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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-KSB  þ
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004  o
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from  to Commission File Number: 0-24031 INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.  South Carolina
    
    57-0910139(State of Incorporation)
    
    (IRS Employer Identification No.)1601 Shop Road, Suite E
    
    29201Columbia, South Carolina
    
    (Zip Code)(Address of Principal Executive Offices)
 Issuers Telephone Number: (803) 736-5595 Securities registered under Section 12(b) of the
    
    Name of Each Exchange on Which Registered:Exchange Act:
    
    NoneNone
 Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of Class) 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 þ No o Check if there is no 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. þ The issuers revenues for the year ended December 31, 2004, the issuers most recent fiscal year,
were $2,028,055. The aggregate market value of voting and non-voting common stock held by non-affiliates of the
issuer on February 28, 2005 was approximately $3,456,000. This value was calculated by excluding
all shares held by officers, directors and controlling stockholders of issuer without conceding
that all such persons are affiliates of the issuer for purposes of the federal securities laws. The number of shares outstanding of the issuers common stock, no par value, on February 28, 2005 was 32,510,400. Transitional Small Business Disclosure Format (Check one): Yes o No þ




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TABLE OF CONTENTS PagePART IItem 1.
    
    Description of Business
    
    
    3Item 2.
    
    Description of Property
    
    
    9Item 3.
    
    Legal Proceedings
    
    
    9Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    9PART IIItem 5.
    
    Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
    
    
    10Item 6.
    
    Managements Discussion and Analysis or Plan of Operation
    
    
    12Item 7.
    
    Financial Statements
    
    
    20Item 8.
    
    Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    20Item 8A.
    
    Controls and Procedures
    
    
    20Item 8B.
    
    Other Information
    
    
    20PART IIIItem 9.
    
    Directors and Executive Officers of the Registrant
    
    
    21Item 10.
    
    Executive Compensation
    
    
    23Item 11.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    27Item 12.
    
    Certain Relationships and Related Transactions
    
    
    28Item 13.
    
    Exhibits
    
    
    29Item 14.
    
    Principal Accountant Fees and Services
    
    
    29Signatures
    
    
    31Financial Statement Index
    
    
    F-1Exhibit Index
    
    
    32
 Statements in this Annual Report on Form 10-KSB include forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act) and
Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).
Forward-looking statements include statements concerning our plans, objectives, goals, strategies,
future events, future revenues or performance, capital expenditures, financing needs, plans or
intentions relating to acquisitions, our competitive strengths and weaknesses, our business
strategy and the trends we anticipate in the industry and economies in which we operate and other
information that is not historical information. You can identify a forward-looking statement by
our use of the words anticipate, estimate, expect, intend, plan, may, will,
continue, believe, objective, projection, forecast, goal, and similar expressions. No
assurance can be given that actual results or events will not differ materially from those
projected, estimated, assumed or anticipated in any such forward-looking statements. There are a number of risks and uncertainties that could cause our actual results to differ
materially from the forward-looking statements contained in this Annual Report. We do not undertake
any obligation to revise these forward-looking statements to reflect future events or
circumstances. Presently known Risk Factors, which are included in Exhibit 99.1 of this Annual
Report and which could impact our forward-looking statements, include, but are not limited to, the
following factors: (i) substantial leverage and indebtedness of the Company; (ii) going concern
issues raised by our auditors; (iii) most of our sales are attributable to one or two principal
customers; (iv) existence of a large accumulated operating deficit; (v) significant unanticipated
fluctuations in our actual or anticipated quarterly revenues and operating results; (vi) the
possibility of slow or impaired performance of our software products; and (vii) a wide variety of
risks specific to the software industry. We file our Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB, proxy
statements, Current Reports on Form 8-K, and other reports filed or furnished pursuant to Section
13(a) or 15(d) under the Exchange Act with the Securities and Exchange Commission (Commission or
SEC). These reports are available as soon as reasonably practicable after we electronically file
such materials with the Commission. The reports are also available in print to any shareholder who
requests them by contacting our corporate secretary at the address above for the Companys
principal executive offices. 2




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PART I Item 1. Description of Business General Overview Incorporated in 1990 in Columbia, South Carolina, Integrated Business Systems and Services,
Inc. (IBSS) originated as a systems integrator for Automatic Data Collection (ADC) systems used in
manufacturing and for specialty on-line transaction processing in the credit card industry. IBSS
has used its core technology, Synapse, its experience, along with its proven
methodology, to develop, market and sell custom solutions for a variety of customer-specific needs
in a number of vertical markets. IBSS ability to respond to a customers unique set of needs and to rapidly produce solutions
specific to those needs is the companys primary advantage. This advantage would not have been
possible if it were not for the Companys key asset,  Synapse, a development and
deployment platform optimized for dynamic, distributed, real-time software applications capable of
processing millions of sub-second transactions. With Synapse, IBSS creates customer specific solutions quickly and easily without
the need to rely on any other vendors technologies, thus dramatically lowering the risks and costs
of providing these solutions and eliminating dependence on third-party software technology
components or licensing to support development, integration and deployment of these solutions. The fact that IBSS does not have to rely on vendors like Microsoft, Oracle, IBM, or others for
the development architecture and framework, or pay run-time license fees for deployment of its
applications, gives IBSS a unique advantage in the marketplace by virtue of increased business
leverage and control, added financial security and licensing and pricing flexibility. Over the years, Synapse has matured and broadened, gaining refinements and
extensions that make it, now more than ever, very comprehensive with broad application for the
development and deployment of integrated enterprise wireless computing and Radio Frequency
Identification (RFID) solutions, as well as many other transaction-centric applications. The management of IBSS intends to exploit the Synapse technology platform and to
concentrate the efforts of the Company on packaging the technology as a development and deployment
product as well as continue to package certain application products based upon the
Synapse engine for cross-vertical opportunities marketed through both direct and
indirect marketing channels. Synapse provides a framework and methodology for creating, implementing and
managing a wide variety of real-time enterprise applications, quickly and efficiently, across
multiple locations (such as headquarters and field offices). This flexible, connectable IBSS
software platform is especially valuable when automating transaction oriented business processes.
The Synapse platform combined with IBSS methodology greatly simplifies the creation of
new applications, the integration of disparate systems and the incorporation of emerging
technologies, like wireless and auto-ID, where a lack of standards or protocols and the constant
introduction of new devices are the norm. Synapse delivers advantages in time and cost
savings in the development, deployment and on-going management of customized applications. IBSS
continues to enhance the product, most recently introducing Synapse Composer, a
powerful, simplified management tool, and Synapse Thin Web, a powerful, high
performance thin client which can be configured from within Synapse. For now, the Companys Synapse marketing is primarily aimed at wireless mobile
computing applications (RF terminals, PDAs, wearable computers, laptops, Pocket PCs and tablet
computers) and automatic-identification technologies (RFID electronic tagging, bar-code data
collection, and other on-line real time machine-to-machine (M2M) applications). The move to RFID
is being facilitated by widespread adoption of Electronic Product Codes (EPC) that permits tagged
objects to be tracked via the Internet. While IBSS markets its products and services to a wide variety of companies and industries, it
is currently dependent on key relationships with two primary customers that represent approximately
95% of fiscal 2004 revenues. 3




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The
SynapseTechnology Synapse is designed to be the glue in heterogeneous environments, easily
interacting with and extending disparate and best-of-breed applications and operating environments,
database management systems, and legacy applications. The Company believes that one of the
greatest challenges for information technology (IT) organizations is the fact that todays
technologies do not adequately address the complexity inherent in aggregating applications from
distributed systems, networks, and devices. Synapse is designed to provide a complete
integrated development and implementation platform that reacts in business process terms, not
procedural language-based programmer terms  an environment capable of defining and maintaining the
entire enterprises topology. Synapse is designed to extend the functionality of legacy
systems, integrate rapidly, and extend business functionality, allowing the customer to quickly
embrace and deploy new standards as they emerge without starting over or re-creating applications. SynapseAdvantages Synapse-based applications offer many advantages to organizations in monitoring,
maintaining and integrating their business systems, applications and processes, both internally and
with their external electronic relationships.  Incrementally Deployed Synapses incremental deployment feature allows
for the solving of point specific solutions now, while providing for easy expansion later, over
time. This lets the user quickly solve problems today and facilitates additional enhancements in a
rapidly changing environment. Application deployment can be planned and executed in manageable
increments. This allows real cost savings and productivity enhancements to begin accruing to the
benefit of the customer much more quickly than is possible with the traditional database model.  Completely Self-Contained By being fully self-contained, Synapse
enables organizations to describe any distributed application without the use of other third-party
supporting software. In addition, no third-party programming tool is needed to modify or extend
Synapse functionality in order to deliver the desired application.  Real-Time Distributed With its real-time and naturally distributed architecture,
Synapse is designed to allow any business to instantaneously update its entire system
through any Synapse node on the enterprise network, thereby eliminating an
organizations reliance on a central critical server, while maintaining efficient management of
applications among systems. It is also designed to take advantage of an organizations existing
investments in information technologies by working with and connecting to multiple financial, human
resource and enterprise resource planning systems. As a result, application development is greatly
simplified, and businesses can extend the life and functionality of their existing applications. Existing SynapseLicensed Offerings Our objective is to become the nations vendor-of-choice among businesses seeking the most
advanced and cost-effective tracking and integration solutions. We are currently focusing the
marketing of our Synapse-based offerings through the following four modules: SynTrack The Company recently announced (January 4, 2005) the immediate availability of its new
intelligent tracking application product, SynTrack.Enabled by Synapse,
SynTrack is initially bundled to aid the healthcare industry in reducing costs and
improving patient care by intelligently tracking personnel and assets. SynTrack uses
RFID technology to efficiently manage hospital staff and equipment, and enables healthcare
professionals to benefit from improved asset management. In addition to being a powerful asset tracking application, SynTrack is also a
multi-technology framework which allows most ADC technology to be defined and integrated into its
functionality. IBSS will continue to select RFID and wireless technology partners and announce the
addition of pre-configuration for their products to SynTrack. Today, customers
purchasing SynTrack may avail themselves of the IBSS integration services to configure
support for new interfaces and devices. Based upon those experiences, IBSS will add pre-configured
support for new technologies to subsequent releases of SynTrack. 4




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Synapse Composer Sold as a bundle with IBSS integration services that utilize Synapse project
methodology, the Synapse Composer integrated development environment provides a
complete framework for the efficient creation, execution, integration and management of wireless
on-line transaction processing applications. It handles all of an organizations wireless and
automatic identification software needs within a single productive framework. Synapse Composer is a next generation software application development tool that
enables the developer to see all of the functional components of the customers software
applications  spanning browser, web server, application server, database server, and integration
with other systems   in a single view. Armed with this unified view of the customers entire
system, the customer can create, troubleshoot and modify every dimension of its software
applications, all in real time, and all while the customers systems are up and running. Synapse Enterprise Application Server The operating environment supporting every Synapse application, the Synapse
Enterprise Application Server provides a complete runtime framework for the efficient
execution, integration and management of on-line transaction processing applications. It is
capable of supporting all of an organizations wireless, mobile data, tracking and automatic
identification software functions within one productive framework, assuring maximum efficiency in
the deployment and management of dynamic, distributed applications. Synapse for Manufacturing Synapse for Manufacturing (configurable execution management and data collection)
bundles the integration capability of the Synapse architecture with application modules
capable of fully automating the manufacturing plant. Synapse for Manufacturing , first
released in September 2000, is a powerful manufacturing execution management system (MES) that
enables the sharing of real-time information with the manufacturing plant, the manufacturers
customers, the supply chain and the manufacturers corporate headquarters. This system enables
on-line process management for manufacturing shop floor environments, leveraging
Synapse to maximize the flexibility, maintainability and efficiency of our customers
systems. The product is designed so that a manufacturing or industrial analyst can configure the
unique processes and process requirements of a manufacturing facility without the typical costs and
development time associated with the application programming required of competing MES
applications. Based upon a bill of operations concept, Synapse for Manufacturing can be
configured to provide detailed shop floor process management for any specific manufacturing
facility, in many cases without requiring the customer to modify existing manufacturing shop floor
methodologies or procedures. As a result, customers are able to achieve a return on their IT
investment more quickly than by using other MES systems. Other MES applications are based on
current application development tools to achieve configurable shop floor applications specific to
individual manufacturing industries such as electronics, food processing or pharmaceuticals.
Synapse for Manufacturing is designed to allow a manufacturing industrial analyst to
configure MES applications for any manufacturing industry, effectively eliminating the need to also
involve traditional computer programmers for custom software development. Synapse-based Partner OEM Offerings PDS Express PDS Express, developed through a joint endeavor with Prospect Airport Services, Inc., one of
the nations leading providers of contracted services to major airlines, utilizes a variety of
rugged wireless hand-held mobile devices and provides seamless real-time integration with airline
reservation systems. Powered by Synapse, PDS Expressprovides Prospects Passenger
Service Attendants, supervisors and dispatchers with the accurate, time-sensitive dispatch and
on-line flight information necessary to electronically log passenger pick-up and delivery, along
with real-time access and connectivity with Prospects on-site operations center. 5




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Customer Support Customer support is provided for all of our customers who have subscribed to IBSS maintenance
support. IBSS customer support is staffed by experienced IBSS professionals focused on resolving
problems and assuring that our customers are satisfied. Our Customer Support Center is available
24 hours a day, 7 days a week. Consulting Services and the SynapseMethodology IBSS offers a variety of consulting services to our customers and to third-party integrators,
including implementation assistance, project planning, process design, and system configuration
and implementation. IBSS professionals can provide these services directly, offering the customer
a full range of business process re-engineering, customization, implementation, project management,
and on-going support services. SynapseMethodology Overview  Services and Deliverables IBSS has developed an optimized methodology for applying Synapse. The
Synapse methodology emphasizes rapid prototyping at every stage of a project to
validate assumptions and mitigate the risk of not meeting the original desired results as reflected
in function, cost, and time to market of the proposed project. At the heart of the
Synapse methodology is the overall ability to describe any distributed application
using only Synapse. When combined with open source tools like Linux,
Synapse and IBSS become an extremely cost effective development option. Customer Education and Training We offer comprehensive training courses for our customers and partners with the goal of
ensuring each customers success with our software applications. Training is also available for
third-party consultants. Services include project team training classes, end-user training classes
and consulting services. Sales and Marketing IBSS is focused on marketing its application products based upon its proprietary
Synapse software to a broad array of commercial and governmental entities, via its
direct sales force and through newly enabled as well as established third-party resellers.
Synapse-based solutions cut costs by efficiently integrating data from myriad
collection devices, processing systems and branded software products, giving field personnel and
headquarters managers see-through vision to track products, people and information across
divisions and around the world. The Company is seeking to build a cadre of indirect resellers made up of businesses that
dominate specific vertical market niches or specialize in targeted vertical or horizontal end-user
markets. Indirect channel vertical market targets include manufacturing/supply chain; healthcare
including hospitals; distribution, for cross-vertical applications like mobile field service and
asset tracking. Because the Company controls its own technology, it can offer an attractive range of flexible
licensing packages to its partners, including server licensing, concurrent user licensing, and
licenses for vertical and advanced option components. This allows the control of branding,
security, and licensing to be offered to both OEM and reseller relationships. Our Sales and Growth Strategies Expand and Leverage Strategic Relationships.We intend to access new markets and distribution
channels by continuing to establish and leverage business relationships with organizations who
bring new vertical market expertise, where IBSS can help them build and deploy new products for
their use and for resale in their vertical market. As a result, we expect to enhance our customer
base, cultivate additional market expertise, and achieve our growth objectives more quickly and
cost-effectively. Target Vertical Markets with Industry-Focused Solutions.We believe that we have a
competitive edge in providing e-business solutions to organizations requiring the rapid creation of
new applications or more efficient handling of the frequent changes or adjustments to their
existing systems and applications, as well as the integration of those systems and applications.
Our belief is founded on the demonstrated ability of Synapse to provide these dynamic
solutions more quickly and at a lower cost than our competition. 6




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We have currently developed and have implemented these solutions for organizations in such
diverse marketplaces as textile and apparel manufacturing, airport support services, furniture
manufacturing, healthcare, commercial printing, and automotive. Accordingly, we have specifically
focused our business development efforts in these targeted industries where we believe our
Synapse products provide us with the greatest competitive advantages. We expect to
benefit significantly from the vertical market potential offered by each of these targeted
industries, and we intend to dedicate more sales and marketing resources to establish more
strategic alliances to penetrate these industries. Enhance the SynapseProduct and Technology Leadership.We believe that in
Synapse and its related suite of products, we have developed the broadest, most
comprehensive and most cost-effective e-business solutions to address the needs of organizations in
dynamic business environments. We have filed a patent application on our core Synapse
technology. We intend to continue investing in research and development to enhance the capability
of Synapse to provide solutions that will enable our customers operations to be more
efficient and extend their organizations more rapidly and cost effectively. Currently, our
development efforts are focused on continuing to enhance the performance and configuration
productivity of Synapse. Our objective is to expand upon our experienced team of developers and engineers, as our
resources allow, and further enhance our corporate culture to foster innovation in the product
development, application configuration and design areas. While we are constantly assessing
available opportunities to achieve synergies through the acquisition of complementary technologies
or businesses that we believe will further our growth strategy, our limited resources prohibit us
from pursuing such opportunities at this time. Leverage Customer Base through Network Effect.We intend to provide the best possible service
to our installed base of customers in order to expand the use of our Synapse products
within our customers organizations. The strategic importance of the Synapse products
to our customers is expected to provide what we believe will become the foundation for our
preferred access to additional projects within their organizations. This visibility to our
customers senior management, combined with our focused implementation and service approach, is
expected to facilitate the rapid adoption and deployment of the Synapse products
throughout the customers enterprise. Furthermore, as our customers deploy Synapse products throughout their extended
organizations, including their supply chains and electronic markets, their customers, suppliers and
partners will be exposed to the robust scope of the functionality provided by Synapse
products in the context of the exchange of mission-critical business information. We believe that
this exposure, which will allow non-customer participants in the supply chain to benefit from
Synapse solutions first-hand, should enable us to create a powerful network effect,
accelerating industry recognition and adoption of our Synapse products. Therefore, we
are focused on this positioning to leverage our opportunities across multiple target markets in
order to grow our revenue base. Research and Development Over the past year, we have focused our research and development efforts primarily on
expanding the core capabilities of Synapse and producing wrapped Synapse-
based application products like SynTrack. We plan to devote design and research
resources, as such resources may become available, to enhance the base Synapse
products, develop more industry-specific applications, and add functionality to our existing
applications. Intellectual Property We regard certain aspects of our internal operations, products and documentation as
proprietary. We rely primarily on a combination of patent, copyright, trademark and trade secret
laws, and other measures to protect our proprietary rights. We also rely on contractual
restrictions in our agreements with customers, employees and others to protect our intellectual
property rights. However, there can be no assurances that these agreements will not be breached,
that we will have adequate remedies for any breach, or that our trade secrets will not otherwise
become known. Our ability to compete and succeed is dependent, in part, upon our patent-pending
technology; and we are in the process of obtaining patent rights to our core technology, the
Synapse model, in the United States and internationally. Competition and Markets While there are many companies offering solutions to the myriad individual problems that
Synapse addresses, we believe that none offer a single solution to address all of the
development, implementation, integration, and management 7




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issues at once. Further, there are technical and business barriers to entry into the
Companys market. The Company is concentrating on protecting its valuable intellectual property
and first-to-market advantage. The Company is building a patent portfolio covering its technology,
and is seeking to establish Synapse as the standard for integrating and managing
wireless networking, mobile computing, ADC and RFID within a single development and implementation
framework. In the recent past, businesses have invested heavily in enterprise applications to automate
and improve the efficiency of their internal business processes. In parallel, there has been a
shift from in-house custom development of mission-critical applications to the purchase of packaged
applications and related services from third-party vendors. These applications have spread
throughout the business world addressing many highly strategic business functions, including
resource planning, supply chain management, customer relationship management, sales force
automation, business decision support and e-commerce. In this new corporate environment, a single
business process can require access to data and information from many distinct applications, none
of which is designed to communicate seamlessly and in real-time with the others. Along with this trend, global competition and difficult economic times have intensified the
competitive environment for all businesses dramatically. This has caused businesses to seek new
ways to generate sustainable competitive advantages. As competition has increased and markets have
become more dynamic, companies have begun to recognize that they must coordinate more closely every
aspect of their business. In order to achieve a more efficient working process while taking
advantage of the enormous investment in the broad range of package and custom software
applications, it has become critical that these applications be efficiently integrated. The
complexity of this integration challenge has historically required time-consuming, expensive,
custom developed solutions. In response, the market for third-party enterprise application
integration software providers has emerged to deliver this integration capability as a packaged
solution. The market for our Synapse technology is extremely broad and could be considered
competitive with any provider of transaction processing, automation or real time data solutions.
IBSS is focused on enabling new vertical solutions to meet the needs of specific industry segments.
These segments to date include wireless on-line transaction processing in manufacturing,
healthcare, transportation and distribution. We will continue to develop applications for solving
problems where real time information and data collection are needed, from automated procurement,
inventory management with asset tracking and distribution management to order processing,
integrated customer support and collaborative planning. The markets in which we operate are highly competitive. Our competitors are diverse and offer
a variety of solutions targeting various segments of the industry sectors for which we have
developed or will develop our applications. Some competitors compete with suites of applications
designed to offer out-of-the-box integration, while the majority offer point solutions designed
specifically to target particular functions or industries. IBSS competes with these other
companies with our breakthrough Synapse architecture and industry-specific
applications. Our value proposition consists of our experience in wireless on-line transaction
processing, our efficient Synapse methodology, and the power and flexibility of our
Synapse platform and framework. In some cases, we compete with a subset of the functionality found in the organizations
existing integrated business applications. These business systems may include large monolithic
software packages commonly referred to as enterprise resource planning (ERP), supply chain
management (SCM), or collaborative production management (CPM) packages. Competitors who
supply these packaged business software products include large ERP software vendors, such as
Microsoft, Oracle, SAP and others that have added or are attempting to add capabilities for supply
chain planning or business-to-business collaboration to their applications; companies such as I2,
Adexa, Manugistics, Manhattan Associates and others that compete principally in supply chain
management applications; companies such as Agile, Commerce One and others that compete principally
with our supplier relationship management applications; and companies such as Apriso, CamStar,
Datasweep, and others that compete in the collaborative production management market place. In summary, we believe that the primary competitive factors which affect the market for our
products and services include product function and features; quality of service offered;
performance and cost; ease of implementation; time-to-benefit advantages (the time period from
identification of technology need or fix to delivery of the application solution); quality of
customer support services; customer training and documentation; a project and implementation
methodology which mitigates risk and product reputation. The relative weight of each of these
factors is customer-specific. Although we believe that our products and services carry a unique
value proposition, with respect to each of these factors, we must continue to invest in our
business to improve our position against current and future competition. 8




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Employees As of February 28, 2005, the Company had a total of 28 full-time employees and no part-time employees. Item 2. Description of Property. The Company does not own any real property. With regard to leased real property, the Company
is party to an office lease agreement for the lease of its corporate headquarters. Under that
certain lease agreement dated October 8, 2002, as amended (Lease), with Pinebelt, LLC, a South
Carolina limited liability company (Landlord), the Company leases 12,175 useable square feet of
office space at the Ten Oaks Office Center, a 57,000 square foot office center located in Columbia,
South Carolina. The Company leases the office space for a period of 120 calendar months and the
current term of the Lease will expire on January 31, 2013. Under the amended terms of the Lease,
the Company is obligated to pay to the Landlord base rental of $40,775 for the calendar year 2005,
$45,550 for the calendar year 2006, $50,325 for the calendar year 2007, and $55,100 per calendar
year through its expiration in 2013, payable in equal monthly installments. The Lease provides for
common area maintenance (CAM) charges, for which the Company is obligated to pay its pro-rata
share. CAM charges are adjustable and are currently at least $1.00 per annual gross square foot of
the leased property (or $0.083 per monthly gross square footage). The Lease also provided for a
$50,000 security deposit, the first $10,000 of which was payable on or before December 15, 2002,
the second $10,000 of which was payable on or before January 15, 2003, and four installments of
$7,500 each were due every 30 calendar days after January 15, 2003. The Company is obligated to
indemnify the Landlord for usual and customary costs and liabilities, including claims arising from
the Companys use of the leased property and breach or default in performances by the Company of
any of its obligations under the Lease. Item 3. Legal Proceedings. We are not currently involved in any pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of our shareholders during the fourth quarter of fiscal
year 2004. 9




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PART II Item 5. Market for Common Equity and Related Stockholder Matters Market Information Shares of our common stock (Common Stock) are traded on the National Association of
Securities Dealers (NASD) Over-the-Counter Bulletin Board System (the OTCBB) under the symbol
IBSS. The following table sets forth the high and low bid prices per share of our Common Stock
for the indicated periods as reported by the OTCBB: High
    
    Low2003First Quarter
    
    $
    0.23
    
    
    $
    0.13Second Quarter
    
    $
    0.21
    
    
    $
    0.14Third Quarter
    
    $
    0.21
    
    
    $
    0.11Fourth Quarter
    
    $
    1.20
    
    
    $
    0.132004First Quarter
    
    $
    0.58
    
    
    $
    0.30Second Quarter
    
    $
    0.40
    
    
    $
    0.22Third Quarter
    
    $
    0.33
    
    
    $
    0.11Fourth Quarter
    
    $
    0.30
    
    
    $
    0.06
 The foregoing quotations reflect inter-dealer prices without retail markup, markdown or
commissions and may not necessarily reflect actual transactions. As of February 28, 2005, we had 120 holders of record of our Common Stock. The number of
record holders was determined from the records of our transfer agent and does not include
beneficial owners of Common Stock whose shares are held in the names of various security brokers,
dealers, and registered clearing agencies. The transfer agent for our Common Stock is Pacific
Corporate Trust Company, which is located at 625 Howe Street, 10th Floor, Vancouver,
British Columbia V6C 3B8. Because many of our shares of Common Stock are held by brokers and other
institutions on behalf of shareholders, we are unable to estimate the total number of shareholders
represented by these record holders. Dividends We have never declared or paid any cash dividends. We do not expect to pay any cash dividends
on our Common Stock in the foreseeable future. We currently intend to retain future earnings, if
any, to finance operations and the growth of our business. We may incur indebtedness in the future
which may prohibit or effectively restrict the payment of dividends, although we have no current
plans to do so. Any future determination to pay cash dividends will be at the discretion of our
Board of Directors. Sales of Unregistered Securities The Company has, within the past three years, sold securities that were exempt from
registration under the Securities Act pursuant to Section 4(2) as described below. 10




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In 2001, the Company restructured substantially all of its short-term and long-term debt into
a series of convertible debentures and notes, several of which have since been amended and
restated. In connection with the debt restructuring, the Company issued the following securities:  
    Promissory note dated August 14, 2001 in the face amount of $125,000 and issued to
Kirkman Finlay III, which permits conversion of the outstanding principal amount into
at least 138,889 shares of Common Stock (at a conversion price equal to or less than
$0.90/share). On October 14, 2003, this note was converted by the holder into 402,186
shares of Common Stock;
    Promissory note dated March 15, 2001 in the face amount of $300,000 and issued to
Rice Street Associates, Ltd., which permits conversion of the outstanding principal
amount into at least 333,333 shares of Common Stock (at a conversion price equal to or
less than $0.90/share); and
    Promissory note dated March 15, 2001 in the face amount of $350,000 and issued to
Fitz-John Creighton McMaster, which permits conversion of the outstanding principal
amount into at least 388,888 shares of Common Stock (at a conversion price equal to or
less than $0.90/share). On March 29, 2002, the Company issued a note to Steve Swanson in the principal amount of
$100,000, at an interest rate of 9% per annum, which was convertible into shares of Common Stock. On October 1, 2003, certain IBSS Class A Investors, LLC converted the outstanding balance of
principal and interest due on its Amended and Restated Class A Secured Debenture ($1,031,677) into
a non-interest bearing and non-convertible note due on December 31, 2006. EEL Group, LLC, which
was formed from the remaining participants in IBSS Class A Investors, LLC who elected not to
convert their notes, received warrants to acquire 15,214,170 shares of Common Stock at a purchase
price of $0.07275 per share, which warrants first become exercisable on October 1, 2004. Also on
October 1, 2003, certain IBSS Class B Investors, LLC converted the outstanding balance of principal
and interest due on its Amended and Restated Class B Secured Debenture ($1,735,399) into a
non-interest bearing and non-convertible note due on December 31, 2006. GEE Enterprises, LLC,
which was formed from the remaining participants in IBSS Class B Investors, LLC who elected not to
convert their notes, received warrants to acquire 22,821,256 shares of Common Stock at a purchase
price of $0.07275 per share, which warrants first become exercisable on October 1, 2004. The
Company issued the following securities pursuant to these transactions:  
    Amended and Restated Class A Secured Debenture dated October 1, 2003 in the
principal amount of $928, 241 and issued to the IBSS Class A Investors, LLC;
    Amended and Restated Common Stock Purchase Warrant (Class A Investors) dated October
1, 2003 and issued to the IBSS Class A Investors, LLC (convertible upon exercise into
464,120 shares of Common Stock);
    Amended and Restated Class A Contingent Common Stock Purchase Warrant dated October
1, 2003 and issued to the IBSS Class A Investors, LLC (convertible upon exercise into
928,241 shares of Common Stock);
    Common Stock Purchase Warrant dated October 1, 2003 and issued to EEL Group, LLC
(convertible upon exercise into 15,214,170 shares of Common Stock);
    Amended and Restated Class B Secured Debenture dated October 1, 2003 in the
principal amount of $1,933,399 and issued to the IBSS Class B Investors, LLC;
    Amended and Restated Common Stock Purchase Warrant (Class B Investors) dated October
1, 2003 and issued to the IBSS Class B Investors, LLC (convertible upon exercise into
2,033,399 shares of Common Stock);
    Amended and Restated Class B Contingent Common Stock Purchase Warrant dated October
1, 2003 and issued to the IBSS Class B Investors, LLC (convertible upon exercise into
2,033,399 shares of Common Stock); and
    Common Stock Purchase Warrant dated October 1, 2003 and issued to GEE Enterprises,
LLC (convertible upon exercise into 22,821,256 shares of Common Stock). Effective October 2, 2003, the Company issued 1,000,000 shares of Common Stock to The Scott
Group pursuant to a consulting agreement under which The Scott Group provides various financial
services to the Company. On December 13, 2003, Steve Swanson converted the outstanding principal and interest
($113,586.29) on his note (as described above) into 391,677 shares of Common Stock at a conversion
price of $.29 per share, in accordance with the terms of the note. 11




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On December 31, 2003, the Company sold 1,250,000 shares of Common Stock and 1,000,000 Common
Stock warrants to Generation Capital Associates, Inc. (GCA) pursuant to the terms of a purchase
agreement with GCA dated December 24, 2003, a Common Stock purchase warrant with GCA dated December
30, 2003, and two separate letter agreements with GCA dated December 24, 2003 and January 13, 2004.
In addition to purchasing 1,250,000 shares of Common Stock, GCA was also granted warrants to
purchase up to 1,000,000 shares of Common Stock. In exchange, GCA paid $250,000 to the Company
that the Company used for short-term operating capital purposes. In January 2004, the Company signed an investment agreement dated January 21, 2004, and a
registration rights agreement dated January 21, 2004 with Dutchess Private Equities Fund, L.P.
(Dutchess) for an equity line of credit. This agreement was terminated on June 28, 2004. No
shares were issued or sold under this agreement. During 2004, the Company raised an additional $505,000 in working capital through the private
sale of 2,525,000 shares of common stock and 1,262,500 warrants with an exercise price of $0.40 and
term of five years. During the first quarter of 2004, the Company secured an agreement with two current investors
who had a significant number of the Companys outstanding common stock warrants that could be
exercised in 2004 to delay their right to exercise such warrants until 2005. This was accomplished
through the issuance of an additional 2,000,000 cashless common stock warrants (1,000,000 for each
investor) that expire in three years from the date of grant. On June 28, 2004, the Company entered into a common stock purchase agreement with Fusion
Capital pursuant to which we sold 1,250,000 shares of Common Stock and 937,500 Common Stock
purchase warrants for $250,000 and Fusion Capital agreed to purchase up to an additional $6,000,000
over a 24-month period. 560,710 shares of Common Stock were issued in connection with this
agreement as a commitment fee. Up to an additional 556,454 shares of common stock are issuable
pro rata as Fusion Capital purchases common stock under the common stock purchase agreement. The
Company estimates that the maximum number of shares it will sell to Fusion Capital under the common
stock purchase agreement, in addition to the shares already issued, will be 15,000,000 shares
assuming Fusion Capital purchases all $6,000,000 of Common Stock. The Company has the right to
control the amount and timing of sales of IBSS Common Stock to Fusion Capital under the common
stock purchase agreement. However, under the terms of the common stock purchase agreement, Fusion
Capital does not have the right nor the obligation to purchase shares of our Common Stock in the
event that the price of our Common Stock is less than $0.20. During the quarter ended December 31,
2004, Fusion purchased 250,000 shares of our Common Stock at $0.20 per share resulting in aggregate
proceeds of $50,000. During the third and fourth quarters of 2004, the Company received advances from certain of
its existing shareholders of $601,000 in the aggregate for short-term working capital purposes.
Although definitive terms for repayment have yet to be agreed upon, it is expected that the Company
will repay these advances using the proceeds from future financings, if and when such financings
occur, and/or through the issuance of additional debt or equity securities or both. These
advances are outstanding at December 31, 2004, and the Company is not currently paying or accruing
any interest related to this balance. Item 6. Managements Discussion and Analysis or Plan of Operation. Overview IBSS emphasis is on helping businesses mitigate risk as they introduce new software products,
extend their existing software applications and systems, or improve the way they do business. The
IBSS value proposition provides three valuable assets to corporate clients:  
    proven expertise in integration, on-line transaction processing and wireless
communications-based solutions;
    a unique Synapse methodology that lets businesses quickly and
economically prototype, test drive, validate and deploy new ideas; and
    IBSS proprietary Synapsetechnology, which gives customers a powerful,
secure enterprise framework. IBSS proprietary Synapse technology enables better security because it is not
susceptible to the same hacker activities related to viruses which currently plague todays
commodity technologies. In addition to a new level of control and security, IBSS, by owning and
controlling its own technology with which it creates on-line applications, can offer its customers
a 12




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flexible business relationship that can entertain custom extensions, unique licensing arrangements
and certain exclusivities in a customers vertical market. This enables IBSS to respond to a
customers unique set of needs and allows IBSS working with the customer to rapidly produce
solutions specific to those needs. Although we currently have limited resources, we intend to invest in research and development of
its Synapsetechnology and the associated Synapseproject management
methodology at such time, if any, that such additional resources become available. The objective of
this continuous improvement is to create ever increasing efficiency, effectiveness and ease of use
for the benefit of internal IBSS productivity, competitive advantage, and flexibility for our
customers and partners. Since restructuring most of our short and long-term debt in December 2001 and paying off or
converting a significant portion of the same in 2002 and 2003, we
have devoted substantial effort to developing our business, enhancing our management team, and focusing on our
growth and marketing efforts. For the near-term, the Companys marketing of its Synapse products is aimed
primarily at wireless mobile computing applications (radio frequency terminals, PDAs, wearable
computers, laptops, Pocket PCs and tablet computers) and automatic-radio frequency identification,
electronic tagging, bar-code data collection, and other on-line real time machine-to-machine
(M2M) applications in manufacturing, healthcare, government, distribution and other vertical
markets. The move of businesses to RFID is being facilitated by widespread adoption of electronic
product codes that permits tagged objects to be tracked via the Internet. We believe that
Synapse has the unique ability to track, analyze and share information on the movement
of e-tagged objects across multiple locations, technologies, computer operating systems and
networks, giving managers total visibility and the knowledge to more efficiently reach their
objectives. We will also consider opportunities for joint ventures, strategic partnerships, and
acquisitions to better leverage our existing market base and expand and improve the capabilities of
our current software architecture. However, we currently have limited resources to effect any such
opportunities and have no current plans to do so. We believe our products and services are gaining recognition and interest in the marketplace.
However, from 2003 to 2004 our total revenues have declined substantially, our net loss has more
than doubled and other key financial measures have deteriorated. We continue to have severe cash
flow and liquidity concerns and a working capital deficiency. As noted elsewhere in this Annual
Report, the report of our independent registered public accounting firm regarding our financial
statements for the three years ended December 31, 2004, indicates that there is serious doubt about
our ability to continue as a going concern. In addition, the Company currently is in default on the payment of principal and interest
under certain notes issued in 2001. The holder of a senior secured note has demanded $563,955 as
payment in full of principal and interest as of March 15, 2005 under such note. This note is
secured by substantially all of the assets of the Company. The Company cannot make any such
payment at this time. See Liquidity and Capital Resources below. 13




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Selected financial operations information is as follows for the fiscal years ended December
31, 2004, 2003, and 2002: Years Ended December 31,2004
    
    
    2003
    
    
    2002Operating Revenues:Services
    
    $
    1,743,595
    
    
    $
    3,133,796
    
    
    $
    2,728,355Software Licensing
    
    
    36,738
    
    
    
    55,937
    
    
    
    506,590Maintenance and Support
    
    
    116,938
    
    
    
    82,040
    
    
    
    67,799Hardware Sales (Third
Party)
    
    
    130,784
    
    
    
    38,970
    
    
    
    84,802Total
Revenues
    
    
    2,028,055
    
    
    
    3,310,743
    
    
    
    3,387,546Cost of RevenuesServices
    
    
    686,721
    
    
    
    912,175
    
    
    
    1,023,634Software Licensing
    
    
    62,506
    
    
    
    191,394
    
    
    
    190,023Maintenance and Support
    
    
    211,346
    
    
    
    110,714
    
    
    
    87,623Hardware Sales (Third
Party)
    
    
    106,129
    
    
    
    26,764
    
    
    
    66,280Total Cost of
Revenues
    
    
    1,066,702
    
    
    
    1,241,047
    
    
    
    1,367,560Operating ExpensesGeneral and Administrative
    
    
    1,389,969
    
    
    
    1,693,122
    
    
    
    2,512,321Sales and Marketing
    
    
    769,397
    
    
    
    311,010
    
    
    
    311,402Research and Development
Costs
    
    
    545,772
    
    
    
    193,574
    
    
    $
    376,660Bad Debt Expense
    
    
    11,400
    
    
    
    21,770
    
    
    
    51,126Total
Operating Expenses
    
    
    2,716,538
    
    
    
    2,219,476
    
    
    
    3,251,509Loss from Operations
    
    
    (1,755,185
    )
    
    
    (149,780
    )
    
    
    (1,231,523
    )Other Income and ExpensesLoss on Disposal of
Equipment
    
    
    
    
    
    
    (15,500

    )
    
    
    (11,999
    )Other income/(expenses)
    
    
    (11,468
    )
    
    
    39,363
    
    
    
    128,050Interest
Income
    
    
    8,749
    
    
    
    5,250
    
    
    
    4,442Interest
Expense
    
    
    (155,841
    )
    
    
    (726,654
    )
    
    
    (1,196,384
    )Non-Controlling Interest
in Loss
    
    
    
    
    
    
    
    
    
    
    (847,353
    )Net
Loss
    
    $
    (1,913,745
    )
    
    $
    (847,321
    )
    
    $
    (3,154,767
    )Basic Weighted Average
Shares
Outstanding
    
    
    29,936,195
    
    
    
    22,922,301
    
    
    
    18,941,043Basic Loss Per
Share
    
    ($
    0.06
    )
    
    ($
    0.04
    )
    
    ($
    0.17
    )Diluted Loss Per
Share
    
    ($
    0.06
    )
    
    ($
    0.04
    )
    
    ($
    0.17
    )
 Results of Operations Fiscal Year Ended December 31, 2004 Compared to Fiscal Year Ended December 31, 2003 Revenues. Our total operating revenues decreased by $1,282,688 (approximately 39%) to
$2,028,055 in 2004 from $3,310,743 in 2003. This decrease was primarily attributable to decreased
service revenues due to a reduction in project-related activities, continued marketing efforts by
production staff related to the development of new customer relationships and non-billable time
devoted to the continued development of the Companys Synapsesuite of products. The
Company experienced a decline in revenues from its largest customer without a corresponding
increase in revenues from other sources. While the Company is hopeful that revenues from this
customer as well as new sources will increase over the near term, without this increase or an
additional capital infusion, or both, the Company will not be able to meet its current and future
financial obligations. Cost of Revenues. Cost of revenues decreased by $174,345 (approximately 14%) to
$1,066,702 in 2004 from $1,241,047 in 2003. This change relative to the change in period-to-period
revenues is primarily attributable to maintaining staffing at minimum levels sufficient to
adequately service existing customer relationships. 14




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Gross Profit and Margins. Our gross profit decreased $1,108,343 (or approximately
54%) to $961,353 in 2004 from $2,069,696 in 2003. We experienced a corresponding gross margin
decrease to approximately 47% in 2004 from approximately 63% in 2003. These decreases were
primarily attributable to the decrease in overall revenues for the period while maintaining staff
at minimum levels sufficient to service existing customer relationships. Operating Expenses. Total operating expenses increased by $497,062 (or approximately
22%) to $2,716,538 in 2004 from $2,219,476 in 2003 due to increases in sales and marketing and
research and development costs partially offset by a reduction in general and administrative
expense. General and administrative expense decreased by $303,153 (or approximately 18%) to $1,389,969
in 2004 from $1,693,122 in 2003. This decrease was primarily attributable to the Companys cost
control program initiated during fiscal year 2004 partially offset by additional professional fees
incurred in connection with several filings with the Securities and Exchange Commission. As a
percentage of total revenues, general and administrative expenses in 2004 increased to
approximately 69% from approximately 51% in 2003. The increase was primarily attributable to a
reduction in the Companys overall revenues for the period. Sales and marketing expenses increased $458,387 (or approximately 147%) to $769,397 in 2004
from $311,010 in 2003. As a percentage of total revenues, sales and marketing expenses for 2004
increased to approximately 38% from approximately 9% in 2003. These increases were primarily
attributable to a significant increase in the Companys sales team and selling activities in
developing new vertical markets and customer relationships. Research and development costs increased by $352,198 (or approximately 182%) to $545,772 in
2004 from $193,574 in 2003. As a percentage of total revenues, research and development costs for
2004 increased to approximately 27% from approximately 6% in 2003. These increases were primarily
attributable to an increase in the Companys research and development staff and the continued
development of the Companys Synapse suite of products. Non-operating Items. Other expenses decreased $538,981 (or approximately 77%) to
$158,560 in 2004 from $697,541 in 2003, primarily as a consequence of a decrease in interest
expense. The largest expense in this category is interest expense. Interest expense decreased
$570,813 (or approximately 79%) to $155,841 from $726,654 in 2003. This decrease was primarily
attributable to certain note holders agreeing to discontinue receipt of interest on their notes
beginning in the fourth quarter of 2003. Fiscal Year Ended December 31, 2003 Compared to Fiscal Year Ended December 31, 2002 Revenues. Our total revenues decreased by $76,803 (approximately 2%) from 2002. This
decrease was primarily attributable to the significant decrease of $450,653 (approximately 89%) in
software licensing revenues. Substantially all of this decrease was due to our increased focus on
expanding the functionality of existing licenses and licensed users, rather than expanding the
number of licensed sites. In addition our revenues from the sales of third party hardware
decreased by $45,832 (approximately 54%) from 2002. This decrease in hardware revenue was
attributable primarily to the fact that hardware sales to our largest customer were significantly
lower than in the prior year. The decrease in total revenues was offset significantly by an increase of $405,441
(approximately 15%) in our service revenues from 2002. Substantially all of this increase was
attributable to our increased focus on expanding the functionality of existing licenses. Also,
revenues from software maintenance fees increased by $14,241 (approximately 21%) from 2002. This
increase was a consequence of applying the licensed software across more functionality, more sites
and more users per the normal maintenance contract terms. Cost of Revenues. Cost of revenues decreased by $126,513 (approximately 9%) from
2002. This decrease was attributable primarily to a decrease of $111,459 (approximately 11%) in
direct services labor costs from 2002. This decrease was also attributable to our ongoing
restructuring and cost control programs, but was offset by additional human resource costs required
for certain customer projects. Our gross margin for services for 2003 was approximately 71%, as
compared to 62% in 2002, due in part to our increased Synapsetool efficiency and
increased staff utilization efficiency. Our cost from the sales of third party hardware also decreased by $39,516 (approximately 60%)
from 2002. This decrease in hardware sales and subsequent hardware costs was associated primarily
with more software intensive, rather than hardware intensive, projects. Our gross margin for
hardware sales for 2003 was approximately 31%, as compared with 22% in 2002. 15




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The decrease in cost of revenues was offset somewhat by immaterial increases in the cost of
licensing our Synapse e-based products and of maintenance. Gross Margin. Gross margin was $2,069,696 in 2003, representing an increase of
$49,710 (approximately 2%) over gross margin in 2002. This increase was due to the factors
described above. Operating Expenses. Total operating expenses decreased by $1,032,033 (approximately
32%) due to significant reductions in general and administrative expense and in research and
development costs. General and administrative expenses decreased by $819,199 (approximately 33%) from 2002.
Also, as a percentage of total revenues, general and administrative expenses decreased to
approximately 51% in 2003 from approximately 74% in 2002. Substantially all of the decrease in
general and administrative expenses was attributable to our cost control program. Our cost control
program focused both on leasehold costs (reducing it to 20% of the prior cost), administrative and
executive salary costs, and miscellaneous professional costs. Reductions in these areas accounted
for approximately 70% of the aggregate cost savings. Research and development costs decreased by $183,086 (approximately 49%) from 2002. This
decrease was primarily associated with a staff reduction and charging a larger portion of the
research and development team with production billable tasks. Research and development expenses
represented approximately 6% and 11% of total revenues for 2003 and 2002, respectively. We expect
research and development expenses to increase in absolute dollars in the foreseeable future as we
continue our product development activities, although we anticipate that these expenses as a
percentage of total revenues to remain approximately the same in 2004. Bad debt expense decreased $29,356 (approximately 57%) from 2002, partially offsetting the
decrease in total operating expenses. Sales and marketing expenses remained approximately
unchanged. Non-operating Items. Non-controlling interest in an affiliated company decreased to
$0 in 2003 from $847,353 in 2002. This decrease was attributable to a one-time write off in 2002
of the Companys accounts receivable due from this affiliate. Interest expense decreased $469,730 (approximately 39%) from 2002. This decrease was due to
the note holders agreeing to discontinue the receipt of interest on their notes beginning in the
fourth quarter of 2003. Other income decreased $88,687 (approximately 69%) from 2002. This decrease was due to a
one-time recovery in 2002 of a previously recorded payroll expense for a former executive. Liquidity and Capital Resources Historical Sources of Liquidity.Prior to 1997, we financed our operations primarily through
our revenues from operations, including funded research and development revenues, and occasional
short-term loans from our principals, their families and other individuals and entities. Since the
middle of 1997, we have financed our operations primarily through private and public offerings of
common stock and convertible debt, and to a lesser extent from operating revenues and through
borrowings from third parties. On December 31, 2001, the Company restructured all of its short-term and long-term debt into
convertible debentures and notes. Under the restructured debt instruments as originally in effect,
approximately 80% of the entire principal balance of the restructured debt was not payable until
January 1, 2004. Substantially all of the remaining 20% was payable during January 2003. Effective
January 1, 2003, the holders of substantially all of that remaining 20% agreed to extend the
January 2003 maturity date until January 2004. On October 1, 2003, the Company restructured substantially all of its short-term investor
debt. Under the restructured debt instruments, approximately 90% of the principal balance is not
payable until the fourth quarter of 2006. Also during 2003, there continued to be some conversion
and satisfaction of our existing debt and the major portion (86%) of this debt was renegotiated on
October 1, 2003 and the notes representing this portion of the debt were converted to non-interest
bearing and non-convertible notes and extended to December 31, 2006. Thirteen percent (13%) of the
debt became short-term debt on January 1, 2004. On October 29, 2004, the holder of the senior
secured note with $539,078 of principle and accrued interest outstanding as of December 31, 2004
(the Note) demanded payment in full. On March 15, 2005, the 16




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holder of this Note again demanded payment in full, in the amount of $563,955 as of March 15,
2005, and has indicated that, in the absence of immediate resolution of this matter, the holder
will explore immediate foreclosure on its secured interest under the Note, which consists of
substantially all of the assets of the Company. According to its terms, this Note became due and
payable in full on January 1, 2003. As previously disclosed, the Company has not made, and cannot
make, any such payment at this time. The Company is currently investigating the circumstances
surrounding the execution and approval of the Note and disputes the amount it may owe under the
Note. While the Company hopes to negotiate a settlement to this demand that will be mutually
acceptable to both parties, no assurance can be given that the Company will be successful in this
endeavor. During the fourth quarter of 2003, the Company raised an additional $230,000 in working
capital from other private investors through the sale to such investors of 900,000 shares of common
stock and 450,000 common stock warrants with an exercise price of $0.40 per share. These sales to
private investors continued into the first and second quarters of 2004, during which time the
Company raised an additional $455,000 in working capital through the sale of 2,275,000 shares of
Common Stock and 1,137,500 Common Stock warrants with an exercise price of $0.40 and a term of five
years. On December 31, 2003, the Company sold 1,250,000 shares of Common Stock and 1,000,000 Common
Stock purchase warrants to Generation Capital Associates, Inc. (GCA). In exchange, GCA paid
$250,000 to the Company, which has been used as short-term operating capital. In January 2004, the Company signed an investment agreement dated January 21, 2004, and a
registration rights agreement dated January 21, 2004 with Dutchess Private Equities Fund, L.P.
(Dutchess) for an equity line of credit. This agreement was terminated on June 28, 2004. No
shares were issued or sold under this agreement. During 2004, the Company raised an additional $505,000 in working capital through the private
sale of 2,525,000 shares of common stock and 1,262,500 warrants with an exercise price of $0.40 and
term of five years. During the first quarter of 2004, the Company secured an agreement with two current investors
who had a significant number of the Companys outstanding common stock warrants that could be
exercised in 2004 to delay their right to exercise such warrants until 2005. This was accomplished
through the issuance of an additional 2,000,000 cashless common stock warrants (1,000,000 for each
investor) that expire in three years from the date of grant. During the second quarter of 2004, the Company advanced $75,000 to a company involved with the
development of a patented directional RFID tag tracking and reporting process. These advances were
evidenced by promissory notes that were collateralized by exclusive rights to certain patents, bore
interest at the prime rate plus 2% and were due to be repaid no later than May 31, 2005. The
Company believes that investments such as these are an important element of its growth strategy in
the area of RFID systems and wireless applications. The outstanding balance, including interest
accrued thereon, was repaid in February 2005. On June 28, 2004, the Company entered into a common stock purchase agreement with Fusion
Capital pursuant to which we sold 1,250,000 shares of Common Stock and 937,500 Common Stock
purchase warrants for $250,000 and Fusion Capital agreed to purchase up to an additional $6,000,000
over a 24-month period. 560,710 shares of Common Stock were issued in connection with this
agreement as a commitment fee. Up to an additional 556,454 shares of common stock are issuable pro
rata as Fusion Capital purchases common stock under the common stock purchase agreement. The
Company estimates that the maximum number of shares it will sell to Fusion Capital under the common
stock purchase agreement, in addition to the shares already issued, will be 15,000,000 shares
assuming Fusion Capital purchases all $6,000,000 of Common Stock. The Company has the right to
control the amount and timing of sales of IBSS Common Stock to Fusion Capital under the common
stock purchase agreement. However, under the terms of the common stock purchase agreement, Fusion
Capital does not have the right nor the obligation to purchase shares of our Common Stock in the
event that the price of our Common Stock is less than $0.20. During the quarter ended December 31, 2004, Fusion purchased 250,000 shares of our Common Stock at $0.20 per share resulting in
aggregate proceeds of $50,000. During the third and fourth quarters of 2004, the Company received
advances from certain of its existing shareholders of $651,000 in the aggregate for short-term
working capital purposes. Although definitive terms for repayment have yet to be agreed upon, it
is expected that the Company will repay these advances using the proceeds from future financings,
if and when such financings occur. Of this amount, $50,000 has been converted to 250,000 shares of
common stock and 125,000 common stock warrants with an exercise price of $0.40 per share. The
remainder of these advances is outstanding at December 31, 2004 and the Company is not currently
paying or accruing any interest related to this balances. 17




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With respect to our trade accounts payable, where permitted under securities laws, we have
satisfied and expect to continue to satisfy certain of our unsecured obligations to third parties
through restricted stock grants. Need for Additional Liquidity.At December 31, 2004, we had a working capital deficit of
$1,980,524. The independent registered public accounting firms report for the year ended December
31, 2004 includes an explanatory paragraph to their audit opinion stating that our 2004 net loss,
accumulated deficit and working capital deficiency raise substantial doubt about our ability to
continue as a going concern. We incurred an operating cash flow deficit of $1,410,744 for 2004.
The Company has experienced a decline in revenues from its largest customer without a corresponding
increase in revenues from other sources. We do not currently have sufficient financial resources
to fund our operations. While the Company expects that revenues from this customer as well as new
sources will increase over the near term, there can be no assurance that such increases will occur.
Without this increase or an additional capital infusion, or both, the Company will not be able to
meet its current and future financial obligations. We will seek to raise additional funds from the private placement of additional debt, equity
or equity-linked securities. Because of several factors, including the operating, market and
industry risks associated with an investment in our common stock; the inclusion of a going concern
paragraph in our annual independent registered public accounting firms report; the fact that our
common stock is traded on the OTCBB; the continued weakness in the capital markets in general and
the technology sectors in particular; and the other factors described in Exhibit 99.1 of this
Annual Report on Form 10-KSB, we may experience difficulty in obtaining additional financing until
our operating results or overall market conditions reflect sustained improvement. Should the
financing we require to sustain our working capital needs be unavailable or prohibitively expensive
when we require it, the consequences would have a material adverse effect on our business,
operating results, financial condition and prospects, which may include the discontinuance of
operations. Capital Commitments.We currently do not have any commitments or budgeted needs in 2005 for
any material capital expenditures, including purchases of furniture, fixtures or equipment. In the
absence of any substantial infusion of growth capital or an unexpected increase in our expected
gross margin for 2005, we do not expect our capital expenditure plans for 2005 to change. Critical Accounting Policies and Accounting Estimates We have adopted various accounting policies that govern the application ofaccounting
principles generally accepted in the United States in the preparation of our financial statements.
Our significant accounting policies are further described in the footnotes to the financial
statements at December 31, 2004, as included in this Annual Report on Form 10-KSB. We consider
these accounting policies to be critical accounting policies. Certain accounting policies involve
significant judgments and assumptions by us, but do not have a material impact on the carrying
value of our assets and liabilities and results of operations. The judgments and assumptions we use are based on historical experience and other factors that
which we believe to be reasonable under the circumstances. Because of the nature of the judgments
and assumptions we make, actual results could differ from these judgments and from estimates which
could have an impact on our carrying values of assets and liabilities and our results of
operations. Certain accounting estimates are particularly sensitive because of their significance to the
financial statements and because of the possibility that future events affecting them may differ
significantly from those expected. The critical accounting policies and the most sensitive
accounting estimates affecting the financial statements were: (i) bad debt reserves to record
accounts receivable at their net realizable value; (ii) valuation of net deferred tax assets; (iii)
valuation of stock options; and (iv) revenue recognition policies. Each of these policies and
estimates are discussed in greater detail below. Accounts receivable are customer obligations due under normal trade terms. The Company
performs continuing credit evaluations of its clients and generally does not require collateral.
Management reviews accounts receivable on a regular basis to determine if any receivables will
potentially be uncollectible. Any accounts receivable balances that are determined to be
uncollectible are included in the allowance for doubtful accounts. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance. Based on the
information available, management believes all accounts receivable are fully collectable and,
therefore, has not established a bad debt reserve or allowance as of December 31, 2004. However,
actual write-offs may occur on the outstanding accounts receivable balances. 18




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Deferred income tax assets and liabilities are computed for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or deductible amounts
in future periods based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense
is the tax payable or refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities. Because of our significant continuing net operating losses
and our accumulated deficit, we have fully reserved the net deferred tax asset. The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25) and related interpretations in accounting for its stock-based compensation
plans and applies the disclosure-only provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation (SFAS 123), as amended by FASB Statement No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure (SFAS 148). We recognize stock-based
compensation expense for stock options granted to employees and non-employee directors if the
quoted market price of the stock at the date of the grant or award exceeds the price, if any, to be
paid by an employee for the exercise of the stock. In December 2004, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 123(R),
Share-Based Payment, (SFAS 123(R)) effective
July 1, 2005, which is a revision of SFAS 123.  SFAS 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. As permitted by SFAS 123, the Company
currently accounts for share-based payments to employees using APB 25s intrinsic value method and,
as such, only recognizes compensation cost for employee stock options to the extent that options
have been issued below the fair market value of the underlying stock on the date of grant.
Accordingly, the adoption of SFAS 123s fair value method will have a significant impact on
our result of operations, although it will have no impact on our overall financial position. The
impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future. However, had we
adopted SFAS 123(R) in
prior periods, the impact of that standard would have approximated
the impact of SFAS 123 as
described in the disclosure of pro forma net income above. IBSS recognizes revenues in accordance with the guidance of Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial Statements, SAB No. 104, Revenue Recognition,
Statement of Position 97-2, Software Revenue Recognition, and related interpretations. IBSS

recognizes revenue for products sold at the time delivery occurs, collection of the resulting
receivable is deemed probable, the price is fixed and determinable, and evidence of an arrangement
exists. Existing customers may purchase product enhancements and upgrades after such enhancements
or upgrades are developed by IBSS based on a standard price list in effect at the time such product
enhancements and upgrades are purchased. IBSS generally has no significant performance obligations
to customers after the date that products, product enhancements and upgrades are delivered. IBSS allocates revenue on arrangements involving multiple elements to each element based on
the relative fair value of each element. IBSSs determination of fair value of each element in
multiple-element arrangements is based on vendor-specific objective evidence (VSOE). IBSS limits
its assessment of VSOE for each element to the price charged when the same element is sold
separately. IBSS has analyzed all of the elements included in its multiple-element arrangements
and determined that it has sufficient VSOE to allocate revenue to each of the multiple-elements. IBSS recognizes service revenues from installation, enhancements, and change order services
based on the standard price list in effect when such services are provided to customers.
Installation is not essential to the functionality of the products sold and is inconsequential or
perfunctory to the sale of the products. Revenues derived from contractual post-contract support
services are recognized ratably over the contract support period. IBSSs revenue recognition policy is significant because its revenue is a key component of
IBSSs results of operations. In addition, the recognition of revenue determines the timing of
certain expenses, such as commissions and royalties. Although IBSS follows specific and detailed
guidelines in measuring revenue, certain judgments affect the application of its revenue policy.
Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing
revenue could cause IBSSs operating results to vary significantly from quarter to quarter and
could result in future operating losses. Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements. 19




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Item 7. Financial Statements. Reference is made to the Financial Statements Index beginning on Page F-1 of this Annual
Report on Form 10-KSB. Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. Item 8A. Controls and Procedures. Evaluation of disclosure controls and procedures. The Companys Chief Executive Officer and
Chief Financial Officer (our principal executive officer and principal financial officer) has
concluded, based on his evaluation as of the end of the period covered by this Report, that our
disclosure controls and procedures are effective to ensure that information required to be
disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms, and include controls and procedures designed to ensure that information
required to be disclosed by us in such reports is accumulated and communicated to the Companys
management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure. Our management, including the Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure controls and procedures or internal controls will prevent or detect all
errors or fraud should any occur. Any control system and procedures, no matter how well designed
and operated, can provide only reasonable, but not absolute, assurance that the objectives of the
control systems and procedures are being met. Because of the inherent limitations in all control
systems, no evaluation can provide absolute assurance that all control issues or instances of error
or fraud, if any, are detected. Changes in internal controls. There were no changes in the Companys internal
control over financial reporting in the fourth quarter of 2004 or in other factors that have
materially affected, or are reasonably likely to materially affect, the Companys internal control
over financial reporting. Item 8B. Other Information. None. 20




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PART III Item 9. Directors and Executive Officers of the Registrant. Directors and Officers of IBSS The executive officers and directors of the Company, and their respective ages and positions
as of December 31, 2004, are as follows: Name
    
    Age
    
    Term As Director
    
    PositionGeorge E. Mendenhall,
Ph.D.
    
    
    67
    
    
    1995-current
    
    Chief Executive Officer and Chairman of the BoardMichael P. Bernard
    
    
    49
    
    
    
    
    Chief Financial OfficerDonald R. Futch
    
    
    54
    
    
    
    
    Vice President  Business DevelopmentStuart E. Massey
    
    
    45
    
    
    1991-current
    
    Executive Vice President, Director, and SecretaryCarl Joseph Berger, Jr.
    
    
    68
    
    
    1998-current
    
    DirectorRichard D. Pulford
    
    
    59
    
    
    2002-current
    
    Director
 George E. Mendenhall, Ph.D., 67, has served as Chairman of the Board and Chief Executive
Officer of the Company since September 2001. Prior to that time, he had served since January 1998
as Vice President of Application Development of the Company and since May 1995 as Executive Vice
President of the Company. He initially became an employee of the Company in February 1994, serving
as the Director of Industrial Consulting. He has served as a director of the Company since May
1995. Dr. Mendenhall has conducted academic research and taught economics and other courses at
Indiana University and Indiana Institute of Technology. In addition, he has published articles
concerning research and evaluation techniques, and has been quoted in such periodicals as Computer
World and Industry Week. Before joining the Company, Dr. Mendenhall provided consulting services
and computer systems to various large manufacturing companies on an independent basis and, from
1990 through February 1994, provided consulting services to the Company. From 1984 until 1989, Dr.
Mendenhall was the President of Synergistic Business Infrastructures Corporation, a computer
systems integrator based in Fort Wayne, Indiana that specialized, among other things, in the
conceptualization, design and implementation of manufacturing shop floor systems, data collection
systems and material tracking systems. Dr. Mendenhall received a Bachelor of Science degree in
Economics from Manchester College in 1960 and a Master of Arts degree and a Ph.D. from Indiana
University in 1968 and 1978, respectively. Michael P. Bernard, 49, has served as Chief Financial Officer of the Company since April 2004.
He served from January 2003 to April 2004 as Treasurer of Guilford Mills, Inc., a major
manufacturer of automotive textile products. From April 2002 to December 2003, Mr. Bernard was
self-employed. From September 1999 to March of 2002, Mr. Bernard served as a senior executive in
positions that included President and Chief Financial Officer for Unifi Technology Group,
Inc./Cimtec Automation, Inc., a manufacturer of systems integration and distribution of advanced
factory automation equipment. For two years prior to that, Mr. Bernard served as Chief Financial
Officer of CORDA Medical Care, Inc., a physician practice management company. Mr. Bernard has over
25 years of financial management experience in a variety of industries including healthcare,
personnel staffing and information technology, with 14 of those years employed by Ernst & Young
LLP, one of the worlds largest registered public accounting firms. Mr. Bernard graduated from the
University of South Florida with a Bachelor of Arts degree in 1978 in business administration,
majoring in accounting, and he has been a certified public accountant since 1980. Stuart E. Massey, 45, has served as Executive Vice President of the Company since September
2001 and as a director of the Company since April 1991. Prior to that time, he had served as Vice
President of Engineering. Mr. Massey also serves as the Secretary of the Company. His
responsibilities include the day-to-day management and coordination of large projects, including
the continuing maintenance of the Synapse software configuration tool. Before joining
the Company, among other things, Mr. Massey managed the implementation of an inter-bank financial
transaction switch for 21




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automated teller machine and point-of-sale systems and assisted in the design of financial
transaction processing software products for Applied Communications, Inc. Mr. Masseys experience
in the industrial automation industry includes the design of a variety of computer control systems,
such as airport lighting, industrial machine tool control, inventory control and shop floor control
systems. Mr. Massey received a Bachelor of Science degree in Electrical and Computer Engineering
from the University of South Carolina in 1986. Donald R. Futch, 54, has served as Vice President of Business Development of the Company since
April 13, 1999. Prior to that date, he served as Vice President of Operations since joining the
Company in January 1998. Mr. Futch is responsible for developing corporate strategic relationships
and indirect distribution channels. Mr. Futch has over 20 years of marketing and technical
management experience in the computer technology industry working with companies including
Electronic Merchant Services, Telequest and Unysis. Prior to joining the Company, Mr. Futch was
employed with AT&T as a regional data specialist and data sales executive. He has extensive
experience in product development in the transaction processing industry and holds a patent in
transaction processing for telecommunications based home banking. Mr. Futch has a Masters of
Business Administration degree with an emphasis in Marketing Research from the University of South
Carolina. Carl Joseph Berger, Jr., 68, has served as a director of the Company since June 1998. He
retired in 1997 from Springs Industries, Inc., a leading manufacturer and marketer of home
furnishings, after serving for eight years as Corporate Director for Electronic Data Interchange.
During his thirty years with Springs Industries, Inc., Mr. Berger served the company in various
positions, including Director of Distribution. Prior to his service with Springs Industries, Inc.,
he worked in various positions with Milliken and Company and M. Lowenstein Corporation where he
served as General Product Manager with Wamsutta Mills in New York. He has served on numerous
boards and committees, including the District Three School Board in Rock Hill, South Carolina,
where he served for eleven years as Board Treasurer. Mr. Berger received his Masters of Business
Administration degree from Winthrop University and a Bachelor of Arts degree from the University of
Georgia, majoring in accounting. Richard D. Pulford, 59, has served as a director of the Company since October 3, 2002. He has
served as President of Corporate Strategies, Inc., (CSI), since he founded CSI in 1981. CSI
provides investment banking services in the Great Lakes region of the United States. The primary
focus of CSI has been in the technology arena. Under Mr. Pulfords direction, CSI has been a
contributor in equity capital fund-raising endeavors for technology start-up companies. Mr.
Pulford also operates in a sales consultant capacity in the automotive industry for a variety of
technology companies, and has provided such services in the past for the Company. Prior to forming
CSI, Mr. Pulford owned and operated a consulting practice specializing in financing acquisition
transactions for operating companies. Mr. Pulford also held positions in the marketing field after
receiving his Masters of Business Administration degree in Finance. CSI and Mr. Pulford are
parties to a sales representative and marketing agreement dated September 16, 2003 (the CSI Sales
Agreement) with the Company that provides for certain payments to Mr. Pulford for his services as
a sales representative for the Company. See Certain Related Party Transactions for more
information regarding the CSI Sales Agreement. Audit Committee The Company has an audit committee consisting of Mr. Carl Joseph Berger, Jr. Mr. Berger is an
independent director. The Board of Directors has determined that it currently does not have an
individual that would be deemed an audit committee financial expert available for service on the
Audit Committee. Section16(a)Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires IBSS executive
officers, directors and persons who own more than ten percent (10%) of IBSS common stock to file
initial reports of ownership and changes in ownership with the SEC. Additionally, SEC regulations
require that IBSS identify any individuals for whom one of the referenced reports was not filed on
a timely basis during the most recent fiscal year or prior fiscal years. To IBSS knowledge, based
solely on a review of reports furnished to it, all Section 16(a) filing requirements applicable to
its executive officers, directors and more than 10% beneficial owners were complied with. 22




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##### 



Item 10. Executive Compensation. Summary Compensation Table The table below summarizes all compensation awarded to, earned by, or paid to our executive
officers by any person for all services rendered in all capacities to us for the fiscal period
ended December 31, 2004. Annual Compensation
    
    Long Term CompensationSecuritiesOther
    
    Restr.
    
    Underlying
    
    
    LTIP
    
    AllAnnual
    
    Stock
    
    Options/
    
    
    Pay-
    
    OtherName
    
    Title
    
    Year
    
    Salary
    
    
    Bonus
    
    Comp.
    
    Awards
    
    SARs (#)
    
    
    outs
    
    Comp.George E. Mendenhall, Ph.D.
    
    Chief Executive
    
    2004
    
    $
    146,867
    
    
    -0-
    
    -0-
    
    -0-
    
    
    -0-
    
    
    -0-
    
    -0-Officer and
    
    2003
    
    $
    104,500
    
    
    -0-
    
    $6,428(1)
    
    -0-
    
    
    5,037,255
    
    
    -0-
    
    -0-Chairman of the Board of Directors
    
    2002
    
    $
    97,596
    
    
    -0-
    
    -0-
    
    -0-
    
    
    96,894
    
    
    -0-
    
    -0-Michael P. Bernard
    
    Chief Financial
    
    2004
    
    $
    100,000
    
    
    -0-
    
    
    
    -0-
    
    
    500,000
    
    
    -0-
    
    -0-OfficerStuart E. Massey
    
    Ex. VP and Chief
    
    2004
    
    $
    146,867
    
    
    -0-
    
    -0-
    
    -0-
    
    
    -0-
    
    
    -0-
    
    -0-Technology Officer
    
    2003
    
    $
    104,500
    
    
    -0-
    
    -0-
    
    -0-
    
    
    5,037,255
    
    
    -0-
    
    -0-2002
    
    $
    97,956
    
    
    -0-
    
    -0-
    
    -0-
    
    
    10,000
    
    
    -0-
    
    -0-Donald R. Futch
    
    VP- Business
    
    2004
    
    $
    111,875
    
    
    -0-
    
    -0-
    
    -0-
    
    
    -0-
    
    
    -0-
    
    -0-Development
    
    2003
    
    $
    84,417
    
    
    -0-
    
    -0-
    
    -0-
    
    
    831,863
    
    
    -0-
    
    -0-2002
    
    $
    83,778
    
    
    -0-
    
    -0-
    
    -0-
    
    
    92,825
    
    
    -0-
    
    -0-
    (1)
    
    Dr. Mendenhall realized taxable income in the amount of $6,248 related to the exercise of
certain stock options during 2003. Option/SAR Grants in Last Fiscal Year
(Individual Grants) Percent of TotalNumber of Securities
    
    Options / SARsNumber of Securities
    
    Granted to
    
    Exercise orUnderlying Options / SARs
    
    Employees in Fiscal
    
    Base Price
    
    ExpirationName of Officer
    
    Granted (#)
    
    Year
    
    ($/Sh.)
    
    DateMichael P. Bernard
    
    
    500,000
    
    
    
    90.91
    %
    
    $
    0.26
    
    
    5 years
   23




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##### 



Effective as of October 1, 2003, the Board of Directors approved an amendment (the Plan
Amendment) to the Companys 2001 Stock Incentive Plan to increase the number of shares that could
be granted under the plan from 1,200,000 to 16,200,000. The Plan Amendment was approved by the
Companys shareholders at the Annual Meeting on June 10, 2004. The current terms of the new employment agreement for the three above-referenced executive
officers of the Company provides that the exercise prices for the stock options granted in 2003 are
subject to adjustments contemplated with respect to options granted under the Companys 2001 Stock
Incentive Plan (the Stock Plan). Such adjustments include, without limitation, subsequent stock
splits, stock dividends, recapitalizations, or similar events. Many of these types of adjustments
could cause the exercise price for each stock option above to be lowered in certain situations. In
the event that the exercise price were lowered as a result of such adjustments, the named executive
would receive an added economic benefit by being able to receive a share of Common Stock upon
exercise of a stock option at an exercise price less than that originally received under the terms
of the Stock Plan and the new employment agreement with the Company. Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values No. of Unexercised
    
    Value of Unexercised In-Shares
    
    Value
    
    Securities Underlying
    
    The-MoneyAcquired On
    
    Realized
    
    Options/SARs at FY End
    
    Options/SARs at FY EndName
    
    Exercise (#)
    
    ($)
    
    Exercisable/Unexercisable
    
    Exercisable/UnexercisableGeorge E. Mendenhall,
Ph.D.
    
    
    
    
    
    2,127,499/3,000,000

    $
    300,000/$450,000Michael P. Bernard
    
    
    
    
    
    75,000/425,000

    $
    2,250/$63,750Stuart E. Massey
    
    
    
    
    
    2,186,148/3,000,000

    $
    314,461/$450,000Donald R. Futch
    
    
    
    
    
    470,299/500,000

    $
    57,369/$75,000
   Employment Agreements Mendenhall Agreement.The Company was party to an employment agreement with George E.
Mendenhall, Ph.D., dated January 1, 1997, as amended September 1, 1997 and January 1, 1999. The
prior January 1, 1997 employment agreement has been superceded by a new employment agreement
between the Company and Mr. Mendenhall dated October 1, 2003. Under the terms of the new employment agreement, Mr. Mendenhall is employed by the Company for
a period of four years ending on December 31, 2007. The term is to be automatically renewed for
additional terms of one year each, unless the Company decides to elect not to renew within 180 days
prior to expiration of the then current term. Mr. Mendenhall receives several forms of performance
and non-performance based compensation. His non-performance based compensation includes annual
base compensation of $152,000, eligibility for an annual bonus, participation in the Companys
existing benefit programs for executive officers, reimbursement of reasonable expenses, and a grant
of 5,000,000 stock options convertible into Common Stock at the exercise price of $0.14 per share.
2,000,000 of these stock options are fully vested as of October 1, 2003. The remaining 3,000,000
of these stock options vest on October 1, 2005. The remainder of Mr. Mendenhalls options for
fiscal year 2003, or 37,255 options, were granted as penny stock options in connection with the
Companys decision to make across the board salary cuts for executive officers and employees in
2003. The new employment agreement with Mr. Mendenhall provides for accelerated vesting of all
unvested options upon a change of control of the Company (as defined in the agreement) and permits
the Company to terminate Mr. Mendenhalls employment with or without cause. In the event that the
Company does so with cause (as defined in the agreement), Mr. Mendenhall forfeits a variety of
compensation and other benefits enumerated in the agreement (excluding vested stock options). In
the event the Company does so without cause, the Company is required to pay to Mr. Mendenhall (i)
all accrued and unpaid salary, bonuses and all unreimbursed expenses, (ii) severance compensation
equal to 18 months of base salary at the rate of base salary in effect immediately preceding the
date of termination but not less than $152,000 per year, (iii) all unvested stock options
referenced above, and (iv) all other employee benefits granted in the agreement that are received
by 24




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##### 



Mr. Mendenhall at the time of termination. Finally, the new employment agreement obligates Mr.
Mendenhall to certain confidentiality and non-competition covenants. Massey Agreement.The Company was also party to an employment agreement with Stuart E. Massey
dated December 31, 1996, and amended September 1, 1997. The prior employment agreement with Mr.
Massey has been superceded by a new employment agreement between the Company and Mr. Massey dated
October 1, 2003. Under the terms of the new employment agreement, Mr. Massey is employed by the Company for a
period of four years ending on December 31, 2007. The term is to be automatically renewed for
additional terms of one year each, unless the Company decides to elect not to renew within 180 days
prior to expiration of the then current term. Mr. Massey receives several forms of performance and
non-performance based compensation. His non-performance based compensation includes annual base
compensation of $152,000, eligibility for an annual bonus, participation in the Companys existing
benefit programs for executive officers, reimbursement of reasonable expenses, and a grant of
5,000,000 stock options convertible into Common Stock at the exercise price of $0.14 per share.
2,000,000 of these stock options are fully vested as of October 1, 2003. The remaining 3,000,000
of these stock options vest on October 1, 2005. The remainder of Mr. Masseys options for fiscal
year 2003, or 37,255 options, were granted as penny stock options in connection with the Companys
decision to make across the board salary cuts for executive officers and employees in fiscal year
2003 (see the section of this prospectus above entitled Executive Compensation). The new employment agreement with Mr. Massey provides for accelerated vesting of all unvested
options upon a change of control of the Company (as defined in the agreement) and permits the
Company to terminate Mr. Masseys employment with or without cause. In the event that the Company
does so with cause (as defined in the agreement), Mr. Massey forfeits a variety of compensation and
other benefits enumerated in the agreement (excluding vested stock options). In the event the
Company does so without cause, the Company is required to pay to Mr. Massey (i) all accrued and
unpaid salary, bonuses and all unreimbursed expenses, (ii) severance compensation equal to 18
months of base salary at the rate of base salary in effect immediately preceding the date of
termination but not less than $152,000 per year, (iii) all unvested stock options referenced above,
and (iv) all other employee benefits granted in the agreement that are received by Mr. Massey at
the time of termination. Finally, the new employment agreement obligates Mr. Massey to certain
confidentiality and non-competition covenants. Futch Agreement.The Company was also party to an employment agreement with Donald R. Futch
dated January 1, 1999. The prior employment agreement with Mr. Futch has been superceded by a new
employment agreement between the Company and Mr. Futch dated October 1, 2003. Under the terms of the new employment agreement, Mr. Futch is employed by the Company for a
period of four years ending on December 31, 2007. The term is to be automatically renewed for
additional terms of one year each, unless the Company decides to elect not to renew within 180 days
prior to expiration of the then current term. Mr. Futch receives several forms of performance and
non-performance based compensation. His non-performance based compensation includes
annual base compensation of $115,000, eligibility for an annual bonus, participation in the
Companys existing benefit programs for executive officers, reimbursement of reasonable expenses,
and a grant of 800,000 stock options convertible into Common Stock at the exercise price of $0.14
per share. 300,000 of these stock options are fully vested as of October 1, 2003. The remaining
500,000 stock options vest on October 1, 2005. The remainder of Mr. Futchs options for fiscal
year 2003, or 31,863 options, were granted as penny stock options in connection with the Companys
decision to make across the board salary cuts for executive officers and employees in 2003 (see the
section of this prospectus above entitled Executive Compensation). The new employment agreement with Mr. Futch provides for accelerated vesting of all unvested
options upon a change of control of the Company (as defined in the agreement) and permits the
Company to terminate Mr. Futchs employment with or without cause. In the event that the Company
does so with cause (as defined in the agreement), Mr. Futch forfeits a variety of compensation and
other benefits enumerated in the agreement (excluding vested stock options). In the event the
Company does so without cause, the Company is required to pay to Mr. Futch (i) all accrued and
unpaid salary, bonuses and all unreimbursed expenses, (ii) severance compensation equal to 18
months of base salary at the rate of base salary in effect immediately preceding the date of
termination but not less than $115,000 per year, (iii) all unvested stock options referenced above,
and (iv) all other employee benefits granted in the agreement that are received by Mr. Futch at the
time of termination. Finally, the new employment agreement obligates Mr. Futch to certain
confidentiality and non-competition covenants. 25




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##### 



McMaster Agreement.On June 30, 2003 the Company terminated its prior employment agreement
with William S. McMaster dated May 30, 2000 in connection with Mr. McMasters tender of his
resignation. At the time this employment agreement was terminated, the Company owed Mr. McMaster
$250,651.37 in deferred wages and accrued interest thereon. The Company is currently making
monthly payments to Mr. McMaster of these deferred wages (and interest) in the amount of $9,548.62. Bernard Agreement.The Company entered into an employment agreement, dated as of March 19,
2004, with Michael P. Bernard. Under the terms of this agreement, Mr. Bernard is employed by the
Company for a three-year period beginning on April 16, 2004. The term is to be automatically
renewed for additional terms of one year each, unless either party elects not to renew within 180
days prior to the expiration of the then current term. Mr. Bernard assumed the responsibilities of
the Chief Financial Officer of the Company beginning on May 14, 2004, immediately following the
filing with the SEC of the Companys Quarterly Report on Form 10-QSB for the fiscal quarter ended
March 31, 2004. Mr. Bernard receives several forms of performance and non-performance based compensation. His
non-performance based compensation includes annual base compensation of $150,000, eligibility for
an annual bonus, participation in the Companys existing benefit programs for executive officers,
reimbursement of reasonable expenses, and a grant of 500,000 stock options convertible into Common
Stock at the exercise price of $0.26 per share. These options have an exercise life of five years
and vest, so long as Mr. Bernard remains an employee of the Company, as follows: (i) 75,000 shares
on October 15, 2004, (ii) 100,000 shares on April 15, 2005, (iii) 75,000 shares on October 15,
2005, (iv) 100,000 shares on April 15, 2006, and (v) 150,000 shares on October 15, 2006. The agreement provides for accelerated vesting of all unvested options upon a change of
control of the Company (as defined in the agreement) and permits the Company to terminate Mr.
Bernards employment with or without cause. In the event that the Company does so with cause (as
defined in the agreement), Mr. Bernard forfeits a variety of compensation and other benefits
enumerated in the agreement (excluding vested stock options). In the event that the Company does
so without cause, or if Mr. Bernard resigns for good cause (as defined in the agreement), the
Company is required to pay Mr. Bernard (i) all accrued and unpaid salary, bonuses and all
unreimbursed expenses, (ii) severance compensation equal to 18 months of base salary at the rate of
base salary in effect immediately preceding the date of termination but not less than $150,000 per
year, (iii) all unvested stock options referenced above, and (iv) all other employee benefits
granted in the agreement that are received by Mr. Bernard at the time of termination for a period
of one year. Finally, the agreement obligates Mr. Bernard to certain confidentiality and
non-competition covenants. Director Compensation The directors of the Company who are executive officers of the Company are not separately
compensated for serving as directors of the Company. All directors of the Company are reimbursed
by the Company for all out-of-pocket costs and expenses reasonably incurred by them in the
discharge of their duties as directors, including out-of-pocket expenses
incurred in attending meetings of the Board of Directors and its committees. Non-employee
directors receive discretionary annual grants of stock options. In addition to reimbursement of such costs and expenses, members of the Board of Directors are
granted stock options in connection with their initial appointment to serve as a member of the
Board of Directors and in connection with their service on committees of the Board of Directors.
During the fiscal year ended December 31, 2003, 250,000 stock options were granted to Mr. Berger
for his service as both chair and co-chair of several Board committees, 200,000 options were
granted to Ms. Cole for her Board committee service and 200,000 stock options were granted to Mr.
Pulford for his Board committee service, each such directors option grant is subject to
shareholder approval at the Annual Meeting. An additional 50,000-share purchase option granted to
Mr. Pulford in 2003, for his initial appointment to the Board, vests with respect to 50% of the
options six months after grant with the remaining options vesting one year after grant. All other
stock options granted to members of the Board in 2003 will vest on October 1, 2005. The exercise
price of all options granted to directors in 2003 is equal to the closing sales price of the Common
Stock on the date of the respective option grant, which was $0.14 per share. The term of each
option is five years. Since Ms. Cole will no longer serve on the Board after the Annual Meeting,
her unvested options will terminate at that time. 26




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##### 



Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters. The following table sets forth information regarding the beneficial ownership of shares of
Common Stock of the Company as of December 31, 2004 (at which time the Company had 32,506,144
shares of Common Stock issued and outstanding) by (i) all shareholders known to the Company to be
beneficial owners of more than 5% of the issued and outstanding Common Stock; and (ii) all
executive officers and directors of the Company, individually and as a group: Amount and Nature ofName of Beneficial Owner
    
    Beneficial Ownership (1)
    
    PercentIBSS Class B Investors, LLC (2)(3)
    
    
    4,066,798
    
    
    
    11.12
    %George E. Mendenhall, PhD. (4)(5)
    
    
    3,417,148
    
    
    
    9.87
    %Stuart E. Massey (4)(6)
    
    
    3,348,248
    
    
    
    9.65
    %Fusion Capital Fund II, LLC (7)
    
    
    2,255,715
    
    
    
    6.94
    %Donald R. Futch (4)(8)
    
    
    583,876
    
    
    
    1.77
    %Carl Joseph Berger, Jr. (4)(9)
    
    
    361,000
    
    
    
    *Michael P. Bernard (4)(10)
    
    
    75,000
    
    
    
    *Richard D. Pulford (4)(11)
    
    
    41,667
    
    
    
    *Shares held by all directors and
executive officers as a group (6
persons total) (12)
    
    
    7,826,939
    
    
    
    20.84
    %
    (1)
    
    Beneficial ownership reflected in the table is determined in accordance with the rules and
regulations of the Commission and generally includes voting or investment power with respect to the
securities. Except as otherwise specified, each of the shareholders named in the above referenced
table has indicated to us that the shareholder has sole voting and investment power with respect to
all shares of Common Stock beneficially owned by that shareholder.(2)
    
    The address for this beneficial owner is c/o Seyburn, Kahn, Ginn, Bess, and Serlin, P.C.,
2000 Town Center, Suite 1500, Southfield, Michigan 48075.(3)
    
    Shares indicated as being owned include (i) 2,033,399 are shares of Common Stock
convertible upon exercise of warrants under an Amended and Restated Common Stock Purchase Warrant
(Class B Investors) dated October 1, 2003 and (ii) 2,033,399 are shares of Common Stock convertible
upon exercise of an Amended and Restated Class B Contingent Common Stock Purchase Warrant dated
October 1, 2003. These shares do not include 22,821,256 shares of Common Stock that GEE
Enterprises, LLC is entitled to receive upon exercise of an existing Common Stock Purchase Warrant
dated October 1, 2003, which may be exercised at any time on or after October 1, 2004 through 5:00
p.m. eastern standard time on December 31, 2006.(4)
    
    The address for this beneficial owner is 1601 Shop Road, Suite E, Columbia, SC 29201.(5)
    
    Shares indicated as being owned include 2,127,499 shares issuable upon the exercise of
common stock options.(6)
    
    Shares indicated as being owned include 2,186,148 shares issuable upon the exercise of
common stock options.(7)
    
    The address for this beneficial owner is 222 Merchandise Mart Plaza, Suite 9-112, Chicago,
Illinois 60654. Shares indicated as being owned include 1,438,750 issued under the common stock
purchase agreement with Fusion Capital, 27




---



##### 



510,715 issued as an initial commitment fee, 4,256 issued
as an additional commitment fee, 50,000 issued as a diligence fee, and 252,000 issued and to be
earned under the Fusion Consulting Agreement (described below). We have also issued a warrant to
Fusion Capital exercisable for an aggregate 937,500 shares of common stock. The warrant may not be
exercised if Fusion Capital, together with its affiliates, would beneficially own more than 9.9% of
our Common Stock outstanding at the time such warrant is exercised by Fusion Capital.(8)
    
    Shares indicated as being owned include 470,299 shares issuable upon the exercise of
common stock options.(9)
    
    Shares indicated as being owned include 75,000 issuable under common stock warrants and
96,000 issuable upon the exercise of common stock options.(10)
    
    Shares indicated as being owned include 75,000 shares issuable upon the exercise of
common stock options.(11)
    
    Shares indicated as being owned include 16,667 issuable upon the exercise of common stock
options.(12)
    
    Shares indicated as being owned include 5,046,613 shares issuable upon the exercise of
common stock options and warrants. Equity Compensation Arrangements The following table provides information with respect to compensation plans under which equity
securities of the Company are authorized for issuance, as of December 31, 2004. 2004 Equity Compensation Plan Information Number ofsecurities to beissued upon
    
    
    
    
    
    
    Number of securitiesexercise of
    
    
    
    
    
    
    remaining available foroutstanding
    
    
    Weightedaverage
    
    
    future issuance under equityoptions,
    
    
    exercise price of
    
    
    compensation planswarrants, and
    
    
    outstanding options,
    
    
    (excluding securitiesrights
    
    
    warrants, and rights
    
    
    reflected in column (a))(a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    14,489,125
    
    
    $
    0.30
    
    
    
    2,878,723Equity compensation
plans not approved
by security holders
    
    
    638,735
    
    
    $
    0.01
    
    
    
    -0-Total
    
    
    15,127,860
    
    
    $
    0.29
    
    
    
    2,878,723
   Item 12. Certain Relationships and Related Transactions. The Company is party to a sales representative and marketing agreement with one of its
directors, Richard D. Pulford, and Mr. Pulfords affiliate corporation, CSI, dated September 16,
2003 (the Sales Agreement). Under the terms of the Sales Agreement, Mr. Pulford is to act as an
exclusive sales representative with respect to certain of the Companys customers and a
non-exclusive sales representative with respect to others and must use his best efforts to market
the Companys products worldwide in order to generate sales revenues. Mr. Pulford cannot market or
sell any products that are competitive with those sold by the Company. Mr. Pulford is also
obligated to perform other services for the Company, 28




---



##### 



including, but not limited to, coordinating
the efforts of the Companys sales staff in working with existing clients, introducing specified
customers and vendors of the Company to other customers and vendors to explore synergistic
relationships, introducing financial resources to the Companys customers, strategic partners,
customers, and vendors where such financing will be directly beneficial to the Company, and
searching for corporate partnering or acquisition opportunities for the Company. The term of the Sales Agreement is for 10 years from its date and may be renewed for
successive additional renewal periods of two years each, unless one party delivers a notice not to
renew within 90 days of the expiration of the then existing term. The Company is permitted to
terminate Mr. Pulford upon written notice for breach of a term or provision of the Sales Agreement,
but must provide him 30 days in which to cure any such breach. Mr. Pulford is obligated to
indemnify the Company for specified losses that result from alleged misrepresentations or other
actions and the Company has a right to audit and inspect the accounts and records generated by Mr.
Pulford as a result of his sales and marketing activities. In exchange for these services, the Company granted to Mr. Pulford three forms of
compensation. The first is the right to receive certain commissions based on the amounts collected
by the Company that are a direct result of Mr. Pulfords sales efforts. In the event that Mr.
Pulford earns such commissions, he may elect to receive payment of the commissions in either (i)
cash or (ii) the grant of stock options or restricted stock grants. Should Mr. Pulford elect to
receive the commissions in stock options, he could be entitled to purchase up to 1,000,000 shares
of Common Stock at an exercise price of $0.14 per share, which was the then market price of a share
of Common Stock on September 16, 2003. The stock options that could be granted to Mr. Pulford in
the event he elects to receive any commissions earned by him will vest at the rate of 1 share for
each net dollar of revenue that Mr. Pulford directly or indirectly contributes to the Companys
gross revenue as a result of his sales efforts. Net revenue is defined under the Sales Agreement
as license revenue, service revenue, maintenance revenue, and hardware revenue minus the cost of
the hardware as well as net income that might be added to the Companys net income by acquisition. The second is a non-refundable monthly cash advance of $10,000 per month (which is taken only
out of the Companys excess cash) (each, a Draw Payment). Each Draw Payment is applied against
future commissions and the aggregate of all Draw Payments cannot exceed $175,000 in the aggregate
over the term of the Sales Agreement. The third is a delayed signing bonus, which provides that the Company is to pay to Mr. Pulford
on the earlier of (i) the 5th anniversary of the Sales Agreement (or September 16, 2008)
or (ii) a change in control of the Company (as defined in the Sales Agreement), a lump sum in the
amount of $175,000, less the amount of all Draw Payments actually paid to Mr. Pulford. During 2004, $105,000 was paid or accrued on behalf of Mr. Pulford in connection with this
agreement. Item 13. Exhibits The accompanying Exhibit Index beginning on Page 32 hereof sets forth the Exhibits that are
both filed and incorporated by reference as part of this Annual Report on Form 10-KSB. Item 14. Principal Accountant Fees and Services. The following table shows the aggregate fees billed or to be billed to the Company by Scott
McElveen, L.L.P. for the years ended December 31, 2004 and 2003: 2004
    
    
    2003Audit Fees (1)
    
    $
    97,045
    
    
    $
    84,971Audit-Related Fees (2)
    
    
    
    
    
    
    Tax Fees (3)
    
    $
    6,000
    
    
    $
    6,524
 29




---



##### 



(1)
    
    Audit Fees:This fee category consists of services for the audit of our annual financial
statements, review of our quarterly financial statements, and services normally provided by the
independent auditors in connection with statutory and regulatory filings including: services
associated with SEC registration statements, other documents filed with the SEC, and documents
issued in connection with securities offerings (e.g., comfort letters and consents); and advice on
audit and accounting matters that arose during the audit or review of our financial statements.(2)
    
    Audit-Related Fees:This fee category consists of assurance and related services by Scott
McElveen, L.L.P. that are reasonably related to performing the audit and review of our financial
statements and are not reported above under Audit Fees. The services for these fees include other
accounting and consultation related to certain third-party contracts.(3)
    
    Tax Fees:This fee category consists of professional services rendered by Scott McElveen,
L.L.P. for tax return preparation, tax compliance and tax planning and advice. 30




---



##### 



SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the
registrant caused this Annual Report on Form 10-KSB to be signed on its behalf by the undersigned,
thereunto duly authorized. Dated:
April 15, 2005
    
    By:
    
    /s/ George E. MendenhallName: George E. MendenhallTitle: Chief Executive Officerand Chairman of the Board
 In accordance with the Securities Exchange Act of 1934, as amended, this Annual Report on Form
10-KSB has been signed by the following persons in the capacities and on the dates indicated below: Signature
    
    Title
    
    Date/s/ George E. Mendenhall
    
    Chief Executive Officer and Chairman
    
    April 15, 2005of the Board (principal executiveGeorge E. Mendenhall
    
    officer)/s/ Michael P. Bernard
    
    Chief Financial Officer (principal
    
    April 15, 2005financial officer and principalMichael P. Bernard
    
    accounting officer)/s/ Stuart E. Massey
    
    Executive Vice President,
    
    April 15, 2005Secretary, and DirectorStuart E. Massey/s/ Richard D. Pulford
    
    Director
    
    April 15, 2005Richard D. Pulford/s/ Carl Joseph Berger, Jr.
    
    Director
    
    April 15, 2005Carl Joseph Berger, Jr.
 31




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##### 



Integrated Business Systems and Services, Inc. Index to Financial Statements PagesReport of Independent Registered Public Accounting Firm
    
    
    
    F-2Financial Statements:Balance Sheets
    
    
    
    F-3Statements of Operations
    
    
    
    F-4Statements of Changes in Shareholders Deficiency
    
    
    
    F-5Statements of Cash Flows
    
    
    
    F-6Notes to Financial Statements
    
    
    
    F-7 to F-28
 F-1




---



##### 



Report of Independent Registered Public Accounting Firm   To the Board of Directors
Integrated Business Systems and Services, Inc.
Columbia, South Carolina We have audited the accompanying balance sheets of Integrated Business Systems and Services, Inc.
(the Company) as of December 31, 2004 and 2003, and the related statements of operations, changes
in shareholders deficiency and cash flows for each of the three years in the period ended December
31, 2004. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 2004 and 2003, and the results
of its operations and its cash flows for each of the three years in the period ended December 31,
2004, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 1 to the financial statements, the Company has a current
year net loss, an accumulated deficit, and a working capital deficiency. These and other factors
raise substantial doubt about the Companys ability to continue as a going concern. Managements
plans in regards to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of these uncertainties. /s/ Scott McElveen, L.L.P. Columbia, South Carolina
March 24, 2005 F-2




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##### 



Integrated Business Systems and Services, Inc.
Balance Sheets
December 31, 2004
    
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    105,084
    
    
    $
    214,925Accounts receivable, trade
    
    
    66,637
    
    
    
    265,644Interest receivable
    
    
    3,065
    
    
    
    31,789Notes receivable
    
    
    75,000
    
    
    
    Prepaid expenses
    
    
    19,646
    
    
    
    726Total current assets
    
    
    269,432
    
    
    
    513,084Capitalized software costs, net
    
    
    10,948
    
    
    
    63,172Property and equipment, net
    
    
    256,911
    
    
    
    377,540Interest receivable, non current
    
    
    37,331
    
    
    
    Other assets
    
    
    50,000
    
    
    
    52,000Total assets
    
    $
    624,622
    
    
    $
    1,005,796Liabilities and Shareholders DeficiencyCurrent liabilities:Convertible notes payable, net of discount
    
    $
    558,439
    
    
    $
    496,219Shareholder advances
    
    
    601,000
    
    
    
    Current portion of long-term debt
    
    
    309,131
    
    
    
    8,664Accounts payable
    
    
    52,510
    
    
    
    104,505Accrued liabilities:Accrued compensation and benefits
    
    
    160,166
    
    
    
    334,978Accrued payroll taxes
    
    
    29,649
    
    
    
    54,022Accrued professional fees
    
    
    326,241
    
    
    
    79,073Accrued interest
    
    
    55,857
    
    
    
    30,543Accrued rent
    
    
    15,000
    
    
    
    67,604Other
    
    
    7,090
    
    
    
    25,500Deferred revenue
    
    
    134,873
    
    
    
    10,063Total current liabilities
    
    
    2,249,956
    
    
    
    1,211,171Long-term debt, net of discount
    
    
    2,872,251
    
    
    
    3,193,960Total liabilities
    
    
    5,122,207
    
    
    
    4,405,131Commitments and contingenciesShareholders deficiency:Preferred stock, undesignated par value, 10,000,000 shares,
none authorized or issued
    
    
    3⁄4
    
    
    
    3⁄4Common shares, voting, no par value, 200,000,000 shares
authorized, 32,506,144 and 26,880,404 shares outstanding
at December 31, 2004 and 2003, respectively
    
    
    21,683,495
    
    
    
    20,868,000Notes receivable officers/directors
    
    
    (131,080
    )
    
    
    (131,080
    )Accumulated deficit
    
    
    (26,050,000
    )
    
    
    (24,136,255
    )Total shareholders deficiency
    
    
    (4,497,585
    )
    
    
    (3,399,335
    )Total liabilities and shareholders deficiency
    
    $
    624,622
    
    
    $
    1,005,796
 The accompanying notes are an integral part of these financial statements. F-3




---



##### 



Integrated Business Systems and Services, Inc.
Statements of Operations
for the years ended December 31, 2004
    
    
    2003
    
    
    2002RevenuesServices
    
    $
    1,743,595
    
    
    $
    3,133,796
    
    
    $
    2,728,355Software licensing
    
    
    36,738
    
    
    
    55,937
    
    
    
    506,590Maintenance
    
    
    116,938
    
    
    
    82,040
    
    
    
    67,799Hardware sales
    
    
    130,784
    
    
    
    38,970
    
    
    
    84,802Total revenues
    
    
    2,028,055
    
    
    
    3,310,743
    
    
    
    3,387,546Cost of revenuesServices
    
    
    686,721
    
    
    
    912,175
    
    
    
    1,023,634Software licensing
    
    
    62,506
    
    
    
    191,394
    
    
    
    190,023Maintenance
    
    
    211,346
    
    
    
    110,714
    
    
    
    87,623Hardware sales
    
    
    106,129
    
    
    
    26,764
    
    
    
    66,2801,066,702
    
    
    
    1,241,047
    
    
    
    1,367,560Gross margin
    
    
    961,353
    
    
    
    2,069,696
    
    
    
    2,019,986Operating expensesGeneral and administrative
    
    
    1,389,969
    
    
    
    1,693,122
    
    
    
    2,512,321Sales and marketing
    
    
    769,397
    
    
    
    311,010
    
    
    
    311,402Research and development costs
    
    
    545,772
    
    
    
    193,574
    
    
    
    376,660Bad debt expense
    
    
    11,400
    
    
    
    21,770
    
    
    
    51,126Total operating expenses
    
    
    2,716,538
    
    
    
    2,219,476
    
    
    
    3,251,509Loss from operations
    
    
    (1,755,185
    )
    
    
    (149,780
    )
    
    
    (1,231,523
    )Other income (losses and expenses):Loss on disposal of equipment
    
    
    3⁄4
    
    
    
    (15,500
    )
    
    
    (11,999
    )Other income (expense)
    
    
    (11,468
    )
    
    
    39,363
    
    
    
    128,050Interest income
    
    
    8,749
    
    
    
    5,250
    
    
    
    4,442Interest expense
    
    
    (155,841
    )
    
    
    (726,654
    )
    
    
    (1,196,384
    )Non-controlling interest
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (847,353
    )Net loss
    
    $
    (1,913,745
    )
    
    $
    (847,321
    )
    
    $
    (3,154,767
    )Loss per share:Net lossBasic and diluted
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    $
    (0.17
    )
 The accompanying notes are an integral part of these financial statements. F-4




---



##### 



Integrated Business Systems and Services, Inc.
Statements of Changes in Shareholders Deficiency Notes
    
    
    
    
    
    
    AccumulatedReceivable
    
    
    
    
    
    
    Deficit and
    
    
    TotalCommon Stock
    
    
    Officers/
    
    
    Unearned
    
    
    Minority
    
    
    ShareholdersIssued
    
    
    Amount
    
    
    Directors
    
    
    Compensation
    
    
    Interest
    
    
    DeficiencyBalance, December
31, 2001
    
    
    17,774,694
    
    
    $
    18,041,226
    
    
    $
    (131,080
    )
    
    $
    
    
    
    $
    (20,981,520
    )
    
    $
    (3,071,374
    )Sale of common shares
    
    
    523,985
    
    
    
    142,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,000Subordinated debt
converted to common
shares
    
    
    3,821,010
    
    
    
    767,851
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    767,851Accounts payable
converted to common
shares
    
    
    38,117
    
    
    
    62,845
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62,845Accounts payable
converted to warrants
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,000Issuance of warrants
    
    
    
    
    
    
    472,112
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    472,112Deferred stock
compensation
    
    
    
    
    
    
    122,869
    
    
    
    
    
    
    
    (42,581
    )
    
    
    
    
    
    
    80,288Long-term debt
beneficial conversion
    
    
    
    
    
    
    228,076
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    228,076Exercise of options
    
    
    72,452
    
    
    
    10,699
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,699Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,154,767
    )
    
    
    (3,154,767
    )Non-controlling interest
in net assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    847,353
    
    
    
    847,353Balance, December 31,
2002
    
    
    22,230,258
    
    
    
    19,877,678
    
    
    
    (131,080
    )
    
    
    (42,581
    )
    
    
    (23,288,934
    )
    
    
    (3,584,917
    )Sale of common shares
    
    
    2,150,000
    
    
    
    430,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    430,000Subordinated debt
converted to common
shares
    
    
    2,080,163
    
    
    
    337,074
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    337,074Accounts payable
converted to common
shares
    
    
    112,618
    
    
    
    23,660
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,660Issuance of warrants for
services
    
    
    
    
    
    
    19,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,000Deferred stock
compensation
    
    
    
    
    
    
    162,477
    
    
    
    
    
    
    
    42,581
    
    
    
    
    
    
    
    205,058Stock issued for services
    
    
    125,000
    
    
    
    16,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,250Exercise of options
    
    
    182,365
    
    
    
    1,861
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,861Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (847,321
    )
    
    
    (847,321
    )Balance, December 31,
2003
    
    
    26,880,404
    
    
    
    20,868,000
    
    
    
    (131,080
    )
    
    
    
    
    
    
    (24,136,255
    )
    
    
    (3,399,335
    )Sale of common shares
    
    
    4,648,215
    
    
    
    622,541
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    622,541Accounts payable
converted to common
shares
    
    
    326,145
    
    
    
    76,470
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,470Stock issued for services
    
    
    577,000
    
    
    
    115,740
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,740Exercise of options
    
    
    74,380
    
    
    
    744
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    744Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,913,745
    )
    
    
    (1,913,745
    )Balance, December 31,
2004
    
    
    32,506,144
    
    
    $
    21,683,495
    
    
    $
    (131,080
    )
    
    $
    
    
    
    $
    (26,050,000
    )
    
    $
    (4,497,585
    )
 The accompanying notes are an integral part of these financial statements F-5




---



##### 



Integrated Business Systems and Services, Inc.
Statements of Cash Flows
for the years ended December 31, 2004
    
    
    2003
    
    
    2002Operating activitiesNet loss
    
    $
    (1,913,745
    )
    
    $
    (847,321
    )
    
    $
    (3,154,767
    )Adjustments to reconcile net loss to cash
provided by (used in) operating activities:Depreciation
    
    
    141,290
    
    
    
    146,369
    
    
    
    148,879Provision for losses on notes and accounts
receivable
    
    
    11,400
    
    
    
    
    
    
    
    41,601Amortization of software costs
    
    
    52,225
    
    
    
    178,122
    
    
    
    179,217Loss on disposal of equipment
    
    
    
    
    
    
    15,500
    
    
    
    11,999Non-controlling interest in net loss
    
    
    
    
    
    
    
    
    
    
    847,353Non-cash interest expense
    
    
    114,220
    
    
    
    306,301
    
    
    
    815,263Deferred compensation
    
    
    
    
    
    
    205,058
    
    
    
    80,288Issuance of warrants and stock in payment of
accounts payable and accrued liabilities
    
    
    176,719
    
    
    
    35,250
    
    
    
    72,000Changes in operating assets and liabilities:Accounts receivable, trade
    
    
    187,606
    
    
    
    (62,674
    )
    
    
    162,398Unbilled revenue
    
    
    
    
    
    
    
    
    
    
    38,856Interest receivable
    
    
    (8,607
    )
    
    
    (5,250
    )
    
    
    (1,904
    )Prepaid expenses and other assets
    
    
    (16,920
    )
    
    
    22,562
    
    
    
    (35,193
    )Accounts payable
    
    
    (51,995
    )
    
    
    (49,658
    )
    
    
    (151,877
    )Accrued liabilities
    
    
    13,658
    
    
    
    179,244
    
    
    
    182,878Deferred revenue
    
    
    124,810
    
    
    
    (63,264
    )
    
    
    (20,050
    )Cash provided by (used in) operating activities
    
    
    (1,169,339
    )
    
    
    60,239
    
    
    
    (783,059
    )Investing activitiesNotes receivable
    
    
    (75,000
    )
    
    
    
    
    
    
    Purchases of property and equipment
    
    
    (20,661
    )
    
    
    (139,560
    )
    
    
    (560
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    
    
    
    
    3,900Related party receivables, net
    
    
    
    
    
    
    5,600
    
    
    
    9,794Cash provided (used in) by investing activities
    
    
    (95,661
    )
    
    
    (133,960
    )
    
    
    13,134Financing activitiesPayments on notes payable
    
    
    (52,000
    )
    
    
    (322,500
    )
    
    
    (175,000
    )Proceeds from issuance of convertible debt
    
    
    
    
    
    
    
    
    
    
    839,000Proceeds from issuance of long-term debt
    
    
    
    
    
    
    130,000
    
    
    
    Payments on long-term debt
    
    
    (21,242
    )
    
    
    (6,589
    )
    
    
    Shareholder advances
    
    
    601,000
    
    
    
    
    
    
    
    Sale of common shares
    
    
    626,657
    
    
    
    430,000
    
    
    
    100,000Proceeds from exercise of common stock options
and warrants
    
    
    744
    
    
    
    1,861
    
    
    
    10,699Proceeds from issuance of convertible
promissory notes
    
    
    
    
    
    
    
    
    
    
    45,000Cash provided by financing activities
    
    
    1,155,159
    
    
    
    232,772
    
    
    
    819,699Net increase (decrease) in cash
    
    
    (109,841
    )
    
    
    159,051
    
    
    
    49,774Cash and cash equivalents at beginning of period
    
    
    214,925
    
    
    
    55,874
    
    
    
    6,100Cash and cash equivalents at end of period
    
    $
    105,084
    
    
    $
    214,925
    
    
    $
    55,874
 The accompanying notes are an integral part of these financial statements. F-6




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##### 



Integrated Business Systems and Services, Inc.
Notes to Financial Statements Note 1. Going Concern: The accompanying financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of
business. As shown in the financial statements, Integrated Business Systems and Services, Inc.
(IBSS or the Company) had a working capital deficiency and an accumulated deficit of
approximately $1,980,524 and $26,050,000, respectively, at December 31, 2004. In addition, the
Company has experienced a significant decline in revenues from its largest customer without a
corresponding increase in revenues from other sources. Further, as disclosed below, the Company
currently is in default on the payment of principal and interest under certain notes issued in
2001. The hold of a senior secured note with principal and interest of $539,078 as of December 31,
2004 has demanded payment in full. The Company cannot make any such payment at this time. Without
an increase in revenues from all sources or an additional capital infusion, or both, the Company
will not be able to meet its current and future financial obligations. Ultimately, IBSS viability as a going concern is dependent upon its ability to generate
positive cash flows from operations, maintain adequate working capital and obtain satisfactory
long-term financing. However, there can be no assurance that the Company will be able to
generate additional revenues, profits or capital in sufficient amounts or within the time frame
necessary to survive the current downturn in operating results. In that event, the Company may be
forced to discontinue its operations. The financial statements do not include any adjustments relating to the recoverability and
classification of liabilities that might be necessary should IBSS be unable to continue as a going
concern. IBSS plans include the following, although it is not possible to predict the ultimate
outcome of IBSS efforts: Investor Debt and Other Payables.On October 1, 2003, IBSS restructured substantially all of
its short-term investor debt. Under the restructured debt instruments, approximately 90% of the
principal balance is not payable until the fourth quarter of 2006. In addition, during the third
and fourth quarters of 2004, the Company received advances from certain of its existing
shareholders of $651,000 in the aggregate for short-term working capital purposes. Of this amount,
$50,000 has been converted to 250,000 shares of common stock and 125,000 common stock warrants with
an exercise price of $0.40 per share. The remainder of these advances is outstanding at December
31, 2004 and the Company is not currently paying or accruing any interest related to this balance. In the months since the issuance of IBSS currently outstanding convertible debt, holders of a
portion of this debt have converted the principal and accrued interest on all or a portion of their
debt into common stock. Although these conversions have reduced IBSS principal and interest
obligations, IBSS is currently faced with principal and interest obligations on the remaining
convertible debt that it will not be able to satisfy from currently projected cash flows from
operations. In this regard, the holder of a senior secured note with $539,078 of principle and
accrued interest outstanding as of December 31, 2004 (the Note) representing the largest portion
of the remainder of this debt, has recently demanded payment in full. According to its terms,
this Note became due and payable in full on January 1, 2003. The Company has not made, and cannot
make, any such payment at this time. The Company is currently investigating the circumstances
surrounding the execution and approval of the Note and disputes the amount it may owe under the
Note. While the Company hopes to negotiate a settlement to this demand that will be mutually
acceptable to both parties, no assurance can be given that the Company will be successful in this
endeavor. Additional Capital.IBSS is seeking to raise additional capital during 2005 through the
private placement of convertible debt or equity securities, or both. Because of several factors,
including the operating, market and industry risks associated with an investment in its common
stock, the fact that IBSS common stock is no longer traded on the Nasdaq Stock Market and is
currently traded on the Over-the-Counter Bulletin Board (OTCBB) maintained by the National
Association of Securities Dealers (NASD), and the continued weakness in the capital markets in
general and the technology sectors in particular, IBSS may experience difficulty in raising
additional financing until its operating results or overall market conditions reflect sustained
improvement. F-7




---



##### 



Integrated Business Systems and Services, Inc.
Notes to Financial Statements Note 2. Summary of Significant Accounting Policies: IBSS is the provider of Synapse,a complete framework and methodology used
to create, implement and manage a wide variety of dynamic, distributed, networked, and real-time
enterprise applications. Synapse utilizes a single, flexible framework to provide time
and cost advantages in the development, deployment, and on-going management of customized
applications. IBSS provides solutions to customers for mission-critical technologies in
manufacturing, distribution, healthcare, finance, insurance, retail, education and government using
Synapseto take advantage of technologies such as wireless networking, mobile computing
and Radio Frequency Identification (RFID). Basis of Consolidation In 2003 and 2002, the financial statements included the accounts of IBSS
and its majority-owned subsidiary, Synamco, L.L.C. (collectively IBSS). Synamco, LLC was
liquidated effective December 31, 2003. Cash and Cash Equivalents IBSS considers all highly liquid investments with a maturity of three
months or less at date of acquisition to be cash equivalents. Accounts Receivable Accounts receivable are customer obligations due under normal trade terms.
IBSS performs continuing credit evaluations of its clients and generally does not require
collateral. Management reviews accounts receivable on a regular basis to determine if any
receivables will potentially be uncollectible. Any accounts receivable balances that are
determined to be uncollectible are included in the allowance for doubtful accounts. After all
attempts to collect a receivable have failed, the receivable is written off against the allowance.
Based on the information available, management believes all accounts receivable are fully
collectable and therefore has not established an allowance as of December 31, 2004. However,
write-offs may occur on the outstanding accounts receivable balances. Notes Receivable During the second quarter of 2004, the Company advanced $75,000 to a company
involved with the development of a patented directional RFID tag tracking and reporting process.
These advances are evidenced by promissory notes that are collateralized by exclusive rights to
certain patents, bear interest at the prime rate plus 2% and are due to be repaid no later than May
31, 2005. All amounts due under these notes were repaid in January 2005. Property and Equipment Property and equipment, including certain support software acquired for
internal use, are stated at cost less accumulated depreciation and amortization. Property and
equipment are depreciated on a straight-line basis over their estimated useful lives, generally
ranging from five to seven years. Leasehold improvements are amortized over the lesser of the term
of the respective lease or estimated useful life of the improvement. Expenditures for major
renewals and betterments that extend the useful lives of property and equipment are capitalized.
Expenditures for maintenance and repairs are charged to expense as incurred. Upon retirement or
sale, the cost of the disposed asset and the related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is credited or charged to income. F-8




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##### 



Integrated Business Systems and Services, Inc.
Notes to Financial Statements Note 2. Summary of Significant Accounting Policies (continued): Revenue Recognition IBSS revenues are generated primarily by licensing to customers standardized
manufacturing software systems and providing integration services, automation and administrative
support and information services to the manufacturing industry. IBSS recognizes revenues related
to software licenses and software maintenance in accordance with the guidance of Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, SAB No. 104, Revenue
Recognition, and with the American Institute of Certified Public Accountants Statement of Position
No. 97-2, Software Revenue Recognition, as amended. IBSS generally recognizes revenue when all of the following criteria are met: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred; (3) the fee is fixed or determinable;
and (4) collectibility is probable. Each of these four criteria above is defined as follows: Persuasive evidence of an arrangement exists. It is IBSS customary practice to have a written
contract, which is signed by both the customer and IBSS or, in situations where a contract is not
required, a customer purchase order has been received. Delivery has occurred. IBSS software may be either physically or electronically delivered to the
customer. Delivery is deemed to have occurred upon the delivery of the electronic code or the
shipment of the physical product based on standard contractual committed shipping terms, whereby
risk of loss passes to the customer when the shipment is picked up by the carrier. If undelivered
products or services exist in an arrangement that are essential to the functionality of the
delivered product, delivery is not considered to have occurred until these products or services are
delivered as described above. The fee is fixed or determinable. IBSS customers generally pay a per-license fee that is based on
the number of servers on which the software is installed, the size of the application that they
will develop for the software, the options provided for those servers, and the number of client
workstations that access the server. Additional license fees are due when the total number of
subscribers using IBSS products increases beyond the specified number for which a license was
purchased or when additional options are added. License fees are generally due within 30-45 days
from product delivery. Collectibility is probable. Collectibility is assessed on a customer-by-customer basis. IBSS
typically sells to customers with high credit ratings and solid payment practices. New customers
are subjected to a credit review process in which IBSS evaluates the customers financial position
and ultimately their ability to pay. If it is determined from the outset of an arrangement that
collectibility is not probable based upon the credit review process, revenue is recognized as cash
payments are received. IBSS agreements with its customers and resellers do not contain product return rights. Revenues
from maintenance, which consist of fees for ongoing support and product updates, are recognized
ratably over the term of the contract, typically one year. Cash payments received in advance of
product or service revenue are recorded as deferred revenue. Consulting revenues are primarily
related to implementation services performed on a time and materials basis under separate service
arrangements. Research and Development Research and development costs consist of expenditures incurred during
the course of planned research and investigation aimed at discovery of new knowledge which will be
useful in developing new products or processes, or significantly enhancing existing products or
production processes, and the implementation of such through design, testing of product
alternatives or construction of working models. Such costs are charged to operations as incurred. F-9




---



##### 



Integrated Business Systems and Services, Inc.
Notes to Financial Statements Note 2. Summary of Significant Accounting Policies (continued): Software Development Costs Under the provisions of SFAS No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, issued by the Financial Accounting
Standards Board (FASB), certain costs incurred in the internal development of computer software,
which is to be licensed to customers, are capitalized. Amortization of capitalized software costs
is provided upon commercial release of the products at the greater of the amount using (i) the
ratio that current gross revenues for a product bear to the total of current and anticipated future
gross revenues of that product or (ii) the straight-line method over the remaining estimated
economic life of the product including the period being reported on. IBSS generally amortizes
capitalized software costs on a straight-line basis over five years. Costs that are capitalized as part of internally developed software primarily include direct and
indirect costs associated with payroll, computer time and allocable depreciation and other direct
allocable costs, among others. All costs incurred prior to the establishment of technological
feasibility, which IBSS defines as the earlier to occur of (1) establishment of a detail program
design or (2) the development of a working model, have been expensed as research and development
costs during the periods in which they were incurred. Once technological feasibility has been
achieved, costs of producing the product master are capitalized. Capitalization stops when the
product is available for general release. The amount by which unamortized software costs exceed
the estimated net realizable value, if any, is charged to income in the period it is determined.
IBSS evaluates the net realizable value of capitalized computer software costs and intangible
assets on an ongoing basis relying on a number of factors, including operating results, business
plans, budgets and economic projections. Because IBSS believes its current process for developing software is essentially completed
concurrently with the establishment of a working model, no costs have been capitalized during 2004
or 2003. Stock-Based Compensation IBSS applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25) and related interpretations in accounting for its stock-based
compensation plans and applies the disclosure-only provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation (SFAS 123), as amended by FASB Statement No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure (SFAS 148). IBSS recognizes stock-based compensation expense for stock options granted to employees and
non-employee directors if the quoted market price of the stock at the date of the grant or award
exceeds the price, if any, to be paid by an employee for the exercise of the stock. F-10




---



##### 



Integrated Business Systems and Services, Inc.
Notes to Financial Statements Note 2. Summary of Significant Accounting Policies (continued): Stock-Based Compensation (continued) In December 2004, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 123®, Share-Based Payment, effective July 1, 2005,
which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123®
requires all share-based payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values. As permitted by Statement 123,
the Company currently accounts for share-based payments to employees using Opinion 25s intrinsic
value method and, as such, only recognizes compensation cost for employee stock options to the
extent that options have been issued below the fair market value of the underlying stock on the
date of grant. Accordingly, the adoption of Statement 123s fair value method will have a
significant impact on the Companys results of operations, although it will have no impact on the
Companys overall financial position. The impact of adoption of Statement 123® cannot be
predicted at this time because it will depend on levels of share-based payments granted in the
future. However, had the Company adopted Statement 123® in prior periods, the impact of that
standard would have approximated the impact of Statement 123 as described in the disclosure of pro
forma net income below. Had compensation cost for options granted under IBSS stock-based compensation plans been
determined based on the fair value at the grant dates consistent with SFAS 123, IBSS net income
and earnings per share would have changed to the pro forma amounts listed below: 2004
    
    
    2003
    
    
    2002Net loss:As reported
    
    $
    (1,913,745
    )
    
    $
    (847,321
    )
    
    $
    (3,154,767
    )Add: stock-based
compensation expense
included in reported net
loss
    
    
    
    
    
    
    205,058
    
    
    
    80,288Deduct: stock-based
compensation expense
determined under the fair
value based method for
all awards
    
    
    (173,524
    )
    
    
    (305,465
    )
    
    
    (750,043
    )Pro forma net loss
    
    $
    (2,087,269
    )
    
    $
    (947,728
    )
    
    $
    (3,824,522
    )Net loss per common share:As reported:Basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.04
    )
    
    $
    (0.17
    )Pro forma:Basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.04
    )
    
    $
    (0.20
    )
 See Note 10 for more information regarding IBSS stock compensation plans and the assumptions used
to prepare the pro forma information presented above. Income Taxes Deferred income tax assets and liabilities are computed for differences between the
financial statement and tax bases of assets and liabilities that will result in taxable or
deductible amounts in future periods based on enacted tax laws and rates applicable to the periods
in which the differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the period plus or minus the change during
the period in deferred tax assets and liabilities. Equity Instruments IBSS issues various types of debt and equity instruments in its efforts to
meet the capital needs of the company. IBSS follows APB 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants
(APB 14) in its accounting for issuances of convertible debt with detachable stock purchase
warrants. In accordance with APB 14, IBSS allocates the portion of proceeds of debt securities
issued with detachable stock purchase warrants, which is allocable to warrants as paid-in-capital,
included as a component of its no par value common stock. IBSS determines the fair value of stock
purchase warrants using Black-Scholes valuation techniques. F-11




---



##### 



Integrated Business Systems and Services, Inc.
Notes to Financial Statements Note 2. Summary of Significant Accounting Policies (continued): Equity Instruments (continued) From time to time, IBSS issues convertible securities with
beneficial conversion features, whereby the conversion feature is in the money and therefore
there is a presumption that the debt will be converted prior to, or at, maturity. In accordance
with FASB Emerging Issues Task Force (EITF) 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios IBSS allocates a
portion of the proceeds equal to the intrinsic value of the embedded beneficial conversion feature
to additional paid-in-capital, included as a component of its no par value common stock. IBSS
recognizes the proceeds allocated to the beneficial conversion feature as interest expense through
the date of earliest conversion. IBSS limits the discount assigned to the beneficial conversion
feature to the amount of proceeds allocated to the convertible instrument. During the year ended
December 31, 2002, interest expense attributable to the beneficial conversion feature was reduced
by approximately $615,000 due to the limits imposed upon IBSS by EITF 98-5. In accordance with EITF 00-27, Application of Issue 98-5 to Certain Convertible Instruments IBSS
allocates the proceeds received in a financing transaction that includes a convertible instrument
to the convertible instrument and any other detachable instruments included in the exchange on a
relative fair value basis. During the years ended December 31, 2003 and 2002, IBSS granted fully exercisable warrants for
services rendered. The fair market value of the warrants was calculated on the measurement date
using the Black-Scholes pricing model and is generally amortized ratably over the term of the
respective agreement or service period, whichever is shorter. Use of Estimates The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect certain
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Accordingly, actual results could materially differ from those estimates. Concentrations of Credit Risk Financial instruments, which potentially subject IBSS to
concentrations of credit risk, consist principally of trade accounts receivable and cash in banks. IBSS performs ongoing credit evaluations on certain of its customers financial condition, but
generally does not require collateral to support customer receivables. IBSS places its cash and
cash equivalents with high credit quality entities and limits the amount of credit exposure with
any one entity. Deposits held with banks may exceed the amount of insurance provided on such
deposits. Generally, these deposits may be redeemed upon demand and therefore bear minimal risk. IBSS two largest customers accounted for the following percentage of net sales in each respective
period: Largest
    
    
    2nd LargestCustomer
    
    
    Customer2004
    
    
    81
    %
    
    
    14
    %2003
    
    
    93
    %
    
    
    4
    %2002
    
    
    88
    %
    
    
    11
    %
 F-12




---



##### 



Integrated Business Systems and Services, Inc.
Notes to Financial Statements Note 2. Summary of Significant Accounting Policies (continued): Concentrations of Credit Risk Accounts receivable due from these customers were approximately
$36,000 (54%) and $250,000 (94%) at December 31, 2004 and 2003, respectively. No other customers
accounted for more than 5% of fiscal 2004, 2003 or 2002 net sales. Net Loss Per Share of Common Stock All net loss per share of common stock amounts presented have
been computed based on the weighted average number of shares of common stock outstanding during the
period. Stock warrants and stock options are not included in the calculation of dilutive loss per
common share because IBSS has experienced operating losses in all periods presented and their
effect is antidilutive. Financial Instruments The carrying values of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to their short maturities. The carrying value of IBSS
notes payable and long-term debt at December 31, 2004 and 2003, approximate fair value as they bear
interest at market rates. Advertising Costs IBSS expenses all advertising costs as incurred. Non-Controlling Interest in Net Assets IBSS records the minority interest portion of its
majority-owned operations, which are applicable to the minority interest partners, as a component
of equity and in its statements of operations. New Accounting Standards In November 2004, the FASB issued Statement of Financial
Accounting Standards No. 151, Inventory Costs, (SFAS 151), an amendment of Accounting Research
Bulletin No. 43, Chapter 4, Inventory Pricing. This accounting standard, which is effective for
annual periods beginning after June 15, 2005, requires that abnormal amounts of idle facility
expense, freight, handling costs, and wasted materials (spoilage) be recognized as current-period
charges. The adoption of SFAS 151 is not expected to have a material effect on the Companys
financial position or results of operations. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, (SFAS 153)
Exchanges of Nonmonetary Assets, an amendment of Accounting Principles Board Opinion No. 29,
Accounting for Nonmonetary Transactions (APB 29). This Statement amends APB 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do not have commercial substance. The Statement
specifies that a nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. This Statement is
effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods
beginning after the date this Statement is issued. Retroactive application is not permitted. The
adoption of SFAS 153 is not expected to have a material effect on the Companys financial position
or results of operations. F-13




---



##### 



Integrated Business Systems and Services, Inc.
Notes to Financial Statements Note 3. Capitalized Software Costs: Capitalized software costs consist of the following at December 31: 2004
    
    
    2003Internally developed software
    
    $
    998,105
    
    
    $
    998,105Less accumulated amortization
    
    
    (987,157
    )
    
    
    (934,933
    )Capitalized software costs, net
    
    $
    10,948
    
    
    $
    63,172
 IBSS has determined that no write-down of capitalized software costs for impairment is necessary
for the reporting periods included in these financial statements. Note 4. Property and Equipment: Property and equipment consists of the following at December 31: 2004
    
    
    2003Computer equipment
    
    $
    291,623
    
    
    $
    270,962Furniture and fixtures
    
    
    138,062
    
    
    
    138,062Marketing equipment
    
    
    107,514
    
    
    
    107,514Office and other equipment
    
    
    102,831
    
    
    
    102,831Computer software
    
    
    76,271
    
    
    
    76,271Leasehold improvements
    
    
    130,000
    
    
    
    130,000846,301
    
    
    
    825,640Less accumulated depreciation
    
    
    (589,390
    )
    
    
    (448,100
    )Property and equipment, net
    
    $
    256,911
    
    
    $
    377,540
 F-14




---



##### 



Integrated Business Systems and Services, Inc.
Notes to Financial Statements Note 5. Convertible Notes Payable: 2004
    
    
    2003Note payable to a third party bearing interest at
10%, established minimum monthly principal and
interest payments, original note balance of $350,000,
note matures January 1, 2003. Principal and interest
are convertible into common shares at $0.50 per
share.
    
    $
    539,078
    
    
    $
    431,289Note payable to a third party bearing interest at
10%, established minimum monthly principal and
interest payments, original note balance of $271,000,
note matures January 1, 2003. Principal and interest
are convertible into common shares at $0.50 per
share.
    
    
    19,361
    
    
    
    64,930$
    558,439
    
    
    $
    496,219
 Under the terms of the convertible notes payable, if the required minimum monthly payments (as
prescribed in the notes) are not made, the note is in default status. In the event of default, the
notes are due on demand and interest escalates to 22%. All events of default occurring through
August 15, 2003 were waived by the note holders. Subsequent to August 15, 2003, the notes were
considered to be in default and accrued interest at 22%. All payments made under the notes are
required by the holder to be applied first to interest and then to principal and any interest which
is not received by the due date be added to the principal balance and bear interest in the same
manner as any unpaid note balances. The notes are collateralized by all of the assets of IBSS. On
October 29, 2004, the holder of the senior secured note with $539,078 of principle and accrued
interest outstanding as of December 31, 2004 (the Note) demanded payment in full. On March 15,
2005, the holder of this Note has again demanded payment in full and has indicated that, in the
absence of immediate resolution of this matter, the holder will explore immediate foreclosure on
its secured interest under the Note. According to its terms, this Note became due and payable in
full on January 1, 2003. As previously disclosed, the Company has not made, and cannot make, any
such payment at this time. The Company is currently investigating the circumstances surrounding
the execution and approval of the Note and disputes the amount it may owe under the Note. While
the Company hopes to negotiate a settlement to this demand that will be mutually acceptable to both
parties, no assurance can be given that the Company will be successful in this endeavor. As part of the financing, IBSS issued the debt holders 423,000 detachable warrants with three-year
terms, which entitle the holder to purchase one common share for each warrant. The warrants are
exercisable at prices ranging from $1.00 to $3.30 per share. Note 6. Long-Term Debt 2004
    
    
    2003Loan payable to an executive officer
bearing interest at prime rate,
principal and interest due on demand
on or after January 1, 2005.
    
    $
    107,048
    
    
    $
    107,048Loan payable to an executive officer
bearing interest at prime rate,
principal and interest due on demand
on or after January 1, 2005.
    
    
    98,042
    
    
    
    98,042Loan payable to an executive officer
bearing interest at prime rate,
principal and interest due on demand
on or after January 1, 2005.
    
    
    94,470
    
    
    
    107,048Loan payable to a third party,
interest at 10%, principal and
interest due monthly, maturing January
1, 2013.
    
    
    114,746
    
    
    
    123,410Loan payable to a third party bearing
zero interest, principal and interest

due December 31, 2006.
    
    
    1,031,677
    
    
    
    1,031,677Loan payable to a third party bearing
zero interest, principal and interest
due December 31, 2006.
    
    
    1,735,399
    
    
    
    1,735,3993,181,382
    
    
    
    3,202,624Less current maturities
    
    
    (309,131
    )
    
    
    (8,664
    )$
    2,872,251
    
    
    $
    3,193,960
 F-15




---



##### 



Integrated Business Systems and Services, Inc.
Notes to Financial Statements Note 6. Long-Term Debt (continued): On December 31, 2001, IBSS issued $2,286,640 principal amount of convertible notes, including a
$1,013,000 refinance of the March 2, 2001 debt issue, due in full on January 1, 2004, or at the
point proceeds greater than $1 million are received from investor funding. The December 31, 2001
debt issue refinanced various cash advances received by IBSS during 2001, totaling $1,273,640.
Interest on the notes was payable in arrears on January 1, 2003 and January 1, 2004. Interest
accrued at a graduating scale beginning at 9% for the first 90 days and increased by 1% each 90-day
period thereafter. If all principal and interest amounts due were paid by January 1, 2003, and
there are no events of default, interest was to remain at 9%. The notes were convertible in whole
or part at any time at the option of the holder at the lesser of $1.00 per share or 50% of the
average closing price for the 30 days prior to conversion. IBSS issued 1,822,519 warrants at an
original exercise price of $1.60 in consideration for these convertible notes. During 2002,
approximately $568,000 of the notes were converted into shares of common stock. During 2002, IBSS issued $839,000 principal amount of convertible debt due in full on January 1,
2004 or at the point proceeds greater than $1 million are received from investor funding. The
terms of the notes issued in 2002 are the same as the December 31, 2001 debt issue. IBSS issued
839,000 warrants at an original exercise price of $1.60. During 2002, $300,000 of the notes were
converted into shares of common stock. In relation to the warrants issued with the December 31, 2001 and the 2002 debt issues the warrant
price was reduced to $0.60 due to the non-payment of the outstanding amounts. On October 1, 2003, the outstanding balances on the above debt issues were refinanced. The terms
of the new notes included combining the accrued interest with the outstanding loan balance, ceasing
interest accruals and voiding the conversion rights. In consideration for voiding the conversion
rights, 38,035,426 warrants were issued which correlated with the conversion price prior to the
refinancing. The warrants have a three-year life, a fixed exercise price of $0.0725 and are
exercisable on or after October 1, 2004. The notes are due in full on December 31, 2006. The
notes are collateralized by all of the assets of IBSS. In accordance with EITF 02-4; Determining Whether a Debtors Modification or Exchange of Debt
Instruments is within the Scope of FASB Statement No. 15, IBSS determined that the creditor had
granted a concession by reducing the interest rate to zero, and therefore, FASB No. 15, Accounting
by Debtors and Creditors for Troubled Debt Restructurings, was applicable. After the refinancing,
the future cash payments were equal to the gross carrying balance, and there was no gain or loss on
the troubled debt restructuring. Annual principal maturities on long-term debt are as follows: 2005
    
    $
    309,1312006
    
    
    2,777,6502007
    
    
    11,6812008
    
    
    12,9042009
    
    
    14,156Thereafter
    
    
    55,860$
    3,181,382
 F-16




---



##### 



Integrated Business Systems and Services, Inc.
Notes to Financial Statements Note 7. Shareholders Deficiency: Preferred Stock- IBSS authorized shares of preferred stock may be issued in one or more series,
and the Board of Directors is authorized, without further action by the shareholders, to designate
the rights, preferences, limitations and restrictions of and upon shares of each series, including
dividend, voting, redemption and conversion rights. The Board of Directors also may designate par
value, preferences in liquidation and the numbers of shares constituting any series. There are not
any shares of preferred stock outstanding at December 31, 2004 or 2003. Common shares On June 10, 2004, the shareholders of the Company approved an amendment to its
Articles of Incorporation to increase the number of authorized shares of common stock from
100,000,000 to 200,000,000 shares. IBSS common shares have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the common shares. Private Offerings In October 2003, IBSS closed three private offerings totaling $180,000. Total
shares issued were 2,150,000 at $0.20 per share. In connection with the offerings, IBSS issued
450,000 stock purchase warrants with a two-year life exercisable at $0.40 per share. In December 2003, IBSS closed a private equity offering with Generation Capital Associates, Inc. (
GCA). Under the terms of the stock purchase agreement, dated December 24, 2003, with GCA, IBSS
sold to GCA 1,250,000 shares of Common Stock. Under the terms of the stock purchase warrant issued
to GCA, IBSS granted to GCA warrants to purchase up to 1,000,000 shares of Common Stock at $0.40
per share. In exchange for the GCA Shares and GCA Warrants, GCA paid $250,000 to IBSS on December
31, 2003. During 2004, the Company raised an additional $505,000 in working capital through the private sale
of 2,525,000 shares of common stock and 1,262,500 warrants with an exercise price of $0.40 and term
of five years. During the first quarter of 2004, the Company secured an agreement with two current investors who
had a significant number of the Companys outstanding common stock warrants that could be exercised
in 2004 to delay their right to exercise such warrants until 2005. This was accomplished through
the issuance of an additional 2,000,000 cashless common stock warrants (1,000,000 for each
investor) that expire in three years from the date of grant. On June 28, 2004, the Company entered into a common stock purchase agreement with Fusion Capital
pursuant to which it sold 1,250,000 shares of Common Stock and 937,500 Common Stock purchase
warrants for $250,000 and Fusion Capital agreed to purchase up to an additional $6,000,000 over a
24-month period. 560,710 shares of Common Stock were issued in connection with this agreement as
a commitment fee. Up to an additional 556,454 shares of common stock are issuable pro rata as
Fusion Capital purchases common stock under the common stock purchase agreement. The Company
estimates that the maximum number of shares it will sell to Fusion Capital under the common stock
purchase agreement, in addition to the shares already issued, will be 15,000,000 shares assuming
Fusion Capital purchases all $6,000,000 of Common Stock. The Company has the right to control the
amount and timing of sales of its Common Stock to Fusion Capital under the common stock purchase
agreement. However, under the terms of the common stock purchase agreement, Fusion Capital does
not have the right nor the obligation to purchase shares of IBSS Common Stock in the event that the
price of its Common Stock is less than $0.20. During the quarter ended December 31, 2004, Fusion
purchased 250,000 shares of the Companys Common Stock at $0.20 per share resulting in aggregate
proceeds of $50,000. F-17




---



##### 



Integrated Business Systems and Services, Inc.
Notes to Financial Statements Note 7. Shareholders Deficiency (continued): Warrants The following table shows warrants outstanding for the purchase of common shares at
December 31, 2004. Warrants are exercisable at the option of the holder. Issue Date
    
    Exercise Price
    
    
    OutstandingFebruary 25, 2000
    
    $2.50 for Group A; and $3.50 for Group B
    
    
    501,875May 30, 2000
    
    $6.00 per share in years one through nine.
    
    
    50,002November 7, 2000
    
    $7.69 per share in years one though five.
    
    
    30,000January 1, 2001
    
    $3.91 per share in years one through five.
    
    
    100,000December 31, 2001
    
    $0.60 per share in years one through two.
    
    
    1,123,000December 31, 2001
    
    Lesser of $1.00 per share or 1/3 of average trading pricefor the 10 days ended 2 days prior to exercise in yearsone through three (as amended)
    
    
    600,000September 11, 2001
    
    $2.85 per share in years one through ten.
    
    
    100,000November 20, 2001
    
    $1.84 per share in years one through five.
    
    
    25,000December 31, 2001
    
    $0.07275 per share in years one through four (as amended).
    
    
    2,497,519January 1, 2002
    
    Lesser of $1.00 per share or 1/2 of average trading pricefor the 10 days ended 2 days prior to exercise in yearsone through three.
    
    
    100,000February 19, 2002
    
    $0.65 per share in years one through three.
    
    
    200,000March 21, 2002
    
    Lesser of $1.00 per share or 1/2 of average trading pricefor the 10 days ended 2 days prior to exercise in yearsone through three.
    
    
    100,000April 1, 2002
    
    Lesser of $1.00 per share or 1/2 of average trading pricefor the 10 days ended 2 days prior to exercise in yearsone through three.
    
    
    100,000October 1, 2003
    
    $0.07275 per share in years two through three.
    
    
    38,035,426October 1, 2003
    
    $0.07275 per share.
    
    
    2,961,640October 28, 2003
    
    $0.30, $0.35, $0.40 and $0.45 in years one through five.
    
    
    200,000December 4, 2003
    
    $0.40 per share in years one through two.
    
    
    250,000December 17, 2003
    
    $0.40 per share in years one through two.
    
    
    200,000December 30, 2003
    
    $0.40 per share in years one through five.
    
    
    1,000,000March 1, 2004
    
    $0.40 per share in years one through five.
    
    
    2,500,000March 31, 2004
    
    $0.40 per share in years one through five.
    
    
    250,000April 27, 2004
    
    $0.40 per share in years one through five.
    
    
    200,000May 5, 2004
    
    $0.40 per share in years one through five.
    
    
    62,500May 18, 2004
    
    $0.40 per share in years one through five.
    
    
    125,000June 28, 2004
    
    $0.40 per share in years one through five.
    
    
    937,500December 29, 2004
    
    $0.40 per share in years one through five.
    
    
    125,000Total Outstanding Warrants
    
    
    
    
    
    
    52,374,462
 Approximately 14,300,000 warrants outstanding are fully vested and exercisable at December 31,
2004. F-18




---



##### 



Integrated Business Systems and Services, Inc.  Note 7. Shareholders Deficiency (continued): Weighted averageexerciseWarrants
    
    
    price per shareOutstanding at December 31, 2001
    
    
    6,232,556
    
    
    $
    2.07Granted during the year
    
    
    500,000
    
    
    $
    0.71Exercised during the year
    
    
    
    
    
    $
    Expired during the year
    
    
    (50,000
    )
    
    $
    1.87Outstanding at December 31, 2002
    
    
    6,682,556
    
    
    $
    1.60Granted during the year
    
    
    39,685,426
    
    
    $
    0.09Exercised during the year
    
    
    
    
    
    $
    Expired during the year
    
    
    (270,000
    )
    
    $
    5.85Outstanding at December 31, 2003
    
    
    46,097,982
    
    
    $
    0.24Granted during the year
    
    
    7,161,640
    
    
    $
    0.26Exercised during the year
    
    
    
    
    
    $
    Expired during the year
    
    
    (885,160
    )
    
    $
    4.55Outstanding at December 31, 2004
    
    
    52,374,462
    
    
    $
    0.13Exercisable at December 31, 2004
    
    
    14,339,000
    
    
    $
    0.43
 Note 8. Loss per share: The following table shows a reconciliation of the numerators and denominators used in calculating
basic and diluted loss per share: 2004
    
    
    2003
    
    
    2002Numerator:Numerator for basic and diluted loss per share
    
    $
    (1,913,745
    )
    
    $
    (847,321
    )
    
    $
    (3,154,767
    )Denominator:Weighted average common shares  basic and
diluted calculation
    
    
    29,963,195
    
    
    
    22,922,301
    
    
    
    18,941,043Basic and diluted loss per share
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    $
    (0.17
    )
 The warrants and options were not included in the computation of diluted loss per share because the
warrants and options would have an antidilutive effect when included in the computation due to
IBSSs net loss. F-19




---



##### 



Integrated Business Systems and Services, Inc.  Note 9. Employee Benefits: Retirement Plan IBSS maintains a 401(k) retirement plan, which is managed by an outside trustee.
All employees are eligible to participate. IBSS has not contributed to the 401(k) plan. Stock Option Plans: 1997 Option Plan IBSS Board of Directors adopted a stock option plan (the 1997 Option Plan),
effective April 29, 1997. Options normally extend for 5 years and under committee policy generally
become exercisable in installments of 50 percent per six months commencing six months from the date
of grant. The maximum number of common shares IBSS has reserved for issuance under the 1997 Option
Plan, including options currently outstanding, is 1,860,000. The number of common shares reserved
for issuance to any one person cannot exceed 5% of the number of issued and outstanding common
shares, and no person is entitled to receive in any one year grants regarding more than 50,000
shares. Information with respect to options granted under the 1997 Option Plan is as follows: Weighted averageexerciseStock Options
    
    
    price per shareOutstanding at December 31, 2001 (1)
    
    
    264,800
    
    
    $
    1.16Outstanding at December 31, 2001
    
    
    590,898
    
    
    $
    5.71Granted during the year
    
    
    418,000
    
    
    $
    0.97Exercised during the year (1)
    
    
    (30,452
    )
    
    $
    1.05Expired or cancelled during the year (1)
    
    
    (99,848
    )
    
    $
    0.99Expired or cancelled during the year
    
    
    (197,400
    )
    
    $
    3.75Outstanding at December 31, 2002 (1)
    
    
    134,500
    
    
    $
    1.21Outstanding at December 31, 2002
    
    
    811,498
    
    
    $
    4.86Granted during the year
    
    
    
    
    
    $
    Exercised during the year (1)
    
    
    
    
    
    $
    Expired or cancelled during the year (1)
    
    
    (52,500
    )
    
    $
    1.87Expired or cancelled during the year
    
    
    (296,998
    )
    
    $
    2.24Outstanding at December 31, 2003 (1)
    
    
    82,000
    
    
    $
    0.95Outstanding at December 31, 2003
    
    
    514,500
    
    
    $
    4.29Exercisable at December 31, 2003 (1)
    
    
    82,000
    
    
    $
    0.95Exercisable at December 31, 2003
    
    
    493,750
    
    
    $
    4.24Granted during the year
    
    
    
    
    
    $
    Exercised during the year (1)
    
    
    
    
    
    $
    Expired or cancelled during the year (1)
    
    
    (82,000
    )
    
    $
    0.95Expired or cancelled during the year
    
    
    (123,000
    )
    
    $
    2.22Outstanding at December 31, 2004 (1)
    
    
    
    
    
    $
    Outstanding at December 31, 2004
    
    
    391,500
    
    
    $
    4.94Exercisable at December 31, 2004(1)
    
    
    
    
    
    $
    Exercisable at December 31, 2004
    
    
    391,500
    
    
    $
    4.94
   (1)
    
    Canadian Dollars; The Canadian exchange rates to one U.S. dollar at December
31, 2003, 2002 and 2001 were $1.2946, $1.5769 and $1.5911, respectively. F-20




---



##### 



Integrated Business Systems and Services, Inc.  Note 9. Employee Benefits (continued): Stock Option Plans (continued): 2001 Option Plan On June 28, 2000, IBSS adopted the 2001 Stock Incentive Plan (the 2001 Option
Plan), effective January 1, 2001. The 2001 Option Plan provides for option awards of up to
16,200,000 shares, stock appreciation rights and restricted stock awards. The options have terms
up to ten years. Information with respect to options granted under the 2001 Option Plan is as follows: Weighted averageexerciseStock Options
    
    
    price per shareOutstanding at December 31, 2001
    
    
    78,000
    
    
    $
    3.41Granted during the year
    
    
    565,625
    
    
    $
    0.68Exercised during the year
    
    
    3⁄4
    
    
    $
    3⁄4Expired or cancelled during the year
    
    
    (28,813
    )
    
    $
    1.78Outstanding at December 31, 2002
    
    
    614,812
    
    
    $
    0.98Exercisable at December 31, 2002
    
    
    238,034
    
    
    $
    1.63Granted during the year
    
    
    13,275,000
    
    
    $
    0.14Expired or cancelled during the year
    
    
    (133,187
    )
    
    $
    0.73Outstanding at December 31, 2003
    
    
    13,756,625
    
    
    $
    0.17Exercisable at December 31, 2003
    
    
    4,706,892
    
    
    $
    0.22Granted during the year
    
    
    550,000
    
    
    $
    0.27Expired or cancelled during the year
    
    
    (209,000
    )
    
    $
    0.28Outstanding at December 31, 2004
    
    
    14,097,625
    
    
    $
    0.17Exercisable at December 31, 2004
    
    
    7,135,000
    
    
    $
    0.20
 2002 Option Plan During 2002, IBSS Board of Directors adopted a non-qualified stock option plan
(the 2002 Option Plan), effective August 1, 2002. The maximum number of common shares reserved
for issuance under the 2002 Option Plan is 939,756 shares. Information with respect to options granted under the 2002 Option Plan is as follows: Weighted averageexerciseStock Options
    
    
    price per shareOutstanding at December 31, 2001
    
    
    
    
    
    $
    3⁄4Granted during the year
    
    
    308,723
    
    
    $
    0.01Exercised during the year
    
    
    
    
    
    $
    Expired or cancelled during the year
    
    
    
    
    
    $
    Outstanding at December 31, 2002
    
    
    308,723
    
    
    $
    0.01Granted during the year
    
    
    631,033
    
    
    $
    0.01Exercised during the year
    
    
    (174,435
    )
    
    $
    0.01Expired or cancelled during the year
    
    
    (52,206
    )
    
    $
    Outstanding at December 31, 2003
    
    
    713,115
    
    
    $
    0.01Granted during the year
    
    
    
    
    
    $
    Exercised during the year
    
    
    (74,380
    )
    
    $
    0.01Expired or cancelled during the year
    
    
    
    
    
    $
    Outstanding and exercisable at December 31, 2004
    
    
    638,735
    
    
    $
    0.01
 F-21




---



##### 



Integrated Business Systems and Services, Inc.  Note 9. Employee Benefits (continued): Stock Option Plans (continued): For the years ended December 31, 2003 and 2002, IBSS recognized expense related to stock-based
compensation of approximately $205,000 and $80,000, respectively. IBSS did not recognize any
expense related to stock-based compensation during 2004. The pro forma disclosures required by SFAS 123 regarding net loss and net loss per share are stated
as if IBSS had accounted for stock options using fair values. Using the Black-Scholes
option-pricing model the fair value at the date of grant for these options was estimated using the
following assumptions: 2004
    
    
    2003
    
    
    2002Dividend yield
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Expected volatility
    
    
    129
    %
    
    
    137
    %
    
    
    122
    %Risk-free rate of return
    
    
    3.02-3.38
    %
    
    
    2.6-2.9
    %
    
    
    2.9-3.3
    %Expected option life, years
    
    
    5
    
    
    
    5
    
    
    
    5
 The Black-Scholes and other option pricing models were developed for use in estimating fair value
of traded options, which have no vesting restrictions and are fully transferable. In addition,
option-pricing models require the input of highly subjective assumptions. IBSS employee stock
options have characteristics significantly different than those of traded options, and changes in
the subjective assumptions can materially affect the fair value estimate. Accordingly, in
managements opinion, these existing models may not necessarily provide a reliable single measure
of the fair value of employee stock options. F-22




---



##### 



Integrated Business Systems and Services, Inc.  Note 10. Income Taxes: Deferred income taxes reflect the net tax effect of temporary differences and carryforwards between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of IBSS deferred tax assets and liabilities
consisted of the following at December 31: 2004
    
    
    2003
    
    
    2002Deferred tax assets:Operating loss carryforwards
    
    $
    7,828,529
    
    
    $
    7,296,194
    
    
    $
    7,617,558Deferred revenue
    
    
    51,252
    
    
    
    3,824
    
    
    
    27,864Other, net
    
    
    58,191
    
    
    
    52,336
    
    
    
    46,063Valuation allowance
    
    
    (7,920,767
    )
    
    
    (7,293,155
    )
    
    
    (7,533,164
    )Total deferred tax assets
    
    
    17,205
    
    
    
    59,199
    
    
    
    158,321Deferred tax liabilities:Capitalized software costs
    
    
    (4,160
    )
    
    
    (24,005
    )
    
    
    (91,692
    )Depreciation
    
    
    (13,045
    )
    
    
    (35,194
    )
    
    
    (55,011
    )Other, net
    
    
    
    
    
    
    
    
    
    
    (11,618
    )Total deferred tax liabilities
    
    
    (17,205
    )
    
    
    (59,199
    )
    
    
    (158,321
    )Total
    
    $
    
    
    
    $
    
    
    
    $
    
 Temporary differences and carryforwards, which gave rise to significant portions of deferred tax
assets and liabilities at December 31, are as follows: 2004
    
    
    2003
    
    
    2002Operating loss carryforward
    
    $
    532,292
    
    
    $
    (321,364
    )
    
    $
    1,396,538Deferred revenue
    
    
    47,427
    
    
    
    (24,040
    )
    
    
    (7,619
    )Other, net
    
    
    28,047
    
    
    
    37,709
    
    
    
    (86,321
    )Capitalized software costs
    
    
    19,846
    
    
    
    67,687
    
    
    
    68,103Valuation allowance
    
    
    (627,612
    )
    
    
    240,008
    
    
    
    (1,370,701
    )Net deferred income taxes
    
    $
    
    
    
    $
    
    
    
    $
    
 F-23




---



##### 



Integrated Business Systems and Services, Inc.  Note 10. Income Taxes (continued): The principal reasons for the differences between income tax expense and the amount computed by
applying the statutory federal rate to pre-tax loss were as follows for the three years ended
December 31: 2004
    
    
    2003
    
    
    2002Tax at statutory federal rate
    
    $
    (650,673
    )
    
    $
    (288,089
    )
    
    $
    (1,057,321
    )Effect on rate of:Stock options, warrants and other
    
    
    78,180
    
    
    
    168,540
    
    
    
    (191,386
    )Life insurance premiums
    
    
    3,499
    
    
    
    4,309
    
    
    
    2,428Penalties
    
    
    6,274
    
    
    
    6,063
    
    
    
    27,688Non-deductible expenses
    
    
    1,213
    
    
    
    884
    
    
    
    1,676State income taxes, net of
federal income tax effect
    
    
    (66,105
    )
    
    
    348,301
    
    
    
    (153,786
    )Change in valuation allowance
    
    
    627,612
    
    
    
    (240,008
    )
    
    
    1,370,701Total
    
    $
    
    
    
    $
    
    
    
    $
    
 As of December 31, 2004, IBSS had federal and state net operating loss carryforwards of
approximately $20,600,000. The net operating loss carryforwards will expire between 2012 and 2024,
if not utilized. Management of IBSS continually evaluates certain limitations which may occur as prescribed under
the Internal Revenue Code (IRC) Section 382, which would potentially limit the availability of
offsetting operating loss carryforwards against future taxable income. In addition, management
continually evaluates the tax consequences of the issuance, and subsequent exercise of, warrants
and options to certain employees and vendors and the impact of the potential compensation on
operating loss carryforwards. In determining that is was more likely than not that the recorded deferred tax asset would not be
realized, management of IBSS considered the following: (1) recent operating results, (2) the
budgets and forecasts that management and the Board of Directors had adopted for the next fiscal
year, (3) the ability to utilize NOLs prior to their expiration, (4) the potential limitation of
NOL utilization in the event of a change of ownership and (5) the generation of future taxable
income in excess of income reported on the financial statements. A valuation allowance of approximately $7,921,000 and $7,293,000 at December 31, 2004 and 2003,
respectively, remained necessary in the judgment of management because the factors noted above
(i.e. forecasts) did not support the utilization of less than a full valuation allowance. F-24




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##### 



Integrated Business Systems and Services, Inc.  Note 11. Related Party Transactions: Sales representative and marketing agreement IBSS is party to a sales representative and
marketing agreement with one of its directors dated September 16, 2003 (the Sales Agreement).
Under the terms of the Sales Agreement, the director is to act as an exclusive sales representative
with respect to certain of IBSS customers and a non-exclusive sales representative with respect to
others and must use his best efforts to market IBSS products worldwide in order to generate sales
revenues. The term of the Sales Agreement is for 10 years from its date and may be renewed for
successive additional renewal periods of two years each, unless one party delivers a notice not to
renew within 90 days of expiration of the then existing term. Compensation under the agreement is
as follows: (1) stock options to purchase up to 1,000,000 shares at an exercise price of $0.14 per
share (options vest at 1 share for each net dollar of revenue directly or indirectly added to IBSS
revenue under the agreement); (2) a non-refundable cash advance of $10,000 per month not to exceed
$175,000 (the Draw Payments) (contingent on net cash as defined in the Sales Agreement); and (3)
a delayed signing bonus to be paid on the earlier of (i) the 5th anniversary of the
Sales Agreement (September 16, 2008) or (ii) a change in control of IBSS (as defined in the Sales
Agreement), a lump sum in the amount of $175,000, less the amount of all Draw Payments actually
paid. Accounts payable and accrued expenses At December 31, 2004 and 2003, IBSS had approximately
$15,000 and $296,000, respectively, owed to related parties included in accounts payable and
accrued expenses, exclusive of payroll accruals. Notes receivable At December 31, 2004, IBSS held two notes receivable with balances totaling
$131,080 due from IBSS chief executive officer and its executive vice president. IBSS loaned
these officers money to exercise Common Stock purchase warrant agreements to purchase an aggregate
of 200,000 shares of IBSS common stock at the applicable exercise price of $0.60 to $0.68 per
share. These notes, which bear interest at the prime rate per annum, matured in 2002 and are due
on demand at December 31, 2004. The loans are collaterized by 200,000 shares of common stock. The
receivable is shown on the balance sheets as a reduction in stockholders equity. Note 12. Supplemental Cash Flow Information: During the years presented below, interest paid amounted to: 2004
    
    
    2003
    
    
    2002Interest paid
    
    $
    18,231
    
    
    $
    68,133
    
    
    $
    38,315
 F-25




---



##### 



Integrated Business Systems and Services, Inc.  Note 12. Supplemental Cash Flow Information (continued): The following table summarizes non-cash investing and financing activities: 2004
    
    
    2003
    
    
    2002Conversion of convertible notes into capital
    
    $
    3⁄4
    
    
    $
    301,500
    
    
    $
    1,650,000Conversion of accrued interest into common stock
    
    $
    3⁄4
    
    
    $
    35,574
    
    
    $
    3⁄4Conversion of accrued salaries and
related interest to long-term debt
    
    $
    3⁄4
    
    
    $
    312,137
    
    
    $
    3⁄4Conversion of accrued interest to
long-term debt and notes payable
    
    $
    114,220
    
    
    $
    683,506
    
    
    $
    3⁄4Offset of related party receivable with related party payable
    
    $
    3⁄4
    
    
    $
    12,600
    
    
    $
    3⁄4
 Note 13. Commitments and Contingencies: Litigation In the normal course of business, IBSS and its subsidiaries may, from time to time,
become parties to various legal claims, actions and complaints. As discussed in Note 6, the Company currently is in default on the payment of principal and
interest in the purported aggregate amount of $539,078 as of December 31, 2004 under certain notes
issued in 2001. In a letter dated March 15, 2005, the holder of this Note has demanded payment in
full and has indicated that, in the absence of immediate resolution of this matter, the holder will
explore immediate foreclosure on its secured interest under the Note. As previously disclosed, the
Company has not made, and cannot make, any such payment at this time. The Company is currently
investigating the circumstances surrounding the execution and approval of the Note and disputes the
amount it may owe under the Note. While the Company hopes to negotiate a settlement to this demand
that will be mutually acceptable to both parties, no assurance can be given that the Company will
be successful in this endeavor. At December 31, 2004, management is not aware of any other pending or threatened litigation, or
unasserted claims that could result in losses that would be material to the financial statements. Operating Lease Commitments IBSS leases its principal facilities under a noncancellable operating
lease expiring in January 2013. The lease consists of a security deposit of $50,000 and base
rental of $40,775 for the calendar year 2005, $45,550 for the calendar year 2006, $50,325 for the
calendar year 2007, and $55,100 per calendar year through its expiration in 2013, payable in equal
monthly installments. IBSS is also responsible for its share of common area maintenance charges.
Renewal option may be granted pursuant to the provisions of the lease. F-26




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##### 



Integrated Business Systems and Services, Inc.  Note 13. Commitments and Contingencies (continued): At December 31, 2004 minimum lease payments are as follows: 2005
    
    $
    48,1672006
    
    
    52,9422007
    
    
    57,7172008
    
    
    62,4922009
    
    
    62,492Thereafter
    
    
    187,476Total
    
    $
    471,286
 Rent expense was approximately as follows for the years ended December 31: 2004
    
    2003
    
    2002$43,000
    
    $103,000
    
    $385,000
 Liens In 2003, the Internal Revenue Service placed a lien on all of IBSS assets for delinquent
tax obligations. Amounts due to the Internal Revenue Service at December 31, 2003 were
approximately $52,000. All obligations related to this lien were settled in 2004. Note 14. Significant Risks and Uncertainties: IBSS operating results and financial condition can be impacted by a number of factors, including
but not limited to the following, any of which could cause actual results to vary materially from
current and historical results or IBSS anticipated future results. Currently, IBSS business is focused principally within the manufacturing and transaction
processing industries. Significant changes in the regulatory or market environment of this
industry could impact demand for IBSS software products and services. Additionally, there is
increasing competition for IBSS products and services, and there can be no assurance that IBSS
current products and services will remain competitive, or that IBSS development efforts will
produce products with the cost and performance characteristics necessary to remain competitive.
Furthermore, the market for IBSS products and services is characterized by rapid changes in
technology. IBSS success will depend on the level of market acceptance of IBSS products,
technologies and enhancements, and its ability to introduce such products, technologies and
enhancements to the market on a timely and cost effective basis, and maintain a labor force
sufficiently skilled to compete in the current environment. As discussed in Note 2, the preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that affect
certain reported amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Amounts affected by these estimates include, but are not
limited to, the estimated useful lives, related amortization expense and carrying values of IBSS
capitalized software development costs. Changes in the status of certain matters or facts or
circumstances underlying these estimates could result in material changes to these estimates, and
actual results could differ significantly from these estimates. IBSS primary efforts are now directed to the development of a market for its Synapsetechnology and the associated Synapseproject management methodology, software
and integration services. Like other companies at this stage of development, IBSS is subject to
numerous risks, including the uncertainty of its chosen market, its ability to develop its markets
and its ability to finance operations and other risks. F-27




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##### 



Integrated Business Systems and Services, Inc.  Note 15. Segment Information: Management has determined that IBSS operates in one dominant industry segment, which involves the
supply of computer technology products and services. These products and services have similar
economic characteristics, customers and distribution methods. All of IBSSs operations, assets and
employees are located in the United States and its revenues are generated in the United States. F-28




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##### 



INDEX TO EXHIBITS Exhibit No.3.1
    
    Amended and Restated Articles of Incorporation of Company
(incorporated by reference to Exhibit 2.1 to the Companys
Form 1-A filed July 9, 1997).3.2
    
    Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 2.2 to the Companys Form 1-A filed July
9, 1997).4.1
    
    Securities Purchase Agreement dated December 24, 2003 between
the Company and GCA Financing, Inc. (incorporated by reference
to Exhibit 4.1 to the Companys Form SB-2 filed February 5,
2004)4.2
    
    Common Stock Purchase Warrant dated December 30, 2003 to GCA
Financing, Inc. (937,500 Shares) (incorporated by reference to
Exhibit 4.2 to the Companys Form SB-2 filed February 5, 2004)4.3
    
    Common Stock Purchase Warrant dated December 30, 2003 to GCA
Financing, Inc. (62,500 Shares) (incorporated by reference to
Exhibit 4.3 to the Companys Form SB-2 filed February 5, 2004)4.4
    
    Letter Agreement dated December 24, 2003 between the Company
and GCA Financing, Inc. (incorporated by reference to Exhibit
4.4 to the Companys Form SB-2 filed February 5, 2004)4.5
    
    Letter Agreement dated January 13, 2004 between the Company
and GCA Financing, Inc. (incorporated by reference to Exhibit
4.5 to the Companys Form SB-2 filed February 5, 2004)4.6
    
    Investment Agreement, dated January 21, 2004 with Dutchess
Private Equities, L.P. (incorporated by reference to Exhibit
4.6 to the Companys Form SB-2 filed February 5, 2004)4.7
    
    Registration Rights Agreement, dated January 21, 2004 with
Dutchess Private Equities, L.P. (incorporated by reference to
Exhibit 4.7 to the Companys Form SB-2 filed February 5, 2004)4.8
    
    Promissory Note dated March 15, 2002 between the Company and
Fitz-John Creighton McMaster (incorporated by reference to
Exhibit 10.13 in the Companys Form 10-QSB for the three-month
period ended September 30, 2002).4.9
    
    Promissory Note dated March 15, 2002 between the Company and
Rice Street Associates, LLC (incorporated by reference to
Exhibit 10.14 in the Companys Form 10-QSB for the three-month
period ended September 30, 2002).4.10
    
    Second Amendment and Restated Promissory Note dated August 14,
2002 between the Company and Kirkman Finlay III (incorporated
by reference to Exhibit 10.15 to the Companys Form 10-QSB for
the three-month period ended September 30, 2002).4.11
    
    Class A Secured Convertible Debenture dated December 31, 2001
between the Company and IBSS Class A Investors (incorporated
by reference to Exhibit 10.21 in the Companys Form 10-QSB for
the three-month period ended March 31, 2002).4.12
    
    Class B Secured Convertible Debenture dated December 31, 2001
between the Company and IBSS Class B Investors (incorporated
by reference to Exhibit 10.22 in the Companys Form 10-QSB for
the three-month period ended March 31, 2002).
 32




---



##### 



Exhibit No.4.13
    
    Common Stock Purchase Warrant dated December 31, 2001 between
the Company and IBSS Class A Investors (incorporated by
reference to Exhibit 10.23 in the Companys Form 10-QSB for
the three-month period ended March 31, 2002).4.14
    
    Common Stock Purchase Warrant dated December 31, 2001 between
the Company and IBSS Class B Investors (incorporated by
reference to Exhibit 10.24 in the Companys Form 10-QSB for
the three-month period ended March 31, 2002).4.15
    
    Omnibus Security Agreement dated December 31, 2001 by and
among the Company, IBSS Class A Investors and IBSS Class B
Investors (incorporated by reference to Exhibit 10.25 in the
Companys Form 10-QSB for the three-month period ended March
31, 2002).4.16
    
    Inter-Creditor Agreement dated December 31, 2001 by and among
the Company, IBSS Class A Investors and IBSS Class B Investors
(incorporated by reference to Exhibit 10.26 in the Companys
Form 10-QSB for the three-month period ended March 31, 2002).4.17
    
    Security Agreement dated June 12, 2001 by and between the
Company and Fitz-John Creighton McMaster (incorporated by
reference to Exhibit 10.27 in the Companys Form 10-QSB for
the three-month period ended September 30, 2002).4.18
    
    Security Agreement dated August 2, 2001 by and between the
Company and Rice Street Associates, LLC (incorporated by
reference to Exhibit 10.28 in the Companys Form 10-QSB for
the three-month period ended September 30, 2002).4.19
    
    Security Agreement dated August 14, 2001 by and between the
Company and Kirkman Finlay III (incorporated by reference to
Exhibit 10.29 in the Companys Form 10-QSB for the three-month
period ended September 30, 2002).4.20
    
    Common stock purchase warrant dated October 28, 2003 between
the Company and Elite Financial Communications Group, LLC
(200,000 shares of Common Stock) (incorporated by reference to
Exhibit 4.20 to the Companys Form SB-2 filed February 5,
2004).4.21
    
    Common stock purchase warrant dated December 4, 2003 between
the Company and Liberty Union Life Assurance Corporation
(250,000 shares of Common Stock) (incorporated by reference to
Exhibit 4.21 to the Companys Form SB-2 filed February 5,
2004).4.22
    
    Common stock purchase warrant dated December 17, 2003 between
the Company and C. Joseph Berger, Jr. (75,000 shares of Common
Stock) (incorporated by reference to Exhibit 4.22 to the
Companys Form SB-2 filed February 5, 2004).4.23
    
    Common stock purchase warrant dated December 17, 2003 between
the Company and Dollie Cole (125,000 shares of Common Stock)
(incorporated by reference to Exhibit 4.23 to the Companys
Form SB-2 filed February 5, 2004).4.24
    
    Common stock purchase warrant dated October 1, 2003 between
the Company and IBSS Class A Investors, LLC (for 15,214,170
shares) (incorporated by reference to Exhibit 4.24 to the
Companys Form SB-2 filed February 5, 2004).4.25
    
    Common stock purchase warrant dated October 1, 2003 between
the Company and IBSS Class B Investors, LLC (for 22,821,256
shares) (incorporated by reference to Exhibit 4.25 to the
Companys Form SB-2 filed February 5, 2004).
 33




---



##### 



Exhibit No.4.26
    
    Amended and Restated Class A Secured Debenture dated October
1, 2003 between the Company and Class A Investors, LLC
(incorporated by reference to Exhibit 4.26 to the Companys
Form SB-2 filed February 5, 2004).4.27
    
    Amended and Restated Class B Secured Debenture dated October
1, 2003 between the Company and Class B Investors, LLC
(incorporated by reference to Exhibit 4.27 to the Companys
Form SB-2 filed February 5, 2004).4.28
    
    Letter Agreement between the Company, Class A Investors, LLC,
and Class B Investors, LLC dated October 1, 2003 (incorporated
by reference to Exhibit 4.28 to the Companys Form SB-2 filed
February 5, 2004).4.29
    
    Amended and Restated Class A Contingent Common Stock Purchase
Warrant dated October 1, 2003 to the IBSS Class A Investors,
LLC (928,241 shares) (incorporated by reference to Exhibit
4.29 to the Companys Form SB-2 filed February 5, 2004).4.30
    
    Amended and Restated Class B Contingent Common Stock Purchase
Warrant dated October 1, 2003 to the IBSS Class B Investors,
LLC (2,033,399 shares) (incorporated by reference to Exhibit
4.30 to the Companys Form SB-2 filed February 5, 2004).4.31
    
    Amended and Restated Common Stock Purchase Warrant (Class A
Investors) dated October 1, 2003 to the IBSS Class A
Investors, LLC (464,120 shares) (incorporated by reference to
Exhibit 4.31 to the Companys Form SB-2 filed February 5,
2004).4.32
    
    Amended and Restated Common Stock Purchase Warrant (Class B
Investors) dated October 1, 2003 to the IBSS Class B
Investors, LLC (2,033,399 shares) (incorporated by reference
to Exhibit 4.32 to the Companys Form SB-2 filed February 5,
2004).10.1
    
    Employment Agreement dated October 1, 2003 between the Company
and George E. Mendenhall (incorporated by reference to Exhibit
10.1 to the Companys Form SB-2 filed February 5, 2004).10.2
    
    Deferred Compensation Agreement dated September 1, 2002
between the Company and George E. Mendenhall (incorporated by
reference to Exhibit 10.2 to the Companys Form SB-2 filed
February 5, 2004).10.3
    
    Employment Agreement dated October 1, 2003 between the Company
and Stuart E. Massey (incorporated by reference to Exhibit
10.3 to the Companys Form SB-2 filed February 5, 2004).10.4
    
    Deferred Compensation Agreement dated September 1, 2002
between the Company and Stuart E. Massey (incorporated by
reference to Exhibit 10.4 to the Companys Form SB-2 filed
February 5, 2004)10.5
    
    Employment Agreement dated October 1, 2003 between the Company
and Donald R. Futch (incorporated by reference to Exhibit 10.5
to the Companys Form SB-2 filed February 5, 2004).10.6
    
    Deferred Compensation Agreement dated September 1, 2002
between the Company and Donald R. Futch (incorporated by
reference to Exhibit 10.6 to the Companys Form SB-2 filed
February 5, 2004)
 34




---



##### 



Exhibit No.10.7
    
    Lease Agreement between the Company and Pinebelt, LLC dated
October 8, 2002 with respect to property at 1601 Shop Road,
Ste E, Columbia, S.C. (incorporated by reference to Exhibit
10.50 in the Companys Form 10-QSB for fiscal year ended March
31, 2003).10.8
    
    Sales Representative and Marketing Agreement dated September
16, 2003 between the Company and Richard D. Pulford
(incorporated by reference to Exhibit 10.8 to the Companys
Form SB-2 filed February 5, 2004)10.9
    
    Integrated Business Systems and Services, Inc. 2002 Stock
Option Plan (incorporated by reference to Exhibit 10.30 in the
Companys Form 10-QSB for the three-month period ended
September 30, 2002).10.10
    
    Nonqualified Stock Option Agreement dated as of May 30, 2000
between the Company and William S. McMaster (incorporated by
reference to Exhibit 10.15 to the Companys 10-KSB for the
year ended December 31, 2000).10.11
    
    Integrated Business Systems and Services, Inc. 2001 Stock
Incentive Plan (incorporated by reference to Exhibit 10.11 in
the Companys Form 10-QSB for the three-month period ended
March 31, 2002).10.12
    
    Letter of Understanding and Statement of Work dated October 2,
2003 between the Company and Scott Group for consulting
services (incorporated by reference to Exhibit 10.12 to the
Companys Form SB-2 filed February 5, 2004).10.13
    
    Service Agreement dated October 25, 2003 between the Company
and Elite Financial Communications Group, LLC (incorporated by
reference to Exhibit 10.13 to the Companys Form SB-2 filed
February 5, 2004).10.14
    
    Placement Agent Agreement dated January 30, 2004 between the
Company and US Euro Securities, Inc. (incorporated by
reference to Exhibit 10.14 to the Companys Form SB-2 filed
February 5, 2004).10.15
    
    Integrated Business Systems and Services, Inc. 2001 Stock
Incentive Plan, Amended and Restated as of March 18, 2004.10.16
    
    Reseller/OEM Agreement dated November 10, 2003 between the
Company and Prospect Airport Services, Inc.23.1
    
    Consent of Independent Registered Accounting Firm31.1
    
    Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.99.1
    
    Risk Factors for Integrated Business Systems and Services, Inc.
 35