULTS.  The  Company  incurred  losses  of  $694,000  and  $60,000,
respectively,  for the years ended December 31, 1997 and 1998. The Company would
have  incurred  a pro forma net loss in the  amount of  $1,006,000  for the year
ended  December 31, 1997,  giving effect to the  acquisition  of Entelechy.  The
Company had an accumulated deficit at December 31, 1998 of $1,065,000. Excluding
the  effects  of  interest  and  merger   expenses  of  $35,000  and   $109,000,
respectively,  the Company did achieve profitability for the year ended December
31,  1998.  Despite  generating  steadily  increasing  levels of  revenues,  the
Company's  operating  expenses  have  increased  and will  continue  to increase
significantly  in  connection  with any expansion  activities  undertaken by the
Company,  including  those relating to  acquisitions,  network  development  and
marketing.  Accordingly,  the  Company's  future  profitability  will  depend on
corresponding increases in revenues.

                                     - 16 -

<PAGE>
      EXPANSION AND ACQUISITIONS.  The Company intends to continue to expand its
operations  through internal  growth.  The Company plans to establish or acquire
additional POPs,  upgrade and expand its network  capacity,  attract  additional
clients  and  subscribers,  expand its work force and its  presence  in selected
geographic markets. Such growth is expected to place a significant strain on its
management,  administration,  operational,  financial  and other  resources.  To
successfully  manage  growth,  the  Company  will be  required  to  continue  to
implement and improve its administrative, operating and financial systems, train
and  manage  its  employees,  monitor  operations,  control  costs and  maintain
effective quality controls.  The Company has limited  experience in effectuating
rapid expansion and in managing  operations that are  geographically  dispersed,
and there can be no  assurance  that the  Company  will be able to  continue  to
successfully  expand its operations or manage growth.  In addition,  the Company
has grown  through,  and  anticipates  that it will  continue  to grow  through,
acquisitions of Internet Service Providers,  systems integrators and consultants
and programming and application developers.  Acquisitions may expose the Company
to particular risks,  including,  without limitation,  diversion of management's
attention,  assumption of  liabilities  and  amortization  of goodwill and other
acquired  intangible assets,  some or all of which could have a material adverse
effect on the  financial  condition  or results of  operations  of the  Company.
Depending on the value and nature of the  consideration  paid by the Company for
acquisitions,  such  acquisitions  may have a dilutive  impact on the  Company's
earnings per share. In making acquisitions, the Company competes for acquisition
targets  with  other  companies,  many of which  are  larger  and  have  greater
financial resources than the Company. There can be no assurance that the Company
will  continue  to  be  successful  in  identifying  acquisition  opportunities,
assessing the value, strengths and weaknesses of such opportunities,  evaluating
the costs of new growth  opportunities  at existing  operations  or managing the
publications it owns and improving their operating efficiency.

      DEPENDENCE ON AETNA;  NON-RECURRING  REVENUES. For the year ended December
31, 1998,  the Company's  largest  client,  Aetna (which  engaged the Company in
October 1997)  accounted for  approximately  35% of the Company's  revenues.  In
December  1998,  the Company  entered into a three-year  agreement with Aetna to
continue to provide  services.  Revenues  derived from the Company's  consulting
contracts are generally  non-recurring in nature.  Non-renewal or termination of
the Company's  contract with Aetna would have a material  adverse  effect on the
Company.  There can be no  assurance  that the Company  will  obtain  additional
contracts for projects similar in scope to those previously  obtained from Aetna
or any other client, that the Company will be able to retain existing clients or
attract new clients or that the Company will not remain  largely  dependent on a
limited  client base which may continue to account for a substantial  portion of
the Company's  revenues.  In addition,  the Company generally will be subject to
delays  in  client  funding;   lengthy  client  review  processes  for  awarding
contracts;   nonrenewal;  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.

      SUBSCRIBER  ATTRITION.  The Company's operating results may be affected by
dial-up subscriber attrition rates.  Subscribers may discontinue service without
penalty  at any time,  and  there  can be no  assurance  that  subscribers  will
continue to purchase  services  from the Company or that the Company will not be
subject to subscriber attrition. Historically, the Company has not retained data
enabling it to  accurately  compute  subscriber  attrition  levels.  Significant
levels of  subscriber  attrition  in the future  could  have a material  adverse
effect on the Company's operating results.

      LIMITED NUMBER OF POPS; GEOGRAPHIC  CONCENTRATION;  UNCERTAINTY OF NETWORK
EXPANSION.  The Company  currently  has 39 POPs in  operation  in  northern  New
Jersey, New York,  Virginia and Alabama.  Consequently,  the results achieved to
date by the Company may not be indicative of the prospects or market  acceptance
of a larger number of POPs in wider and more geographically dispersed areas. The
process  of  acquiring   existing  POPs  or   identifying   suitable  sites  and
establishing  additional POPs can be lengthy. There can be no assurance that the
Company will be successful in acquiring  existing POPs or  identifying  suitable
sites and establishing  additional POPs. Failure to obtain and install telephone
lines  and  network  equipment  on  a  timely  and  cost-effective  basis  could
materially  delay the  Company's  plans  with  respect to the  establishment  of
additional POPs in target markets. The Company has relatively limited experience
in establishing POPs and has limited  financial,  technical and other resources.
There can be no assurance  that the Company will be able, for financial or other
reasons,  to successfully  expand its network of POPs or that any expansion will
not be subject to unforeseen delays and costs.

      EMERGING AND EVOLVING MARKETS;  UNCERTAINTY OF MARKET ACCEPTANCE;  LIMITED
MARKETING,  SERVICE AND  SUPPORT  CAPABILITIES.  The  markets for the  Company's

                                     - 17 -

<PAGE>

services are relatively new and evolving and are  characterized by consolidating
trends. As a result,  the ultimate level of demand for the Company's services is
subject to a high degree of uncertainty.  Any significant  decline in demand for
computer  networking  services  or in  the  computer  industry  generally  or in
particular market segments could have a material adverse effect on the Company's
business and prospects. The Company's success will be largely dependent upon its
ability to continually attract and retain additional clients and subscribers and
replace  terminating  clients  and  subscribers.  Achieving  significant  market
acceptance will require  substantial efforts and expenditures to create enhanced
awareness of the services offered by the Company. The successful  implementation
of the Company's  business  plans will also require the Company to expand client
service and support  capabilities to satisfy  increasingly  sophisticated client
requirements. The Company currently has limited marketing experience and limited
marketing, service, client support and other resources. To date, the Company has
relied  principally  on the  efforts  of its  executive  officers  to market its
services.  There  can  be  no  assurance  that  the  Company  will  be  able  to
successfully  expand  its  marketing  activities,   client  service  or  support
capabilities,  or that the  Company's  efforts will result in  continued  market
acceptance for the Company's services.

      COMPETITION.   The  markets  for  the   Company's   services   are  highly
competitive.  There are no substantial barriers to entry and the Company expects
that  competition  will intensify in the future.  The Company  believes that its
ability  to  compete   successfully  will  be  significantly   affected  by  the
availability  of  highly  skilled   engineers,   programmers  and   technicians;
continuing  referrals by clients; the geographic scope of the Company's network;
and industry and general  economic  trends.  The Company  competes with numerous
large companies that have  substantially  greater market presence and financial,
technical,  marketing and other resources than the Company,  including (i) large
information technology consulting and service providers and application software
firms such as Andersen Consulting,  Cambridge  Technology  Partners,  Electronic
Data Systems Corporation and American  Management  Systems;  (ii) international,
national, regional and commercial Internet Service Providers such as Performance
Systems  International,  Inc., Earthlink,  Mindspring and UUNet WorldCom;  (iii)
established  on-line  services  companies  such as  America  Online,  Inc;  (iv)
computer  hardware and software and other  technology  companies such as IBM and
Microsoft  Corp.;  (v) national  long-distance  carriers such as AT&T Corp., MCI
WorldCom and Sprint, and regional telephone  companies,  including Bell Atlantic
and Bell South, and cable operators;  and (vi) major accounting  firms.  Many of
these  competitors  have announced  plans to expand their service  offerings and
increase their focus on the computer  networking and Internet related  services'
markets.  As a result,  competition  is expected to intensify for highly skilled
network engineers,  programmers and technicians.  There can be no assurance that
competitors will not develop or offer services that provide  performance,  price
or other advantages over those offered by the Company,  that the Company will be
able to attract,  hire or retain highly skilled network  engineers,  programmers
and technicians or that the Company will have the financial resources, technical
expertise or marketing and support capabilities to compete successfully.

      RAPID  TECHNOLOGICAL  CHANGE.  The markets for the Company's  services are
characterized by rapid technological change,  changes in client requirements and
preferences,  frequent  new  product  and service  introductions  embodying  new
processes and  technologies and evolving  industry  standards and practices that
could render the Company's existing practices and methodologies obsolete or less
attractive  to existing and  prospective  clients.  The  Company's  success will
depend on its ability to improve existing and develop new services and solutions
that address the increasingly  sophisticated and varied needs of its current and
prospective  clients, and respond to technological  advances,  emerging industry
standards and  practices  and  competitive  service  offerings.  There can be no
assurance   that  the  Company  will  be  successful   in  responding   quickly,
cost-effectively  and sufficiently to these developments.  The Company's dial-up
access  service is also  subject to  fundamental  changes in the manner in which
Internet  access  services are  delivered.  Currently,  the Internet is accessed
primarily through computers and telephone lines. To the extent that the Internet
becomes increasingly accessible by screen-based telephones,  television or other
consumer  electronic  devices which change the way Internet  access is routinely
provided,  the Company may be required to acquire or develop new  technology  or
modify its existing technology to accommodate these developments. The pursuit of
these technological advances may require substantial time and expense, and there
can be no  assurance  that the Company  will  succeed in adapting  its  Internet
access service to alternate access devices and conduits.

      CAPACITY  CONSTRAINTS;  SYSTEM FAILURE AND SECURITY  RISKS.  The Company's
operations  depend upon the  capacity,  reliability  and security of its network
infrastructure.  The Company  currently has limited network capacity and will be
required  to  continually  expand  its  network  infrastructure  to  accommodate
significant numbers of users and increasing amounts of information. Expansion of
the  Company's  network   infrastructure  will  require  significant  financial,
operational and management resources. There can be no assurance that the Company
will be able to expand its network  infrastructure to meet potential demand on a
timely basis,  at a  commercially  reasonable  cost,  or at all.  Failure by the
Company to expand its  network  infrastructure  on a timely  basis  would have a
material adverse effect on the Company. Although the Company maintains redundant

                                     - 18 -

<PAGE>

connections to the Internet,  the Company's operations will also be dependent on
the  Company's  ability to protect its computer  equipment  against  damage from
fire, power loss,  telecommunications failures and similar events. The Company's
network  infrastructure  will be vulnerable to computer  viruses,  break-ins and
similar  disruptions  from  unauthorized  tampering with the Company's  computer
systems.  Computer  viruses or problems  caused by third  parties  could lead to
material interruptions, delays or cessation in service. Inappropriate use of the
Internet by third  parties  could also  potentially  jeopardize  the security of
confidential  information  stored in  computer  systems.  Security  and  privacy
concerns may limit the  Company's  ability to develop a  significant  subscriber
base.

      DEPENDENCE ON THIRD-PARTY  SUPPLIERS AND  MANUFACTURERS;  POSSIBLE SERVICE
INTERRUPTIONS AND EQUIPMENT  FAILURES.  The Company is currently  dependent upon
Bell Atlantic, Bell South, MCI WorldCom, Sprint, Hyperion,  ICI/Digex and KMC to
provide leased telecommunication lines on a cost-effective and continuous basis,
and on UUNet Worldcom, Winstar, Sprint, ICI/Digex, CRL, Cox and Cable & Wireless
to provide Internet access. In accordance with industry custom, the Company does
not maintain  interconnect  agreements with these suppliers.  Increases in rates
charged  by such  suppliers  could  adversely  affect  the  Company's  operating
margins.  Failure to obtain  continuing  access to such  networks  resulting  in
material  business  interruptions  would  also  have an  adverse  effect  on the
Company. The Company also is dependent on third-party  manufacturers of hardware
components.  Except for a limited number of  non-exclusive  reseller  agreements
with certain  suppliers,  the Company has not entered into  agreements  with any
equipment manufacturer. Failure by manufacturers to deliver quality equipment on
a timely basis or any inability to obtain alternative  sources of supply,  could
materially  adversely  affect the  Company's  business  and limit the  Company's
ability to expand its network.  In addition,  the Company's  operations  require
that its POPs  and its  third-party  telecommunications  networks  operate  on a
continuous  basis.  It is  possible  that the  Company's  POPs and  third  party
telecommunications   networks   may  from  time  to  time   experience   service
interruptions  or  equipment  failures.   Service  interruptions  and  equipment
failures  resulting  in  material  delays  would  adversely  affect  client  and
subscriber  confidence,  as  well  as  the  Company's  business  operations  and
reputation.

      RECRUITMENT AND RETENTION OF QUALIFIED  PERSONNEL.  The Company's business
is labor  intensive.  The  Company's  success  will  depend  upon its ability to
identify,  hire,  train  and  retain  professional  engineers,  programmers  and
technicians  who can  provide  the  strategy,  technology  and  creative  skills
required by clients.  Qualified  professionals are in high demand and are likely
to  remain a  limited  resource  for the  foreseeable  future.  The  Company  is
currently  dependent on the services of temporary personnel to satisfy increased
client requirements. The Company competes intensely for qualified personnel with
other companies,  and there can be no assurance that the Company will be able to
attract or retain other highly  qualified  engineers,  programmers and technical
personnel in the future.  Failure to attract and retain qualified  professionals
in sufficient  numbers would  severely  limit the Company's  ability to complete
existing projects and expand its operations.

      POSSIBLE NEED FOR ADDITIONAL FINANCING.  The Company's business is capital
intensive.  Based on proposed plans and assumptions  relating to its operations,
the  Company  believes  that  the  proceeds  of its  financings,  together  with
projected  cash  flow  from   operations  will  be  sufficient  to  satisfy  its
contemplated  cash  requirements.  In the event that the Company's plans change,
its  assumptions  change or prove to be  inaccurate  or if the  proceeds of this
offering or cash flow prove to be  insufficient to implement its business plans,
the  Company  may be  required  to seek  additional  financing  or  curtail  its
expansion activities. There can be no assurance that the Company will be able to
implement its business plan or that any  assumptions  relating to such plan will
prove to be accurate or that any additional  financing would be available to the
Company on  commercially  reasonable  terms,  or at all. The inability to obtain
additional financing,  if required,  would have a material adverse effect on the
Company.  The Company may determine to seek additional debt or equity  financing
to fund  the cost of  continuing  expansion.  To the  extent  that  the  Company
finances an  acquisition  with equity  securities,  the  issuance of such equity
securities   may  result  in  dilution  to  the   interests  of  the   Company's
stockholders.  Additionally,  if the Company incurs  indebtedness or issues debt
securities in connection  with any  acquisition,  the Company will be subject to
risks that interest  rates may fluctuate and cash flow may be  insufficient  for
the payment of principal and interest on any such indebtedness.

      POSSIBLE  FLUCTUATIONS  IN OPERATING  RESULTS;  LENGTHY  SALES CYCLE.  The
Company's operating results may fluctuate significantly from period to period as
a result of the length of the  Company's  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.  The  Company's  business  is
generally  subject to lengthy sales cycles,  which  requires the Company to make
expenditures  and use significant  resources  prior to receipt of  corresponding
revenues.  Historically,  the Company's  revenues have been higher in the fourth

                                     - 19 -

<PAGE>


quarter as a result of client budgeting and expenditures cycles. There can be no
assurance that the foregoing factors will not result in significant fluctuations
in future operating results.

      GOVERNMENT REGULATION;  POTENTIAL LIABILITY FOR CONTENT.  Recently enacted
federal,  state and local  legislation aimed at limiting the use of the Internet
to transmit certain content and materials could result in significant  liability
to Internet Service  Providers.  These types of legislative  actions present the
potential for increased  scrutiny and attempts to impose liability upon Internet
Service  Providers for  information  disseminated  through their  networks.  The
adoption or strict  enforcement  of any such laws or  regulations  may limit the
growth of the Internet,  which could decrease demand for the Company's  services
and  increase  the  Company's  cost  of  doing   business.   Additionally,   the
applicability to the Internet of existing laws governing issues such as property
ownership,  libel and personal privacy is uncertain. As a result, it is possible
that the adoption of new  legislation  or regulation or the  application  to the
Internet of existing laws and regulations relating to property ownership,  libel
and  personal  privacy  could have a  material  adverse  effect on the  Company.
Changes in the regulatory  environment  relating to Internet  access,  including
regulatory changes which directly or indirectly affect  telecommunication  costs
or increase  the  likelihood  or scope of  competition  from local and  regional
telephone companies or others,  could also have a material adverse effect on the
Company.

      LIMITED  INTELLECTUAL  PROPERTY  PROTECTION.   The  Company  relies  on  a
combination  of copyright and trademark  laws,  trade secrets and  nondisclosure
agreements to protect its proprietary information.  The Company currently has 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,  the  Company's  proprietary  information  without  authorization.  In
addition, there can be no assurance that any confidentiality  agreements between
the Company and its employees or any agreements  with its customers will provide
meaningful protection for the Company's proprietary  information in the event of
any unauthorized use or disclosure of such proprietary information. The majority
of the Company's current agreements with its clients contain provisions granting
to the client  intellectual  property  rights to certain of the  Company's  work
product, including customized programming that is created during the course of a
project. The Company anticipates that agreements with future clients may contain
similar  provisions.  Other existing  agreements to which the Company is 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,  the  Company's  ability to reuse or resell
such rights will or may be limited.

      POTENTIAL LIABILITY TO CLIENTS. The Company's consulting engagements often
involve  development,  implementation  and maintenance of applications  that are
critical to the operations of its clients' businesses.  The Company's failure or
inability to meet a client's  expectations  in the  performance  of its services
could  harm  the  Company's  business  reputation  or  result  in  a  claim  for
substantial   damages   against  the  Company,   regardless   of  the  Company's
responsibility  for such failure or  inability.  In  addition,  in the course of
performing  services,  the Company's personnel often gain access to technologies
and  content  that  include  confidential  or  proprietary  client  information.
Although the Company has 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.
The Company attempts to limit  contractually  its damages arising from negligent
acts,  errors,  mistakes or omissions in rendering  services  and,  although the
Company  maintains  general  liability  insurance  coverage  in  the  amount  of
$1,000,000  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 the Company that
are uninsured,  exceed available  insurance coverage or result in changes to the
Company's insurance policies, including premium increases or the imposition of a
large  deductible  or  co-insurance  requirements,  would  adversely  affect the
Company.

      DEPENDENCE ON KEY PERSONNEL.  The success of the Company will be dependent
on the personal  efforts of Nicholas R.  Loglisci,  Jr., its President and Chief
Executive Officer;  Clark D. Frederick,  its Chief Technical  Officer;  Frank R.
Altieri,  Jr., its Chief Information  Officer and other key personnel.  Although
the  Company has entered  into  employment  agreements  with  Messrs.  Loglisci,
Frederick and Altieri, the loss of the services of any of such individual,  as a
result of extended  leaves due to military  service or  otherwise,  could have a
material  adverse  effect  on  the  Company.  The  Company  maintains  "key-man"
insurance on the life of each of Messrs. Loglisci,  Frederick and Altieri in the
amount of $2,000,000.

      AUTHORIZED   PREFERRED  STOCK.  The  Company's  Restated   Certificate  of
Incorporation  authorizes the Company's  Board of Directors to issue one million
shares  of  "blank  check"  preferred  stock,  par  value  $.01 per  share  (the

                                     - 20 -

<PAGE>


"Preferred  Stock"),  and  to  fix  the  rights,  preferences,   privileges  and
restrictions,  including  voting  rights,  of such  shares of  Preferred  Stock,
without further stockholder approval.  The rights of the holders of Common Stock
will be subject to and may be adversely affected by the rights of holders of any
Preferred Stock that may be issued in the future. The ability to issue Preferred
Stock  without  stockholder  approval  could  have the  effect of making it more
difficult  for a third  party to acquire a majority  of the voting  stock of the
Company  thereby  delaying,  deferring or  preventing a change in control of the
Company.

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.

                                    PART III

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

      The  information  appearing  under the captions  "Proposal 1 - Election of
Directors," "Executive Officers of the Company," "Promoters and Control Persons"
and "Section 16(a) Beneficial  Ownership Reporting  Compliance" in the Company's
Proxy  Statement for its 1999 Annual  Meeting of  Stockholders  (the "1999 Proxy
Statement") is incorporated herein by reference.

ITEM 10. EXECUTIVE COMPENSATION

      Information  appearing under the caption  "Executive  Compensation" in the
1999 Proxy Statement is incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      Information  appearing under the caption "Security Ownership of Beneficial
Owners and  Management" in the 1999 Proxy  Statement is  incorporated  herein by
reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Information appearing under the caption "Certain Transactions" in the 1999
Proxy Statement is incorporated herein by reference.

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.

EXHIBIT NO.             DESCRIPTION
-----------             -----------
   *3.1     Restated  Certificate  of  Incorporation  of the  Company  (filed as
            Exhibit 3.1 to the  Company's  Registration  Statement on Form SB-2,
            File No.  333-47741,  filed on April  23,  1998  (the  "Registration
            Statement")).
   *3.2     Restated  By-Laws of the Company,  as amended  (filed as Exhibit 3.2
            to the Company's Registration Statement).
    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 the Company's  Registration
            Statement).

                                     - 21 -

<PAGE>


  *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  the   Company's   Registration
            Statement).
  *10.2     Form of Warrant to Purchase Shares of Stock, dated as of October 31,
            1997  (filed  as  Exhibit   10.4  to  the   Company's   Registration
            Statement).
  *10.3     Form of  Employment  Agreement  between the Company and  Nicholas R.
            Loglisci,  Jr. (filed as Exhibit 10.5 to the Company's  Registration
            Statement).+
  *10.4     Form of  Employment  Agreement  between  the  Company  and  Clark D.
            Frederick  (filed  as  Exhibit  10.6 to the  Company's  Registration
            Statement).+
  *10.5     Form  of  Employment   Agreement   between  the  Company  and  Frank
            Altieri,  Jr. (filed as Exhibit 10.7 to the  Company's  Registration
            Statement).+
  *10.6     Form  of  Employment  Agreement  between  the  Company  and  Jeffrey
            Brenner  (filed  as  Exhibit  10.8  to  the  Company's  Registration
            Statement).+
  *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  the  Company's
            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,  Jospeh  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 the  Company's  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 the
            Company's 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 the Company's Registration Statement).+
 *10.11     Commercial  Sublease,  dated as of May 5, 1997,  between the Company
            and Information  Systems & Communications,  Inc., in connection with
            the Company's premises in Fairfax,  Virginia (filed as Exhibit 10.16
            to the Company's Registration Statement).
 *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 the Company's premises
            in Cedar Knolls, New Jersey (filed as Exhibit 10.17 to the Company's
            Registration Statement).
 *10.13     Letter Agreement,  dated as of October 21, 1997, between the Company
            and EI Realty in  connection  with the  Company's  premises in Cedar
            Knolls,  New  Jersey  (filed  as  Exhibit  10.18  to  the  Company's
            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 the Company's  premises in Cedar Knolls,  New Jersey
            (filed as Exhibit 10.19 to the Company's 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 the Company's 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 the Company's Registration Statement).
 *10.17     Lease Agreement,  dated as of January 31, 1998,  between the Company
            and R&G International,  in connection with the Company's premises in
            Huntsville,  Alabama  (filed  as  Exhibit  10.22  to  the  Company's
            Registration Statement).
**10.18     Loan  Agreement,  dated October 30, 1998, by and between the Company
            and First Union National Bank.
**21.1      Subsidiaries of the Company.
**24.1      Power of Attorney (appears on signature page).
**27.1      Financial Data Schedule.
-------------

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


(B)    REPORTS ON FORM 8-K

      On October 9, 1998,  the Company  filed a Report with the SEC on Form 8-K,
under  Item 2, to report  the  execution  of a  definitive  Membership  Interest
Purchase  Agreement,  dated as of September 24, 1998,  among the Company and the
interest holders of DesignFX, whereby the Company acquired all of the issued and
outstanding  membership  interests of DesignFX in exchange for 176,944 shares of
the  Company's  Common  Stock.  The Company has also  reserved  23,216 shares of
Common Stock for issuance in connection  with the DesignFX  combination  pending
the final calculation of defined financial data. The Company filed the financial
statements required by Items 7(a) and 7(b) of Form 8-K on December 9, 1998.

      On December 22, 1998, the Company filed a Report with the SEC on Form 8-K,
under Item 2, to report the  Acquisition  Agreement,  dated as of  December  10,
1998,  among the Company  and the members of Halo and Halo,  whereby the Company
acquired  all of the  issued and  outstanding  membership  interests  of Halo in
exchange for 180,866 shares of the Company's  Common Stock. The Company has also
reserved  38,365 shares of Common Stock for issuance in connection with the Halo
combination pending the final calculation of defined financial data. The Company
filed the  financial  statements  required by Items 7(a) and 7(b) of Form 8-K on
February 26, 1999.

                                     - 22 -


<PAGE>



                                   SIGNATURES

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

                                        IBS INTERACTIVE, INC.


Dated:   March 31, 1999                 By:   /s/ NICHOLAS R. LOGLISCI, JR.
                                           -----------------------------------
                                           Nicholas R. Loglisci, Jr.
                                           President and 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 Clark
D. Frederick his true and lawful  attorney-in-fact and agent, with full power of
substitution  and  resubstitution,  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.

      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 31st day of March, 1999.


      SIGNATURE                           TITLE(S)

/S/ NICHOLAS R. LOGLISCI, JR.            President, Chief Executive Officer and
-------------------------------          Director (Principal Executive Officer)
Nicholas R. Loglisci, Jr.

/S/ CLARK D. FREDERICK                   Chief Technical Officer and Director
-------------------------------
Clark D. Frederick

/S/ FRANK R. ALTIERI, JR.                Chief Information Officer and Director
-------------------------------
Frank R. Altieri, Jr.
                                        
/S/ JEFFREY E. BRENNER                   Senior Vice President, Finance and
-------------------------------          Administration (Principal Financial and
Jeffrey E. Brenner                       Accounting Officer)

/S/ SUSAN HOLLOWAY TORRICELLI            Director
-------------------------------
Susan Holloway Torricelli

/S/ BARRETT N. WISSMAN                   Director
-------------------------------
Barrett N. Wissman

/S/ DAVID FAEDER                         Director
-------------------------------
David Faeder

/S/ PATRICIA DUFF                        Director
-------------------------------
Patricia Duff

                                     - 23 -

<PAGE>

                             IBS INTERACTIVE, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                   PAGE
                                                                   ----

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

Consolidated Balance Sheets as of December 31, 1997 and 1998....... F-3

Consolidated Statements of Operations for the years ended
    December 31, 1997 and 1998..................................... F-4

Consolidated Statements of Stockholders' Equity for the years
    ended December 31, 1997 and 1998............................... F-5

Consolidated Statements of Cash Flows for the years
    ended December 31, 1997 and 1998............................... F-6

Notes to Consolidated Financial Statements......................... F-7


                                       F-1

<PAGE>


               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  (formerly  known as Internet  Broadcasting
System,  Inc.) as of December  31,  1997 and 1998 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  generally  accepted  auditing
standards.  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, 1997 and 1998 and the
results  of their  operations  and their  cash flows for the years then ended in
conformity with generally accepted accounting principles.

/s/ BDO Seidman, LLP
BDO Seidman, LLP

Woodbridge, New Jersey
March 29, 1999

                                       F-2

<PAGE>

                             IBS INTERACTIVE, INC.
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1998

                                                             December 31,
                                                 ------------------------------
                                                          1997           1998
                                                 ------------------------------
                     ASSETS

Current Assets:
   Cash and cash equivalents..................    $    153,000     $5,477,000
   Accounts receivable (net of allowance for     
      doubtful accounts of $106,000 in 1997 and
      $23,000 in 1998)........................       1,974,000      1,492,000
   Prepaid income taxes.......................               -         54,000
   Prepaid expenses and other current assets..          28,000        175,000
   Deferred income tax asset..................          50,000        126,000
                                                 ------------------------------
      Total Current Assets....................       2,205,000      7,324,000
Property and equipment, net...................         701,000        943,000
Intangible assets, net........................          56,000      1,418,000
Deferred income tax asset.....................               -          5,000
Deferred offering costs.......................          45,000              -
Advance to related party......................               -         70,000
Other assets..................................          61,000        115,000
                                                 ------------------------------
TOTAL ASSETS                                       $ 3,068,000     $9,875,000
                                                 ==============================

      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Current maturities of long-term debt.......    $    575,000    $    47,000
   Accounts payable...........................         322,000        414,000
   Deferred revenue...........................         503,000         45,000
   Accrued salaries and related expenses......          71,000        106,000
   Accrued project costs......................         305,000              -
   Accrued professional fees..................               -         50,000
   Customer deposits..........................          80,000         59,000
   Accrued interest payable...................          14,000              -
   Income taxes payable.......................          25,000              -
   Other current liabilities..................         358,000        205,000
                                                 ------------------------------
      Total Current Liabilities...............       2,253,000        926,000
Long-term debt, less current maturities.......         281,000        225,000
Deferred compensation.........................               -        705,000
Deferred income tax liabilities...............          34,000              -
                                                 ------------------------------
Total liabilities.............................       2,568,000      1,856,000
                                                 ------------------------------

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
      2,059,777 shares - 1997 and 3,616,580
      shares - 1998...........................          21,000         36,000
   Additional paid in capital.................       1,491,000      9,048,000
   Unearned compensation......................          (7,000)             -
   Accumulated deficit........................      (1,005,000)    (1,065,000)
                                                 ------------------------------
   Total Stockholders' Equity.................         500,000      8,019,000
                                                 ------------------------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY         $ 3,068,000     $9,875,000
                                                 ==============================


          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      F-3

<PAGE>



                             IBS INTERACTIVE, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998


                                                         December 31,
                                                 ------------------------------
                                                           1997           1998
                                                 ------------------------------

Revenues........................................    $5,161,000     $9,805,000
Cost of services................................     2,817,000      6,438,000
                                                 ------------------------------
Gross Profit....................................     2,344,000      3,367,000

Operating Expenses:
   Selling, general and administrative .........     2,810,000      3,001,000
   Amortization of intangible assets............        12,000        173,000
   Non-cash compensation expenses...............        40,000        290,000
   Merger related expenses......................             -        109,000
                                                 ------------------------------
                                                     2,862,000      3,573,000
                                                 ------------------------------
        Operating loss..........................      (518,000)      (206,000)
Interest expense................................        79,000         84,000
Interest income.................................             -       (185,000)
Other (income) expense, net.....................        13,000        (60,000)
                                                 ------------------------------

Loss before income taxes........................      (610,000)       (45,000)

Income tax provision............................       (84,000)       (15,000)
                                                 ------------------------------

Net loss........................................    $ (694,000)  $    (60,000)
                                                 ==============================

Loss per share
   Basic and Diluted............................         $(.34)         $(.02)
                                                 ==============================

Weighted average number of common stock and          
equivalents.....................................     2,050,660      3,123,419
                                                 ==============================


          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      F-4

<PAGE>



                                  IBS INTERACTIVE, INC.
                     CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998


<TABLE>
<CAPTION>

                               Common Stock
                        -------------------------
                              Number               Additional                                               Total
                                of                   Paid-in     Unearned   Subscription  Accumulated    Stockholders'
                              Shares     Amount      Capital   Compensation  Receivable     Deficit         Equity
                        ----------------------------------------------------------------------------------------------

<S>                          <C>         <C>       <C>           <C>         <C>         <C>            <C>         
Balance - January 1,    
  1997, as previously
  reported                   1,679,975   $17,000   $1,088,000    $(47,000)   $(54,000)   $  (283,000)   $   721,000

Adjustments in
  connection with
  pooling of interests
  - DesignFX                   176,944     2,000       (2,000)          -           -        (45,000)       (45,000)

Adjustments in
  connection with
  pooling of interests
  - Halo                       180,866     2,000       (2,000)          -           -         17,000         17,000
                        ----------------------------------------------------------------------------------------------

Balance, January 1,
  1997, as restated          2,037,785    21,000    1,084,000     (47,000)    (54,000)      (311,000)       693,000

Shares issued in
  connection with
  acquisition - AllNet          15,883         -       52,000           -           -              -         52,000

Payment of common
  stock subscription
  receivable                         -         -            -           -      54,000              -         54,000

Amortization of
  unearned compensation              -         -            -      40,000           -              -         40,000

Shares issued in
  connection with
  private placement              6,109         -       20,000           -           -              -         20,000

Issuance and
  amortization of
  warrants associated
  with 1997 Notes                    -         -       54,000           -           -              -         54,000

Capital contributions                                 281,000                                               281,000

Net loss                             -         -            -           -           -       (694,000)      (694,000)
                        ----------------------------------------------------------------------------------------------

Balance - December 31,
  1997                       2,059,777    21,000    1,491,000      (7,000)          -     (1,005,000)       500,000

Net proceeds from
  initial public
  offering                   1,380,000    14,000    6,628,000           -           -              -      6,642,000

Issuance and
  amortization of
  directors' options                 -         -       79,000           -           -              -         79,000

Shares issued in
  connection with
  acquisition -
  Entelechy                    147,310     1,000      670,000           -           -              -        671,000

Conversion of
  Entelechy demand note         25,000         -      150,000           -           -              -        150,000

Shares issued in
  connection with
  acquisition - MBS              4,493         -       30,000           -           -              -         30,000

Amortization of
  unearned compensation              -         -            -       7,000           -              -          7,000

Net loss                             -         -            -           -           -        (60,000)       (60,000)
                        ----------------------------------------------------------------------------------------------

Balance - December 31,
  1998                       3,616,580   $36,000   $9,048,000      $    -     $     -    $(1,065,000)    $8,019,000
                        ==============================================================================================

</TABLE>


          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      F-5

<PAGE>




                             IBS INTERACTIVE, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998

                                                           December 31,
                                                  -----------------------------
                                                          1997           1998
                                                  -----------------------------
Cash flows from operating activities:
   Net loss...................................     $  (694,000)   $   (60,000)
Adjustments to reconcile net loss to net cash
   provided by (used in) operating activities:
      Depreciation and amortization...........         285,000        633,000
      Loss on disposals of fixed assets.......          69,000         18,000
      Non-cash interest expense...............          24,000         49,000
      Compensation expense - Entelechy........               -        180,000
      Non-cash compensation...................          40,000        110,000
      Deferred income tax provision (benefit).          57,000       (115,000)
Changes in operating assets and liabilities 
 (net of effects of purchase acquisitions):
   Accounts receivable........................      (1,365,000)       605,000
   Prepaid expenses and other assets..........           1,000       (201,000)
   Accounts payable and accrued expenses......         660,000       (457,000)
   Deferred revenue...........................         276,000       (458,000)
   Income taxes...............................          25,000        (79,000)
   Deposits and other.........................          63,000        (57,000)
                                                  -----------------------------
        Net cash provided by (used in) operating      
          activities..........................        (559,000)       168,000
                                                  -----------------------------

Cash flows from investing activities:
   Capital expenditures - property and equipment      (272,000)      (727,000)
   Asset acquisitions and related costs.......         (75,000)      (116,000)
                                                  -----------------------------
        Net cash used in investing activities.        (347,000)      (843,000)
                                                  -----------------------------

Cash flows from financing activities:
   Proceeds from initial public offering......               -      8,280,000
   Private sales of common stock..............          74,000              -
   Capital contributions......................         282,000              -
   Offering costs.............................         (25,000)    (1,613,000)
   Repayments of notes payable................        (100,000)      (358,000)
   Proceeds from notes payable................         375,000         25,000
   Repayments from (advances to) related parties        79,000        (70,000)
   Proceeds from (repayment of) 1997 Notes....         200,000       (200,000)
   Payments of capital lease obligations......         (30,000)       (65,000)
                                                  -----------------------------
        Net cash provided by financing activities      855,000      5,999,000
                                                  -----------------------------

Net increase (decrease) in cash and cash               
  equivalents.................................         (51,000)     5,324,000

Cash and cash equivalents, at beginning of year        204,000        153,000

                                                  -----------------------------
Cash and cash equivalents, at end of year.....     $   153,000    $ 5,477,000
                                                  =============================


          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      F-6

<PAGE>

                             IBS INTERACTIVE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998


NOTE 1- ORGANIZATION AND BACKGROUND

IBS  Interactive,  Inc. (the  "Company") and its  subsidiaries  provides a broad
range of computer networking,  programming,  applications development,  Internet
subscriber  access,  Internet  Web-site  development  and  network  installation
services.  Services are  primarily  rendered to  businesses  and  organizations,
including governmental and not-for-profit entities. The Company was incorporated
under the name Internet  Broadcasting  System,  Inc. and changed its name to IBS
Interactive,  Inc. on March 10, 1998. The Company, a Delaware  corporation,  has
its main administrative  office in Cedar Knolls, New Jersey, along with regional
offices throughout New Jersey, Alabama and Virginia.

RESTATEMENTS

Previously  issued  consolidated  financial  statements and notes thereto of the
Company have been restated,  as required by Accounting  Principles Board Opinion
No. 16,  "Business  Combinations,"  to reflect  the 1998  business  combinations
accounted for as poolings-of-interests  (DesignFX Interactive,  LLC ("DesignFX")
and Halo Network Management, LLC ("Halo") see Note 3).

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION

Revenue is  recognized as services are provided to clients and  subscribers.  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.

For the years ended December 31, 1997 and 1998, the Company recognized  revenues
of $252,000  and $29,000  respectively,  on projects in process.  Such  unbilled
amounts are included in accounts receivable, net, at December 31, 1997 and 1998,
respectively.

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
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 income (loss) and earnings  (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.

WARRANTS

The fair values  ascribed to warrants that were granted in  connection  with the
1997  Notes  (see Note 6) have  been  capitalized  and  amortized,  as  interest
expense, over the expected life of the underlying debt.

INCOME TAXES

The  Company  accounts  for  income  taxes in  accordance  with  SFAS  No.  109,
"Accounting for Income Taxes".  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

                                      F-7


<PAGE>

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 DesignFX and Halo 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 corporation. Under those regulations, the owners
individually  received the income tax  provision or benefit of their  respective
share of DesignFX's and Halo's net income or loss. Accordingly,  the Company has
not  recorded a provision  or benefit for federal and state income taxes for the
year ended  December 31, 1997 and from  January 1, 1998  through the  respective
acquisition dates of DesignFX and Halo.

In future periods,  the Company's  consolidated  income tax provision or benefit
will include the operating results of DesignFX and Halo. As such, the historical
tax provision of the Company, as reflected in the accompanying consolidated 1997
and 1998  statements of  operations,  is not  necessarily  indicative of the tax
provision  or benefit  that would have been  recorded had DesignFX and Halo been
acquired at the beginning of 1997.

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.

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, 1997, a single  customer  accounted  for 74% of total net accounts
receivable and at December 31, 1998, two customers  accounted for 21% and 17% of
total net accounts receivable.

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 year ended  December 31, 1998,  the Company's  allowance for doubtful
accounts  was reduced by $83,000.  The  decrease  was  comprised  of charged off
accounts totaling $39,000 and a reduction in the allowance (based on the results
of an assessment of the collectibility of outstanding balances) of $44,000.

At December 31, 1998,  cash  equivalents  of $4,982,000  and $443,000  represent
investments  in  GE  Capital   Corporation   commercial   paper  and  short-term
obligations of the United States government, respectively.

The Company  maintains  substantially  all of the machinery  and  communications
network  equipment  utilized in  providing  Internet  access to customers at one
location.

SOURCES OF SUPPLIES AND VENDORS

The Company has multiple vendors, which provide data communications and Internet
access  services  to  customers.   Although  management   believes   alternative
telecommunications  and access facilities could be found in a timely manner, any
disruption or  termination  of these  services  could have a short-term  adverse
effect on  operating  results.  In  addition,  the Company is also  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.

Although  the  Company  attempts  to  maintain  multiple  vendors  for  required
products, its modems,  terminal servers and high-performance  routers, which are
important  components  of its  network,  are  currently  acquired  from  limited
sources. In addition, some of the Company's suppliers have limited resources and
production capacity.  If the suppliers are unable to meet the Company's needs as
it builds out its network infrastructure, then delays and increased costs in the

                                      F-8

<PAGE>

expansion of the Company's network infrastructure could result, which could have
an adverse effect on operating results.

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.

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 years ended  December 31, 1997
and 1998.

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.

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.

EARNINGS (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 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  655,049  shares at December 31, 1998),  could  potentially  dilute
basic earnings per share.

The  Company's  1998 pro forma  basic  loss per share  (which  assumes  that the
proceeds  from the initial  public  offering of common stock and  repayments  of
certain borrowings occurred on January 1, 1998), totaled $.01 per share.


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

                                      F-9

<PAGE>

assumptions  used  in  the  consolidated  financial  statements  relate  to  the
Company's continued ability to deliver state-of-the-art technical and subscriber
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.

EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998,  the  Financial  Accounting  Standards  Board issued SFAS No. 133,
"Accounting  for Derivative  Instruments and Hedging  Activities"  ("SFAS 133"),
which establishes  accounting and reporting standards for derivative instruments
and hedging  activities.  The Company is currently reviewing the effects of SFAS
133,  if any.  This  statement  will be adopted by the Company no later than its
year ending December 31, 2000.

NOTE 3 - BUSINESS COMBINATIONS

POOLINGS-OF-INTERESTS

On September 24, 1998 and December 10, 1998, the Company  acquired  DesignFX and
Halo,    respectively,    in   business    combinations    accounted    for   as
poolings-of-interests.   DesignFX,   which  engages  in  the   development   and
maintenance of Web-sites on the Internet,  became a  wholly-owned  subsidiary of
the Company through the exchange of 176,944 shares of the Company's common stock
(exclusive  of  the  reserves  discussed  below)  for  all  of  the  outstanding
membership  interests  of DesignFX.  On December 9, 1998,  DesignFX was formally
merged into the Company.  Halo, which engages in full-service network solutions,
including planning, installation and maintenance services, became a wholly-owned
subsidiary  of the  Company  through  the  exchange  of  180,866  shares  of the
Company's  common stock  (exclusive of the reserves  discussed below) for all of
the outstanding  membership  interests of Halo. The ultimate number of shares to
be issued to the  former  owners of  DesignFX  and Halo is  contingent  upon the
resolution of specific and, to a lesser extent,  general financial matters.  The
Company  has  reserved  23,216 and 38,365 of common  shares for  issuance to the
owners of DesignFX and Halo, respectively,  pending the outcome of such matters.
The Company  expects to reach  agreement on the ultimate  number of shares to be
issued  in the  year  ending  December  31,  1999.  The  accompanying  financial
statements are based on the assumption that the Company, DesignFX and Halo, were
combined as of January 1, 1997 and,  accordingly,  financial statements of prior
years have been restated to give effect to the combinations.

Summarized  results of  operations  of the  Company,  DesignFX  and Halo for the
period January 1, 1997 through December 31, 1997 are as follows:

                                  COMPANY     DESIGNFX      HALO
                                  -------     --------      ----

Net revenues                    $2,741,000    $572,000  $1,848,000
Net income (loss)                  198,000    (825,000)    (67,000)


Summarized  unaudited  results of operations of the Company and DesignFX through
September  30,  1998 (the  closest  practical  date to the date of the  DesignFX
acquisition) are as follows:

                                              COMPANY    DESIGNFX
                                              -------    --------

Net revenues                                $6,091,000  $1,181,000
Net income                                      52,000      42,000

                                      F-10

<PAGE>

Summarized  unaudited  results of  operations  of the Company  and Halo  through
December  31,  1998  (the  closest  practical  date  to the  date  of  the  Halo
acquisition) are as follows:

                                              COMPANY      HALO
                                              -------      ----

Net revenues                                $7,853,000  $1,952,000
Net income (loss)                             (326,000)    266,000

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

The Company  incurred charges of $109,000 for fees and costs associated with the
acquisitions of DesignFX and Halo. Such amounts, for transactions  accounted for
as a pooling of  interests,  are expensed as services are rendered and costs are
incurred.

PURCHASES

ALLNET TECHNOLOGY SERVICES, INC.

On March 1, 1997,  the  Company  acquired  certain  assets of AllNet  Technology
Services, Inc. ("AllNet"), an Internet Service Provider, in exchange for $75,000
of cash and 13,378  shares of  Company  common  stock in a business  combination
accounted  for as a purchase.  The fair value of the shares issued in connection
with the  acquisition  approximated  $52,000 and was based, in part, on the fair
market value of shares sold in the  Company's  1996 private  placement of common
stock  (see  Note 7). Of the  total  purchase  price of  $127,000,  $65,000  was
allocated  to  equipment  and the  balance was  assigned  to various  intangible
assets.  The results of  operations  of AllNet are included in the  accompanying
financial  statements  from the acquisition  date forward.  With respect to this
acquisition,  the  results  of  operations  from  January  1, 1997  through  the
acquisition date were not material and, accordingly, pro forma operating results
are not presented.

JDT WEBWERX LLC

On January 1, 1998,  the  Company  acquired  certain  assets of JDT  WebwerX LLC
("JDT"),  a business  providing  programming  and  applications  development and
Internet access, for $35,000 cash, in a business combination  accounted for as a
purchase.  Of the total  purchase  price of  $35,000,  $9,000 was  allocated  to
equipment and the balance was assigned to various intangible assets. The results
of operations of JDT are included in the accompanying  financial  statements for
the entire year ended December 31, 1998. With respect to this  acquisition,  the
results  of  operations  for the  year  ended  December  31,  1997  through  the
acquisition date were not material and, accordingly, pro forma operating results
are not presented.

ENTELECHY, INC.

On January  31,  1998,  the  Company  acquired  substantially  all the assets of
Entelechy, Inc. ("Entelechy"),  in exchange for 277,434 shares of Company common
stock in a business combination accounted for as a purchase.  The Company issued
147,310  shares at closing,  and will issue an  additional  130,124  shares (the
"Contingent  Shares") over a three-year period on each of January 31, 1999, 2000
and 2001 to the former  Entelechy  stockholders.  The issuance of such shares is
contingent upon the former  Entelechy  stockholders  remaining in the continuous
employ of the Company. The total purchase price for Entelechy was based upon the
value of shares  issued at  closing  and  related  acquisition  costs.  Goodwill
arising from the Entelechy acquisition totaled $828,000,  and is being amortized
over a period of five years.  The values ascribed to the Contingent  Shares will
result in a charge to operations as such shares are earned through the Company's
years ending  December 31, 2001.  The related  charge to operations for the year
ended  December  31,  1998  totaled  $180,000.  Assuming  the  former  Entelechy
stockholders  remain in the  continuous  employ of the  Company,  the Company is
expected to incur a charge to  operations  of $197,000,  $197,000 and $17,000 in
each of the years ending  December 31, 1999,  2000 and 2001,  respectively.  The
Company's  liability  for the  values  ascribed  to  these  shares  approximates
$591,000 and is included in "Deferred Compensation" in the accompanying December
31, 1998 consolidated  balance sheet. Such liability will be reduced if and when
the shares are formally issued.

                                      F-11

<PAGE>

Entelechy  had an  outstanding  demand  note of $150,000 to a relative of one of
Entelechy's principals. The demand note did not bear interest and was converted,
subsequent to the consummation of the Company's  initial public  offering,  into
25,000 shares of the Company's common stock.

The following  summarized,  unaudited pro forma  information  for the year ended
December  31, 1997  assumes that the  acquisition  of Entelechy  had occurred on
January 1, 1997:

                                                 Unaudited
                                               ------------
Net revenues                                   $ 5,484,000
Operating loss                                    (920,000)
Net loss                                        (1,006,000)
Loss per share:
   Basic and diluted                           $      (.49)
                                               ============

The pro forma operating  results reflect estimated pro forma adjustments for the
amortization  of intangibles  $(156,000)  and  compensation  expense  $(197,000)
related to the issuance of the  Contingent  Shares over a one-year  period.  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 1997,  or of future  results of the  combined
companies.

MBS, INC.

On December 1, 1998, the Company acquired certain assets of MBS, Inc. ("MBS"), a
Certified  Technical  Education Center-Partner (providing  training on MicroSoft
Solutions)  for cash of $50,000,  the issuance of 4,493 shares of Company common
stock  and  an  assumption  of  liabilities  totaling  $150,000.  This  business
combination was accounted for as a purchase. The purchase price was allocated to
the fair market  values of tangible and  intangible  assets  acquired.  Goodwill
arising from the MBS acquisition totaled $181,000, and is being amortized over a
period of ten  years.  The  results of  operations  of MBS are  included  in the
accompanying  financial  statements  from the  acquisition  date  forward.  With
respect to this  acquisition,  the results of  operations  from  January 1, 1998
through the  acquisition  date were not  material  and,  accordingly,  pro forma
operating results are not presented.

NOTE 4 - PROPERTY AND EQUIPMENT

Major classes of property and equipment, net, consist of the following:

                                                      December 31,
                                               ---------------------------
                                                      1997           1998
                                               ------------   ------------
Network equipment                               $1,101,000     $1,635,000
Office equipment, fixtures and vehicles             70,000        107,000
Leasehold improvements                                   -         81,000
                                               ------------   ------------
                                                 1,171,000      1,823,000
Less: accumulated depreciation                    (470,000)      (880,000)
                                               ------------   ------------
                                               $   701,000    $   943,000
                                               ============   ============

At  December  31,  1997 and 1998,  equipment  subject  to capital  leases,  less
accumulated   depreciation,   amount  to  $98,000  and  $60,000,   respectively.
Depreciation  expense for the years ended December 31, 1997 and 1998 amounted to
$273,000 and $459,000,  respectively,  which includes  depreciation of equipment
subject to capital lease agreements of $19,000 and $38,000, respectively.


                                      F-12

<PAGE>




NOTE 5 - INTANGIBLE ASSETS

Intangible assets, net, are comprised of the following:

                                                      December 31,
                                               ---------------------------
                                                      1997           1998
                                               ------------   ------------
Goodwill - Entelechy                           $         -     $  828,000
Goodwill - MBS                                           -        181,000
Goodwill - JDT                                           -         26,000
Deferred compensation                                    -        705,000
Customer lists                                      67,000         67,000
Organizational costs                                 2,000          2,000
                                               ------------   ------------
                                                    69,000      1,809,000
Less: accumulated amortization                     (13,000)      (391,000)
                                               ------------   ------------
                                                  $ 56,000     $1,418,000
                                               ============   ============

Amortization  expense was $12,000 and $378,000 for the years ended  December 31,
1997 and 1998, respectively.

NOTE 6 - BORROWINGS

At  December  31,  1997 and 1998,  the  Company's  outstanding  borrowings  were
comprised of the following:

                                                      1997           1998
                                               ------------   ------------
1997 Notes                                       $ 200,000     $        -
DesignFX - development loan                        175,000        200,000
DesignFX - bank loan                               200,000              -
Halo - line of credit                               35,000              -
Halo - vehicle loan                                 16,000              -
Other debt                                         107,000              -
Capital leases                                     123,000         72,000
                                               ------------   ------------
                                                   856,000        272,000
Less: current portion                             (575,000)       (47,000)
                                               ------------   ------------
Total-long term borrowings                       $ 281,000     $  225,000
                                               ============   ============

1997 NOTES

On October 31, 1997, the Company  entered into a series of financing  agreements
with eight individual investors (collectively, the "1997 Notes"). The 1997 Notes
accrued  interest at a rate of 8% and were paid in full after the closing of the
Company's  initial public offering of common stock.  The  outstanding  principal
balance of the 1997 Notes amounted to $200,000 at December 31, 1997.

In  connection  with the  issuance of the 1997 Notes,  investors  also  received
warrants to an aggregate of purchase up to 48,872 shares of the Company's common
stock at an exercise price of $3.54 per share through October 2000 (see Note 7).
The Company capitalized the fair values ascribed to the warrants, which included
a value  reflective of the excess of the initial public  offering price less the
exercise  price,  as a deferred  financing  cost of $35,000  (included in "Other
Assets" in the  accompanying  December 31, 1997 balance sheet).  Such costs were
amortized over the life of the 1997 Notes.  Interest expense for the years ended
December 31, 1997 and 1998,  including the amortization of the value ascribed to
warrants, totaled $22,000 and $45,000, respectively. The effective interest rate
on the 1997 Notes, which includes the amortization of the value of the warrants,
approximated 68% per annum.

                                      F-13

<PAGE>

DESIGNFX - DEVELOPMENT LOAN

In March 1997,  DesignFX  entered into an  agreement  with a bank to develop and
design the  software  and  hardware for the bank's sites on the Internet and the
worldwide  web.  Provisions  of the agreement  provided for various  advances to
DesignFX in order to provide  working  capital for  expenses  incurred  with the
design and  development of such web sites. In September 1998, this agreement was
terminated and a new agreement was executed.  Terms of the new agreement provide
for the advances to be repaid in monthly installments equal to 50% of DesignFX's
defined  revenues  received through the bank's web site. Based on the negotiated
terms in this obligation,  management does not anticipate that any repayments of
this loan will be due during the year ending December 31, 1999. In addition, the
Company will accrue,  in the form of a royalty,  10% of defined  revenues.  Upon
repayment in full of this  advance,  the accrued  royalties,  without  interest,
shall be paid over a period of one year in twelve  equal  monthly  installments.
Obligations  under this loan totaled  $175,000 and $200,000 at December 31, 1997
and 1998, respectively.

DESIGNFX - BANK LOAN

In July 1997,  DesignFX borrowed $200,000 from a bank.  Repayment terms provided
for interest only payments  through January 1999, with interest based on 1% over
the bank's  prime rate of  interest  (9 3/4% at December  31,  1997).  Remaining
principal and unpaid interest were due in monthly  installments through December
2001. The outstanding balance was paid off in November 1998.

HALO - LINE OF CREDIT

Halo had a credit line with a bank that accrued interest (9 1/2% at December 31,
1997) at a rate indexed to the bank's  prime rate.  The  outstanding  balance at
December 31, 1997 totaled  $35,000.  The  outstanding  balance was repaid by the
Company in the year ended December 31, 1998 and the credit line was terminated.

HALO - VEHICLE LOAN

In 1997,  Halo  entered  into a borrowing  agreement  with a bank to finance the
purchase of a vehicle.  The secured note accrued interest at a rate of 8.85% and
was payable in full in May of 2001. The outstanding balance at December 31, 1997
totaled $16,000. The outstanding balance was paid off during 1998.

OTHER DEBT

In  1995,  the  Company  issued  three-year  promissory  notes  in the  original
aggregate  principal  amount of  $100,000  of  which,  notes  with an  aggregate
original principal amount of $95,000 remained  outstanding at December 31, 1997.
These notes  accrued  interest at a rate of 6%.  Interest  expense for the years
ended December 31, 1997 and 1998 amounted to $6,000 and $2,000, respectively.

Bank  borrowings  assumed in  connection  with the  acquisition  of  Interactive
Networks, Inc. ("INI") in 1996, accrued interest at the rate of 10%. Outstanding
borrowings  assumed from INI  amounted to $12,000 as of December 31, 1997.  Such
borrowings were secured by the Company's  assets.  Interest  expense for each of
the years  ended  December  31,  1997 and 1998  amounted  to $2,000 and  $1,000,
respectively.

The  promissory  notes and the INI bank  borrowings  were paid off with proceeds
from the  Company's  initial  public  offering of common stock.  In addition,  a
demand note of $150,000 assumed in the Entelechy  acquisition was converted into
25,000 shares of Company common stock in 1998.

LINE OF CREDIT

In October 1998,  the Company  entered into a promissory  note  agreement with a
bank for a line of credit.  Borrowings are 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 is based on the
London  Interbank  Offering Rate ("LIBOR") plus 2% or the bank's prime rate plus

                                      F-14

<PAGE>

 .25%. The agreement requires the Company to comply with certain  operational and
financial  covenants.  There were no outstanding  borrowings  under this line of
credit at December 31, 1998 and the agreement expires on June 30, 1999.

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,
1997 and 1998  totaled  $123,000  and $72,000,  respectively.  Interest  expense
related to such  agreements  was $7,000 and $18,000 for the years ended December
31, 1997 and 1998, respectively.

DEBT AND LEASE MATURITIES

At December 31, 1998,  aggregate  required  principal  payments,  including  the
present value of amounts owed under capital leases, are as follows:

YEAR ENDING DECEMBER 31,                                        AMOUNT
------------------------                                        ------

1999                                                           $ 47,000
2000                                                            225,000
                                                            ============
      Total                                                    $272,000
                                                            ============

NOTE 7 - STOCKHOLDERS' EQUITY

In May 1998,  the Company  completed  an initial  public  offering of its common
stock. In connection with the offering, the Company registered,  issued and sold
1,380,000  shares of common  stock,  including  180,000  shares of common  stock
issued  in   connection   with  the  exercise  in  full  of  the   underwriter's
over-allotment  option at an initial  public  offering price of $6.00 per share.
The  proceeds to the Company (net of  underwriting  discounts,  commissions  and
other  expenses  payable  by  the  Company)  totaled  approximately  $6,642,000.
Additionally,  the Company  registered 120,000 shares of common stock underlying
warrants,  which  were sold to the  underwriter  ("Underwriter  Warrants").  The
warrants are exercisable for a four-year period  commencing on May 14, 1999 at a
price of $8.10 per share.

The Company  incurred costs in connection with the issuance and  distribution of
securities  in the  offering  in the amount of  $1,638,000.  Such costs  include
underwriting discounts and commissions in the amount of $828,000,  expenses paid
to or for the  underwriting  in the amount of $248,000 and other expenses in the
amount of $562,000.

STOCK SPLITS

On March 9, 1998, the Company  effected a 1,029.1 for 1 stock split and on April
21,  1998,  a 1.187 for 1 stock  split.  All share and per share  data have been
restated for all periods presented to reflect the splits.

CAPITAL STOCK

At December  31,  1998,  218,872  shares of common  stock were  reserved for the
exercise  of  stock  warrants,  comprised  of the  aforementioned  Underwriter's
Warrants,  48,872  reserved shares for the 1997 Note investors and 50,000 for an
investment advisory firm (see Warrants below).


On March 9, 1998 the  Company's  Board of Directors  approved an increase in the
number of shares of authorized  capital stock to 12,000,000,  of which 1,000,000
shares were designated as "blank check"  preferred  stock and 11,000,000  shares
were designated as common stock.

                                      F-15

<PAGE>

PRIVATE PLACEMENT

During  1997,  the Company sold 6,109 shares of common stock for net proceeds of
approximately  $20,000.  At December  31,  1996, a  subscription  receivable  of
$54,000 was owed to the Company. Such amount was received in January 1997.

WARRANTS

As  discussed  in Note 6, the 1997 Note  investors  also  received  warrants  to
purchase  up to  48,872  shares of the  Company's  common  stock.  The 1997 Note
investors  may  exercise  the  warrants at any time  through  October 2000 at an
exercise price of $3.54 per share.

In November  1998,  the Company  entered  into an agreement  with an  investment
advisory  firm who will  directly  assist  the  Company  in  future  acquisition
efforts.  In return for services to be rendered,  the Company has issued  50,000
warrants to such firm.  The warrants will vest over the period of service if the
requisite  number of acquisitions  are  consummated.  The exercise prices of the
warrants were based,  in part, on the fair market value of the Company's  common
stock at the date of the agreement.  The values ascribed to the warrants will be
capitalized. Such acquisitions were consummated in the first quarter of 1999.

STOCK AWARDS

In February  1996,  the Company  entered into an  employment  agreement  with an
individual which provided for compensation  that included the issuance of 24,436
shares of common stock to be issued ratably over a two-year period. Compensation
expense  associated with such shares  (computed using the per share price of the
1996 private  placement) was $40,000 and $7,000 for the years ended December 31,
1997 and 1998, respectively.

In April 1998, the Company agreed to issue 20,000 shares of restricted  stock to
an officer.  The stock award vests over a four-year period;  however, if certain
events occur,  the unvested  portion of the award will  automatically  vest. The
value  ascribed to the stock award  ($114,000)  was based,  in part,  on the per
share  price of the  Company's  common  stock in its  initial  public  offering.
Compensation  expense for the year ended December 31, 1998 totaled $24,000.  The
Company's  liability  for the  values  ascribed  to  these  shares  approximates
$114,000 and is included in "Deferred Compensation" in the accompanying December
31, 1998 consolidated  balance sheet. Such liability will be reduced if and when
the shares are formally issued.

STOCK OPTION PLAN

As of March 10, 1998, the Board of Directors adopted the 1998 Stock Option Plan.
Under the terms of this plan, the Company has reserved  330,000 shares of common
stock for future grants (see Note 15).

Under the  Company's  1998 Stock  Option Plan,  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, 1998, the Company could grant an aggregate of 62,850 shares under the plan.

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
$79,000 in 1998.

                                      F-16

<PAGE>


The following table summarizes  information  about stock options  outstanding at
December 31, 1998:
<TABLE>
<CAPTION>

                  Options Outstanding                              Options Exercisable
  -----------------------------------------------------      ----------------------------------
                                 Weighted                                                         
                                 average      Weighted                           Weighted
                                remaining     average                            average
                     Number     contractual   exercise             Number        exercise
                   outstanding  life (years)   price            exercisable       price
  -----------------------------------------------------      ----------------------------------
<S>                 <C>           <C>          <C>             <C>             <C>   
                                                                   
  $6.00               215,500       9.5        $6.00              26,938          $6.00
  $6.25 to $6.38       23,950       9.7         6.26               1,496           6.26
  $7.25 to $7.97       16,950       9.8         7.50                 706           7.50
  $8.09 to $8.63       10,750       9.5         8.18               1,344           8.18
                    ----------                                   ----------
                      267,150       9.5         6.14              30,484           6.14
                    ----------                                   ----------
</TABLE>


There were no option  grants in the year ended  December 31, 1997.  Transactions
under the 1998 Stock Option Plan are summarized as follows:
                                                       
                                   Year ended December 31,
                                   -----------------------
                                            1998
                                   -----------------------
                                                 Weighted
                                                 average
                                                 exercise
                                        Shares    price
  ---------------------------------------------------------
  Outstanding at beginning of year             -         -
  Granted                                267,150    $ 6.14
  Exercised                                    -         -
  Canceled                                     -         -
  ---------------------------------------------------------
  Outstanding at end of year             267,150      6.14
  ---------------------------------------------------------
  Options exercisable at year end         30,484      6.14
  ---------------------------------------------------------
  Options available for grant             62,850
  ---------------------------------------------------------

Under the  accounting  provisions of SFAS 123, the Company's  1998 pro forma net
loss and loss per share would have been:


  --------------------------------------------------------
  Net loss                                  $(125,000)
  Net loss per share; basic and diluted       $(.04)
  --------------------------------------------------------

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:

  December 31, 1998
  --------------------------------------------------------
  Dividend yield                                       0%
  Expected volatility                               46.1%
  Risk-free interest rate                            5.39%
  Expected life - years                                10
  Weighted  average fair value of options granted  $ 3.47
  --------------------------------------------------------

                                      F-17

<PAGE>



NOTE 8 - TAXES

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

                                                      December 31,
                                               ---------------------------
                                                      1997           1998
                                               ------------   ------------
Current
   Federal....................................     $21,000      $ 102,000
   State......................................       6,000         28,000
                                               ------------   ------------
                                                    27,000        130,000
                                               ------------   ------------
Deferred
   Federal....................................      29,000        (91,000)
   State......................................      28,000        (24,000)
                                               ------------   ------------
                                                    57,000       (115,000)
                                               ============   ============
   Total income tax provision                    $  84,000     $   15,000
                                               ============   ============



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

                                                      December 31,
                                               ---------------------------
                                                      1997           1998
                                               ------------   ------------
Deferred Tax Asset, Current:
   Accounts receivable allowances...........      $ 26,000    $     9,000
   Net operating loss carryforwards.........         2,000              -
   Accrued compensation.....................             -        117,000
   Other assets.............................        20,000              -
   Other, net...............................         2,000              -
                                               ------------   ------------
                                                  $ 50,000    $    126,000
                                               ============   ============
Deferred Tax Asset (Liabilities), Non-Current:
   Intangible assets........................             -    $ 1,070,000
   Valuation allowance......................             -     (1,070,000)
   Property and equipment...................       (34,000)        16,000
   Other....................................             -        (11,000)
                                               ------------   ------------
                                                  $(34,000)   $     5,000
                                               ============   ============

Differences between the federal provision (benefit) computed at a statutory rate
and the Company's effective tax rate are as follows:

                                                      December 31,
                                               ---------------------------
                                                      1997           1998
                                               ------------   ------------
Statutory rate.............................     $ (207,000)    $  (15,000)
State taxes, net of federal benefit........         20,000          3,000
Benefit attributed to DesignFX and Halo owners     303,000        (76,000)
Amortization of Entelechy goodwill.........              -         52,000
Non-deductible expenses....................         31,000         45,000
Decrease in deferred income tax valuation        
allowance..................................        (76,000)             -
Other, net.................................         13,000          6,000
                                               ============   ============
                                                $   84,000       $ 15,000
                                               ============   ============

                                      F-18


<PAGE>

A  current  benefit  of  $12,000  related  to  Entelechy  acquisition  costs was
recognized in the year ended December 31, 1998. The benefit reduced the carrying
value of goodwill arising from the acquisition.

Based on historical  results of the Company and its  acquisitions  and estimated
1999 earnings,  which includes earnings on certain  consulting  projects and the
effects  of  integrated   operations  of  the  Company,   management   considers
realization  of the deferred tax assets  generated  from  operations  to be more
likely than not.

The  acquisitions  of  DesignFX  and Halo were  deemed to be  taxable  among the
parties and,  accordingly,  the Company was required to revalue the tax bases of
the  intangible  assets of DesignFX and Halo.  This  revaluation  resulted in an
excess  of tax  bases  over  carrying  values.  Based  on an  assessment  of the
Company's ability to generate taxable income beyond the year ending December 31,
1999, the Company, upon the acquisitions of DesignFX and Halo, has established a
valuation  allowance of $1,070,000  against the entire deferred tax asset, since
realization  of the  asset can not be  considered  to be more  likely  than not.
Management will perform periodic  assessments of its ability to generate taxable
income  and  reduce  the  valuation  allowance  if  realization  of the asset is
considered more likely than not. For federal and state income tax purposes,  the
Company will amortize this intangible asset over a period of 15 years.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases facilities and equipment under operating leases and subleases
expiring through December 2003. Some of the leases have renewal options and most
contain  provisions for passing through certain  incremental  costs. At December
31, 1998, future net minimum annual rental payments under non-cancelable  leases
are as follows:

YEAR ENDING DECEMBER 31,                                      AMOUNT
-------------------------                                     ------
1999                                                        $   628,000
2000                                                            576,000
2001                                                            439,000
2002                                                            307,000
2003                                                            178,000
                                                            ------------
      Total                                                  $2,128,000
                                                            ============

Total  rental  expense  for the  years  ended  December  31,  1997  and 1998 was
approximately $124,000 and $384,000, respectively.

EMPLOYMENT AGREEMENTS

The Company has entered into  employment and  consulting  contracts with certain
officers, employees and stockholders,  which provide for minimum annual salaries
to be paid over specified  terms. At December 31, 1998,  future  commitments for
such payments were as follows:

YEAR ENDING DECEMBER 31,                                      AMOUNT
------------------------                                      ------
1999                                                         $2,053,000
2000                                                          1,468,000
2001                                                            605,000
2002                                                            296,000
                                                            ------------
TOTAL                                                        $4,422,000
                                                            ============

FIXED ASSETS

At  December  31,  1998,  the Company  had  entered  into fixed  asset  purchase
commitments of approximately $1,200,000.

                                      F-19


<PAGE>

NOTE 10 - RELATED PARTY TRANSACTIONS

FINANCING TRANSACTIONS

At December 31, 1997,  certain of the  Company's  stockholders  held  promissory
notes made by the Company in the aggregate original principal amount of $95,000.
These notes accrued interest of 6%. Interest expense for each of the years ended
December 31, 1997 and 1998 amounted to $6,000 and $2,000, respectively.

Certain relatives of the Company's  executive officers were 1997 Note investors.
The terms of such  borrowings are the same as those afforded to other  investors
(see Note 6).

DesignFX had a non-interest  bearing demand note payable to an owner. The amount
outstanding at December 31, 1997 totaled $15,000,  the balance of which was paid
in 1998. The imputed  interest expense for the years ended December 31, 1997 and
1998 was not material.

At December 31, 1998, the Company had advanced  $70,000 to an entity  controlled
by an officer of DesignFX. Repayment terms have yet to be finalized.

GUARANTEES

Certain  executive  officers,  who are also  stockholders  of the Company,  have
provided, at no cost to the Company,  personal guarantees of certain obligations
of the Company.  The amount of obligations  subject to these guarantees  totaled
$117,000 and $72,000 at December 31, 1997 and 1998, respectively.


OTHER TRANSACTIONS

An entity  whose  stockholder  is also a  stockholder  of the  Company  provided
management  consulting services to the Company.  Fees for such services amounted
to $14,000 and $0 for the years ended December 31, 1997 and 1998, respectively.

An entity, which is owned by certain owners of the Halo, provided managerial and
administrative  services to Halo.  In 1997,  Halo was charged  $120,000 for such
services  (included in General and  Administrative  Expenses in the accompanying
December 31, 1997 consolidated statement of operations).  Due to the acquisition
of Halo by the Company  (described  in Note 3), there was no  allocation of such
expenses to Halo in 1998. At December 31, 1997 and 1998,  Halo owed $128,000 and
$0 to this entity.  The related  interest  expense totaled $7,000 and $0 for the
years ended December 31, 1997 and 1998.

Cash  contributed to the Company from DesignFX and Halo owners totaled  $281,000
and $0 for the years ended December 31, 1997 and 1998, respectively.

NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION

As disclosed in Note 3, the Company has consummated  various asset  acquisitions
in 1997 and 1998.  In  conjunction  with  such  acquisitions,  liabilities  were
assumed as follows:

                                                      1997           1998
                                               ------------   ------------
Fair value of assets acquired                     $127,000     $1,010,000
Cash proceeds                                       75,000         50,000
Fair value of issued common stock                   52,000        700,000
                                               ============   ============
      Liabilities assumed                      $         -0-   $  260,000
                                               ============   ============

Cash paid for interest and income taxes are as follows:

                                      F-20

<PAGE>
                                                      1997           1998
                                               ------------   ------------
      Interest                                      $7,000      $  63,000
      Income Taxes                                   2,000        197,000
                                               ============   ============

In 1997,  the Company  acquired  $95,000 of equipment  subject to capital  lease
obligations. In 1998, a demand note of $150,000 was settled through the issuance
of 25,000 shares of Company common stock.

NOTE 12 - MAJOR CLIENTS OF THE COMPANY

One client  accounted  for 29% and 35% of the  Company's  revenues for the years
ended December 31, 1997 and 1998, respectively.  One consulting project provided
to the same client  accounted for 24% and 28% of the Company's  revenues for the
years ended December 31, 1997 and 1998, respectively.

NOTE 13 - SEGMENT INFORMATION

The Systems  Integration,  Programming and Applications  Development  Consulting
segment  consists  primarily  of custom  programming  for  Intranet and Internet
applications,  including distance learning and e-commerce. The Internet Services
segment provides  dedicated leased line, frame relay and digital subscriber line
communications,  dial-up  access  and  mail  service.  The  Web  Design  segment
(principally   DesignFX)   provides   Web-site   development  and   maintenance,
programming and hosting services. The Network Installations segment (principally
Halo) provides full service network solutions including  planning,  installation
and  maintenance.  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 years ended December
31, 1997 and 1998.

The Company's  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 or were
subject to autonomous control.

Segment  information  as of and for the years ended  December  31, 1997 and 1998
are as follows (in thousands):

<TABLE>
<CAPTION>
                            Systems
                          Integration,  
                          Programming
                              and
                          Applications
                          Development   Internet    Web      Network
December 31, 1997          Consulting   Services   Design  Installation  Corporate    Total
--------------------------------------------------------------------------------------------
<S>                         <C>          <C>       <C>       <C>          <C>        <C>
Revenues                    $1,750       $  991    $ 572     $1,848       $   -      $5,161
Cost of services               208          891      565      1,153           -       2,817
                          ------------- ---------  -------   ---------    -------   --------
Gross profit                 1,542          100        7        695           -       2,344
Selling, general &            
administrative                 404          663      850        704         189       2,810
Amortization of                 
intangible assets                -           12        -          -           -          12
Non-cash compensation         
expense                         40            -        -          -           -          40
                          ------------- ---------  -------   ---------    -------   --------
Operating income (loss)      1,098         (575)    (843)        (9)       (189)       (518)
Interest expense                 -            -      (28)       (14)        (37)        (79)
Other income (expense),         
net                              -            -       46        (44)        (15)        (13)
Income tax (provision)        
benefit                       (330)         173        -          -          73         (84)
                          ------------- ---------  -------   ---------    -------   --------
Net income (loss)          $   768        $(402)   $(825)    $   (67)     $(168)     $ (694)
                          ============= =========  =======   =========    =======   ========
Allocated assets            $1,523        $ 616    $ 256     $   360      $ 313      $3,068
                          ============= =========  =======   =========    =======   ========
Expenditures for
allocated assets            $    -        $ 152    $  94     $    24      $   2      $  272                                         
                          ============= =========  =======   =========    =======   ======== 
</TABLE>                   
                                      F-21

<PAGE>

<TABLE>
<CAPTION>
                            Systems
                          Integration,  
                          Programming
                              and
                          Applications
                          Development   Internet    Web      Network
December 31, 1998          Consulting   Services   Design  Installation  Corporate    Total
--------------------------------------------------------------------------------------------
<S>                         <C>          <C>       <C>       <C>          <C>        <C>
Revenues                    $4,967       $1,301    $1,585    $1,952       $    -     $9,805
Cost of services             2,504        1,629      926      1,379            -      6,438
                          ------------- ---------  -------   --------    ---------   -------
Gross profit                 2,463         (328)     659        573            -      3,367
Selling, general &          
administrative               1,456          280      454        303          508      3,001
Amortization of              
intangible assets              154           19        -          -            -        173
Non-cash compensation         
expense                        187            -        -          -          103        290
Merger expenses                  -            -        -          -          109        109
                          ------------- ---------  -------   --------    ---------   -------
Operating income (loss)        666         (627)     205        270         (720)      (206)
Interest expense                 -            -      (18)        (5)         (61)       (84)
Interest income                  -            -        -          1          184        185
Other income (expense), net      -            -       31         38           (9)        60
Income tax (provision)        
benefit                       (464)         251        -          -          198        (15)
                          ------------- ---------  -------   --------    ---------   -------
Net income (loss)           $  202        $(376)    $218       $304       $ (408)    $  (60)
                          ============= =========  =======   ========    =========   =======
Allocated assets            $2,430        $ 550     $213       $289       $6,393     $9,875
                          ============= =========  =======   =========   =========   =======
Expenditures for            $    -        $ 336     $220       $  -       $  171     $  727   
allocated assets          ============= =========  =======   =========   =========   =======                                        
                          
</TABLE>

NOTE 14 - FOURTH QUARTER ADJUSTMENTS

In the fourth quarter of 1998, the Company recognized,  as changes in estimates,
the pre-tax  effects of: (i) reducing  liabilities  accrued in previous years by
$55,000 (included in other (income)  expense,  net), (ii) reducing the allowance
for  doubtful  accounts by $44,000,  and (iii)  reducing a current  year royalty
liability by $37,000.  The Company incurred  charges of $109,000 for
fees and costs  associated  with the  acquisitions  of DesignFX  and Halo in the
fourth quarter of 1998. Management fee expenses allocated to Halo from a related
party totaling $90,000 through September 30, 1998 were eliminated in the fourth
quarter of 1998.

NOTE 15 - SUBSEQUENT EVENTS

ACQUISITIONS

On January 29, 1999,  the Company  acquired  substantially  all of the assets of
Mainsite Communications  (Mainsite") for approximately $53,000 in cash. Mainsite
is an Internet Service Provider based in Bridgeport, New Jersey.

On February 22, 1999, the Company  acquired  substantially  all of the assets of
the Renaissance  Internet  Services Division  ("Renaissance")  of PIVC, LLC, for
$365,000,  a one-year  promissory  note of $228,000  and the  issuance of 44,046
shares of common  stock,  subject  to  certain  adjustments.  Renaissance  is an
Internet Service Provider headquartered in Huntsville, Alabama.

On March 1, 1999,  the Company  acquired  substantially  all of the assets of EZ
Net,  Inc.,  a  Yorktown,   Virginia-based   Internet   Service   Provider  with
approximately 3,100 consumer dial-up and 40 corporate accounts,  in exchange for
$300,000 in cash and the  issuance  of 33,289  shares of Company  common  stock,
subject to certain adjustments.

On March 25, 1999, the Company acquired  substantially  all of the assets of the
ADViCOM division of Multitronics,  Inc., for approximately  $118,000 in cash and
the issuance of 4,424  shares of common  stock.  ADViCOM is an Internet  Service
Provider based in Huntsville, Alabama.

                                      F-22


<PAGE>

All of these business  combinations  have been  accounted for as purchases.  The
ultimate  values  ascribed to the purchases  are subject to certain  adjustments
between  the  parties.   The  Company's  1999  acquisitions  do  not  represent,
individually  and  in  the  aggregate,  significant  subsidiaries.  Accordingly,
condensed and pro forma financial information is not presented.

OPTION PLAN

In January 1999, the Board of Directors  decided to have its stockholders  vote,
at the Annual  Meeting of  Stockholders,  on the  approval of a new stock option
plan,  which  would  permit the  Company to grant  additional  stock  options to
purchase an aggregate of 300,000 shares of common stock of the Company.


                                      F-23

<PAGE>

                                 EXHIBIT INDEX


EXHIBIT NO.       DESCRIPTION

   *3.1     Restated  Certificate  of  Incorporation  of the  Company  (filed as
            Exhibit 3.1 to the  Company's  Registration  Statement on Form SB-2,
            File No.  333-47741,  filed on April  23,  1998  (the  "Registration
            Statement")).
   *3.2     Restated  By-Laws of the Company,  as amended  (filed as Exhibit 3.2
            to the Company's Registration Statement).
    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 the Company's  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  the   Company's   Registration
            Statement).
  *10.2     Form of Warrant to Purchase Shares of Stock, dated as of October 31,
            1997  (filed  as  Exhibit   10.4  to  the   Company's   Registration
            Statement).
  *10.3     Form of  Employment  Agreement  between the Company and  Nicholas R.
            Loglisci,  Jr. (filed as Exhibit 10.5 to the Company's  Registration
            Statement).+
  *10.4     Form of  Employment  Agreement  between  the  Company  and  Clark D.
            Frederick  (filed  as  Exhibit  10.6 to the  Company's  Registration
            Statement).+
  *10.5     Form  of  Employment   Agreement   between  the  Company  and  Frank
            Altieri,  Jr. (filed as Exhibit 10.7 to the  Company's  Registration
            Statement).+
  *10.6     Form  of  Employment  Agreement  between  the  Company  and  Jeffrey
            Brenner  (filed  as  Exhibit  10.8  to  the  Company's  Registration
            Statement).+
  *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  the  Company's
            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,  Jospeh  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 the  Company's  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 the
            Company's 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 the Company's Registration Statement).+
  *10.11    Commercial  Sublease,  dated as of May 5, 1997,  between the Company
            and Information  Systems & Communications,  Inc., in connection with
            the Company's premises in Fairfax,  Virginia (filed as Exhibit 10.16
            to the Company's Registration Statement).
  *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 the Company's premises
            in Cedar Knolls, New Jersey (filed as Exhibit 10.17 to the Company's
            Registration Statement).
  *10.13    Letter Agreement,  dated as of October 21, 1997, between the Company
            and EI Realty in  connection  with the  Company's  premises in Cedar
            Knolls,  New  Jersey  (filed  as  Exhibit  10.18  to  the  Company's
            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 the Company's  premises in Cedar Knolls,  New Jersey
            (filed as Exhibit 10.19 to the Company's 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 the Company's Registration Statement).

<PAGE>

  *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 the Company's Registration Statement).
  *10.17    Lease Agreement,  dated as of January 31, 1998,  between the Company
            and R&G International,  in connection with the Company's premises in
            Huntsville,  Alabama  (filed  as  Exhibit  10.22  to  the  Company's
            Registration Statement). 
 **10.18    Loan  Agreement,  dated October 30, 1998, by and between the Company
            and First Union National Bank.
 **21.1     Subsidiaries of the Company.
 **24.1     Power of Attorney (appears on signature page).
 **27.1     Financial Data Schedule.
-------------

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