<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                        
                                   FORM 10-K
                                        
             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

       For the fiscal year ended                 Commission File Number
            June 30, 1998                               0-21131


                        INTERNATIONAL NETWORK SERVICES
            (Exact name of registrant as specified in its charter)
             California                                77-0289509
  (State or other jurisdiction of                   (I.R.S. Employer
   incorporation or organization)                  Identification No.)


                  1213 Innsbruck Drive, Sunnyvale, CA  94089
              (Address of principal executive offices) (Zip Code)

      Registrant's telephone number, including area code: (408) 542-0100

       Securities registered pursuant to Section 12(b) of the Act: NONE
          Securities registered pursuant to Section 12(g) of the Act:

                     COMMON STOCK, NO PAR VALUE PER SHARE
                               (Title of Class)

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [_]


     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     As of September 14, 1998, there were 33,010,460 shares of the Registrant's
Common Stock outstanding ,and the aggregate market value of such shares held by
non-affiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on September 14, 1998) was approximately
$36.50.  Shares of Common Stock held by each executive officer and director and
by each entity that owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.

                      DOCUMENTS INCORPORATED BY REFERENCE
                                        
     Certain sections of the Registrant's Annual Report to Shareholders for the
year ended June 30, 1998 (the "1998 Annual Report") are incorporated by
reference in Parts II and IV of this Form 10-K to the extent stated herein.
Also, certain sections of the Registrant's definitive Proxy Statement for the
1998 Annual Meeting of Shareholders to be held on October 29, 1998 are
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
<PAGE>
 
                   INTERNATIONAL NETWORK SERVICES FORM 10-K
                    FOR THE FISCAL YEAR ENDED JUNE 30, 1998

                               TABLE OF CONTENTS
                                        
Part I

     Item  1.  Business
     Item  2.  Properties
     Item  3.  Legal Proceedings
     Item  4.  Submission of Matters to a Vote of Security Holders


Part II

     Item  5.  Market for the Company's Common Stock and Related Shareholder
                Matters
     Item  6.  Selected Financial Data
     Item  7.  Management's Discussion and Analysis of Financial Condition and
                Results of Operations
     Item  7A. Quantitative and Qualitative Disclosure About Market Risk
     Item  8.  Financial Statements and Supplementary Data
     Item  9.  Changes in and Disagreements with Accountants on Accounting and
                Financial Disclosure

Part III

     Item  10. Directors and Executive Officers of INS
     Item  11. Executive Compensation
     Item  12. Security Ownership of Certain Beneficial Owners and Management
     Item  13. Certain Relationships and Related Transactions


Part IV

     Item  14. Exhibits, Financial Statements Schedule, and Reports on Form 8-K

               Exhibit Index
               Signatures
               Financial Statement Schedule
<PAGE>
 
PART I

ITEM 1.   BUSINESS

          The following discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended.  Predictions of
future events are inherently uncertain.  Actual events could differ materially
from those predicted in the forward-looking statements as a result of the risks
set forth in the following discussion and, in particular, the risks discussed
below under the caption "Risk Factors that May Affect Operating Results."

  International Network Services ("INS" or the "Company") is a worldwide
provider of services for complex enterprise networks. The Company provides
services for the full life cycle of a network, including planning, design,
implementation, operations and optimization, and maintains expertise in the most
complex network technologies and multivendor environments. Areas of expertise
include wide area networks ("WANs"), network management, network and host
security and high performance local area networks ("LANs"), and virtual LANSs
("VLANs"). The Company believes that it is able to provide unbiased assessments
and optimal solutions for its clients. The Company offers its services on a long
or short term basis in any or all phases of the network life cycle. The
Company's services are particularly well suited to clients who out-task a
portion of their information technology infrastructure. The Company has
developed an on-line solutions resource, Knowledge Network, through which the
Company's network systems engineers communicate and collaborate to provide
solutions to clients' complex enterprise network needs. The Company is
leveraging its expertise in complex networks to develop electronic services
which combine software and services to provide clients with solutions for
certain repetitive network management tasks, such as network monitoring and
network performance reporting. The Company's current electronic service,
EnterprisePRO/SM/, is designed to collect data, generate reports and compile
network information for use in the optimization of networks. The Company serves
its clients, many of which have multi-location enterprise networks, through its
network of 36 offices. As of June 30, 1998, the Company employed 1,353 persons,
including 1,053 network systems engineers and managers.


BACKGROUND

  The ability of businesses to exchange information both internally and
externally is a competitive advantage in many industries. To exchange
information, many businesses are increasingly using client/server based
applications, e-mail, remote access by mobile workers, the Internet, corporate
Intranets, video, graphics and audio. The amount of data generated by these
applications combined with the larger number of users connected to networks, has
increased traffic and placed higher demand on networks. In this environment,
companies that have the most responsive and reliable information systems
networks will have a competitive advantage.

  As network traffic has grown, the technology underlying networks has become
increasingly complex. Network hardware and software companies are rapidly
developing sophisticated new technologies such as routers, inverse multiplexers,
switches, asynchronous transfer mode ("ATM") and VLANs to accommodate the
increase in data traffic. The implementation of these technologies requires
significant expertise. In addition, the complexity of networks is magnified by
the need to integrate these new technologies with legacy network systems. As a
result, it is increasingly difficult for network managers to ensure the
reliability, performance and security of these large, heterogeneous networks.
Furthermore, the tools available to manage today's networks are themselves very
complex and require investments in hardware, software, personnel and training.

  Although companies have attempted to develop the necessary expertise, this
rapid technological change and increasing complexity have made it difficult for
companies to implement and manage their 
<PAGE>
 
large multivendor network environments. In addition, to remain competitive,
companies are increasingly focused on their core business competencies and often
turn to third-party service providers for non-core functions, such as those
related to their computing environments. While some companies "out-source" their
entire computing environment, an increasing number of companies are pursuing an
approach to more actively manage their computing environments by "selectively
out-sourcing" or "out-tasking" only a limited set of services. The rapid
technological changes in networking and the move to out-tasking have created
increased demand for third-party network services.

  To date, it has been difficult for businesses to find adequate third-party
solutions for their complex network services needs. Although there are many
suppliers of network services, few focus on services for complex multivendor
networks. For example, some computer systems and network equipment vendors
provide services; however, they focus on distributing their own products and
often lack the skills to implement solutions in multivendor environments.
Systems integrators and value added resellers ("VARs") have historically focused
on legacy computing environments and often do not have sufficient expertise in
distributed client/server network environments. Telecommunications providers are
often called upon to provide complex multivendor data network services as part
of total communication solutions; however, they often do not have adequate or
available expertise and therefore often look to other third-party service
providers for complex network services.


INS SOLUTION

  INS is a provider of services for complex enterprise networks. The Company
provides services for the full life cycle of a network, including planning,
design, implementation, operations and optimization, and maintains expertise in
the most complex network technologies and multivendor environments. The Company
believes that it is able to provide unbiased assessments and optimal solutions
for its clients. In addition, the Company provides a focused, flexible approach
to assisting clients in any or all phases of the network life cycle. The
Company's services are particularly well suited to out-tasking. The Company has
developed an on-line solutions resource, Knowledge Network, through which the
Company's network systems engineers communicate and collaborate to provide
solutions to clients' complex enterprise network needs. In addition to
professional services, the Company has developed electronic services which
combine software and services to provide clients with solutions for repetitive
network management tasks. The Company's current electronic service,
EnterprisePRO, is designed to collect data, generate reports and compile network
information for use in the optimization of networks. The Company serves its
clients, many of which have multi-location enterprise networks, through its
network of 36 offices.


STRATEGY

  The Company's objective is to become the premier provider of services for
complex enterprise networks. To achieve its objective, the Company is pursuing
the following strategies:

  Build and Strengthen Client Relationships. The Company believes that
delivering dependable, high-quality network services is critical to
strengthening its relationships with existing clients, gaining repeat business
and generating new business from referrals. The Company seeks to establish long-
term relationships with its clients by becoming an integral part of their
network operations. The Company also plans to continue to build and strengthen
relationships with hardware and software vendors, system integrators and
telecommunications providers to assist them in providing total networking
solutions to their customers.

  Expand Client Base in Existing and New Markets. The Company's strategy is to
expand its presence in the geographic markets it currently serves and to enter
new markets where it views the opportunity as attractive. The Company currently
offers its services through a network of 36 offices in the United States, Canada
and the United Kingdom. The Company believes that a broad presence will
strengthen its 
<PAGE>
 
competitive position within the network services market and enable it to better
service its clients and enter new markets worldwide.

  Attract and Retain High Quality Network Systems Engineers. The Company
believes that its network systems engineers are critical to its success. The
Company's strategy is to continue to attract and retain the most qualified
network systems engineers by providing a rich environment and culture and by
offering professional development and financial opportunities. The Company
generally recruits network systems engineers that have significant technical
expertise and offers them professional training as well as the opportunity to
accelerate their career development by working on difficult problems and
collaborating with other network systems engineers to implement sophisticated
technology in complex enterprise networks. The Company promotes its corporate
culture with stated values that encourage employees to be their best, work as a
team and continually learn. The Company intends to continue to build its
worldwide recruiting organization and to invest heavily in training and
development.

  Develop and Expand Corporate Infrastructure. The Company believes that its
corporate infrastructure provides it with a competitive advantage in delivering
services while enabling it to expand its operations. This infrastructure
includes functions, such as recruiting, training and professional development,
collaboration tools, such as Knowledge Network, and management information
systems to give management the information necessary to make timely and accurate
decisions. The Company believes that by continuing to develop and refine its
employee recruiting and training infrastructure, strengthening its operational
management reporting systems and controls, and expanding its information
resources, it will be well-positioned to deliver high quality network services
and support growth in its operations.

  Expand Electronic Services. The Company intends to leverage its expertise in
complex networks by continuing to develop electronic services and software
license fees for certain repetitive network management tasks, such as network
monitoring and network performance reporting. In addition to the potential of
revenue from services and license fees, electronic services are designed to
build and maintain client relationships and provide opportunities for additional
professional services.

  Pursue Strategic Acquisitions. The Company intends to research, and if
appropriate, pursue acquisitions some of which may include expanding within
existing markets, entering new markets, increasing the range of services, adding
industry and technical expertise, and/or acquiring technology that can be used
in electronic services.

  No assurance can be given that the Company will be able to implement its
strategy or achieve its objectives. See "Risk Factors That May Affect Operating
Results."

SERVICES

  The Company provides professional services and technology expertise for all
phases of the network life cycle and provides electronic services for routine
network management tasks.

 Professional Services

  The Company had 1,053 network systems engineers and managers engaged in
providing services for complex enterprise networks as of June 30, 1998. The
Company has both the breadth of expertise required to support the full life
cycle of a network, which includes planning, design, implementation, operations
and optimization, and the depth of expertise required to address complex and
rapidly changing technology. The Company offers its services on a long- or
short-term basis in any or all phases of the network life cycle. The Company's
services maximize flexibility in meeting customer requirements, offer added
value, and can be clearly described and presented.

  In order to meet the challenge of providing consistent, quality service, the
Company staffs each project with a complement of network systems engineers with
requisite technical and management 
<PAGE>
 
experience. The Company works with the client to create a plan that defines what
will be delivered as well as how success or completion will be measured. To
encourage quality assurance, the Company involves the service management team in
all aspects of delivery and also coordinates content and progress reviews.
Further, the Company uses Knowledge Network to bring the expertise and
experience of many talented network systems engineers to bear on an assignment.

  The Company's services are provided either as discrete projects or as part of
ongoing relationships. Project content and scope range from simple task-oriented
engineering and value-added implementation efforts to large-scale programs
involving multiple resources across several client locations. The Company
generates revenue from its professional services generally on a time and
expenses basis; however, some projects are delivered on a fixed-price basis. The
success of the Company's business will depend on the Company's ability to
fulfill the increasingly sophisticated needs of its clients. The Company's
clients are generally able to reduce or cancel their use of the Company's
services without penalty and with little or no notice. See "Risk Factors That
May Affect Operating Results -- Risks Associated with Client Concentration;
Absence of Long-Term Agreements" and "--Risks Associated With Electronic
Services."

 Network Life Cycle Services

  The Company provides services for any or all phases of the network life cycle,
which includes planning, design, implementation, operations and optimization.

  Network Planning. The network planning phase of the network life cycle focuses
on providing clients with strategic and tactical reviews of their current
network operations and future network requirements. Network planning services
encompass a number of critical planning elements:

  .  Defining client business requirements

  .  Developing strategic information architectures

  .  Performing network baseline audits

  .  Preparing capacity plans for the physical network, logical transport and
     services

  .  Selecting preferred technology

  .  Conducting network security audits and planning

  Network Design. The network design phase 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. The Company generates a set
of working papers that identify the specific technologies to be used and how
these technologies will be configured and implemented. These services also take
into consideration how the new technology will integrate into the client's
existing hardware and software and how it will be managed on an ongoing basis.
Examples of services provided by the Company in the network design phase
include:

  .  Defining functional requirements

  .  Developing multivendor integration plans

  .  Preparing technical design documentation

  .  Developing engineering specifications and documents

  .  Preparing Request for Proposal specifications or other make/buy criteria
<PAGE>
 
  .  Providing detailed component purchasing lists

  Network Implementation. The network implementation phase includes high value-
added network services, such as internet protocol addressing and router
configuration, and, to a much lesser extent, traditional system integrator
functions, such as hardware installation. The Company believes it has expertise
in integrating new systems without disrupting ongoing business operations,
thereby adding value and reducing risk to clients. The Company customizes an
implementation plan for each client, which may include the following activities:

  .  Project management

  .  Integrating new hardware and software products and systems

  .  Building network operations and management centers

  .  Re-configuring and upgrading network elements, systems and facilities

  .  Implementing installation documentation, conformance testing and compliance
     certification

  Network Operations. The network operations phase includes ongoing tasks
necessary to keep the client's network fully operational. The Company has
experience in delivering operations services to a range of clients, including
those with newer client/server networks running both Internet (TCP/IP) and
workgroup (Novell and Microsoft) protocols intermingled with legacy (SNA)
networks. Specific operations activities are delivered according to individual
client requirements drawing from a well-understood set of operating practices.
Examples of these practices include:

  .  Network administration, including management of user accounts, service
     levels, and client administrative or accounting practices

  .  Network utilization analysis, involving ongoing measurement of network
     activity against established network baselines

  .  Ongoing management of documentation, including physical assets, logical
     topologies, policies and procedures

  .  Network troubleshooting, involving fault detection, isolation, repair and
     restoration

  .  Alarm management including setting of alarm levels, cross-correlation,
     problem diagnosis and dispatch of service resources

  .  Network backup, including design and supervision of backup processes and
     policies, and exercise of disaster recovery procedures

  .  Routine moves, additions, and changes to network elements, infrastructure
     and services

  Network Optimization. The network optimization phase involves maximizing the
rate of return of enterprise network investments on behalf of the client by such
methods as reducing operating costs and increasing network utilization. Although
optimization may be viewed as a separate stage of the network life cycle,
optimization is closely linked with the other phases of the network life cycle.
Optimization services can be long-term in nature, address issues such as cost
containment and utilization, and are often aimed at optimizing LAN
infrastructure. These services can also be packaged as discrete projects,
designed to present alternatives for optimization of workgroup, departmental,
building, or campus network investments. Finally, the Company can assist in
optimizing "logical" networks, wherein the Company 
<PAGE>
 
addresses a protocol, service or application operating in the larger context of
the client's enterprise network. Examples of the Company's network optimization
services include:

  .  Recommendations for efficient allocation of bandwidth

  .  Network traffic analysis, identification of bottlenecks and recommendations
     for change

  .  Network process re-engineering

  .  Knowledge transfer to client operations personnel on topics, such as basic
     practices, or operation of network management tools and stations


 Technology Expertise

  The Company has developed expertise in a number of areas, including WANs,
network management, network and host security, high performance LANs and VLANs.

  Wide Area Networks. Wide area network design and optimization has special
value in multi-protocol, multi-vendor enterprise network environments. The
Company has substantial expertise in the design and optimization of shared
transport TCP/IP and SNA networks, including emerging and legacy networking
disciplines that span more than 20 years of network technology. Subject matter
expertise includes commercial transport technologies (frame relay, ATM, T1/T3
leased lines with HDLC, SONET, SMDS, ISDN, and X.25), interior and exterior
routing protocols (IGRP, EIGRP, CIDR, BGP-4, OSPF, RIP, and RIPv2), and commonly
used network protocols ( TCP/IP, SNA, IPX, Apple, DECnet, VINES).

  Network Management. Network management practices include design and
implementation of network operations/management centers, design of distributed
network management systems, selection, installation, and integration of network
management platforms and integration with alarm managers, trouble ticket systems
and "manager of managers" tools. Subject matter expertise includes SNMP, SNMPv2,
RMON, RMON2, HPOV, Optivity, Netview 6000, SunNet Manager, Spectrum, Seagate
NerveCenter, Remedy ARS and broad-based skills in network management concepts
and functions (fault, performance, configuration, accounting, security).

  Network and Host Security. Network and host security practices include
research and documentation of security policies, selection and installation of
Internet and Intranet firewalls, secure remote access solutions, identification
and installation of various security tools, audits of server and workstation
security, and training of clients on security topics. Subject matter expertise
includes firewall design, remote access design, authentication, server, host,
and workstation industry best practices, new security protocols (S/WAN, SHTTP,
SSL), cryptography and encryption, and high performance secure platforms.

  High Performance Local Area Networks and Virtual Local Area Networks.
Consulting on design and implementation of high-performance LANs and VLANs
requires maintaining state of the art expertise on a broad array of topics. The
Company has expertise in switching technology and products, performance tuning,
ATM technology and applications, ATM migration, full-duplex LANs, and other high
speed LAN components.


 Electronic Services

  The Company has leveraged its expertise in complex networks to develop
electronic services which combine software and services to provide clients with
solutions for certain repetitive network management tasks, such as network
monitoring and network performance reporting. The Company's current offering,
EnterprisePRO, is designed to collect data, generate reports and compile network
information for use in the optimization of networks. The Company believes that

<PAGE>
 
EnterprisePRO can reduce network administration costs, improve operating
efficiencies and provide a better perspective on network performance.

  EnterprisePRO is designed to be a "turn-key" solution for network performance
reporting and analysis. Prior to the quarter ended September 30, 1997, the
Company offered its electronic services to clients only as a service under which
the Company generally received a one-time installation fee and a monthly service
fee that varied with the size of the network being monitored. The Company
currently allows clients to separately purchase a software license, software
subscription and support services as an alternative to the service contract. The
EnterprisePRO server software provides a proprietary network data collection
system and an intuitive Web-based user interface. A single server polls each
device every five minutes and can monitor up to 10,000 network interfaces. The
Web-based interface provides customizable network views that allow clients to do
network diagnosis, interactive decision support, and management information for
fact-based network architecture and upgrade planning. EnterprisePRO reports
include utilization statistics for frame relay, WAN, LAN and router CPU,
ethernet Hubs device uptime, and RMON and ROMON2 statistics, including top
transmitters and protocol distribution. The INS operations center includes
additional proprietary software. EnterprisePRO support service provides an
automatic connection to the operations center by modem and download of the data.
Operations center personnel back up the data and view generated exception
reports to do daily quality checks and provide client support. The operations
center performs updates to client configurations, troubleshooting of
EnterprisePRO servers and updates EnterprisePRO service via a software push
delivery model. EnterprisePRO installation services provide installation of the
server at the client site and a connection to the INS operations center at the
Company's headquarters. EnterprisePRO software subscription provides periodic
updates of server software.

  The Company believes that its professional services and electronic services
complement one another. The cumulative expertise of the Company's professional
services staff provides valuable information upon which electronic services may
be based. Electronic services are designed to build and maintain client
relationships and provide opportunities for additional professional services.

KNOWLEDGE NETWORK

  Knowledge Network is the Company's on-line solutions resource. Knowledge
Network combines the Company's proprietary information stored in a document
management system, a library of industry and manufacturer product information
and specifications, periodicals, databases and CDs from vendors providing
additional technical support, and a means by which the Company's network systems
engineers can communicate and collaborate in resolving clients' complex
enterprise network issues. Network problems encountered by INS network systems
engineers and the ultimate solutions are catalogued and stored on a confidential
central database for use by INS network systems engineers and management only.
INS network systems engineers are able to query the Knowledge Network for
precedents, conversation threads and other possible solutions for difficult
network issues and can send e-mail through the Knowledge Network to other INS
network systems engineers for assistance in resolving these issues. Knowledge
Network enables the Company to leverage the collective talents and experience of
network experts in the organization to provide clients with proven and cost-
effective solutions to their network services needs. The Company believes that
the Knowledge Network provides it with a competitive advantage over other
network services providers.

CLIENTS

The Company performs professional services for a variety of clients across a
broad range of industries. The Company has derived a significant portion of its
revenue from a limited number of large clients and expects this concentration to
continue. No one client accounted for more than 10% of revenue in fiscal 1997 or
1998.  In fiscal 1996, a client accounted for approximately $7.5 million, or
17.0%, of the Company's revenue. See "Risk Factors That May Affect Operating
Results--Risks Associated with Client Concentration; Absence of Long-Term
Agreements."
<PAGE>
 
SALES AND MARKETING

  The Company employs account managers who identify and sell to clients and
manage client relationships. Many members of the Company's account management
team have significant experience selling complex network and computer products
and services. The Company also has a marketing group which provides sales
support materials and marketing communications. Account managers generally
identify clients through direct marketing and referrals. The Company employs a
team selling approach, whereby account managers collaborate with field and
technical managers and network systems engineers to assess potential projects
and communicate the specific expertise of the Company's consultants to potential
clients. In addition to other marketing strategies, the Company believes that
delivering dependable, high-quality services is critical to strengthening its
relationships with existing clients, gaining repeat business and generating new
business from referrals. The Company seeks to establish long-term relationships
with its clients by becoming an integral part of their network operations.

  The Company markets its professional services directly to large end-user
clients who have chosen to out-task network services, and indirectly through
third parties, including large telecommunications carriers, systems integrators,
hardware and software vendors, and VARs.  In addition, the Company has developed
a significant relationship with Cisco Systems, Inc., ("Cisco") pursuant to which
the Company has entered into direct relationships with clients as a result of
referrals from Cisco and provides services directly to Cisco, primarily as a
subcontractor.  The Company believes that maintaining and enhancing its
relationship with Cisco is important to the Company's business due to Cisco's
leading position in the large scale, enterprise internetworking market. Cisco
develops, manufactures, markets and supports high-performance, multiprotocol
internetworking systems that link geographically dispersed LANs and WANs.
Although the Company believes that its relationship with Cisco is good, there
can be no assurance that the Company will be able to maintain or enhance its
relationship with Cisco. Any deterioration in the Company's relationship with
Cisco could have a material adverse effect on the Company's business, operating
results and financial condition. Furthermore, although the Company has a
relationship with Cisco, the Company is an independent provider of network
services and seeks to provide the best solution for its clients regardless of
network platform or vendor. Therefore, should the Company's relationship with
Cisco be perceived as compromising the Company's ability to provide unbiased
solutions, the Company's relationship with existing or potential clients could
be materially adversely affected.

  The Company's current electronic service, EnterprisePRO, is marketed through
the Company's account managers and through resellers and OEMs. EnterprisePRO
resellers will identify potential clients and negotiate the services contracts
and are responsible for installation and first level support of the client
installation. The Company provides the back office automation and service to the
client.  The success of these contracts will depend in part on the level of
commitment and effort of these resellers. Electronic services may be sold under
the Company's name or under a private label of the reseller.  

  The Company's clients are generally able to reduce or cancel their use of the
Company's services without penalty and with little or no notice. As a result,
the Company believes that the number and size of its existing projects are not
reliable indicators or measures of future revenue. The Company has in the past
provided, and is likely in the future to provide, services to clients without a
written commitment or contract. When a client defers, modifies or cancels a
project, the Company must be able to rapidly redeploy network systems engineers
to other projects in order to minimize the underutilization of employees and the
resulting adverse impact on operating results. In addition, the Company's
operating expenses are relatively fixed and cannot be reduced on short notice to
compensate for unanticipated variations in the number or size of projects in
progress. As a result, any termination, significant reduction or modification of
its business relationships with any of its significant clients or with a number
of smaller clients could have a material adverse effect on the Company's
business, operating results and financial condition.
<PAGE>
 
  The Company's future success will also depend in large part on the development
of new business by the Company's account managers, who solicit new business and
manage relationships with existing clients. As a result, the Company's success
will depend on its ability to attract and retain qualified account managers who
have an understanding of the Company's business and the industry it serves.
Competition for account managers is intense and the Company has experienced, and
may in the future experience high rates of turnover among its account managers.
In addition, integration of new account managers into the Company's business can
be lengthy. Any inability of the Company to attract and retain a sufficient
number of account managers or to integrate new account managers into the
Company's operations on a timely basis, would impair the Company's ability to
obtain projects from new and existing clients which could have a material
adverse effect on the Company's business, operating results and financial
condition.


HUMAN RESOURCES

  The Company believes that its success in recruiting and retaining experienced,
highly-qualified and highly-motivated personnel will depend in part on its
ability to provide a rich environment and culture and to offer professional
development and financial opportunities. As of June 30, 1998, the Company
employed 1,353 persons, including 1,053 network systems engineers and managers.

  Recruiting. The success of the Company is dependent in part on attracting and
retaining talented, creative and motivated personnel at all levels. The Company
dedicates significant resources to its recruiting efforts. The Company generally
seeks to meet its hiring needs through referrals from existing INS employees,
through a nationwide network of recruiters and through the college graduate
program. The Company's network systems engineers together have expertise in a
wide array of computer and network systems of the Company's clients and a broad
understanding of the industries in which the Company's clients are involved.

  Corporate Culture. The Company believes that developing a rich environment and
culture is critical to its success in achieving its mission of becoming the
premier provider of services for complex enterprise networks. The Company
actively fosters a set of basic values, which were developed by its employees.
These values include a dedication to being the best, respecting others and
working as a team, continuous learning and development, trustworthiness and
empowerment. The Company encourages employees to use these values in daily
decision making and balance the interests of clients, shareholders and employees
to maximize long-term Company value. The Company believes that its growth and
success are attributable in large part to its high-caliber employees and the
Company's adherence to these values.

  Professional Development. Professional development includes career
opportunities and on-the-job challenges, as well as training programs. The
Company has two career tracks for consultants, a technical track and a
management track. The Company has established a training program, which includes
national and local consultative approach workshops, collaboration workshops, new
management training and technical training. In support of its curriculum, the
Company offers advanced training through on-site simulation labs and numerous
computer-based training modules. In addition, Knowledge Network serves as an
additional training and information resource. The Company's personnel keep
apprised of technological advances and developments through a combination of on-
the-job exposure to relevant technology, special training programs, peer review
and discussions, and supervision by seasoned technical personnel.

  Compensation. The Company believes that by linking employee compensation to
the success of the Company through its incentive compensation programs, the
Company encourages an owner attitude, which the Company believes results in
decisions that maximize the Company's value and employee retention. The
Company's compensation package consists of a combination of salary, performance-
based incentive compensation, stock options and benefit plans.
<PAGE>
 
  The Company's success will depend in part on the continued services of its key
employees. The Company does not have employment or non-competition agreements
with any of its key or other employees. The loss of services of one or more of
the Company's key employees could have a material adverse effect on the
Company's business, operating results and financial condition. In addition, if
one or more key employees joins a competitor or forms a competing company, the
loss of such employees and any resulting loss of existing or potential clients
to any such competitor could have a material adverse effect on the Company's
business, operating results and financial condition. In the event of the loss of
any such employee, there can be no assurance that the Company would be able to
prevent the unauthorized disclosure, or use, of the Company's, or its clients'
technical knowledge, practice or procedures by such personnel, or that such
disclosure, or use, would not have a material adverse effect on the Company's
business, operating results and financial condition.

  The Company's future success will depend in large part on its ability to hire,
train and retain network systems engineers who together have expertise in a wide
array of network and computer systems and a broad understanding of the
industries the Company serves. Competition for network systems engineers is
intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. In particular, competition is intense
for the limited number of qualified managers and senior network systems
engineers. The Company has experienced, and may in the future experience high
rates of turnover among its network systems engineers. Any inability of the
Company to hire, train and retain a sufficient number of qualified network
systems engineers could impair the Company's ability to adequately manage and
complete its existing projects or to obtain new projects, which, in turn, could
have a material adverse effect on the Company's business, operating results and
financial condition. The Company has experienced, and may in the future,
experience increasing compensation costs for its network systems engineers. Any
inability of the Company to recover increases in compensation of network systems
engineers through higher billing rates or to reduce other expenses to offset
such increases, could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, any inability of the
Company to attract and retain a sufficient number of qualified network systems
engineers in the future could impair the Company's planned expansion of its
business.


COMPETITION

  The network industry is comprised of a large number of participants and is
subject to rapid change and intense competition. With respect to professional
services, the Company faces competition from system integrators, value added
resellers ("VARs"), local and regional network services firms,
telecommunications providers, network equipment vendors, and computer systems
vendors, many of which have significantly greater financial, technical and
marketing resources and greater name recognition, and generate greater service
revenue than does the Company. With respect to electronic services, the Company
also faces competition from software vendors. The Company has faced, and expects
to continue to face, additional competition from new entrants into its markets.
Increased competition could result in price reductions, fewer client projects,
underutilization of employees, reduced operating margins and loss of market
share, any of which could materially adversely affect the Company's business,
operating results and financial condition. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors. The failure of the Company to compete successfully would have a
material adverse effect on the Company's business, operating results and
financial condition.

  In addition, most of the Company's clients have internal network support
services capabilities and could choose to satisfy their needs through internal
resources rather than through outside service providers. As a result, the
decision by the Company's clients or potential clients to perform network
services internally could have a material adverse effect on the Company's
business, operating results and financial condition.
<PAGE>
 
  The Company believes that the principal competitive factors in the market in
which it competes include the nature of the services offered, quality of
service, client responsiveness, marketing, management, corporate culture, client
relationships, knowledge base, infrastructure and price. The Company believes it
competes favorably with respect to these factors. The Company believes that its
focus, depth and breadth of expertise and experience, infrastructure and
management distinguish it from its competitors.

INTELLECTUAL PROPERTY

  The Company's success is dependent in part on its information technology, some
of which is proprietary to the Company, and other intellectual property rights.
The Company relies on a combination of nondisclosure and other contractual
arrangements, technical measures, and trade secret and trademark laws to protect
its proprietary rights. The Company has one patent application pending and
holds one registered trademark. The Company enters into confidentiality
agreements with its employees and attempts to limit access to and distribution
of proprietary information. There can be no assurance that the steps taken by
the Company in this regard will be adequate to deter misappropriation of
proprietary information or that the Company will be able to detect unauthorized
use or take appropriate steps to enforce intellectual property rights. The
Company has in the past entered into services contracts with clients that assign
rights to certain aspects of the work performed under such contracts to such
clients. The Company does not believe that such contracts will limit the
Company's ability to render its services to other clients. However, there can be
no assurance that the Company will not receive communications in the future from
third parties or clients asserting that the Company has infringed or
misappropriated the proprietary rights of such parties. Any such claims, with or
without merit, could be time consuming, result in costly litigation and
diversion of technical and management personnel or require the Company to
develop non-infringing technology or enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company or at all. In the event of a successful claim of
infringement or misappropriation against the Company and failure or inability of
the Company to develop non-infringing technology or license the infringed,
misappropriated, or similar technology, the Company's business, operating
results and financial condition could be materially adversely affected.

RISK FACTORS THAT MAY AFFECT OPERATING RESULTS

  The following risk factors could materially and adversely affect the Company's
future operating results and could cause actual events to differ materially from
those predicted in the Company's forward-looking statements related to its
business.


  Variability of Quarterly Operating Results. Substantially all of the Company's
revenue is derived from professional services, which are generally provided on a
"time and expenses" basis. Professional services revenue is recognized only when
network systems engineers are engaged on client projects. In addition, a
majority of the Company's operating expenses, particularly personnel and related
costs, depreciation and rent, are relatively fixed in advance of any particular
quarter. As a result, any underutilization of network systems engineers may
cause significant variations in operating results in any particular quarter and
could result in losses for such quarter. Factors which could cause such
underutilization include: the reduction in size, delay in commencement,
interruption or termination of one or more significant projects; the completion
during a quarter of one or more significant projects; the inability to obtain
new projects; the overestimation of resources required to complete new or
ongoing projects; and the timing and extent of training, weather related shut-
downs, vacation days and holidays. The Company's revenue and earnings may also
fluctuate from quarter to quarter based on a variety of factors including the
loss of key employees, an inability to hire and retain sufficient numbers of
network systems engineers and account managers, reductions in billing rates,
write-offs of billings, or services performed at no charge as a result of the
Company's failure to meet its clients' expectations, claims by the Company's
clients for the actions of the Company's employees arising from damages to
clients' business or 
<PAGE>
 
otherwise, competition, timing of employment taxes, the development and
introduction of new services, decrease or slowdown in the growth of the
networking industry as a whole and general economic conditions. The Company's
operating results may also fluctuate based upon the ongoing market acceptance
and the timing and size of orders for electronic services (see "Risks Associated
with Electronic Services") which are difficult to forecast. If an unanticipated
order shortfall for electronic services occurs, the Company's operating results
could be materially adversely affected, particularly because margins are higher
on electronic services than professional services. In addition, the Company
plans to continue to expand its operations based on sales forecasts by hiring
additional network systems engineers, account managers and other employees, and
adding new offices, systems and other infrastructure. The resulting increase in
operating expenses would have a material adverse effect on the Company's
operating results if revenue were not to increase to support such expenses.
Based upon all of the foregoing, the Company believes that quarterly revenue and
operating results are likely to vary significantly in the future and that 
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied on as indications of future performance.
Furthermore, it is likely that in some future quarter the Company's revenue or
operating results will be below the expectations of public market analysts or
investors. In such event, the price of the Company's common stock would likely
be materially adversely affected.

    Risks Associated with Client Concentration; Absence of Long-Term Agreements.
The Company has derived a significant portion of its revenue from a limited
number of large clients and expects this concentration to continue. No one
client, however, accounted for more than 10% of the Company's revenue for the
year ended June 30, 1998. There can be no assurance that revenue from clients
that have accounted for significant revenue in past periods, individually or as
a group, will continue, or if continued will reach or exceed historical levels
in any future period. The Company has, in the past, experienced declines in
revenue from clients that have accounted for significant revenue. In addition,
the Company generally does not have a long-term services contract with any of
its clients. The Company's clients are generally able to reduce or cancel their
use of the Company's professional services without penalty and with little or no
notice. As a result, the Company believes that the number and size of its
existing projects are not reliable indicators or measures of future revenue.
When a client defers, modifies or cancels a project, the Company must be able to
rapidly redeploy network systems engineers to other projects in order to
minimize the underutilization of employees and the resulting adverse impact on
operating results. In addition, the Company's operating expenses are relatively
fixed and cannot be reduced on short notice to compensate for unanticipated
variations in the number or size of projects in progress. As a result, any
significant reduction in the scope of the work performed for any significant
client or a number of smaller clients, the failure of anticipated projects to
materialize, or deferrals, modifications or cancellations of ongoing projects by
any of these clients could have a material adverse effect on the Company's
business, operating results and financial condition.

    Need to Attract and Retain Qualified Network Systems Engineers. The
Company's future success will depend in large part on its ability to hire, train
and retain network systems engineers who together have expertise in a wide array
of network and computer systems and a broad understanding of the industries the
Company serves. Competition for network systems engineers is intense, and there
can be no assurance that the Company will be successful in attracting and
retaining such personnel. In particular, competition is intense for the limited
number of qualified managers and senior network systems engineers. The Company
has experienced, and may in the future experience high rates of turnover among
its network systems engineers. Any inability of the Company to hire, train and
retain a sufficient number of qualified network systems engineers could impair
the Company's ability to adequately manage and complete its existing projects or
to obtain new projects, which, in turn, could have a material adverse effect on
the Company's business, operating results and financial condition. The Company
has experienced, and may in the future, experience increasing compensation costs
for its network systems engineers. Any inability of the Company to recover
increases in compensation of network systems engineers through higher billing
rates or to reduce other expenses to offset such increases, could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, any inability of the Company to attract and
retain a 
<PAGE>
 
sufficient number of qualified network systems engineers in the future could
impair the Company's planned expansion of its business.

    Dependence on New Business Development. The Company's future success will
also depend in large part on the development of new business by the Company's
account managers, who solicit new business and manage relationships with
existing clients. As a result, the Company's success will depend on its ability
to attract and retain qualified account managers who have an understanding of
the Company's business and the industry it serves. Competition for account
managers is intense and the Company has experienced, and may in the future
experience high rates of turnover among its account managers. In addition,
integration of new account managers into the Company's business can be lengthy.
Any inability of the Company to attract and retain a sufficient number of
account managers or to integrate new account managers into the Company's
operations on a timely basis, would impair the Company's ability to obtain
projects from new and existing clients which could have a material adverse
effect on the Company's business, operating results and financial condition.

    Risks Associated with Electronic Services. The Company's long-term strategy
is to derive a significant portion of its revenue from electronic services. The
Company has expended, and expects to continue to expend, substantial amounts in
the development and marketing of its electronic services. The introduction of
EnterprisePRO and any other electronic services that the Company may develop in
the future will be subject to risks generally associated with new service
introductions, including delays in development, testing or introduction, or the
failure to satisfy clients' requirements.

    Management of Growth. The Company has recently experienced a period of rapid
revenue and client growth and an increase in the number of its employees and
offices and in the scope of its supporting infrastructure. The Company does not
believe this rate of growth is sustainable. This growth has resulted in new and
increased responsibilities for management personnel and has placed and continues
to place a significant strain on the Company's management and operating and
financial systems. The Company will be required to continue to hire management
personnel and improve its systems on a timely basis and in such a manner as is
necessary to accommodate any increase in the number of transactions and clients,
any increase in the size of the Company's operations and any introduction of new
products and services. There can be no assurance that the Company's management
or systems will be adequate to support the Company's existing or future
operations. Any failure to implement and improve the Company's systems or to
hire and retain the appropriate personnel to manage its operations would have a
material adverse effect on the Company's business, operating results and
financial condition.

    Intense Competition. The network industry is comprised of a large number of
participants and is subject to rapid change and intense competition. With
respect to professional services, the Company faces competition from system
integrators, VARs, local and regional network services firms, telecommunications
providers, network equipment vendors, and computer systems vendors, many of
which have significantly greater financial, technical and marketing resources
and greater name recognition, and generate greater service revenue than does the
Company. With respect to electronic services, the Company also faces competition
from software vendors. The Company has faced, and expects to continue to face,
additional competition from new entrants into its markets. Increased competition
could result in price reductions, fewer client projects, underutilization of
employees, reduced operating margins and loss of market share, any of which
could materially adversely affect the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able to
compete successfully against current or future competitors. The failure of the
Company to compete successfully would have a material adverse effect on the
Company's business, operating results and financial condition.

    Risks Associated With Potential Acquisitions. As part of its business
strategy, the Company may make acquisitions of, or significant investments in,
complementary companies, products or technologies. Any such future transactions
would be accompanied by the risks commonly encountered in making acquisitions of
companies, products and technologies. Such risks include, among others, the
difficulty 
<PAGE>
 
associated with assimilating the personnel and operations of acquired companies,
the potential disruption of the Company's ongoing business, the distraction of
management and other resources, the inability of management to maximize the
financial and strategic position of the Company through the successful
integration of acquired personnel, technology and rights, the maintenance of
uniform standards, controls, procedures and policies, and the impairment of
relationships with employees and clients as a result of the integration of new
management personnel. There can be no assurance that the Company will be
successful in overcoming these risks or any other problems encountered in
connection with any such acquisitions.

    Risks Associated With Potential International Expansion. A component of the
Company's long-term strategy is to expand into international markets. The
Company provides professional services to certain of its United States clients
in foreign locations.  The Company has opened an office in the United Kingdom to
serve its clients in Europe and an office in Toronto to serve its clients in
Canada. To date, revenue generated from international operations has not been
significant. There is no assurance that the revenue generated from international
operations will be adequate to offset the expense of establishing and
maintaining these foreign operations, and if revenue does not materialize as
anticipated, the Company's business, operating results and financial condition
could be materially adversely affected. There can be no assurance that the
Company will be able to successfully market, sell and deliver its services in
international markets. In addition to the uncertainty as to the Company's
ability to expand into international markets, there are certain risks inherent
in conducting business on an international level, such as unexpected changes in
regulatory requirements, export restrictions, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, employment laws and
practices in foreign countries, longer payment cycles, problems in collecting
accounts receivable, political instability, fluctuations in currency exchange
rates, imposition of currency exchange controls, seasonal reductions in business
activity during the summer months in Europe and certain other parts of the
world, and potentially adverse tax consequences, any of which could adversely
impact the success of the Company's international operations. There can be no
assurance that one or more of these factors will not have a material adverse
effect on the Company's future international operations and,  consequently, on
the Company's business, operating results and financial condition. There can be
no assurance that the Company will be able to  compete effectively in these
markets.


    Relationship with Cisco Systems. Although the Company is a vendor
independent provider of network services, the Company has a significant
relationship with Cisco and believes that maintaining and enhancing this
relationship is important to the Company's business due to Cisco's leading
position in the large scale enterprise internetworking market. Cisco develops,
manufactures, markets and supports high-performance, multiprotocol
internetworking systems that link geographically dispersed LANs and WANs. The
Company has entered into direct relationships with clients as a result of
referrals from Cisco and provides services directly to Cisco, primarily as a
subcontractor. In addition, during the quarter ended December 31, 1997, the
Company entered into a resale agreement with Cisco, whereby Cisco's sales
organization will market EnterprisePRO to its customers and INS will deliver and
administer the service. In addition, Cisco is a shareholder of the Company and
an officer of Cisco is a member of the Company's Board of Directors. Although
the Company believes that its relationship with Cisco is good, there can be no
assurance that the Company will be able to maintain or enhance its relationship
with Cisco. Any deterioration in the Company's relationship with Cisco could
have a material adverse effect on the Company's business, operating results and
financial condition. In addition, should the Company's relationship with Cisco
be perceived as compromising the Company's ability to provide unbiased
solutions, the Company's relationship with existing or potential clients could
be materially adversely affected.


     Year 2000.  The year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year.
Computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a major
system failure or miscalculations. The year 2000 issue creates risk for the
Company from unforeseen problems in its own computer systems and from third
parties. Failure of the Company's and/or third 
<PAGE>
 
parties' computer systems could have a material adverse impact on the Company's
ability to conduct its business. The Company is currently reviewing its
products, its internal computer systems and systems of third parties on which
the Company relies for handling the year 2000. Based on information available to
date, the Company believes that it will be able to complete its year 2000
compliance review and make any necessary modifications to its products and
internal systems prior to the end of 1999. The Company further believes that
such review and modification, if any, will not require the Company to incur any
material charge to operating expenses over the next several years. The Company
is also seeking confirmation from third parties that their systems are year 2000
compliant or that plans are being developed to address the year 2000 problem.
However, there can be no assurance that such third-party systems will be year
2000 compliant or that the failure of such systems to be year 2000 compliant
would not have a material adverse effect on the Company's financial position or
results of operations. The Company believes its current electronic service
offering, EnterprisePro, is year 2000 compliant.


ITEM 2.   PROPERTIES

  The Company's principal administrative, sales, marketing and service
development facilities are located in approximately 47,000 square feet in two
buildings in Sunnyvale, California pursuant to leases which expire in 2001 and
2005. In addition, the Company leases field support offices in 36 cities. The
field offices range from small executive offices to a 7,000 square foot
facility. Lease terms range from month-to-month on certain executive offices to
five years on certain direct leases.  Because the Company's professional
services are generally performed at the client site, field facilities are
generally small. Field facilities are generally used for periodic meetings,
training and administration and by account managers. The Company has field
facilities in Atlanta, Georgia; Austin, Texas; Boston, Massachusetts;
Burlington, Massachusetts; Charlotte, North Carolina; Chicago, Illinois;
Cleveland, Ohio; Columbus, Ohio; Costa Mesa, California; Dallas, Texas; Denver,
Colorado; Detroit, Michigan; Ft. Lauderdale, Florida; Hartford, Connecticut;
Houston, Texas; Iselin, New Jersey; Jacksonville, Florida; Kansas City, Kansas;
Los Angeles, California; Minneapolis, Minnesota; New York, New York; Parsippany,
New Jersey; Philadelphia, Pennsylvania; Phoenix, Arizona; Quincy, Massachusetts;
Raleigh, North Carolina; Sacramento, California; San Antonio, Texas; San Diego,
California; San Mateo, California; San Ramon, California; Seattle, Washington;
Tampa, Florida; Tulsa, Oklahoma; Washington, D.C., and Woodland Hills,
California.  The Company is continually evaluating the adequacy of existing
facilities and facilities in new cities and believes that suitable additional
space will be available in the future on commercially reasonable terms as
needed.


ITEM 3.   LEGAL PROCEEDINGS


The Company is not party to any material legal proceedings.


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

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
<PAGE>
 
                                    PART II
                                        
ITEM 5.   MARKET FOR COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER
          MATTERS

     The Company's Common Stock has been traded on the Nasdaq National Market
under the trading symbol "INSS" since the Company's initial public offering on
September 18, 1996. The following table sets forth the high and low sale prices
per share of the Company's Common Stock for the periods indicated.

<TABLE>
<CAPTION>
Fiscal 1997                                                          High             Low
                                                                     ----             ---
<S>                                                             <C>              <C>
   First Quarter (from September 18, 1996)                          $39.75           $28.00

   Second Quarter                                                   $51.88           $26.13

   Third Quarter                                                    $39.00           $17.94

   Fourth Quarter                                                   $27.75           $15.50

Fiscal 1998                                                     

   First Quarter                                                    $28.75           $19.38

   Second Quarter                                                   $24.00           $16.00

   Third Quarter                                                    $29.88           $21.00

   Fourth Quarter                                                   $40.63           $27.50
</TABLE>


     As of September 14, 1998, the Company had 230 shareholders of record. The
price for the Common Stock on the close of business on September 14, 1998 was
$36.50 per share. The Company has never paid any cash dividends on its Common
Stock. The Company intends to retain any earnings for use in its business and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future.


ITEM 6.   SELECTED FINANCIAL DATA

     The information required by this item is incorporated by reference to the
     section entitled "Selected Financial Data" in the 1998 Annual Report.


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

     The information required by this item is incorporated by reference to the
     section entitled "Management's Discussion and Analysis of Financial
     Condition and Results of Operations" in the 1998 Annual Report.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The information required by this item is incorporated by reference to the
     section entitled "Management's Discussion and Analysis of Financial
     Condition and Results of Operations - Market Risk" in the 1998 Annual
     Report.
<PAGE>
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information required by this item is incorporated by reference to the
     section entitled "Financial Statement" in the 1998 Annual Report.

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

     Not applicable
<PAGE>
 
                                   PART III
                                        
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

     The information required by this item concerning the Company's directors
and executive officers is incorporated by reference to the information set forth
in the sections entitled "Election of Directors" and "Executive Officer
Compensation" in the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders to be filed with the Commission within 120 days after the end of
the Company's fiscal year ended June 30, 1998.



ITEM 11. EXECUTIVE COMPENSATION

     The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the sections entitled
"Election of Directors -- Director Compensation" and "Executive Officer
Compensation" in the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders to be filed with the Commission within 120 days after the end of
the Company's fiscal year ended June 30, 1998.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement for the 1998
Annual Meeting of Shareholders to be filed with the Commission within 120 days
after the end of the Company's fiscal year ended June 30, 1998.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section entitled "Certain Transactions" in the Company's Proxy Statement
for the 1998 Annual Meeting of Shareholders to be filed with the Commission
within 120 days after the end of the Company's fiscal year ended June 30, 1998.
<PAGE>
 
                                    PART IV
                                        
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a) The following documents are filed as part of this Form 10-K:

         1.    Financial Statements.  The following  financial statements of the
         Company and the Report of Independent Accountants thereon are
         incorporated by reference to the portions of the Company's 1998 Annual
         Report filed as Exhibit 13.1 to this Form 10-K:

      Consolidated Balance Sheets at June 30, 1997 and 1998
      Consolidated Statements of Income for each of the three years in the
        period ended June 30, 1998
      Consolidated Statements of Shareholders' Equity for each of the three
        years in the period ended June 30, 1998
      Consolidated Statements of Cash Flows for each of the three years in the
        period ended June 30, 1998
      Notes to Consolidated Financial Statements
      Report of Independent Accountants

         2.    Financial Statement Schedule.  The following financial statement
         schedule of the Company for each of the three years in the period ended
         June 30, 1998 is filed as part of this Form 10-K and should be read in
         conjunction with the Financial Statements, and related notes thereto,
         of the Company.

             Report of Independent Accountants on Financial Statement Schedule
 
             Schedule II--Valuation and Qualifying Accounts and Reserves

                Schedules not listed above have been omitted since they are
         either not required, not applicable, or the information is otherwise
         included.

         3.    Exhibits:  See Item 14(c) below.

     (b) Reports on Form 8-K. No Reports on Form 8-K were filed during the
     fourth quarter ended June 30, 1998.

     (c) Exhibits.  The exhibits listed on the accompanying index to exhibits
     immediately following the financial statement schedule are filed as part
     of, or incorporated by reference into, this Form 10-K.

     (d) Financial Statement Schedule.  See Item 14(a)2 above.
<PAGE>
 
                                  SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 24th day of
September, 1998.

                                International Network Services


                                By:  /s/ Kevin J. Laughlin
                                   -------------------------------------------
                                    Kevin J. Laughlin
                                    Vice President, Finance,
                                    Chief Financial Officer, Secretary


                               POWER OF ATTORNEY

  KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Donald K. McKinney and Kevin J. Laughlin
and each of them, jointly and severally, his attorneys-in-fact, each with full
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each said attorneys-in-fact
or his substitute or substitutes, may do or cause to be done by virtue hereof.

  Pursuant to the requirements of the Securities Exchange Act of 1934, this Form
10-K has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
            Signature                                         Title                                     Date
<S>                                 <C>                                                         <C>
 
    /s/ Donald K. McKinney          Chairman of the Board (Principal Executive Officer)          September 24, 1998
  ----------------------------                                                                   ------------------
  Donald K. McKinney
 
    /s/ Kevin J. Laughlin           Vice President, Finance, Chief Financial Officer and         September 24, 1998
  ----------------------------                                                                   ------------------
  Kevin J. Laughlin                 Secretary (Principal Financial and Accounting Officer)
 
 
    /s/ John L. Drew                                                                             September 24, 1998
  ----------------------------                                                                   ------------------
  John L. Drew                      President, Chief Executive Officer and Director
 
    /s/ Douglas C. Allred                                                                        September 24, 1998
  ----------------------------                                                                   ------------------
  Douglas C. Allred                 Director
 
    /s/ Vernon R. Anderson                                                                       September 24, 1998
  ----------------------------                                                                   ------------------
  Vernon R. Anderson                Director
 
    /s/ David Carlick                                                                            September 24, 1998
  ----------------------------                                                                   ------------------
  David Carlick                     Director
 
    /s/ Lawrence G. Finch                                                                        September 24, 1998
  ----------------------------                                                                   ------------------
  Lawrence G. Finch                 Director
</TABLE>
<PAGE>
 
                        INTERNATIONAL NETWORK SERVICES
                                        
         SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                       Additions
                                                                      -----------  
                                                         Balance at   Charged to                             
                                                         Beginning     Costs and                 Balance at  
                    Description                           of Year      Expenses     Deductions   End of Year 
                    -----------                          ---------    ----------   ------------  -----------
<S>                                                  <C>           <C>          <C>           <C> 
Allowance for returns and doubtful accounts:
   Year Ended June 30, 1996                                  $221       $  610      $  (277)       $  554

   Year Ended June 30, 1997                                  $554       $  561      $  (527)       $  588
 
   Year Ended June 30, 1998                                  $588       $2,690      $(1,810)       $1,468
 
</TABLE>
<PAGE>
 
       REPORT OF INDEPENDENT ACCOUNTANT ON FINANCIAL STATEMENT SCHEDULE
                                        
To the Board of Directors of International Network Services

Our audits of the consolidated financial statements referred to in our report
dated July 24, 1998, except for Note 9 which is dated as of August 25,1998,
appearing in the 1998 Annual Report to Shareholders of International Network
Services (which report and consolidated financial statements are incorporated by
reference in this Annual Report on Form 10-K) also included an audit of the
Financial Statement Schedule listed in Item 14(a)2 of this Form 10-K. In our
opinion, this Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP
San Jose, California
July 24, 1998
<PAGE>
 
                                 EXHIBIT INDEX


Exhibit                            Exhibits                                 Page
  No.

 3.1   Amended and Restated Articles of Incorporation. (1)

 3.2   Amended and Restated Bylaws. (1)

 4.1   Reference is made to Exhibits 3.1, and 3.2.

 4.2   Specimen Common Stock Certificate. (1)

 4.3   Investors' Rights Agreement between the Registrant and the 
       parties named therein dated June 11, 1993, as amended. (1)

10.1*  Form of Indemnification Agreement entered into between the 
       Registrant and each of the executive officers and directors 
       and certain key employees. (1)

10.2*  Amended and Restated 1992 Flexible Stock Incentive Plan, as 
       amended, and forms of agreements thereto. (1)

10.3*  1996 Stock Plan and form of agreement thereto. (1)

10.4*  1996 Employee Stock Purchase Plan.  (1)

10.5   Lease Agreement between the Registrant and Aetna Life 
       Insurance Company dated May 8, 1996. (1)

10.6   Lease Agreement between the Registrant and John Hancock 
       Mutual Life Insurance Company dated December 8, 1997.

10.7   Credit Agreement between the Registrant and Wells Fargo Bank 
       dated August 14, 1998

10.8   1998 Non Statutory Stock Option Plan

10.9*  Form of Change of Control Agreement entered into between the 
       Registrant and each of the executive officers

13.1   Portions of the Annual Report to Shareholders for the fiscal 
       year ended June 30, 1998, expressly incorporated by reference 
       herein.

23.1   Consent of PricewaterhouseCoopers LLP, Independent Accountants.

24.1   Power of Attorney (see page 20).

27.1   Financial Data Schedule.
-----------
*   Indicates management compensatory plan, contract or arrangement.
(1) Incorporated by reference to the Registrant's Registration Statement on Form
    S-1 (File No. 333-9287) declared effective on September 18, 1996.