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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                              -------------------
                                   FORM 10-KSB

(Mark One)

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

For the fiscal year ended December 31, 1999

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:

                                                  Name of Each Exchange
        Title of Each Class                        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: $18,774,000.

         The aggregate market value of voting and non-voting  common equity held
by non-affiliates of the Registrant as of March 24, 2000 was $45,216,396

         As of March  24,  2000,  6,065,849  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 our 2000 Annual  Meeting of  Stockholders,  which will be filed on or before
April 28, 2000.

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<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 OUR (AS HEREINAFTER DEFINED)  EXPECTATIONS,
HOPES, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. FORWARD-LOOKING STATEMENTS
INCLUDE:  THE PLANS AND  OBJECTIVES  OF THE  COMPANY FOR FUTURE  OPERATIONS  AND
TRENDS  AFFECTING  OUR  FINANCIAL  CONDITION  AND  RESULTS  OF  OPERATIONS.  ALL
FORWARD-LOOKING  STATEMENTS IN THIS REPORT ARE BASED ON INFORMATION AVAILABLE TO
THE COMPANY AS OF THE DATE THIS REPORT IS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE "SEC"), AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH
FORWARD-LOOKING  STATEMENTS.  FACTORS THAT COULD CAUSE ACTUAL  RESULTS TO DIFFER
MATERIALLY  FROM THOSE EXPRESSED OR IMPLIED BY SUCH  FORWARD-LOOKING  STATEMENTS
INCLUDE, BUT ARE NOT LIMITED TO, (I) A DECLINE IN GENERAL ECONOMIC CONDITIONS OR
A LOSS OF MAJOR CUSTOMERS,  (II) THE  UNAVAILABILITY OR MATERIAL INCREASE IN THE
PRICE OF TELECOMMUNICATIONS SERVICES AND FACILITIES,  (III) AN ADVERSE 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." WE UNDERTAKE 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

         We (as used herein,  "we," "us," "our" and the  "Company"  refer to IBS
Interactive, Inc.) are a leading provider of one-stop e-Business and Information
Technology (IT)  professional  services and Web-site  Hosting (our "Professional
Services and  Web-Site  Hosting" business  segment) to mid-size  businesses  and
public sector  institutions in the Eastern U.S. We also provide  Internet access
services  (our "Internet  Access  Services" business  segment) to  consumer  and
business customers in certain markets of the Eastern U.S.

         We  represent  an  emerging  breed of  e-Business  and IT  professional
services firm: one that provides total solutions by transforming technology into
value for clients through integrated,  multi-disciplinary service offerings.
We utilize  advanced  technologies  to provide our clients with  programming and
applications development, network services, IT consulting and training, Web-site
hosting and Internet access services.

         We provide the following  services  individually or as part of a
one-stop package custom designed for a client's needs:

PROFESSIONAL SERVICES & WEB-SITE HOSTING

    PROGRAMMING AND APPLICATIONS DEVELOPMENT

        --   Customized   application   development,  including:  Web  portals,
             e-commerce,  distance  learning,  real  audio  and  video,  online
             databases, interactive communications and purchasing systems
        --   Content management
        --   Intranet and extranet systems
        --   Web-site development and maintenance

     NETWORK SERVICES

        --   Network planning, design and implementation
        --   Network support and optimization
        --   Security audits and protocol recommendation
        --   Network and applications programming
        --   Cabling and wiring



                                      -1-
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     IT CONSULTING AND TRAINING

        --   Desktop and network server support
        --   Software upgrades and support
        --   Disaster recovery plans and protocol  recommendation
        --   Network cost audits
        --   IT planning and staffing
        --   Merger & acquisition technology integration services
        --   Microsoft Certified Technical Education Center (CTEC)

     WEB-SITE HOSTING

        --   Shared hosting and co-location services

     INTERNET ACCESS SERVICES

        --   Digital Subscriber Line (DSL)
        --   Dedicated access (T-1 and T-3 service)
        --   Dial-up access
        --   Integrated Services Digital Network (ISDN)

         We market our  e-Business  and IT  professional  services  and Web-site
hosting to  mid-sized  businesses  (including  mid-sized  departments  of larger
enterprises) and public sector institutions,  who we believe are increasingly in
need  of  and  demanding  one-stop  solutions  for  these  services  due  to the
difficulty  and  expense of  managing  and  integrating  multiple  vendors.  Our
comprehensive  suit of services  enables our clients to  capitalize  on the wide
variety of critical business and data communication  opportunities made possible
by the Internet and Internet-related technologies.

         Our clients  during the year ended  December 31, 1999  included,  among
others:  Aetna US  Healthcare,  The  Archdiocese  of New  York,  Black & Decker,
Commerce Bank, Dendrite International,  Deutsche Bank, Foster Wheeler Corp., ING
Barings, Loews Theatres, McKinsey, Mobil Oil Corporation,  TIAA/CREF, University
of  Southern  Mississippi, and the Wharton School of Business at  the University
of Pennsylvania.

         For the  year  ended  December  31,  1999,  Professional  Services  and
Web-Site Hosting  accounted for  approximately  78% and Internet Access Services
accounted for approximately 22%, respectively, of our revenues.

         We were incorporated in February 1995 as Internet Broadcasting Systems,
Inc. and changed our name to IBS  Interactive,  Inc., when we went public in May
1998. We trade on the NASDAQ SmallCap Market under the symbol IBSX.

GENERAL DEVELOPMENT OF BUSINESS - ACQUISITIONS

         In January 1998, we acquired all of the issued and outstanding  capital
stock of Entelechy, Inc. ("Entelechy"),  a distance learning and web programming
firm based in Huntsville, Alabama, in consideration for 277,434 shares of common
stock,  of which  147,310  shares were issued at the closing and 130,124  shares
were to be earned  and issued  ratably  on each of the  first,  second and third
anniversaries  of the  acquisition  closing  date,  provided  that,  the  former
Entelechy  stockholders to whom such shares are issuable remain our employees on
each  respective  anniversary.  We incurred a charge of  approximately  $197,000
relating  to the  issuance  of such  common  stock in 1999 and  expect  to incur
charges of $197,000 and $17,000 relating to the issuance of such common stock in
each  of the  years  ending  December  31,  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,  we  acquired   substantially   all  of  the  assets
(consisting  primarily  of  computer  equipment  and  intangible  assets) of JDT
WebwerX LLC ("JDT  WebwerX"),  a web  programming  company based in Southern New
Jersey, for $35,000 in cash. The acquisition was accounted for as a purchase.

                                      -2-
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         On September 24, 1998, we entered into a Membership  Interest  Purchase
Agreement with all of the members of DesignFX Interactive,  LLC ("DesignFX"),  a
Web-design,  programming and hosting company located in Cherry Hill, New Jersey,
whereby we acquired all of the issued and  outstanding  membership  interests of
DesignFX in  exchange  for 200,160  shares of common  stock  (subject to certain
adjustments)  valued by the parties at $6.25 per share. The combination has been
accounted for as a pooling of interests.  Accordingly,  our 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,  we  acquired  substantially  all of the assets of
MBS, Inc.  ("MBS"),  for  approximately  $50,000 in cash, 4,493 shares of common
stock,   subject  to  certain   adjustments,   and  the  assumption  of  certain
liabilities.  MBS is a Huntsville,  Alabama-based  Microsoft Certified Technical
Education Provider - Partner Level.

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

         On January 29,  1999,  the Company  acquired  substantially  all of the
assets of Mainsite Communications,  Inc. ("Mainsite"), for approximately $53,000
in cash and the  assumption  of certain  liabilities.  Mainsite  is an  internet
service provider ("ISP") based in Bridgeport, New Jersey.

         On February 22, 1999,  we acquired  substantially  all of the assets of
the Renaissance  Internet Services division  ("Renaissance")  of PIVC,  LLC, for
approximately  $365,000 in cash,  a one-year  promissory  note of  $228,000  and
44,046  shares  of  common  stock,  subject  to  certain  adjustments,  and  the
assumption of certain  liabilities.  Renaissance  is an ISP based in Huntsville,
Alabama. Renaissance was sold in October 1999 as part of the sale of our Alabama
Internet  Access  Services  assets  (See,  "General  Development  of  Business -
Strategic Alternatives").

         On March 1, 1999,  we  acquired  substantially  all of the assets of EZ
Net, Inc. ("EZ Net"), in exchange for $300,000 in cash,  33,289 shares of common
stock,   subject  to  certain   adjustments,   and  the  assumption  of  certain
liabilities. EZ Net is an ISP based in Yorktown, Virginia.

         On March 25, 1999, we acquired  substantially  all of the assets of the
ADViCOM division ("ADViCOM") of Multitronics,  Inc., for approximately  $118,000
in cash, 4,424 shares of common stock, subject to certain  adjustments,  and the
assumption  of  certain  liabilities.  ADViCOM  is an ISP  based in  Huntsville,
Alabama.  ADViCOM  was sold in October  1999 as part of the sale of our  Alabama
Internet  Access  Services  assets  (See,  "General  Development  of  Business -
Strategic Alternatives").

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

         On April 30,  1999,  we  acquired  all of the  issued  and  outstanding
capital stock of Realshare,  Inc. ("Realshare"),  for approximately 6,000 shares
of common stock, subject to certain adjustments. Realshare is a Cherry Hill, New
Jersey-based Web-site design and programming company.

         On April 30,  1999,  we  acquired  all of the  issued  and  outstanding
capital stock of Millennium  Computer  Applications,  Inc.,  ("Millenium")  in a
merger  transaction,  for  approximately  $200,000 in cash and 19,673  shares of

                                      -3-

<PAGE>

common  stock,  subject to certain  adjustments.  Millennium  is an ISP based in
Shallotte, North Carolina.

         On May 7, 1999, we acquired  substantially  all of the consumer dial-up
and ISDN accounts and related computer equipment of Planet Access, Inc. ("Planet
Access"),  for  approximately  $380,000 in cash,  19,114 shares of common stock,
subject to  certain  adjustments,  and the  assumption  of certain  liabilities.
Planet Access is a Stanhope, New Jersey-based ISP.

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

         On July 30, 1999, we acquired all of the issued and outstanding capital
stock  of  Jaguar  Systems,  Inc.  ("Jaguar"),  in  a  merger  transaction,  for
approximately  $131,000  in  cash  payable  in 12  substantially  equal  monthly
installments and 44,965 shares of common stock,  subject to adjustments.  Jaguar
is a Salem, New Jersey-based ISP.

         On August 26,  1999,  we  acquired  substantially  all of the assets of
Florence  Business Net ("Florence"),  for  approximately  $68,750 in cash, 3,145
shares of common stock,  subject to certain  adjustments,  and the assumption of
certain  liabilities  relating to the purchased assets.  Florence is a Florence,
South Carolina-based ISP.

GENERAL DEVELOPMENT OF BUSINESS - STRATEGIC ALTERNATIVES

         On October 18, 1999, we sold our Internet Access  Services  business in
Huntsville,  Alabama  to  HiWAAY,  an ISP in the  area.  We  incurred  a loss of
$350,000  in  connection  with this sale that is  reflected  in our  results  of
operations for the year ended December 31, 1999.

         We are currently evaluating strategic alternatives and options relating
to our Internet Access Services business, which may include the possible sale of
all or a remaining portion of our remaining  Internet Access Services  business.
At March 24, 2000, our Internet Access Services business consists of over 16,000
dial-up subscribers, 250 digital subscriber line accounts, and 47 dedicated line
accounts. Total allocated assets, revenues, and operating losses of our Internet
Access Services segment as of and for the years ended December 31, 1998 and 1999
are as follows:

                                                    1998                1999
                                                    ----                ----
        Total Assets.....................           $84,000          $4,301,00
        Revenues.........................        $1,301,000         $4,068,000
        Operating Losses.................         ($269,000)         ($943,000)


        No assurances can  be  given  that  if  our  remaining  Internet  Access
Services  assets  are sold that the  transaction(s)  will not  result in a  loss
since the  ultimate  proceeds  are  subject  to a number of  uncertainties  that
management  is unable to predict  with a high degree of  certainty at this time.
Such uncertainties include, but are not limited to: future market conditions and
the  availability of buyer(s) willing to purchase the assets on terms acceptable
to us.

GENERAL DEVELOPMENT OF BUSINESS - FINANCING EFFORTS

         In August 1995, we 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  received  2,449
shares of common stock for every note purchased.

                                      -4-

<PAGE>


         On October 31, 1997,  we 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 our  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 our
common stock at an exercise  price of $3.54 per share  through  October 2000. We
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, approximated 68% per annum.

         On May 14, 1998,  our  registration  statement on Form SB-2, as amended
(file number  333-47741),  relating to the initial  offering of our common stock
was declared  effective by the SEC (the "IPO").  In connection  with the IPO, we
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 IPO  price  of  $6.00  per  share,
resulting in proceeds to us (net of underwriting discount, commissions and other
expenses  payable  by  the  Company)  in the  aggregate  approximate  amount  of
$6,642,000.   Additionally,   we  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.

         In  September  and  October  1999,  we sold  approximately  $600,000 of
convertible  debentures (the "1999  Debentures").  The 1999  Debentures  accrued
interest at the rate of 12% per annum and were due in full in October 2001.  The
1999  Debentures  were  convertible  at our option into common  stock at a price
equal to the price per share we  received  in a  subsequent  equity  offering of
greater  than  $3,000,000.  In  addition,  upon  conversion,   holders  of  1999
Debentures  were entitled to receive 13,680 warrants to purchase common stock at
$12.50 per share upon conversion. The 1999 Debentures were converted in December
1999.  We recognized a non-cash  charge of $43,000 on the warrants'  fair market
value upon  conversion of the 1999  Debentures in December  1999.  The effective
interest  rate on the  1999  Debentures  over  the two  months  that  they  were
outstanding,  including the  amortization of the value ascribed to the warrants,
approximated 115% per annum.

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

         On December 7, 1999, we raised net proceeds of $4,697,500  in a private
placement  (which includes the $600,000  received for the 1999  Debentures) (the
"October Private Placement") of 96 units (the "October Unit(s)") each consisting
of:  (i) 5,000  shares of common  stock,  par  value  $.01,  of the,  and (ii) a
five-year  warrant to purchase 1,250 shares of common stock at an exercise price
per share of $12.50. The purchase price of each October Unit was $50,000. In the
event that we shall,  for a period of one (1) year after the closing date,  sell
any equity  securities or equity  derivative  securities for a consideration per
share of $10.00 or less (a "Lower Subsequent Price"), then a number of shares of
common  stock  shall be issued to such  investor  in the  October  Units,  at no
additional cost to such investor,  equal to: (x) the number of Shares  contained
in the October  Units purchased by such investor  multiplied by a fraction,  the
numerator  of which  shall be $10.00 and the  denominator  of which shall be the
Lower Subsequent  Price,  less (y) the number of Shares contained in the October
Units  purchased  by such  investor.  In  connection  with the  October  Private
Placement, the 1999

                                      -5-
<PAGE>

Debentures  were  converted  into an  aggregate  of $600,000  of October  Units,
consisting of 60,000  shares,  and warrants to purchase  15,000 shares of common
stock at an exercise price of $12.50 per share. In addition, holders of the 1999
Debentures also received  warrants to purchase up to an additional 13,680 shares
of common stock at an exercise price of $12.50 per share.

         On  December 8, 1999,  we raised net  proceeds of $940,000 in a private
placement  (the  "December  Private  Placement")  of  20  units  (the  "December
Unit(s)") each consisting of: (i) 5,000 shares of common stock,  par value $.01,
of the Company,  and (ii) a five-year warrant to purchase 1,250 shares of common
stock at an  exercise  price per share of  $12.50.  The  purchase  price of each
December Unit was $50,000.  In the event that we shall,  for a period of one (1)
year after the closing date,  sell any equity  securities  or equity  derivative
securities for a consideration  per share of $10.00 or less (a "Lower Subsequent
Price"),  then a number  of  shares  of  common  stock  shall be  issued to such
investor in the December Units,  at no additional  cost to such investor,  equal
to: (x) the number of Shares  contained in the December Units  purchased by such
investor  multiplied  by a fraction,  the numerator of which shall be $10.00 and
the  denominator  of which  shall be the Lower  Subsequent  Price,  less (y) the
number of Shares  contained in the December  Units  purchased by such  investor.
(See "Management's  Discussion & Analysis of Financial  Condition and Results of
Operations - Liquidity and Capital Resources," for subsequent activities).

COMPANY SERVICES

         We offer our  clients a full  array of  custom-designed,  scalable  and
reliable e-Business and IT professional services,  Web-site hosting and Internet
access services. These include:

        --     Programming and applications development
        --     Network services
        --     IT consulting and training
        --     Web-site hosting
        --     Internet access

PROFESSIONAL SERVICES AND WEB-SITE HOSTING

         PROGRAMMING AND APPLICATIONS DEVELOPMENT

         PROGRAMMING.   Programming  for  Intranet  and  Internet   applications
requires  knowledge of many different  programming  languages,  including  PERL,
UNIX,  ASP,  MTS,  C++,  JAVA,  HTML,  Cold Fusion and  customized  database and
applications  programming.  We maintain 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, and (iv)
provide consulting services.

         CUSTOMIZED APPLICATIONS  DEVELOPMENT AND DISTANCE LEARNING.  Customized
applications  development  includes services such as: E-Commerce "shopping cart"
style  on-line  catalogs,  multi-media  audio  and  video,  purchasing  systems,
intranet and extranet systems, 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.

         WEB-SITE DEVELOPMENT AND MAINTENANCE. Web-site development involves the
design and development of a client's Web-site.  Working with clients and outside
graphic designers and programmers,  we design,  create and maintain multi-media,
interactive  Web-sites  for our  clients,  using  the  latest  applications  and
development tools, such as Cold Fusion, ASP, MTL and HTML.

         NETWORK SERVICES

         We provide a comprehensive range of network 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

                                      -6-
<PAGE>

network  requirements.  We provide network  planning  services which 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, we
generate 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 the  network  design  services  we offer  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.

         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  our  clients'  networking  needs,  we
maintain  affiliations  and  reseller  arrangements  with  leading  hardware and
software vendors,  including Hewlett Packard Co., COMPAQ,  Novell, Cisco Systems
and a  variety  of  distributors.  We  customize  implementation  plans 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.

         NETWORK OPERATIONS. Network operations includes ongoing tasks necessary
to keep the client's network fully  operational.  We provide 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 networks. We perform specific operation activities in
accordance with individual client requirements only after analyzing the client's
existing operating  practices.  Examples of the network operation  activities we
offer  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. The network optimization services we offer can also be packaged
as discrete  projects,  designed to present  alternatives  for  optimization  of
workgroup, departmental,  building or campus network investments.  Additionally,
we 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 the network  optimization  services we offer
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.

                                      -7-
<PAGE>

         INFORMATION TECHNOLOGY (IT) CONSULTING AND TRAINING

         CONSULTING.   Consulting   services  are  provided  to  businesses  and
organizations seeking information, guidance and staffing in order to effectively
analyze  and utilize  computer  networks,  the  Internet  and other  information
technology prior to the time such businesses make  investments of capital,  time
and/or  personnel.  The  consulting  services we provide are closely  related to
network  optimization and include: (i) desktop and other network server support;
(ii) software  upgrades and support,  (iii) merger and  acquisitions  technology
integration services,  (iv) security audits and protocol  recommendations,  (ii)
disaster  recovery  plan audit and  protocol  recommendations,  (v) network cost
audits and (vi) strategic plan development.

         TRAINING.  Training  services we offer include (i) one- on-one Internet
training for executives and (ii) group training for non-computer professionals.

         We are 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
our technical  networking and  development  products.  A CTEC must use Microsoft
Official Curriculum and Microsoft Certified Trainers to provide education to our
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 our Huntsville,  Alabama office, the Company
has achieved Microsoft Partner Level status.

         WEB-SITE HOSTING

          Internet  hosting  is a  multi-media  Internet  service  that  permits
clients to have a continued  presence on the Web directly through our high-speed
servers  and   multi-homed  Internet  network.  The hosting  services we provide
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 our Network Operations Center ("NOC"). Co-location
permits a client's  Internet  content to be hosted on a dedicated server located
at our  NOC,  and we  either  own the  server  or it is  leased  to the  client.
Co-location 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 certain of the client's security
concerns  associated with connection of the client's private network(s) to a Web
server.

INTERNET ACCESS SERVICES

         We  provide a  broad range of Internet  access,  including T-1, T-3 and
digital  subscriber  line  ("DSL")  service,  dedicated  leased  lines,  dial-up
services and hosting services.

         The Internet access options  we offer to  our clients  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.
Our high-speed,  digital  communications  network provides business and consumer
subscribers  with direct access to the full range of Internet  applications  and
resources.

         As discussed  earlier,  we are evaluating  strategic  alternatives with
respect to the Internet Access Services segment of our business.

SALES AND MARKETING

         Our sales and marketing  strategy is driven by our ability to offer our
clients comprehensive e-Business and IT professional services,  Web-site Hosting
and Internet Access  Services.  Our marketing  efforts are primarily  focused on
mid-sized  businesses  and  organizations,  and to a  lesser  extent,  on  small
businesses  and  consumers.  We utilize  both  direct  selling  and  third-party
channels for marketing our services.

         Our  marketing  efforts  principally  involve  print,  radio and direct
mailing in areas within the geographic scope of our markets. We believe that the
continued  expansion  of our  print,  radio and  targeted  direct  mailings  are
important  factors in our ability to continue to expand our business and compete
effectively.

                                      -8-
<PAGE>


         We also generate sales leads through referrals from clients,  responses
to requests for proposals,  referrals from other  e-Business and IT professional
service  businesses and ISPs, our own Web-site and associated links and industry
seminars and trade shows.  Efforts in all of these areas will  continue and will
be increased in 2000. As a result of the  continuing  extension of services that
we  offer,  we are able to offer  our  clients a wider  range of  solutions  and
capitalize on opportunities that we previously outsourced.

         We currently  employ 27  full-time  sales  people.  We believe that the
technical knowledge of our executive officers, programmers and network engineers
enhances  the  efforts  of our  sales  staff and  allows  us  to  develop  sales
proposals meeting the specific needs and budgets of our prospective  clients. In
conjunction  with recent  increases in our 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 we offer.

CLIENTS

         Our client base consists primarily of businesses and organizations with
e-Business and IT professional  services,  Web-site hosting, and Internet access
needs.  We intend to expand  our  client  base in all of our  business  segments
through internal growth as well as through acquisitions to lessen our dependence
on any one particular client or group of clients.

         We are  dependent  on a limited  number of  clients  for a  substantial
portion of our  revenues.  For the years ended  December 31, 1998 and 1999,  our
largest client, Aetna, accounted for approximately 23% and 15%, respectively, of
our  revenues.  Revenues  derived from our  consulting  contracts  are generally
non-recurring  in  nature.  Our  contract  with  Aetna  provides  that we render
services  pursuant  to purchase  orders,  each of which  constitutes  a separate
contractual commitment by Aetna. Non-renewal or termination of our contract with
Aetna or the failure by Aetna to issue  additional  purchase  orders to us under
the existing  contract would have a material  adverse effect on us. There can be
no assurance that we will obtain  additional  contracts for projects  similar in
scope to those  previously  obtained,  that we will be able to  retain  existing
clients or attract new clients or that we will not remain largely dependent on a
limited  client base which may continue to account for a substantial  portion of
our revenues.  See "Management's  Discussion and Analysis of Financial Condition
and Results of  Operations  -- Certain  Factors  Which May Affect the  Company's
Future Performance -- Dependence on Aetna; Non-Recurring Revenue."

COMPETITION

         The markets  for our  services  are highly  competitive.  With  limited
barriers to entry we believe the  competitive  landscape  will  continue to grow
both from new entrants to the market as well as from existing  players,  such as
ISPs, expanding the breadth of their services.

         We believe that competition in the Web-site hosting and Internet access
market is primarily based upon quality of service, range of services,  technical
support and experience.

         We believe  that  competition  in the  e-Business  and IT  professional
services market is based upon the following factors:

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

         Traditional professional services firms (e.g., management consultants),
traditional IT service  providers and advertising  firms, have created divisions
within their  organizations that focus on the e-Business needs of their clients.
Many of these service providers, however, do not provide the breadth of services

                                      -9-
<PAGE>

needed to offer  comprehensive,  integrated  e-Business  solutions and services.
Management  consulting  firms  focus  on  overall  business  strategies  and the
remodeling of business  processes for use in an Internet  environment.  The more
traditional  IT service  providers  are focused on systems  integration  and the
development and implementation of enterprise software applications.  Advertising
agencies and pure Web design shops have  focused on the  marketing  and creative
development of services,  but typically lack deep technical capabilities and the
ability to provide complete, integrated solutions.

         We  compete  with  numerous  large  companies  that have  substantially
greater market presence and financial,  technical, marketing and other resources
than we have, including (i) large information  technology consulting and service
providers and application software firms; (ii) international, national, regional
and commercial ISPs; (iii) established on-line services companies; (iv) computer
hardware and software and other technology companies; (v) national long-distance
carriers,  regional  telephone  companies,  and cable operators;  and (vi) major
accounting  firms.  Many of our competitors have announced plans to expand their
service offerings and increase their focus on the e-Business and IT professional
services  market.  As a result,  competition is expected to intensify for highly
skilled network engineers, programmers and technicians.

         As a result of  increased  competition,  we also  expects to  encounter
significant  pricing  pressure,  which  in  turn  could  result  in  significant
reductions  in the  average  selling  price  of our  services.  There  can be no
assurance  that we  will  be  able to  offset  the  effects  of any  such  price
reductions  through an increase in the number of clients,  higher  revenue  from
enhanced services,  cost reductions or otherwise.  In addition,  we believe that
continuing  consolidation in the e-Business and IT professional  services market
could result in increased price and other competition in the industry. Increased
price or other  competition  could make it difficult  for us to gain  additional
clients and  subscribers  and could have a material  adverse effect on us. There
can  be no  assurance  that  we  will  be  able  to  compete  successfully.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations -- Certain Factors Which May Affect the Company's Future  Performance
-- Competition."

EMPLOYEES

         As of March 24,  2000,  we had 320  full-time  employees,  including  7
executive  officers,  224 programmers,  network  engineers and  technicians,  27
persons  devoted  exclusively  to  providing  technical  support to clients,  27
persons  dedicated  to sales  and  marketing  activities  and 35  administrative
personnel, and 5 part-time employees. None of our employees are represented by a
labor union, and we are not a party to any collective bargaining agreements.  We
believe that our employee  relations are good. See "Management's  Discussion and
Analysis of Financial  Condition and Results of  Operations  -- Certain  Factors
Which May Affect the Company's Future Performance -- Retaining Key Personnel."

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

ITEM 2.       DESCRIPTION OF PROPERTY

         We serve  our clients through  our corporate  headquarters  and Network
Operations  Center ("NOC"),  each located in Cedar Knolls,  New Jersey,  and our
regional offices located in New Jersey,  New York, North Carolina,  Virginia and
Alabama, as well as our network of seven physical POPs.

         At December 31, 1999,  we did not own any real  property and  conducted
our operations at the following leased premises:


                                      -10-


<TABLE>
<CAPTION>
                                                                                      Approximate
                                                                      Approximate       Annual
                                                                        Square         Leased
Location                            Description of Facility             Footage         Cost        Lease Term
--------                            -----------------------             -------       -----------   -----------
<S>                                <C>                                 <C>           <C>           <C>

2 Ridgedale Ave.                    Corporate headquarters,               9,830        $155,000    5/01/97-3/31/03
Suite 350                           sales, technical support,
Cedar Knolls, NJ 07927              NOC customer support,
                                    administration

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

446 Highway 35                      Sales, customer support,               6000         $98,000    9/1/99-8/31/04
Eatontown, NJ 07724                 programming and network
                                    services

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

116 John Street                     Sales, customer support,              2,518         $53,000    12/1/99-11/30/02
Suite 620                           programming and network
New York, NY 10038                  services

5030 Bradford Dr.                   Sales, customer support,             11,784        $182,000    01/1/00-11/31/04
 Huntsville, AL 35805               programming and network
                                    services

114 Castle Drive                    Storage Space                         2,000         $33,000    11/1/99-10/31/00
Madison, AL 35758

1810 Second Loop Rd                 Sales, customer support,              1,000          $9,600    10/1/99-09/30/01
Suite 10                            Internet access services
Florence, SC 29501

4924 Main Street                    Sales, customer support,              2,000         $24,000    3/1/99-2/28/02
Shallotte, NC 28459                 Internet access services

739 Thimble Shoals                  Sales, customer support,              1,355         $14,000    5/1/99-4/30/02
Suite 405                           Internet access services
Newport News, VA 23606


</TABLE>

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

         In addition to our office space,  we currently lease the sites at which
our  physical  POPs are  located.  We believe  that we would be readily  able to
locate  other  space  in  which to house  our  corporate  headquarters  and NOC,
regional  offices and our  physical  POPs if any leased  space  currently  being
utilized were to become unavailable.

ITEM 3.       LEGAL PROCEEDINGS

         There is  no pending  legal proceeding to which we are a party which we
believe is likely to have a material adverse effect on our financial condition
or results of operations.



                                      -11-
<PAGE>


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

         No matters  were  submitted  to a vote of security  holders  during the
quarter ended December 31, 1999.

                                     PART II

ITEM 5.       MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Our 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.


                          1998                       HIGH                 LOW
                          ----                       ----                 ---
                      First Quarter                   ---                 ---
                      Second Quarter(1)              $9.00               $8.00
                      Third Quarter                  $8.75               $3.25
                      Fourth Quarter                 $9.00               $4.00


                           1999                       HIGH                LOW
                           ----                       ----                ---
                      First Quarter                  $21.25              $8.13
                      Second Quarter                 $24.50             $19.13
                      Third Quarter                  $25.38             $19.25
                      Fourth Quarter                 $21.38              $9.50

---------------------
(1) Trading in our common stock on the NASDAQ SmallCap Market System began on
    May 18, 1998


         The number of holders of record of our common  stock on March 24,  2000
was 111.

         There were no  dividends  or other  distributions  made by the  Company
during the fiscal year ended December 31, 1999 with respect to our common stock.
It is  anticipated  that cash  dividends  will not be paid to the holders of our
common stock in the foreseeable future.

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

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

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

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

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

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

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


                                      -12-
<PAGE>

interests). The issuance of the EBI Warrants to EBI was exempt from registration
under the  Securities  Act of 1933, as amended (the "Act"),  pursuant to Section
4(2) of the Act.

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

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

         In connection with our December Private Placement, we issued to LaSalle
Street Securities Corp. ("LaSalle") a five-year warrant to purchase 8,000 shares
of our  common  stock at  $12.50  per share as  partial  payment  for  LaSalle's
services as a placement agent. The issuance was exempt from  registration  under
the  Securities  Act  pursuant  to Section  3(b) and  Regulation  D  promulgated
thereunder.

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

         On May 14, 1998,  our  registration  statement on Form SB-2, as amended
(file number 333-47741) (the "Registration Statement"),  relating to our IPO was
declared effective by the SEC. In connection with the IPO, we 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 us (net of  underwriting  discounts,  commissions  and
other expenses payable by us) in the aggregate approximate amount of $6,642,000.
Additionally,  we registered 120,000 shares of common stock underlying  warrants
to purchase  common stock sold by us 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,  1999,  we have  applied an aggregate of $854,000 of the net proceeds of the
IPO for the  full  repayment  of  certain  indebtedness;  $665,000  towards  the
purchase of  equipment;  $1,689,000  towards  the  purchase of assets of, or the
outright acquisition of, companies;  $1,260,000 towards sales and marketing; and
$2,174,000 towards general administrative  expenses. We believe that none of the
proceeds used 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.  We believe that we have 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.
All net proceeds of the IPO in the amount of $6,642,000 have been used.

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

         THE FOLLOWING  DISCUSSION AND ANALYSIS SHOULD BE READ TOGETHER WITH THE
CONSOLIDATED  FINANCIAL  STATEMENTS  AND  NOTES  TO  SUCH  STATEMENTS  APPEARING
ELSEWHERE HEREIN.

OVERVIEW

         We provide a broad range of e-Business  and IT  professional  services,
including  computer  networking,  programming and  applications  development and
consulting  services and Web-site hosting services (our  "Professional  Services
and Web-Site  Hosting" business  segment)  primarily to mid-size  businesses and
public sector  institutions  and Internet access services (our "Internet  Access
Services" business segment) to consumer and business customers. Our revenues are
derived  principally  from fees earned in  connection  with the  performance  of
Professional  Services and  Web-Site  Hosting  services  and fees from  Internet
Access Services subscribers and customers.

                                      -13-

<PAGE>


         We  commenced  operations  in  June  1995 as an ISP  offering  Web-site
hosting  services.  Since  April 1996,  we have  acquired  Interactive,  Mordor,
AllNet, Entelechy, JDT WebwerX LLC, DesignFX, MBS, Halo, Mainsite,  Renaissance,
EZ-Net, ADViCOM, Spectrum, Millenium,  Realshare, Planet Access, Spencer, Jaguar
and Florence.  We began to provide  e-Business and IT  professional  services in
April 1996 and have increasingly emphasized such services.

         We are currently evaluating strategic alternatives and options relating
to our Internet Access Services business, which may include the possible sale of
all or a portion of our remaining  Internet Access Services  business.  At March
24, 2000, our Internet Access Services  business consists of over 16,000 dial-up
subscribers,  250  digital  subscriber  line  accounts,  and 47  dedicated  line
accounts. In the fourth quarter of 1999, we consummated the sale of our Internet
Access Services  assets in Alabama.  The sale of these assets resulted in a loss
of $350,000  which is reflected in our results of operations  for the year ended
December 31,1999.  Total assets,  revenues, and operating losses of the Internet
Access Services segment as of and for the years ended December 31, 1998 and 1999
are as follows:

 -------------------------- ---------------- ----------------
                                   1998             1999
                                   ----             ----
 --------------------------  -------------  ----------------
 Total Assets..............       $84,000      $4,301,000
 --------------------------  ------------   ----------------
 Revenues...................   $1,301,000      $4,068,000
 --------------------------  -------------  ----------------
 Operating Losses...........   ($269,000)      ($943,000)
 --------------------------  -------------  ----------------

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

         No  assurances  can be  given  that if our  remaining  Internet  Access
Services  assets  are sold that the  transaction(s)  will not  result in a loss,
since the  ultimate  proceeds  are  subject  to a number of  uncertainties  that
management  is unable to predict  with a high degree of  certainty at this time.
Such uncertainties include, but are not limited to: future market conditions and
the  availability of buyer(s) willing to purchase the assets on terms acceptable
to us.

         Our  Professional   Services  and  Web-Site  Hosting  business  segment
generally  produces  higher  profit  margins than our Internet  Access  Services
business segment.  For the year ended December 31, 1999,  Professional  Services
and  Web-Site  Hosting  accounted  for  approximately  78% of our  revenues  and
Internet  Access  Services  accounted for  approximately  22% of our revenues as
compared to 91% and 9%, respectively, for the year ended December 31, 1998.

         We expect that operating  expenses will increase  significantly in 2000
in  connection  with  expansion  activities  that  we  anticipate   undertaking,
including those related to: increased marketing and sales activities,  potential
acquisitions  of e-Business  professional  services  firms and  amortization  of
intangibles related to acquisitions.  Accordingly, our future profitability will
depend on  corresponding  increases in revenues from  operations.  Our projected
expense levels are based on our expectations  concerning  future  revenues.  Any
decline in demand for our services or increases in expenses  that are not offset
by  corresponding  increases in revenue could have a material  adverse effect on
us.

         We  expect to incur  charges  of  approximately  $197,000  and  $17,000
related to the  acquisition  of Entelechy in the years ending  December 31, 2000
and 2001; and charges of approximately $94,000, $94,000 and $28,000 in the years
ended  December  31,  2000,  2001 and 2002,  respectively,  in  connection  with
restricted  stock grants to an executive  officer.  The value of the  restricted
stock grants will be expensed ratably over the respective periods that the stock
is earned.

         We anticipate that growth in our business will increase operating costs
and will require the Company to hire additional network  engineers,  programmers
and  technical  personnel.  At March 24,  2000,  the Company  had 320  full-time
employees,  which  includes 90 employees of digital  fusion,  Inc. who joined us
upon our merger with  digital  fusion,  Inc.  (see  "Management's  Discussion  &
Analysis--Recent Events"). We have entered into employment agreements with 33 of
our  employees,  including our executive  officers,  which provide for aggregate
payments of $4,060,000 through and including the year ending December 31, 2003.

                                      -14-
<PAGE>

1999 ACQUISITIONS

PURCHASES

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

         On February 22, 1999,  we acquired  substantially  all of the assets of
the Renaissance  Internet Services division  ("Renaissance")  of PIVC, LLC,  for
approximately  $365,000 in cash,  a one-year  promissory  note of  $228,000  and
44,046  shares  of  common  stock,  subject  to  certain  adjustments,  and  the
assumption of certain  liabilities.  Renaissance  is an ISP based in Huntsville,
Alabama. Renaissance was sold in October 1999 as part of the sale of our Alabama
Internet Access Services assets.

         On March 1, 1999,  we  acquired  substantially  all of the assets of EZ
Net, Inc. ("EZ Net"), in exchange for $300,000 in cash,  33,289 shares of common
stock,   subject  to  certain   adjustments,   and  the  assumption  of  certain
liabilities. EZ Net is an ISP based in Yorktown, Virginia.

         On March 25, 1999, we acquired  substantially  all of the assets of the
ADViCOM division ("ADViCOM") of Multitronics,  Inc., for approximately  $118,000
in cash, 4,424 shares of common stock, subject to certain  adjustments,  and the
assumption  of  certain  liabilities.  ADViCOM  is an ISP  based in  Huntsville,
Alabama.  ADViCOM  was sold in October  1999 as part of the sale of our  Alabama
Internet Access assets.

         On April 30,  1999,  we  acquired  all of the  issued  and  outstanding
capital stock of Realshare,  Inc. ("Realshare"),  for approximately 6,000 shares
of common stock, subject to certain adjustments. Realshare is a Cherry Hill, New
Jersey-based Web-site design and programming company.

         On April 30,  1999,  we  acquired  all of the  issued  and  outstanding
capital stock of Millennium Computer  Applications,  Inc.  ("Millennium"),  in a
merger  transaction,  for  approximately  $200,000 in cash and 19,673  shares of
common  stock,  subject to certain  adjustments.  Millennium  is an ISP based in
Shallotte, North Carolina.

         On May 7, 1999, we acquired  substantially  all of the consumer dial-up
and ISDN accounts and related computer equipment of Planet Access, Inc. ("Planet
Access"),  for  approximately  $380,000 in cash,  19,114 shares of common stock,
subject to certain adjustments and the assumption of certain liabilities. Planet
Access is a Stanhope, New Jersey-based ISP.

         On July 30, 1999, we acquired all of the issued and outstanding capital
stock of  Jaguar  Systems,  Inc.  ("Jaguar"),  in a  merger,  for  approximately
$131,000 in cash payable in 12  substantially  equal  monthly  installments  and
44,965 shares of common stock,  subject to adjustments.  Jaguar is a Salem,  New
Jersey-based Internet Service Provider.

         On August 26,  1999,  we  acquired  substantially  all of the assets of
Florence  Business Net ("Florence"),  for  approximately  $68,750 in cash, 3,145
shares of our  common  stock,  subject to  adjustments,  and the  assumption  of
certain liabilities. Florence is a Florence, South Carolina-based ISP.

         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.   Each  acquisition  does  not  represent  a
significant   subsidiary.   Accordingly,   condensed  and  pro  forma  financial
information is not presented.

POOLINGS OF INTERESTS

         On March 31,  1999,  we  completed  the  acquisition  of Spectrum  that
provided  for the  exchange  of all of the  outstanding  stock of  Spectrum  for
145,456 shares of our common stock.

         On June 30, 1999, we completed the acquisition of Spencer that provided
for the exchange of all of the  outstanding  stock of Spencer for 260,005 shares
of common stock.

         As required by this method of  accounting,  financial  statements  (and
amounts  included  in  Management's  Discussion  and  Analysis  and  Results  of
Operations)  contained  in our Form 10-KSB for the year ended  December 31, 1998
were restated and filed with the SEC in a Form 8-K dated December 20, 1999.

                                       15
<PAGE>

RESULTS OF OPERATIONS

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

----------------------------------------------- --------------------------------
                                                   YEARS ENDED DECEMBER 31,
----------------------------------------------- --------------------------------
                                                     1998                1999
                                                     ----                ----
-----------------------------------------------   -----------        -----------
Revenues.......................................       100%               100%
-----------------------------------------------   -----------        -----------
Cost of services...............................        67                 69
-----------------------------------------------   -----------        -----------
Gross Profit...................................        33                 31
-----------------------------------------------   -----------        -----------
Selling, general and administrative expense....        32                 56
-----------------------------------------------   -----------        -----------
Amortization expense...........................         1                  3
-----------------------------------------------   -----------        -----------
Non-cash compensation expenses.................         2                  2
-----------------------------------------------   -----------        -----------
Merger expenses................................         1                  1
-----------------------------------------------   -----------        -----------
Operating loss.................................        (3)               (31)
-----------------------------------------------   -----------        -----------
Interest and other expenses....................        (1)                 2
-----------------------------------------------   -----------        -----------
Loss before income taxes.......................        (2)               (33)
-----------------------------------------------   -----------        -----------
Income tax provision...........................          -                  -
-----------------------------------------------   -----------        -----------
Net loss.......................................        (2)               (33)
-----------------------------------------------   -----------        -----------


YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1999


         REVENUES.  Revenues  increased by $3,561,000,  or 23%, from $15,213,000
for the year ended December 31, 1998, to $18,774,000 for the year ended December
31,  1999.  Professional  Services and Web-Site  Hosting  revenues  increased by
$794,000,  or 6%, from  $13,912,000  in 1998 to  $14,706,000  in 1999.  Internet
Access Services revenues increased by $2,767,000 or 213% from $1,301,000 in 1998
to $4,068,000 in 1999.

         The increase in Professional Services and Web-Site Hosting revenues was
due to increases in networking service revenues and programming service revenues
offset by decreases in  consulting  service  revenues.  The increase in Internet
Access  Services  revenues was due to the acquisition of several ISPs throughout
1999.

         COST OF  SERVICES.  Cost of  services  for  Professional  Services  and
Web-Site  Hosting consists  primarily of expenses  relating to cost of equipment
and  applications  sold  to  clients,  salaries  and  expenses  of  engineering,
programming and technical  personnel,  equipment costs for Web-site  hosting and
fees paid to outside consultants  engaged for client projects.  Cost of services
for Internet  Access  Services  consists of  personnel  and  equipment  expenses
relating to the operation of the network and costs  associated  with  monitoring
network traffic and quality.  Cost of services increased by $2,796,000,  or 27%,
from $10,207,000 for 1998 to $13,003,000 for 1999.  Growth in our direct payroll
expense  accounted  for  $688,000,  or 7%,  of the  increase  in  total  cost of
services.  Professional Services and Web-Site Hosting cost of services increased
by $769,000 or 9% from $8,907,000 in 1998 to $9,676,000 in 1999. Internet Access
Services cost of services  increased by  $1,872,000  or 144% from  $1,300,000 in
1998 to $3,172,000 in 1999.

         The increase in  Professional  Services  and  Web-Site  Hosting cost of
services was primarily due to direct payroll costs associated with the growth of
the business.  The increase in Internet Access Services cost of services was due
to direct  payroll and network and equipment  cost  increases  arising from 1999
acquisitions of several ISPs.

                                      -16-
<PAGE>

         GROSS  PROFIT.  Our gross profit was  $5,006,000  or 33% of revenues in
1998 and  $5,771,000 or 31% of revenues in 1999. The decrease in gross profit as
a  percentage  of  sales  was  due to the  increase  in  lower  margin  revenues
associated with the Internet Access Services business. Professional Services and
Web-Site  Hosting gross profit  increased by $25,000,  or 1%, from $5,005,000 in
1998 to $5,030,000 in 1999.  Internet Access Services gross profit  increased by
$1,000 from $895,000 in 1998 to $896,000 in 1999.

         The decrease in Professional Services and Web-Site Hosting gross profit
was primarily due to increased  direct payroll costs  associated with the growth
of the business.  The increase in Internet  Access Services gross profit was due
to the 1999 acquisition of several ISPs.

         SELLING,    GENERAL   AND   ADMINISTRATIVE.    Selling,   general   and
administrative  expenses consist primarily of salaries and costs associated with
marketing literature,  advertising, direct mailings, and accounting, finance and
sales and marketing personnel, administrative personnel, as well as professional
fees and other costs connected with the administration of the Company.  Selling,
general and  administrative  expenses  increased by  $5,640,000,  or 115%,  from
$4,905,000  in 1998  to  $10,545,000  for  1999.  Such  increase  was  primarily
attributable to the Company's expanded promotional and marketing activities, the
hiring of  additional  marketing and sales  personnel,  the hiring of additional
administrative  personnel to support the increase in our professional  staff and
client base, and additional  administrative  and  professional  costs associated
with operating as a public company.

         Professional  Services  and  Web-Site  Hosting  selling,   general  and
administrative expenses increased by $1,182,000, or 29%, from $4,146,000 in 1998
to  $5,328,000  in  1999.   Internet  Access  Services   selling,   general  and
administrative expenses increased by $1,292,000,  or 515%, from $251,000 in 1998
to  $1,543,000  in 1999.  The  increase in  Professional  Services  and Web-Site
Hosting selling,  general and  administrative  expenses was due to the hiring of
additional  marketing and sales personnel,  and expanded promotional and selling
activities.  The  increase  in Internet  Access  Services  selling,  general and
administrative  expenses  was  due  to  increased  salaries,  adverstising,  and
overhead  costs  associated  with the  businesses  acquired  in 1999.  Corporate
selling,  general and  administrative  expenses  increased by $3,166,000 or 623%
from $508,000 in 1998 to $3,674,000 in 1999. The increase in Corporate  selling,
general and  administrative  expenses  was due to  increased  professional  fees
associated with operating as a public company for seven additional months during
1999 as compared to 1998,  and  increased  overhead  costs  associated  with the
Company's growth.

         AMORTIZATION OF INTANGIBLE  ASSETS.  Amortization of intangible  assets
increased  by  $341,000,  from  $173,000  for 1998 to  $514,000  for 1999.  This
increase is primarily  attributable  to the  amortization  of intangible  assets
(customer lists and goodwill),  related to the ISP acquisitions throughout 1999.
Amortization  expense will significantly  increase in future periods as a result
of  the  Company's March 2000  acquisition of digital fusion,  inc. (See "Recent
Events")

         NON-CASH COMPENSATION EXPENSE.  Non-cash compensation expense increased
from  $290,000 in 1998 to $332,000 in 1999.  This  increase was due primarily to
additional  grants and the related  timing of  restricted  stock to an executive
officer. We expect charges of $94,000,  $94,000, and $28,000 in the years ending
December 31, 2000, 2001 and 2002 for such grants.  We expect to incur charges of
approximately  $197,000  and $17,000 in the years  ending  December 31, 2000 and
2001, respectively,  in connection with the issuance of certain shares of common
stock to the former Entelechy stockholders.

         MERGER RELATED  EXPENSES.  During  1999 we incurred charges of $232,000
for fees and  costs  associated  with the  acquisitions  of Halo,  Spectrum  and
Spencer.  During  1998 we  incurred  charges  of  $109,000  for fees  and  costs
associated  with the  acquisition  of DesignFX and a lesser  portion of expenses
related to 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  incurred in connection with financing
efforts.  Excluding  the  nonrecurring  interest  charges of $35,000 in 1998 and
$43,000 in 1999  associated with the  amortization  of warrants  granted to debt
holders, interest expense was $94,000 and  $38,000,  respectively,  for 1998 and
1999.  This decrease is due to debt  repayments  totaling  $558,000 in 1998 with
proceeds from our IPO and declines in overall  borrowings.  Interest  expense is
expected to increase  substantially  in the future as a result of our assumption

                                      -17-
<PAGE>

of approximately $4.2 million of indebtedness in connection with our acquisition
of digital fusion, inc. (See, "Recent Events").

         INTEREST  INCOME.  Interest  income  decreased from $185,000 in 1998 to
$116,000  in 1999 due to a decrease  in our cash  position  in 1999  relative to
1998, as a result of the timing of our IPO in May 1998 and our private placement
financings in October and December 1999. We have invested proceeds from the 1999
private placements in money market funds and overnight deposits.

         LOSS ON DISPOSAL  OF ASSETS.  The loss on disposal of assets in 1999 of
$350,000  was  related  to the  sale of our  Alabama  Internet  Access  Services
business.

         OTHER (INCOME) EXPENSE, NET.  Other  expenses  of  $26,000  in 1999 are
comprised of miscellaneous items.

         NET LOSS.  As a result of  the  foregoing,  we recognized a net loss of
$6,238,000  for the year  ended  December  31,  1999  compared  to a net loss of
$366,000 for the year ended December 31, 1998.

LIQUIDITY AND CAPITAL RESOURCES

         On May 14, 1998,  the  registration  statement relating  to our IPO was
declared effective by the SEC. In connection with the IPO, we 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 IPO price of $6.00 per share resulting in proceeds
to us (net of underwriting  discount,  commissions and other expenses payable by
us)  in  the  aggregate  approximate  amount  of  $6,642,000.  Additionally,  we
registered 120,000 shares of common stock underlying warrants to purchase common
stock we sold to the  underwriter  for $100. The warrants are  exercisable for a
four-year period that commenced on May 14, 1999 at a price of $8.10 per share.

         From the effective date of the Registration  Statement through December
31, 1999, we applied an aggregate of $854,000 of the net proceeds of the IPO for
the full  repayment of certain  indebtedness;  $665,000  towards the purchase of
equipment;  $1,689,000  towards  the  purchase  of assets  of,  or the  outright
acquisition  of,  companies;   $1,260,000  towards  sales  and  marketing;   and
$2,174,000 towards general administrative  expenses. We believe that none of the
proceeds used 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.  We believe that we have 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.
All net proceeds of the IPO in the amount of $6,642,000 have been used.

         Subsequent to the IPO, our primary  operating  cash  requirements  have
been to fund expenses in connection  with  providing  Professional  Services and
Web-site  Hosting to clients and Internet  Access  Services to  subscribers  and
customers.  We have  historically  satisfied  our working  capital  requirements
principally through the issuance of debt and equity securities.  At December 31,
1999,  we had working  capital of  $6,294,000,  compared  to working  capital of
$7,011,000 at December 31, 1998.

         In September and October 1999, we raised  $600,000  through the sale of
our 1999 Debentures.  Pursuant to the terms of the 1999 Debentures,  in December
1999 $600,000 of the 1999  Debentures  were  converted at our option into 60,000
shares of common stock and five year warrants to purchase an  additional  15,000
shares  of  common  stock  at  $12.50.  In  addition,  the  holders  of the 1999
Debentures  received  warrants to purchase another 13,680 shares of common stock
at $12.50.

         In December 1999, we received net proceeds of $4,697,500 in the October
Private  Placement  of units.  Each unit was  offered at a price of $50,000  and
consisted  of 5,000 shares of common  stock and  five-year  warrants to purchase
2,500  shares of common stock at a price of $12.50 per share.  We converted  all
$600,000 of our 1999 Debentures into 12 units of the October Private  Placement.
Holders of the 1999 Debentures also received  warrants to purchase an additional
13,680  shares of common stock at a price per share of $12.50.  We  recognized a
non-cash charge on the amortization of the warrants' fair values upon conversion
of the 1999 Debentures.

                                      -18-
<PAGE>

         In December  1999, we received net proceeds of $940,000 in the December
Private  Placement  of units  having the same  terms as the  October  units.  In
connection with the December Private Placement,  we issued five-year warrants to
purchase  8,000 shares of common stock at an exercise price of $12.50 to LaSalle
St. Securities, LLC as partial payment for its services as a placement agent.

         In  February  2000,  we  commenced  a $9.9  million  private  placement
consisting of units of common stock and warrants (the "2000 Private Placement").
Each unit is offered at a price of $110,000  and  consists  of 10,000  shares of
common stock and three-year warrants to purchase 2,500 shares of common stock at
a price of $13.75 per share. Through March 24, 2000, we have received $2,068,000
in net proceeds from the 2000 Private Placement. No assurances can be given that
we will be able to  successfully  raise  any or all of the  balance  of the 2000
Private Placement.

         The year to year decrease in operating cash flow arose from losses from
operations  (net loss of  $366,000  in 1998  compared  to  $6,238,000  in 1999),
increases in accounts receivable of $1,517,000 and decreases in accrued expenses
and  accounts  payable  of  $1,094,000.  These  amounts  were  offset in part by
increases in non-cash charges of $1,238,000.

         Net cash used  in  investing  activities was $867,000 and $1,299,000 in
1998 and 1999,  respectively.  The  increase  in  capital  expenditures  was due
principally to  enhancements  in our NOC, as well as upgrading and enhancing the
capabilities  of the Internet  Access  Services  businesses.  Cash used in asset
acquisitions,   principally  ISP  businesses,  totaled  $1,857,000  compared  to
$116,000 in 1998. The sale of the Internet  Access Service  businesses  based in
Alabama provided $835,000 of cash in 1999.

         Financing  activities  provided cash and cash equivalents of $5,711,000
in 1998 compared to $5,552,000  in 1999. In 1998,  our IPO net proceeds  totaled
$6,667,000  and  payments on existing  indebtedness  amounted to  $731,000.  Net
proceeds from our 1999 Private  Placements and Convertible Debt Offering totaled
$5,026,000  and $600,000,  respectively,  and the exercise of warrants  provided
$658,000  of cash.  Distributions  to owners of  Spencer  and  Spectrum  totaled
$329,000 in 1999.

         At December  31, 1999,  we had  obligations  pursuant to capital  lease
obligations in the aggregate amount of $21,000.  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, we secured  equipment lines of credit from three equipment
vendors,  each in the amount of $500,000.  There were no borrowings  outstanding
under these lines of credit at December 31, 1999.

         In June 1998,  we obtained a $1.5  million  line of credit from a bank.
The  line of  credit  was for a  one-year  period  ending  July 1,  1999 and was
extended  through  September  30,1999 at which  point it was fully paid down and
terminated. As of December 31, 1999, we had no available line of credit.

         Our working  capital at December  31, 1999 was  $6,294,000.  We believe
that operating  cash flow generated  through  existing  customers,  new business
activities and cost reduction  efforts,  current cash and cash  equivalents  and
working  capital  levels,  and the  expected  proceeds  from  the  2000  Private
Placement will be sufficient to fund  operating cash flow needs,  debt principal
payment  obligations,  capital  expenditures  and  acquisitions  for a period of
twelve months. Our current estimate of capital  expenditures for the year ending
December 31, 2000 approximates  $250,000.  In the event that we are unsuccessful
in raising the  balance of the 2000  Private  Placement,  we will be required to
re-examine  our  current  business  plans  and seek  alternative  financing.  No
assurances can be given that  alternative  financing  will be available on terms
acceptable to us.

FLUCTUATIONS IN OPERATING RESULTS

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

                                      -19-
<PAGE>

cycles that require us to make expenditures and use significant  resources prior
to receipt of  corresponding  revenues.  Historically,  our  revenues  have been
higher in the fourth  quarter as a result of client  budgeting  and  expenditure
cycles.

INFLATION

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

YEAR 2000

         We  did not experience any  material business interruptions as a result
of the Year 2000 issue.  Our own hardware and software  applications  functioned
well and we did not  experience any problems with the software  applications  of
any of the third parties upon whose systems we rely for our operations. We spent
approximately  $50,000 in connection with our Year 2000 compliance  efforts that
were expensed as incurred through 1999. We will continue to monitor our critical
computer  applications  and  those of our  third  party  suppliers  and  vendors
throughout the Year 2000 to ensure that any Year 2000 matters that may arise are
addressed promptly.

RECENT EVENTS

         On March 1,  2000,  we  acquired  all of the  capital  stock of digital
fusion,  inc., an e-Business  programming  and  consulting  firm based in Tampa,
Florida,  for 975,000  shares of common stock and a $500,000  subordinated  note
paying interest of 6%. In addition, we issued options to purchase 470,000 shares
of common stock at $10.49 per share to certain  executives of digital  fusion as
an inducement to serve as employees of the Company. We also assumed bank debt of
approximately  $3.3 million (the "digital  fusion Bank Debt") and a subordinated
note of $827,500  accruing  interest at 4.56% per annum. As of March 24, 2000 we
were  negotiating  the terms of the  repayment  of the  principal of the digital
fusion  Bank Debt.  It is expected  that the  digital  fusion Bank Debt will pay
interest at the prime rate plus 2% and that the principal will have to be repaid
by August 29, 2000. In addition,  the digital fusion Bank Debt is expected to be
secured by all of the assets of the  Company.  We expect to pay down the digital
fusion Bank Debt through proceeds from our 2000 Private Placement if available.

         In February 2000, we commenced the 2000 Private Placement. Each unit is
offered at a price of $110,000 and consists of 10,000 shares of common stock and
three-year  warrants  to  purchase  2,500  shares of common  stock at a price of
$13.75 per share.  Through  March 24,  2000,  we had  raised  $2,068,000  in net
proceeds through our 2000 Private  Placement.  No assurance can be given that we
will be able to successfully raise any or all of the balance of the 2000 Private
Placement.

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

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

         PRIOR  OPERATING  LOSSES;  LACK  OF  PROFITABILITY;   FUTURE  OPERATING
RESULTS. We have recently experienced  significant losses in our operations.  We
expect to continue to incur significant  losses for the foreseeable  future. For
the year ended  December 31, 1999 our operating loss was  $6,238,000.  We expect
our  expenses to increase as we seek to grow our  business  and as our  business
expands. We cannot assure you that our revenues will increase as a result of our
increased  spending.  If  revenues  grow more  slowly  than  anticipated,  or if
operating expenses exceed expectations, we may not become profitable. Even if we
become  profitable,  we may be unable to sustain our  profitability.  We may not
generate  sufficient  cash flow from  operations  or be able to raise capital in
sufficient  amounts  to  enable us to  continue  to  operate  our  business.  An
inability to sustain  profitability may also result in an impairment loss in the

                                      -20-
<PAGE>

value of our long-lived assets,  principally  goodwill,  property and equipment,
and  other  tangible  and  intangible  assets.  If we  are  unable  to  generate
sufficient cash flow from operations or raise capital in sufficient amounts, our
business will be materially and adversely affected.

         DEPENDENCE ON AETNA; NON-RECURRING REVENUE. For the year ended December
31, 1999,  our largest  client,  Aetna  accounted for  approximately  15% of our
revenues.  In December 1998, we entered into a contractual  agreement with Aetna
to provide certain IT professional  services.  Non-renewal or termination of our
contract with Aetna would have a material adverse effect on us. Revenues derived
from our consulting  contracts are generally  non-recurring in nature. There can
be no assurance that we will obtain additional contracts for projects similar in
scope to those previously  obtained from Aetna or any other client, that we will
be able to retain  existing  clients or attract  new clients or that we will not
remain largely dependent on a limited client base, which may continue to account
for a substantial  portion of our revenues.  In addition,  we generally  will be
subject  to  delays in client  funding;  lengthy  client  review  processes  for
awarding contracts;  non-renewal; delay, termination,  reduction or modification
of  contracts  in the  event of  changes  in client  policies  or as a result of
budgetary constraints;  and increased or unexpected costs resulting in losses in
the event of "fixed-price" contracts.

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

         EMERGING  AND  EVOLVING  MARKETS.  The  markets  for our  services  are
relatively new and evolving,  and therefore the ultimate level of demand for our
services is subject to a high degree of uncertainty.  Any significant decline in
demand for programming and applications  development,  networking  services,  IT
consulting,  Web-site  hosting or  Internet  access  services  could  materially
adversely effect our business and prospects.

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

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

         COMPETITION.   Competition  for  the  e-Business  and  IT  professional
services  and  Web-hosting  and  Internet  access  services  that we  provide is
significant,  and we expect that competition will continue to intensify.  We may
not have the financial resources,  technical  expertise,  sales and marketing or
support capabilities to successfully meet this competition.  If we are unable to
compete  successfully  against such competitors,  our business will be adversely
affected.  We compete against  numerous large companies that have  substantially
greater market presence,  longer operating histories,  more significant customer
bases,  and  financial,  technical,  facilities,  marketing,  capital  and other
resources than we have.

         Our  competitors   include   international,   national,   regional  and
commercial  ISPs,  established  on-line  service  providers,   cable  operators,
specialized ISPs, regional Bell operating  companies and national  long-distance
carriers such as:

     --   Performance  Systems  International,   Earthlink,   Mindspring,  UUNet
          WorldCom,  America Online, Bell Atlantic Corp., Bell South Corp., AT&T
          Corp., MCI WorldCom,  Sprint Corp.,  Concentric  Network  Corporation,
          Exodus Communications, Inc., Globix Corporation,  QWESTCommunications,

                                       21
<PAGE>

          Frontier GlobalCenter,  GTE/BBN, DIGEX, Verio Inc., AboveNet,  AirGate
          PCS,  Cypress  Communications,   Darwin  Networks,  Teligent,  Winstar
          Communications,   ICG   Communications.   Network  Access   Solutions,
          Intermedia Communications, ITC DeltaCom, Knology Holdings, Triton PCS,
          and Z-Tel Technologies.

         Our competitors  also include  national,  regional and local e-Business
professional IT  professional  services firms,  software  development  firms and
major accounting firms such as:

     --   Andersen Consulting;  Cambridge  Technology Partners;  Electronic Data
          Systems  Corporation;  American  Management  Systems;  IBM,  Microsoft
          Corp.; Netplex Group, Inc.; Deloitte & Touche; Braun Consulting, Inc.;
          Diamond  Technology  Partners;  eLoyalty;  iXL  Enterprises;   Sapient
          Corporation; Zamba Solutions; Catalyst International;  E3 Corporation;
          Modis Professional  Services;  Employease,  Inc.; Great Plains,  Inc.;
          MAPICS,  Inc.;  Planning  Technologies,   Inc.;  Technology  Solutions
          Company; Whittman-Hart Inc.; and Third Millenium Communications, Inc.

         Still  other  competitors  who offer some of the  services  the Company
offers  may expand  their  capabilities  to  include a full  suite of  services.
Companies in this arena include  Applied  Theory,  US  Interactive,  Interliant,
Appnet, Breakaway Solutions, and Internet Commerce Corporation.

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

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

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

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

         DEPENDENCE ON OPERATIONS CENTER. Our success depends in large part upon
the  performance  of our network  operations  center  ("NOC") and our ability to
expand our NOC as our customer  base gets larger and the needs of our  customers
for Internet access,  Web-site hosting and Web-site  programming services become
more  demanding.  If we are  unsuccessful  in providing a NOC with the necessary
capabilities,  our business  will be  materially  and  adversely  affected.  Our
existing  NOC  relies   entirely  on   third-party   data   communications   and
telecommunications  providers.  These  include  ISPs,  such as  UUNet  Worldcom,
Sprint, Winstar, ICI/Digex, CRL, Cox and Cable & Wireless, and long-distance and
local  carriers,  such as Bell  Atlantic,  Bell  South,  MCI  WorldCom,  Sprint,
Hyperion,  ICI/Digex  and KMC, to provide  leased  telecommunication  lines on a
cost-effective and continuous basis. These carriers

                                      -22-
<PAGE>


are subject to price constraints,  including tariff controls, that in the future
may be relaxed or lifted.  This could have a material and adverse  effect on the
costs of  maintaining  our NOC. In accordance  with industry  custom,  we do not
maintain agreements with these suppliers. Accordingly, we cannot assure you that
these  suppliers will continue to provide  services to us or that we can replace
them on comparable terms.

         Other risks and  difficulties  that we may encounter in connection with
expanding our network include our ability to adapt our network infrastructure to
changing customer requirements and changing industry standards.

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

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

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

         DEPENDENCE  ON  HARDWARE  AND  SOFTWARE  SUPPLIERS.  We rely on outside
vendors to supply us with computer hardware,  software and networking equipment.
These  products are  available  from only a few sources.  We primarily buy these
products from Hewlett Packard,  Sun Microsystems,  Ascend,  Cisco and Adtran. We
cannot  assure you that we will be able to obtain the products and services that
are needed on a timely basis and at affordable prices.

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

         DIFFICULTY IN ESTABLISHING  AND MANAGING  EXPANDING  OPERATIONS.  A key
element of our business  strategy is the  expansion of our  continuing  business
segments,  which requires a great deal of management time and the expenditure of
large  amounts of money.  Our success  will  depend on our ability to  complete,
integrate,  operate and  further  expand and  upgrade  our  continuing  business
segments would  materially and adversely affect our business plans. In addition,
our inability to manage and expand our continuing business segment, if we do not
institute adequate  financial and managerial  controls and reporting systems and
procedures  to operate from  multiple  facilities  in  geographically  dispersed
locations, our operations will be materially and adversely affected.

         IDENTIFYING  SUITABLE  ACQUISITION  CANDIDATES.  A key  element  of our
expansion strategy is to grow through  acquisitions.  If we do identify suitable
candidates,  we  may  not  be  able  to  make  investments  or  acquisitions  on
commercially  acceptable  terms.  Acquisitions  may  cause a  disruption  in our
ongoing  business,  distract  our  management  and other  resources  and make it

                                      -23-
<PAGE>

difficult to maintain our standards, controls and procedures. We may not be able
to successfully  integrate the services,  products and personnel of any acquired
business into our operations.  We may not be able to retain key employees of the
acquired companies or maintain good relations with their customers or suppliers.
We may be required  to incur  additional  debt,  and we may be required to issue
equity  securities,  which may be  dilutive to  existing  stockholders,  to fund
acquisitions.

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

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

     --   The potential disruption of our business.

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

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

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

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

         RETAINING  KEY  PERSONNEL.  As we continue to increase the scope of our
operations,  our workforce has grown  significantly.  As of March 24, 2000,  the
Company had 320 full-time and five part-time  employees,  including 90 employees
from our merger with digital fusion.  We will need to attract,  train and retain
more employees for management,  engineering,  programming,  sales and marketing,
and customer support technician positions.  Competition for qualified employees,
particularly engineers,  programmers and technicians, is intense.  Consequently,
we may not be  successful  in  attracting,  training and retaining the people we
need to continue to offer  solutions and services to present and future  clients
in a cost effective manner or at all.

         NEED  FOR  CAPITAL.   Our  future  capital  uses  and requirements will
depend on numerous factors, including:

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

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

     --  The expansion of operations.

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

     --  Costs related to acquisitions of technology or businesses.

     --  Competitive developments.

                                       24
<PAGE>

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

         There can be no assurance that additional funding will be available for
us to finance our ongoing  operations when needed or that adequate funds for our
operations,  whether from financial markets, collaborative or other arrangements
with corporate partners or from other sources, will be available when needed, if
at all, or on terms  acceptable to us. Our inability to obtain  sufficient funds
may require us to delay,  scale back or eliminate  some or all of our  expansion
programs, to limit the marketing of our services, or to license to third parties
the rights to  commercialize  products or  technologies  that we would otherwise
seek to develop and market ourselves.  This would have a material adverse effect
on our business.

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

         Factors that could cause quarterly results to fluctuate include:

     --  Customer demand for services.

     --  The timing of the expansion of operations.

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

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

     --  Changes in the growth rate of Internet usage.

     --  Changes in pricing by us or competitors.

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

     --  Costs related to acquisitions of technology or businesses.


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

         LIMITED INTELLECTUAL  PROPERTY PROTECTION.  We rely on a combination of
copyright and trademark laws,  trade secrets laws and license and  nondisclosure
agreements to protect our  proprietary  information,  particularly  the computer

                                      -25-
<PAGE>

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

         Our policy is to execute confidentiality  agreements with our employees
and   consultants   upon  the   commencement  of  an  employment  or  consulting
relationship  with us. These agreements  generally require that all confidential
information developed or made known to the individual by us during the course of
the individual's  relationship with us be kept confidential and not disclosed to
third parties. These agreements also generally provide that inventions conceived
by the  individual  in the  course  of  rendering  services  to us  shall be our
exclusive  property.  There can be no assurance that such agreements will not be
breached,  that we would have adequate remedies for any breach or that our trade
secrets  will not  otherwise  become known to or be  independently  developed by
competitors.

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

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

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

         We have granted  options to purchase  680,000 shares under our 1998 and
1999 Stock  Option  Plans.  We have  granted  options to purchase an  additional
470,000 shares in connection  with the digital fusion merger.  If the holders of
these options were to exercise  their rights and sell the shares issued to them,
it could have an adverse effect on the market price of our common stock.

                                      -26-
<PAGE>

         We have also granted  32,500 shares of  restricted  stock to one of our
officers.  Of these shares,  5,000 vested in 1999 and, of the  remaining  27,500
shares,  9,167  shares will vest in each of 2000 and 2001 and 9,166  shares will
vest in 2002 (5,000 of these shares have been issued in 2000). In addition,  the
Company  has  reserved  up to  approximately  117,000  shares  for  issuance  in
connection with certain acquisitions  (including 50,000 shares to be reserved in
connection  with the digital  fusion merger) and has agreed to issue warrants to
purchase up to 327,000  shares in  connection  with the  consulting  agreements,
private  placement  financings,  the conversion of the 1999 Debentures and other
agreements.  If and when these  shares are issued by the Company and sold by the
various holders, sale of these shares could have an adverse effect on the market
price of our common stock.

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

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

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

ITEM 7.       FINANCIAL STATEMENTS

         Financial Statements are attached hereto following page F-2.

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

         None.

                                    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 our Proxy
Statement  for  our  2000  Annual  Meeting  of  Stockholders  (the  "2000  Proxy
Statement") is incorporated herein by reference.

ITEM 10.      EXECUTIVE COMPENSATION

         Information appearing under the caption "Executive Compensation" in the
2000 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 2000 Proxy  Statement is incorporated
herein by reference.

                                      -27-
<PAGE>

ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information  appearing under the caption "Certain  Transactions" in the
2000 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 our Registration  Statement on Form
                  SB-2, File No.  333-47741,  filed on April 23, 1998 (the
                  "Registration Statement")).
   *3.2           Amended and Restated  By-Laws of the Company (filed as Exhibit
                  3.2 to our Quarterly Report on Form 10-QSB for the quarter
                  ended September 30, 1999).
    4.1           See  Exhibit  numbers  3.1  and  3.2  for  provisions  of the
                  Restated  Certificate of Incorporation  and Restated By-Laws
                  of the Company, as amended, defining the rights of the holders
                  of common stock.
   *4.2           Specimen form of  certificate  evidencing the shares of common
                  stock of the Company (filed as Exhibit 4.1 to our Registration
                  Statement).
  *10.1           Form of  Registration  Rights  Agreement,  dated  as of May 6,
                  1997, between the Company and the holders of certain shares of
                  common  stock  (filed  as  Exhibit  10.2  to our  Registration
                  Statement).
  *10.2           Form   of  Warrant to  Purchase  Shares of Stock,  dated as of
                  October  31,  1997 (filed as Exhibit 10.4 to our Registration
                  Statement).
  *10.3           Employment Agreement, dated as of May 3, 1999, by and between
                  IBS and Nicholas R. Loglisci, Jr. (filed as Exhibit 10.1 to
                  our Quarterly Report on form 10-QSB for the quarter ended
                  June 30, 1999).+
  *10.4           Employment Agreement, dated as of May 3, 1999, by and between
                  IBS and Frank R. Altieri, Jr. (filed as Exhibit 10.3 to
                  our Quarterly Report on form 10-QSB for the quarter ended
                  June 30, 1999).+
  *10.5           Employment Agreement, dated as of May 3, 1999, by and between
                  IBS and Jeffrey E. Brenner (filed as Exhibit 10.4 to
                  our Quarterly Report on form 10-QSB for the quarter ended
                  June 30, 1999).+
 **10.6           Employment Agreement, dated as of May 7, 1999, by and between
                  IBS and Howard Johnson.+
  *10.7           Stock   Purchase   Agreement,  dated as of January  31,  1998,
                  between the Company and Entelechy, Inc. and the  stockholders
                  of  Entelechy,  Inc.  named  therein   (filed as Exhibit 10.12
                  to our Registration Statement).
 *10.8            Membership  Interest Purchase  Agreement,  dated September 24,
                  1998,  by and among the  Company  and Peter  Bowman,  Lawrence
                  Rafkin,  Robert  Gillespie,  Steven  Rotella,  Steven  Swartz,
                  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 our  Report  on Form 8-K,  filed on
                  October 9, 1998).
 *10.9            Membership Interest Acquisition Agreement,  dated December 10,
                  1998, by and among the Company,  Carl  Broadbent,  Keith Lowy,
                  Stephen  Lowy and  Halo  Network  Management,  LLC  (filed  as
                  Exhibit 2.1 to our Report on Form 8-K,  filed on December  22,
                  1998).
 *10.10           IBS   Interactive,   Inc.   1998   Stock  Option  Plan  (filed
                  as Exhibit  10.14  to  our Registration Statement).+
 *10.11           IBS Interactive, Inc. 1999 Stock Option Plan (filed as part of
                  our Proxy Statement for the Annual Meeting of Stockholders
                  held on June 4, 1999).+
 *10.12           Second  Lease  Modification  Agreement,  dated  as of March 3,
                  1998,  by and among the  Company  and EI Realty,  2  Ridgedale
                  Avenue, Inc. and Hanover Park for Industry, in connection with
                  our  premises in Cedar  Knolls,  New Jersey  (filed as Exhibit
                  10.17 to our Registration Statement).
 *10.13           Letter  Agreement,  dated as of October 21, 1997,  between the
                  Company and EI Realty in connection with our premises in Cedar
                  Knolls, New Jersey (filed as Exhibit 10.18 to our Registration
                  Statement).
 *10.14           Lease  Agreement,  dated as of May 1, 1997, by and between the
                  Company  and  Iron  Investment  Corp.  and  Hanover  Park  for
                  Industry, in connection with our premises in Cedar Knolls, New
                  Jersey (filed as Exhibit 10.19 to our Registration Statement).
 *10.15           Network  Services  Contract,  dated as of December  27,  1996,
                  between the Company and the Catholic Healthcare Network (filed
                  as Exhibit 10.20 to our Registration Statement).
 *10.16           Professional Service Agreement Consulting, dated as of October
                  23, 1997, between Aetna Life Insurance Company and the Company
                  (filed as Exhibit 10.21 to our Registration Statement).

                                      -28-
<PAGE>

 *10.17           Lease  Agreement,  dated as of January 31,  1998,  between the
                  Company and R&G International, in connection with our premises
                  in  Huntsville,   Alabama  (filed  as  Exhibit  10.22  to  our
                  Registration Statement).
 *10.18           Loan  Agreement,  dated  October  30,  1998,  by  and  between
                  the Company and First Union National Bank (filed as Exhibit
                  10.18 to our Annual Report on Form 10-KSB for the fiscal year
                  ended December 31, 1998).
 *10.19           IBS Interactive, Inc. Deferred Compensation Plan, effective
                  May 1, 1999 (filed as Exhibit 10.5 to our Quarterly Report on
                  Form 10-QSB for the quarter ended June 30, 1999).+
 *10.20           Amendment 1 to IBS Interactive, Inc. Deferred Compensation
                  Plan, effective August 1, 1999 (filed as Exhibit 10.1 to our
                  Quarterly Report on Form 10-QSB for the quarter ended
                  September 30, 1999).+
 *10.21           Exchange Agreement, dated as of March 31, 1999, by and among
                  IBS, Dan E. Spencer, Raymond Deep, Michael Bayless, Michael
                  Ivy, Belly Lenox and Spectrum Information Services, Inc.
                  (filed as Exhibit 2.1 to our Report on Form 8-K filed on
                  April 15, 1999).
 *10.22           Agreement and Plan of Merger dated as of June 30, 1999, among
                  Arnold Schron, Spencer Analysis, Inc., IBS and SAI Acquisition
                  Corp. (filed as Exhibit 2.1 to our Report on Form 8-K, filed
                  on July 15, 1999).
 *10.23           Agreement and Plan of Merger dated as of February 10, 2000,
                  among Sean D. Mann, Roy E. Crippen III, Michael E. Mandt, Ali
                  A. Husain, Robert E. Siegmann, digital infusion, inc., IBS,
                  and Digital Fusion Acquisition Corp. (filed as Exhibit 2.1 to
                  our Report on 8-K, filed March 24, 2000).
**10.24           Employment Agreement dated as of March 1, 2000 by and
                  between IBS and Roy E. Crippen, III.+
**10.25           Employment Agreement dated as of March 1, 2000 by and
                  between IBS and Sean D. Mann.+
**21.1            Subsidiaries of the Company.
**23.1            Consent of BDO Seidman, LLP
**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 December 20, 1999, we filed a report with the SEC on Form 8-K, under
Item 2, amending our Form 10-KSB filed with the SEC on March 31, 1999, restating
our financial  statements  (and amounts  included in  Management's  Discussion &
Analysis and Results of  Operations)  contained in our Report on Form 10-KSB for
the year  ended  December  31,  1998,  to  reflect  the  acquisition  of Spencer
Analysis,  Inc., which was  accounted  for as a pooling of interests.

                                      -29-
<PAGE>



SIGNATURES

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

                                      BS INTERACTIVE, INC.


Dated:   March 30, 2000               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 Frank
R. Altieri, Jr. his true and lawful  attorney-in-fact and agent, with full power
of substitution and  re-substitution,  for him and in his name, place and stead,
in any and all capacities,  to sign any and all amendments to this Annual Report
on Form  10-KSB,  and to file the  same,  with all  exhibits  thereto  and other
documents in connection therewith,  with the Securities and Exchange Commission,
granting unto said  attorney-in-fact  and agent,  full power and authority to do
and perform each and every act and thing  requisite  and necessary to be done in
and  about  the  premises,  as fully as he might or could do in  person,  hereby
ratifying and  confirming all that said  attorney-in-fact  and agent or their or
his  substitutes  or  substitute,  may lawfully do or cause to be done by virtue
hereof.

         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 30th day of March, 2000.

         SIGNATURE                  TITLE(S)
         ---------                  --------


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


/S/ FRANK R. ALTIERI, JR.           Chief Technical Officer and Director
-------------------------------
Frank R. Altieri, Jr.


/S/ROY E. CRIPPEN III               Chief Operating Officer and Director
-------------------------------
Roy E. Crippen III


/S/ HOWARD B. JOHNSON               Chief Financial Officer
-------------------------------     (Principal Financial and Accounting Officer)
Howard B. Johnson


/S/ CLARK FREDERICK                 Director
-------------------------------
Clark Frederick


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


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


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

<PAGE>



FINANCIAL STATEMENTS AND EXHIBITS


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

                                                                    PAGE

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

Consolidated Balance Sheets as of December 31, 1998 and 1999...      F-3

Consolidated Statements of Operations for the years ended
  December 31, 1998 and 1999...................................      F-4

Consolidated Statements of Stockholders' Equity for the years
  ended December 31, 1998 and 1999.............................      F-5

Consolidated Statements of Cash Flows for the years
  ended December 31, 1998 and 1999.............................      F-6

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



<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  as of  December  31,  1998  and  1999  and the  related
consolidated  statements of operations,  stockholders' equity and cash flows for
the  years  then  ended.  These  consolidated   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  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, 1998 and 1999 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 24, 2000



<PAGE>


                              IBS INTERACTIVE, INC.
                           CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1998 AND 1999

                                                         December 31,
                                                ------------------------------
                                                          1998         1999
                                                ------------------------------
                     ASSETS

Current Assets:
Cash and cash equivalents.......................   $ 5,532,000  $ 2,892,000
  Accounts receivable (net of allowance for
    doubtful accounts of $73,000 in 1998 and
    $261,000 in 1999)...........................     2,678,000    4,117,000
Prepaid income taxes............................        54,000      164,000
Prepaid expenses and other current assets.......       184,000      279,000
Deferred income tax asset.......................       126,000            -
                                                ------------------------------
Total current assets............................     8,574,000    7,452,000
Property and equipment, net.....................       983,000    1,012,000
Intangible assets, net..........................     1,418,000    4,794,000
Deferred income tax asset.......................         5,000            -
Advance to related party........................        70,000            -
Other assets....................................       126,000      217,000
                                                ------------------------------
TOTAL ASSETS....................................   $11,176,000  $13,475,000
                                                ==============================

      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt............      $ 79,000    $ 130,000
Accounts payable................................       696,000      527,000
Deferred revenue................................        45,000      102,000
Accrued salaries and related expenses...........       206,000            -
Accrued professional fees.......................        60,000      164,000
Customer deposits...............................        59,000       25,000
Accrued warranty expense........................        90,000            -
Deferred income tax liability...................        84,000            -
Other current liabilities.......................       244,000      210,000
                                                ------------------------------
Total current liabilities.......................     1,563,000    1,158,000
Long-term debt, less current maturities.........       277,000      142,000
Deferred compensation...........................       705,000      590,000
Pension obligation..............................       208,000      267,000
Acquisition liabilities.........................             -      546,000
                                                ------------------------------
Total liabilities...............................     2,753,000    2,703,000
                                                ------------------------------

Commitments and contingencies

Stockholders' Equity:
  Preferred Stock - $.01 par value; authorized
    1,000,000 shares, no shares issued
    and outstanding.............................             -            -
  Common Stock - $.01 par value; authorized
    11,000,000 shares, issued and
    outstanding 4,002,541 shares - 1998 and
    5,020,532 shares - 1999.....................        39,000       50,000
Additional paid in capital......................     9,280,000   18,185,000
Accumulated deficit.............................      (896,000)  (7,463,000)
                                                ------------------------------
Total Stockholders' Equity......................     8,423,000   10,772,000
                                                ------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......   $11,176,000  $13,475,000
                                                ==============================

      SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.        2


<PAGE>

                              IBS INTERACTIVE, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999

                                                         December 31,
                                                ------------------------------
                                                          1998         1999
                                                ------------------------------

Revenues........................................   $15,213,000  $18,774,000
Cost of services................................    10,207,000   13,003,000
                                                ------------------------------
Gross Profit....................................     5,006,000    5,771,000

Operating expenses:
  Selling, general and administrative...........     4,905,000   10,545,000
  Amortization of intangible assets.............       173,000      514,000
  Non-cash compensation expenses................       290,000      332,000
  Merger related expenses.......................       109,000      232,000
                                                ------------------------------
                                                     5,477,000   11,623,000
                                                ------------------------------
         Operating loss......................         (471,000)  (5,852,000)
Interest expense................................      (129,000)     (81,000)
Interest income.................................       185,000      116,000
Loss on disposal of assets......................             -     (350,000)
Other income (expense), net.....................        75,000      (26,000)
                                                ------------------------------

Loss before income taxes........................      (340,000)  (6,193,000)

Income tax (provision)..........................       (26,000)     (45,000)
                                                ------------------------------

Net loss........................................    $ (366,000) $(6,238,000)
                                                ==============================

Loss per share

  Net loss per share - basic and diluted........     $ (.10)        $ (1.45)
                                                ==============================

Weighted average number of common stock and
  equivalents...................................     3,509,380    4,310,458
                                                ==============================



      SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.        3


<PAGE>


                            IBS INTERACTIVE, INC.
               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999

<TABLE>
<CAPTION>


                                Common stock       Additional
                           ----------------------    Paid-in      Unearned    Accumulated  Stockholders'
                           No. of shares   Amount    Capital    Compensation    Deficit       Equity
-------------------------------------------------------------------------------------------------------
<S>                          <C>          <C>     <C>             <C>         <C>          <C>
Balance, January 1, 1998,
  as restated                2,445,738    $24,000 $ 1,723,000     $(7,000)    $  (240,000) $ 1,500,000
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
Distribution to Spectrum
  and Spencer shareholders           -          -           -           -        (290,000)    (290,000)
Net loss                             -          -           -           -        (366,000)    (366,000)
---------------------------------------------------------------------------------------------------------
Balance, December 31, 1998   4,002,541     39,000   9,280,000           -        (896,000)   8,423,000
Shares issued in
  connection with
  acquisitions                 138,045      2,000   2,216,000           -               -    2,218,000
Shares issued upon
  conversation of debt          60,000      1,000     599,000           -               -      600,000
Shares issued in
  connection with private
  placements                   520,000      5,000   5,195,000           -               -    5,200,000
Distribution to Spectrum
  & Spencer shareholders             -          -           -           -        (329,000)    (329,000)
Issuance and amortization
  of directors' options              -          -      59,000           -               -       59,000
Exercise of warrants           136,656      1,000     657,000           -               -      658,000
Offering costs in
  connection with debt
  offering and private
  placement                          -          -    (174,000)          -               -     (174,000)
Interest expense for
  warrants in connection
  with debt offering                 -          -      43,000           -               -       43,000
Additional shares issued
  in connection with
  acquisitions                 163,290      2,000      310,000          -               -      312,000
Net loss                             -          -           -           -      (6,238,000)  (6,238,000)
---------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999   5,020,532    $50,000 $18,185,000     $     -     $(7,463,000) $10,772,000
=========================================================================================================


                        SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.             4

</TABLE>




<PAGE>

                            IBS INTERACTIVE, INC.
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999

                                                         December 31,
                                                ------------------------------
                                                          1998         1999
                                                ------------------------------

Cash flows from operating activities:
  Net loss......................................    $ (366,000) $(6,238,000)
  Adjustments to reconcile net loss to net cash.
    provided by (used in) operating activities:
      Depreciation and amortization.............       667,000    1,388,000
      Loss on disposals of fixed assets.........        18,000            -
      Bad debt expense..........................        40,000      188,000
      Non-cash interest expense.................        49,000       43,000
      Compensation expense - Entelechy..........       180,000      197,000
      Non-cash compensation.....................       110,000      136,000
      Deferred income tax provision (benefit)...      (123,000)      47,000
      Loss on disposal of assets................             -      350,000
      Changes in operating assets and liabilities (net
        of effects of purchase acquisitions):
         Accounts receivable....................       616,000   (1,517,000)
         Prepaid expenses and other assets......      (210,000)    (125,000)
         Accounts payable and accrued expenses..       (34,000)  (1,094,000)
         Deferred revenue.......................      (458,000)      57,000
         Income taxes...........................       (79,000)     (110,000)
         Deposits and other.....................       (57,000)    (274,000)
         Pension Obligation.....................        58,000       59,000
                                                ------------------------------
           Net cash provided by (used in)
             operating activities...............       411,000   (6,893,000)
                                                ------------------------------
Cash flows from investing activities:
  Capital expenditures - property and equipment.      (751,000)    (277,000)
  Asset acquisitions and related costs..........      (116,000)  (1,857,000)
  Proceeds on assets sold.......................                    835,000
                                                ------------------------------
           Net cash used in investing activities      (867,000)  (1,299,000)
                                                ------------------------------
Cash flows from financing activities:
  Proceeds from initial public offering.........     8,280,000
  Private placements of common stock............             -    5,200,000
  Capital distributions.........................      (290,000)    (329,000)
  Offering costs................................    (1,613,000)    (174,000)
  Repayments of notes payable...................      (396,000)    (352,000)
  Proceeds from warrants........................             -      658,000
  Proceeds from notes payable...................        65,000      600,000
  Advances to related parties.                         (70,000)
  Repayment of 1997 Notes.......................      (200,000)
  Payments of capital lease obligations.........       (65,000)     (51,000)
                                                ------------------------------
           Net cash provided by financing
             activities                              5,711,000    5,552,000
                                                ------------------------------
Net increase (decrease) in cash and cash
  equivalents...................................     5,255,000   (2,640,000)
Cash and cash equivalents, at beginning of year.       277,000    5,532,000
                                                ------------------------------
Cash and cash equivalents, at end of year.......   $ 5,532,000   $2,892,000
                                                ==============================


         SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.        5


<PAGE>

                            IBS INTERACTIVE, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999


NOTE 1- ORGANIZATION AND BACKGROUND

IBS  Interactive,  Inc. (the  "Company") and its  subsidiaries  provides a broad
range of computer networking,  programming,  applications development,  Internet
Web-site development,  Internet subscriber access ("Internet Access Services" or
"IS"),  network  consulting  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, New York, Virginia, and Alabama.

The Company is  evaluating  strategic  alternatives  and options on its Internet
Services segment, which may include the possible sale of a portion or all of its
remaining IS businesses.  The IS Segment was comprised, as of December 31, 1999,
of six distinct  companies  throughout the eastern United States.  In the fourth
quarter of 1999, the Company  consummated  the sale of two IS companies based in
Virginia  and  Alabama to raise  operating  funds.  The sale of these  companies
resulted in a loss of $350,000.  Total allocated assets,  revenues and operating
losses of the IS business as of and for the years  ended  December  31, 1998 and
1999 are as follows:

                             1998           1999
   Total Assets          $ 84,000     $4,301,000
   Revenues            $1,301,000     $4,068,000
   Operating losses    $ (269,000)    $ (943,000)

No assurances can be given that if the remaining IS businesses are sold that the
transaction(s)  will not  result in a loss,  since  the  ultimate  proceeds  are
subject to a number of uncertainties that management is unable to predict with a
high degree of certainty at this time.  Such factors include but are not limited
to:  the  timing  of  adopting  a formal  plan for  disposition,  future  market
conditions,  and the  availability of a suitable  buyer(s) for the IS segment on
acceptable terms to the Company.

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  and  1999  business
combinations accounted for as poolings-of-interests  (DesignFX Interactive,  LLC
("DesignFX"),  Halo  Network  Management,  LLC  ("Halo"),  Spectrum  Information
Systems, Inc. ("Spectrum") and Spencer Analysis, Inc. ("Spencer") (see Note 3).

Such restated  financial  statements  were initially filed with the Securities &
Exchange Commission on Form 8-K on December 20, 1999.

Note 2 - SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

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

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, 1998 and 1999, the Company recognized  revenues
of $29,000 and  $436,000,  respectively,  on projects in process.  Such unbilled
amounts are included in accounts receivable, net, at December 31, 1998 and 1999,
respectively.


<PAGE>

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 loss and loss per  share as if the fair  value  based
method of  accounting  had been  applied,  as required by Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123").

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

WARRANTS

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

INCOME TAXES

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

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

In future periods,  the Company's  consolidated  income tax provision or benefit
will include the operating results of DesignFX,  Halo,  Spectrum and Spencer. As
such,  the  historical  tax  provision  of  the  Company,  as  reflected  in the
accompanying  consolidated  1998  and  1999  statements  of  operations,  is not
necessarily  indicative  of the tax  provision  or benefit  that would have been
recorded had DesignFX, Halo, Spectrum and Spencer been acquired at the beginning
of 1998.

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

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.




<PAGE>
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, 1998, two customers accounted for 30% and 12% of total net accounts
receivable.  At December 31, 1999,  one customer  accounted for 12% 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 years ended  December 31, 1998 and 1999 the  Company's  allowance for
doubtful   accounts  was   decreased  by  $39,000  and  increased  by  $188,000,
respectively  (for bad debt  provisions)  and was  decreased  by $39,000 and $0,
respectively, for written off balances.

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

The Company  maintains  substantially  all of the machinery  and  communications
network equipment utilized in its IS business at limited locations.

SOURCES OF SUPPLIES AND VENDORS

The Company has multiple vendors, which provide data communications and Internet
access services to customers of its IS business.  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.

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, 1998
and 1999.

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.

PENSION ACCOUNTING

The Company has adopted SFAS No. 132 "Employers'  Disclosures about Pensions and
Other  Post-retirement  Benefits"  as it  relates  to a  Spencer  pension  plan.
Subsequent  to the  acquisition  of Spencer in 1999,  the plan was amended to no
longer require the Company to accrue future service benefits.  The provisions of


<PAGE>

SFAS  No.  132  revise   employers'   disclosures   about   pension   and  other
post-retirement benefit plans. It does not change the measurement or recognition
of these plans. It standardizes  the disclosure  re-quirements  for pensions and
other post-retirement benefits to the extent practicable.

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.

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  910,223  shares at December 31, 1999),  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 $.09 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
assumptions  used  in  the  consolidated  financial  statements  relate  to  the
Company's  continued  ability to deliver  state-of-the-art  technical  services,
which are subject to competitive market and technology changes.

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

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, as amended, will be adopted by the Company no later
than its year ending December 31, 2000.

NOTE 3 - BUSINESS COMBINATIONS (Also, see Note 16)

POOLINGS-OF-INTERESTS

On September 24, 1998,  December 10, 1998,  March 31, 1999 and June 30, 1999 the
Company acquired DesignFX, Halo, Spectrum and Spencer 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 200,160 shares of

<PAGE>

the Company's  common stock 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 219,231 shares of the Company's common stock for
all of the outstanding membership interests of Halo.

Spectrum,  which is a full-service  provider of network and systems  integration
solutions,  became a wholly-owned subsidiary of the Company through the exchange
of 145,456  shares of the  Company's  common  stock  (exclusive  of the reserved
shares discussed below) for all of the outstanding shares of Spectrum.  Spencer,
which is a provider of network consulting to a wide array of businesses,  became
a wholly-owned  subsidiary of the Company through the exchange of 240,505 shares
of the Company's common  stock(exclusive of the reserved shares discussed below)
for all of the outstanding  shares of Spencer.  The ultimate number of shares to
be issued to the former  owners of Spectrum and Spencer is  contingent  upon the
resolution of specific and, to a lesser extent,  general financial matters.  The
Company  has  reserved  10,909 and 19,500 of common  shares for  issuance to the
owners of  Spectrum  and  Spencer  respectively,  pending  the  outcome  of such
matters.  With respect to DesignFX and Halo, the Company reached an agreement on
the ultimate  number of shares issued in the year ended  December 31, 1999.  The
accompanying  financial statements are based on the assumption that the Company,
DesignFX,  Halo,  Spectrum and Spencer were  combined as of the earliest  period
presented  and,  accordingly,  financial  statements  of prior  years  have been
restated to give effect to the combinations.  Such restated financial statements
were initially  filed with the  Securities & Exchange  Commission on Form 8-K on
December 20, 1999.

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

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

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

                       Company        Halo
                     ----------    ----------
    Net revenues    $7,853,000     $1,952,000
    Net income        (326,000)       266,000

Summarized unaudited results of operations of the Company and Spectrum (the date
of the  acquisition)  for the year ended  December 31, 1998 and the three months
ended March 31, 1999 are as follows:

                                                     Three Months Ended
                               1998                    March 31, 1999
                       Company      Spectrum       Company       Spectrum
                   -------------- ------------- ------------  --------------
    Net revenues    $9,805,000     $1,674,000    $2,601,000       $672,000
    Net income (loss)  (60,000)      (419,000)     (280,000)       117,000

Summarized  unaudited  results of  operations of the Company and Spencer for the
year ended December 31, 1998 and the six months ended June 30, 1999 (the date of
acquisition) are as follows:

                                                      Six Months Ended
                               1998                     June 31, 1999
                       Company       Spencer       Company        Spencer
                   -------------- ------------- ------------  --------------
    Net revenues   $11,479,000     $3,734,000   $ 7,076,000     $1,677,000
    Net income (loss) (479,000)       113,000    (1,578,000)       135,000


<PAGE>

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

In 1998 and  1999  the  Company  incurred  charges  of  $109,000  and  $232,000,
respectively,  for fees and costs  associated with the acquisitions of DesignFX,
Halo, Spectrum,  and Spencer. Such amounts, for transactions  accounted for as a
pooling-of-interests,  are  expensed  as  services  are  rendered  and costs are
incurred.

PURCHASES

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.

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
year ending  December 31, 2001.  The related  charge to operations for the years
ended  December 31, 1998 and 1999 totaled  $180,000 and $197,000,  respectively.
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
and $17,000 in the years ending  December 31, 2000 and 2001,  respectively.  The
Company's  liability  for the  values  ascribed  to  these  shares  approximates
$281,000 and is included in "Deferred Compensation" in the accompanying December
31, 1999 consolidated  balance sheet. The liability has been reduced by $310,000
for shares formally issued in 1999.

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.  Entelechy's  results of operations
for the month of January  1998 were not  material  and,  accordingly,  pro forma
results of operations for the year ended December 31, 1998 are not presented.

MBS, INC.

On December 1, 1998, the Company acquired certain assets of MBS, Inc. ("MBS"), a
Certified  Technical  Education  Center-Partner  Level  (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  $156,000,  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

<PAGE>

January 1, 1998 through the acquisition date were not material and, accordingly,
pro forma operating results are not presented.

IS Acquisitions

During 1999,  the Company  consummated  nine distinct  acquisitions  of Internet
Service   Providers   throughout  the  Eastern  United  States.   All  of  these
acquisitions were accounted for using the purchase method of accounting. None of
the  acquisitions  were considered  significant  subsidiaries  and, as a result,
condensed and pro forma  financial  information is not  presented.  The carrying
value of these assets have been  increased and a liability has been  established
at  December  31,  1999,  to  reflect  the  value  of  consideration  ($546,000;
principally   Company  common  stock)  that  is  probable  of  issuance  to  the
predecessor owners under existing contracts and commitments.  The liability will
be reduced as common shares are formally  issued in the year ending December 31,
2000.  Management does not expect, at present,  that the ultimate disposition of
these  commitments  will have a material  effect on the carrying  values of such
assets at  December  31,  1999.  The  aggregate  value of  consideration  issued
(including common stock that is probable of issuance),  assumed  liabilities and
direct costs related to these nine acquisitions is as follows:

     Cash payments                                   $1,857,000
     Fair value of issued common stock                2,219,000
     Fair value of likely to be issued common stock     546,000
     Assumed liabilities and direct costs             1,048,000
                                                    -----------
         Total                                       $5,670,000
                                                    ===========

Goodwill and intangible  assets arising from these  acquisitions  ($3,915,000 at
December 31, 1999) are amortized over a ten year period.

NOTE 4 - PROPERTY AND EQUIPMENT

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

                                                December 31,
                                       ------------------------------
                                               1998           1999
                                        -----------   ------------
     Network equipment                  $ 1,661,000    $ 2,194,000
     Office equipment, fixtures and
       vehicles                             427,000        485,000
     Leasehold improvements                  86,000         96,000
                                        -----------   ------------
                                          2,174,000      2,775,000
     Less: accumulated depreciation      (1,191,000)    (1,763,000)
                                        -----------   ------------
                                          $ 983,000    $ 1,012,000
                                        ===========   ============

At  December  31,  1998 and 1999,  equipment  subject  to capital  leases,  less
accumulated  depreciation,   amounted  to  $60,000  and  $22,000,  respectively.
Depreciation  expense for the years ended December 31, 1998 and 1999 amounted to
$492,000 and $600,000,  respectively,  which includes  depreciation of equipment
subject to capital lease agreements of $38,000 and $38,000, respectively.

NOTE 5 - INTANGIBLE ASSETS

Intangible assets, net, are comprised of the following:


<PAGE>

                                                December 31,
                                       ------------------------------
                                               1998           1999
                                        -----------   ------------
     Intangibles - IS Acquisitions       $        -    $ 3,915,000
     Goodwill - Entelechy                   828,000        828,000
     Goodwill - MBS                         156,000        156,000
     Goodwill - JDT                          26,000         26,000
     Deferred compensation                  705,000        900,000
     Customer lists                          69,000         69,000
                                       ------------   ------------
                                          1,784,000      5,894,000
     Less: accumulated amortization        (366,000)    (1,100,000)
                                       ------------   ------------
                                         $1,418,000    $ 4,794,000
                                       ============   ============

Amortization  expense was $378,000 and $788,000 for the years ended December 31,
1998 and 1999, respectively.

NOTE 6 - BORROWINGS

At  December  31,  1998 and 1999,  the  Company's  outstanding  borrowings  were
comprised of the following:

                                                December 31,
                                       ------------------------------
                                               1998           1999
                                        -----------   ------------
     DesignFX - development loan          $ 200,000      $ 142,000
     Spectrum - notes payable                84,000              -
     Promissory Notes                             -        109,000
     Capital leases                          72,000         21,000
                                       ------------   ------------
                                            356,000        272,000
     Less: current portion                  (79,000)      (130,000)
                                       ------------   ------------
     Total-long term borrowings           $ 277,000      $ 142,000
                                       ============   ============

1997 NOTES

On October 31, 1997, the Company  entered into a series of financing  agreements
with eight  individual  investors  for proceeds of $200,000  (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.

In  connection  with the  issuance of the 1997 Notes,  investors  also  received
warrants to purchase an aggregate of 48,872 shares of the Company's common stock
at an exercise  price of $3.54 per share through  October 2000 (see Note 8). 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. Such costs were amortized 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, approximated 68% per annum.

CONVERTIBLE DEBT

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


<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 the settlement of this obligation,  management does not anticipate that
any  contractual  repayments  of this loan will be due  during  the year  ending
December 31,  2000.  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 $200,000
and $142,000 at December 31, 1998 and 1999, respectively.

SPECTRUM - NOTES PAYABLE

Spectrum  notes  payable of $84,000 at December  31, 1998,  accrued  interest at
rates of 8.25% to 12%. The notes were paid off in 1999.

PROMISSORY NOTES

In connection  with two of its 1999 IS  acquisitions,  the Company  entered into
agreements  to pay the  former  owners  approximately  $307,000  in the  form of
unsecured  promissory  notes. The notes are payable in 2000 and bear interest at
average rates of  approximately  6% per annum. At December 31, 1999, the Company
was  still  obligated  to pay  approximately  $109,000  under  the  terms of the
agreements.

LINE OF CREDIT

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

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,
1998 and 1999  totaled  $72,000  and  $21,000,  respectively.  Interest  expense
related to such  agreements  was $18,000 and $7,000 for the years ended December
31, 1998 and 1999, respectively.

DEBT AND LEASE MATURITIES

At December 31, 1999,  aggregate  required  principal  payments,  including  the
present value of amounts owed under capital leases, are as follows:

     YEAR ENDING DECEMBER 31,             Amount
                                       ---------
     2000                               $130,000
     2001                                142,000
                                       ---------
     Total                              $272,000
                                       =========


<PAGE>

NOTE 7  BENEFIT PLANS

DEFINED BENEFIT PLAN

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

Net periodic pension cost for this plan includes the following components:

     DECEMBER 31,                                       1998        1999
     ---------------------------------------------------------------------------
     Components of net periodic pension cost:
      Service cost                                  $185,000    $148,000
      Interest cost                                   26,000      46,000
      Actual return on plan assets                   (27,000)     (8,000)
      Recognized net actuarial (gain) loss            13,000      (7,000)
     ---------------------------------------------------------------------------
     Net periodic pension cost                      $197,000    $179,000
     ===========================================================================

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

     DECEMBER 31,                                       1998        1999
     ---------------------------------------------------------------------------
     Changes in benefit obligation:
      Benefit obligation, beginning of year         $370,000    $769,000
      Service cost                                   186,000     148,000
      Interest cost                                   26,000      46,000
      Actuarial loss                                 187,000    (439,000)
     ---------------------------------------------------------------------------
      Benefit obligation, end of year                769,000     524,000
     ---------------------------------------------------------------------------
     Changes in plan assets:
      Fair value of plan assets, beginning of year   133,000     299,000
      Actual return on plan assets                    26,000       9,000
      Employer contribution                          140,000     120,000
     ---------------------------------------------------------------------------
      Fair value of plan assets, end of year         299,000     428,000
     ---------------------------------------------------------------------------
      Unfunded status                               (470,000)    (96,000)
      Unrecognized prior service cost                      -    (231,000)
      Unrecognized net actuarial loss                262,000      60,000
     ---------------------------------------------------------------------------
      Accrued benefit cost                         $(208,000)  $(267,000)
     ===========================================================================

Assumptions used in these actuarial valuations were:

     DECEMBER 31,                              1998     1999
     --------------------------------------------------------------
      Discount rate                            7.0%     7.0%
      Expected long-term rate of return        8.0%     7.5%
     ==============================================================

401(K) PLAN

The Company sponsors a defined contribution benefit plan covering  substantially
all  employees.  Eligible  employees are allowed to contribute up to 6% of their
compensation.  Company  contributions  are at the sole discretion of management.
There were no contributions for the years ended December 31, 1998 and 1999.


<PAGE>

NOTE 8 - STOCKHOLDERS' EQUITY (ALSO, SEE NOTE 16)

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,  1999,  327,241  shares of common  stock were  reserved for the
exercise of stock warrants, comprised of the unexercised Underwriter's Warrants,
of 60,561,  145,000  reserved shares for the 1998 private  placement  investors,
100,000 for investment  advisory firms and 21,680 to other parties (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.

PRIVATE PLACEMENTS

In  November  1999,  the Board of  Directors  of the  Company  approved  private
placements  of up to $10  million of defined  units which  consist of  1,000,000
shares of common stock and 250,000  warrants to purchase  common stock.  Through
December  31,  1999,  the Company had raised $5.2  million  (which  excludes the
proceeds from convertible debt  subsequently  exchanged for units) in connection
with this private  placement and ceased efforts on additional  sales of units in
early 2000.

In February  2000,  the Board of  Directors  of the  Company  approved a private
placement of up to $9.9 million of defined units which consist of 900,000 shares
of common stock and 225,000 warrants to purchase common stock. Through March 24,
2000, the Company had raised  approximately $2.1 million in connection with this
private placement.

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  have  exercised the warrants in 1999 at an exercise price
of $3.54 per share.

In November  1998,  the Company  entered  into an agreement  with an  investment
advisory  firm who directly  assisted  the Company in  acquisition  efforts.  In
return for such services,  the Company has issued 50,000  warrants to this firm.
The warrants  have vested and the  requisite  number of  acquisitions  have been
consummated.  The  exercise  prices of the warrants are $6.60 per share and were
based,  in part, on the fair market value of the  Company's  common stock at the

<PAGE>

date of the agreement. The values ascribed to the warrants have been capitalized
and have been amortized over the useful lives of the acquisitions.

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

STOCK AWARDS

The Company has issued  32,500  shares of  restricted  stock to an officer.  The
stock awards vest over a four-year period; however, if certain events occur, the
unvested  portion of the awards will  automatically  vest. The value ascribed to
the stock awards ($309,000) was based, in part, on the fair market values of the
Company's  common  stock on the  award  dates.  Compensation  expense  for these
agreements  for the years ended  December 31, 1998 and 1999 totaled  $31,000 and
$77,000,  respectively. The Company's liability for the values ascribed to these
shares approximates  $309,000 and is included in "Deferred  Compensation" in the
accompanying  December 31, 1999 consolidated  balance sheet.  Such  liability is
reduced when the shares are formally issued.

STOCK OPTION PLAN

The Company maintains two qualified stock option plans.  Under the terms of both
plans,  the  Company  has  reserved  680,000  shares of common  stock for future
grants.

Under the Company's  Stock Option Plans,  the Company may grant  incentive stock
options to certain officers, employees and directors. The options expire five or
ten years from the date of grant.  Accelerated vesting occurs following a change
in control of the Company and under  certain other  conditions.  At December 31,
1999, the Company could grant an aggregate of 170,450 shares under the plans.

During the year ended  December 31, 1998,  the Company issued options to outside
members of their  Board of  Directors,  which vest over a one-year  period.  The
exercise  prices of such  options  were based on the fair  market  values of the
Company's  stock at the grant dates.  The related  compensation  charge  totaled
$79,000 and $59,000 in 1998 and 1999, respectively.

The following table summarizes  information  about stock options  outstanding at
December 31, 1999:

                           Options Outstanding          Options Exercisable
----------------------------------------------------  --------------------------
                                Weighted
                                 Average    Weighted               Weighted
                                Remaining    average                average
                    Number     contractual  exercise     Number    exercise
Exercise Price    Outstanding life (years)    price    exercisable   price
----------------------------------------------------  --------------------------
$6.00 to $6.38     192,658         8.6       $ 6.03      101,681     $ 6.03
$7.25 to $8.63      27,700         8.7         7.76       15,389       7.76
$16.00              17,142         2.54       16.00        6,636      16.00
$20.00 to $21.75   249,658         2.98       21.16       48,087      21.16
$22.00 to $23.438   22,392         4.25       23.30        2,778      23.30
----------------------------------------------------  --------------------------
                   509,550         5.46      $14.62      174,571     $11.00
----------------------------------------------------  --------------------------


<PAGE>

There were no option grants prior to the Company's 1998 initial public offering.
Transactions under various qualified and non qualified option plans for 1998 and
1999 are summarized as follows:

                                                                 Weighted
                                                                  average
                                                                 exercise
                                                      Shares       price
     ---------------------------------------------------------------------------
     Outstanding at January 1, 1998                        -           -
     Granted                                         267,150       $6.14
     Exercised                                             -           -
     Canceled                                              -           -
     ---------------------------------------------------------------------------
     Outstanding at December 31, 1998                267,150        6.14
     Granted                                         294,942       21.00
     Exercised                                             -           -
     Canceled                                        (52,542)       7.53
     ---------------------------------------------------------------------------
     Outstanding at December 31, 1999                509,550      $14.62
     Options exercisable at December 31, 1999        174,571      $11.00
     ---------------------------------------------------------------------------
     Options available for grant at December 31, 1999 170,450
     ---------------------------------------------------------------------------

Under the  accounting  provisions of SFAS 123, the  Company's  1998 and 1999 pro
forma net loss and loss per share would have been:

                                               1998          1999
 --------------------------------------- --------------  ------------
 Net loss                                   $(431,000)   $(6,909,000)
 Net loss per share; basic and diluted          $(.12)        $(1.60)
 --------------------------------------- --------------  ------------

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:

                                              1998           1999
 --------------------------------------- --------------  ------------
 Dividend yield                                 0%               0%
 Expected volatility                         46.1%            45.8%
 Risk-free interest rate                     5.39%            5.25%
 Expected life - years                         10               10
 Weighted average fair value of
  options  granted                          $3.47            $6.22
 --------------------------------------- ---------------  -------------

NOTE 9 - TAXES

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

                                                            December 31,
                                                   ---------------------------
                                                            1998        1999
                                                   ---------------------------
Current:
  Federal..........................................    $ 102,000   $(133,000)
  State............................................       47,000     131,000
                                                   ---------------------------
                                                         149,000      (2,000)
                                                   ---------------------------
Deferred:
  Federal..........................................      (91,000)    111,000
  State............................................      (32,000)    (64,000)
                                                   ---------------------------
                                                        (123,000)     47,000
                                                   ---------------------------
  Total income tax provision.......................     $ 26,000    $ 45,000
                                                   ===========================


<PAGE>

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

                                                            December 31,
                                                   ---------------------------
                                                            1998        1999
                                                   ---------------------------
Deferred Tax Asset, Current:
  Accounts receivables ............................    $ (90,000)  $ 104,000
  Accrued compensation.............................      117,000      94,000
  Change in tax status of Spencer..................            -     (90,000)
  Other, net.......................................       15,000           -
  Valuation allowance..............................            -    (108,000)
                                                   ---------------------------
                                                        $ 42,000         $ -
                                                   ===========================
Deferred Tax Asset (Liabilities), Non-Current:
  Intangible assets................................  $ 1,185,000  $1,092,000
  Property and equipment...........................       16,000     228,000
  Other............................................      (11,000)          -
  Tax benefit of state income tax net
    operating loss carryforwards...................            -     304,000
  Tax benefit of federal income tax, net
    operating loss carryforwards...................            -   1,668,000
  Change in tax status of Spencer..................            -     (90,000)
  Valuation allowance..............................   (1,185,000) (3,202,000)
                                                   ---------------------------
                                                         $ 5,000         $ -
                                                   ===========================


<PAGE>

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

                                                            December 31,
                                                   ---------------------------
                                                            1998        1999
                                                   ---------------------------

Statutory benefit..................................    $(116,000) $(2,106,000)
State taxes, net of federal benefit................       10,000     (384,000)
Results attributed to DesignFX, Halo, Spectrum
  and Spencer owners...............................       29,000      254,000
Amortization of non-deductible goodwill............       52,000       99,000
Non-deductible expenses............................       45,000       36,000
Increase in deferred income tax valuation allowance            -    2,125,000
Other, net.........................................        6,000       21,000
                                                   ---------------------------
                                                        $ 26,000     $ 45,000
                                                   ===========================

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

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, the Company has established a
valuation allowance against this 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.

As of  December  31,  1999,  the  Company  had  available  federal and state net
operating loss  carryforwards of  approximately  $4,906,000 and $5,238,000 which
expire in 2019 and 2006, respectively.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases facilities and equipment under operating leases and subleases
expiring through December 2004. Some of the leases have renewal options and most
contain  provisions for passing through certain  incremental  costs. At December
31, 1999, future net minimum annual rental payments under non-cancelable  leases
are as follows:

YEAR ENDING DECEMBER 31,            AMOUNT
-------------------------        ---------
2000                            $1,800,000
2001                             1,555,000
2002                             1,064,000
2003                               530,000
2004                               265,000
                              ------------
   Total                        $5,214,000
                              ============

<PAGE>

Total  rental  expense  for the  years  ended  December  31,  1998  and 1999 was
approximately $451,000 and $1,219,000, respectively.

EMPLOYMENT AGREEMENTS

The Company has entered into  employment and  consulting  contracts with certain
officers and  employees,  which provide for minimum  annual  salaries to be paid
over specified terms.  Future commitments for such payments  (including those to
individuals employed by digital fusion [see Note 16]) were as follows:

YEAR ENDING DECEMBER 31,            AMOUNT
-------------------------        ---------
2000                            $2,383,000
2001                             1,059,000
2002                               490,000
2003                               128,000
                              ------------
   Total                        $4,060,000
                              ============

NOTE 11 - 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% and were paid off in 1998.  Interest expense
for the year ended December 31, 1998 amounted to $2,000.

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
of the note  totaled  $15,000  and was paid off in 1998.  The  imputed  interest
expense for the year ended December 31, 1998 was not material.

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
$72,000 and $21,000 at December 31, 1998 and 1999, respectively.

OTHER TRANSACTIONS (ALSO SEE NOTE 8)

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

In 1998 and 1999 Spencer and  Spectrum  distributed  an  aggregate  $290,000 and
$329,000, respectively, of cash to its shareholders.


<PAGE>



NOTE 12 - CASH FLOW INFORMATION

As disclosed in Note 3, the Company has consummated  various asset  acquisitions
in 1998 and 1999.  In  conjunction  with  such  acquisitions,  liabilities  were
assumed as follows:

                                        1998         1999
                                    -----------  -----------
Fair value of assets acquired        $1,010,000  $5,670,000
Cash proceeds                            50,000   1,857,000
Fair value of issued common stock       700,000   2,765,000
                                    -----------  -----------
Liabilities assumed                   $ 260,000  $1,048,000
                                    ===========  ===========

Cash paid for interest and income taxes are as follows:

                                        1998         1999
                                    -----------  -----------
Interest                               $109,000   $38,000
Income Taxes                            197,000    50,000
                                    ===========  ===========

During  1999,  the Company  converted  $600,000 of debt and $310,000 of deferred
compensation  liabilities  into common stock. In 1999, the carrying values of IS
acquisitions  were increased and a liability  established by $546,000 to reflect
common stock likely to be issued.  In 1998,  the Company  acquired  $32,000,  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 13 - MAJOR CLIENTS OF THE COMPANY

One client  accounted  for 23% and 15% of the  Company's  revenues for the years
ended December 31, 1998 and 1999, respectively.  One consulting project provided
to the same client  accounted  for 18% of the  Company's  revenues  for the year
ended December 31, 1998.

NOTE 14 - SEGMENT INFORMATION

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

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

There were no intersegment  sales and transfers  during the years ended December
31, 1998 and 1999.

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.


<PAGE>



Segment information as of and for the years ended December 31, 1998 and 1999 are
as follows (in thousands):

                               Professional
December 31, 1998                Services         IS     Corporate    Total
--------------------------------------------------------------------------------
Revenues                          $13,912      $1,301        $-     $15,213
Cost of services                    8,907       1,300         -      10,207
--------------------------------------------------------------------------------
Gross profit                        5,005           1         -       5,006
Selling, general & administrative   4,146         251       508       4,905
Amortization of intangible assets     154          19         -         173
Non-cash compensation expense           -           -       290         290
Merger expenses                         -           -       109         109
--------------------------------------------------------------------------------
Operating income (loss)               705        (269)     (907)       (471)
Interest expense                        -           -      (129)       (129)
Interest income                         -           -       185         185
Other income (expense), net             -           -        75          75
Income tax (provision) benefit       (332)        108       198         (26)
--------------------------------------------------------------------------------
Net loss                             $373       $(161)    $(578)      $(366)
================================================================================
Allocated assets                   $3,532         $84    $7,560     $11,176
================================================================================
Expenditures for allocated assets    $244        $336      $171        $751
================================================================================

                               Professional
December 31, 1999                Services         IS     Corporate    Total
--------------------------------------------------------------------------------
Revenues                          $14,706      $4,068        $-     $18,774
Cost of services                    9,676       3,172       155      13,003
--------------------------------------------------------------------------------
Gross profit                        5,030         896      (155)      5,771
Selling, general & administrative   5,328       1,543     3,674      10,545
Amortization of intangible assets     218         296         -         514
Non-cash compensation expense         197           -       135         332
Merger expenses                         -           -       232         232
--------------------------------------------------------------------------------
Operating income (loss)              (713)       (943)   (4,196)     (5,852)
Interest expense                        -           -       (81)        (81)
Interest income                         -           -       116         116
Loss on disposal of assets              -        (350)        -        (350)
Other income (expense), net             -           -       (26)        (26)
Income tax (provision) benefit        (45)          -         -         (45)
--------------------------------------------------------------------------------
Net income (loss)                   $(758)      $(1,293) $(4,187)    $(6,238)
================================================================================
Allocated assets                   $4,512        $4,301   $4,662     $13,475
================================================================================
Expenditures for allocated assets  $    -        $    -     $277        $277
================================================================================


NOTE 15 - 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.


<PAGE>

In the fourth quarter of 1999, the Company recognized,  as changes in estimates,
the pre tax effects of (i)  increasing  the allowance  for doubtful  accounts by
$100,000,  and (ii) increased employee benefit expenses of $88,000.  The Company
also  recognized  a loss of  $350,000 on the sale of certain IS  businesses  and
interest  expense of $43,000 on warrants  granted on the  convertible  debt (see
Note 6).

NOTE 16- SUBSEQUENT EVENT

On March 1, 2000 the Company  signed an agreement  to purchase  the  outstanding
stock of digital fusion,  inc.  ("digital  fusion") in return for 975,000 shares
(50,000 shares of which will be reserved upon settlement of certain matters) and
$500,000 of a  subordinated  note (accruing 6% per annum) and assumption of debt
totaling  $4.2 million.  digital  fusion is a Tampa,  Florida based  provider of
e-business  professional  services  to a wide  array of  commercial  businesses.
Certain  digital  fusion  officers and employees will also receive non qualified
options to purchase  470,000 shares of Company  common stock;  such options will
vest over a period of 3 years. Of the assumed $4.2 million of debt, $3.3 million
is secured and payable in 2000.

The following  summarized,  unaudited pro forma  information  for the year ended
December 31, 1999 assumes that the acquisition of Digital Fusion had occurred on
January 1, 1999:

                                Unaudited
                              ------------
Net revenues                   $30,874,000
Operating loss                 (8,553,000)
Net loss                       (9,226,000)
Loss per share:
  Basic and diluted            $    (1.75)
                              ============

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