================================================================================
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)
    |X|     Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
            Exchange Act of 1934

                 For the quarterly period ended March 31, 2003

                                       or

    |_|     Transition Report Pursuant to Section 13 or 15(d) of the Securities
            Exchange Act of 1934

                          COMMISSION FILE NUMBER 29947

                      INTEGRATED INFORMATION SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<CAPTION>
         <S>                                                       <C>
             DELAWARE                                                   86-0624332
     (State of Incorporation)                                     (IRS Employer I.D. No.)
</TABLE>

                                 2250 West 14th Street
                                 Tempe, Arizona 85281
                       (Address of principal executive offices)

                                    (480) 752-5000
                            (Registrant's telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                  YES |X|  NO |_|

The registrant has not been subject to the filing requirements of Sections 13 or
15(d) of the Securities Exchange Act of 1934 for the past 90 days.

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, not including shares held in treasury:

      As of May 12, 2003, there were 3,480,151 shares of Common Stock, $0.001
par value, outstanding.
================================================================================
<PAGE>

               INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                     PAGE
                                                                                     ----
<S>         <C>                                                                      <C>
PART I      FINANCIAL INFORMATION..................................................   3

      ITEM 1   UNAUDITED FINANCIAL STATEMENTS......................................   3

               Condensed Consolidated Balance Sheets as of
               March 31, 2003 and December 31, 2002................................   3

               Condensed Consolidated Statements of Operations for
               the Three Months Ended March 31, 2003 and 2002......................   4

               Condensed Consolidated Statements of Cash Flows for
               the Three Months Ended March 31, 2003 and 2002......................   5

               Notes to Condensed Consolidated Financial Statements................   6

      ITEM 2   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
               CONDITION AND RESULTS OF OPERATIONS.................................  12

      ITEM 3   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
               MARKET RISK.........................................................  17

      ITEM 4   CONTROLS AND PROCEDURES.............................................  23

PART II     OTHER INFORMATION            ..........................................  24

      ITEM 1   LEGAL PROCEEDINGS...................................................  24

      ITEM 2   CHANGES IN SECURITIES AND USE OF PROCEEDS...........................  24

      ITEM 6   EXHIBITS AND REPORTS ON FORM 8-K....................................  25

SIGNATURES  .......................................................................  26
</TABLE>


                                       2
<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

               INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                      March 31,   December 31,
                                                                        2003         2002
                                                                      --------    -----------
                                                                           (Unaudited)
                                      ASSETS
<S>                                                                    <C>           <C>
Current assets:
    Cash and cash equivalents ...................................     $    460      $  1,145
    Restricted cash .............................................          571           835
    Accounts receivable, net factored with recourse .............        1,356         2,153
    Unbilled revenues on contracts ..............................           62           105
    Prepaid expenses and other current assets ...................            6           177
                                                                      --------      --------
       Total current assets .....................................        2,455         4,415
    Property and equipment, net .................................        1,720         3,055
    Goodwill ....................................................        5,241         5,080
    Other assets ................................................          500           730
                                                                      --------      --------
                                                                      $  9,916      $ 13,280
                                                                      ========      ========
                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
    Accounts payable and accrued expenses .......................     $  3,319      $  3,523
    Amounts due under accounts receivable financing .............        2,217         2,898
    Current installments of note payable ........................          341           253
    Other current liabilities ...................................           45           216
    Current installments of capital lease obligations ...........          172            43
    Deferred revenues on contracts ..............................          146           270
                                                                      --------      --------
       Total current liabilities ................................        6,243         7,203
    Capital lease obligations, less current installments ........           10            16
    Note payable to bank ........................................        4,396         4,481
    Other liabilities ...........................................          207           979
                                                                      --------      --------
       Total liabilities ........................................       10,856        12,679
                                                                      --------      --------
Commitments, contingencies and subsequent
 events (notes 2, 10, 15 and 17)
Stockholders' equity:
    Preferred stock, $.001 par value 5,000,000 shares
     authorized and 20,000 issued and outstanding
     at March 31, 2003 ..........................................         --            --
    Common Stock, $.001 par value; authorized 100,000,000
     shares; issued and outstanding 3,480,151 shares at
     March 31, 2003 and December 31,2002 ........................            3             3
    Additional paid-in capital ..................................       94,765        94,561
    Accumulated deficit .........................................      (90,395)      (88,650)
    Accumulated other comprehensive loss ........................          (31)          (31)
                                                                      --------      --------
                                                                         4,342         5,883
Treasury stock, at cost, 990,360 shares at March 31,
 2003 and December 31, 2002 .....................................       (5,282)       (5,282)
                                                                      --------      --------
       Total stockholders' equity (deficit) .....................         (940)          601
                                                                      --------      --------
                                                                      $  9,916      $ 13,280
                                                                      ========      ========
</TABLE>

See accompanying notes to condensed consolidated financial statements


                                       3
<PAGE>

               INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                    Three Months Ended March 31,
                                                                   ----------------------------
                                                                        2003         2002
                                                                      -------     --------
                                                                           (Unaudited)
<S>                                                                   <C>         <C>
Revenues ........................................................     $ 2,921     $  8,267
Cost of
revenues ........................................................      (2,045)      (6,232)
                                                                      -------     --------
       Gross profit .............................................         876        2,035
                                                                      -------     --------
Operating expenses:
    Selling and marketing .......................................         657        1,054
    General and administrative ..................................       2,583        5,645
    Asset impairments and restructuring charges .................        --          2,751
    Gain on settlement of lease termination agreements and
      other liabilities .........................................        (783)        --
                                                                      -------     --------
       Total operating expenses .................................       2,457        9,450
                                                                      -------     --------
       Loss from operations .....................................      (1,581)      (7,415)
Interest and other income .......................................           2           49
Interest expense ................................................        (166)        (119)
                                                                      -------     --------
       Loss before cumulative effect of a change in
        accounting principle ....................................      (1,745)      (7,485)
Cumulative effect of a change in accounting principle ...........        --         (3,187)
                                                                      -------     --------
       Net loss .................................................     $(1,745)    $(10,672)
                                                                      =======     ========
Loss per share:
Loss before cumulative effect of a change in
  accounting principles .........................................     $  (.50)    $  (2.26)
Cumulative effect of a change in accounting principle ...........        --           (.96)
                                                                      -------     --------
    Loss per share, basic and diluted ...........................     $  (.50)    $  (3.22)
Weighted average common shares outstanding ......................       3,480        3,310
                                                                      =======     ========
</TABLE>

See accompanying notes to condensed consolidated financial statements


                                       4
<PAGE>

               INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (In thousands)
<TABLE>
<CAPTION>
                                                                 Three Months Ended March 31,
                                                                 ---------------------------
                                                                     2003         2002
                                                                   --------    ---------
                                                                        (Unaudited)
<S>                                                                <C>         <C>
Cash flows from operating activities:
     Net loss .................................................    $(1,745)    $(10,672)
     Adjustments to reconcile net loss to net cash
       used in operating activities:
         Cumulative effect of a change in
           accounting principle ...............................       --          3,187
         Depreciation and amortization ........................        583        1,228
         Asset impairment and restructuring ...................       --          2,751
         Loss on disposition of assets ........................        527        2,751
         Provision for doubtful accounts ......................        (29)         496
         Gain on settlement of obligations.....................       (783)        --
         Change in assets and liabilities, net
          of acquisitions:
             Accounts receivable ..............................        826         (670)
             Unbilled revenues on contracts ...................         43           39
             Prepaid expenses and other assets ................        171          210
             Other assets .....................................         84            9
             Accounts payable and accrued expenses ............         84        1,099
             Deferred revenues on contracts ...................       (121)         116
                                                                   -------     --------
                Net cash used in operating activities .........       (360)      (2,207)
                                                                   -------     --------
Cash flows from investing activities:
     Capital expenditures .....................................        (10)        (415)
     Proceeds from disposition of assets ......................        268           58
     Acquisitions .............................................       --           (400)
                                                                   -------     --------
                Net cash provided by (used in)
                investing activities ..........................        258         (757)
                                                                   -------     --------
Cash flows from financing activities:
     Restricted cash ..........................................         17          227
     Net borrowings (repayments) ..............................       (766)        --
     Repayments of capital lease obligations ..................       --           (633)
     Issuance of redeemable convertible preferred stock .......        200         --
                Net cash used in financing activities .........       (583)        (406)
                                                                   -------     --------
Effect of exchange rate on cash ...............................       --             (4)
Decrease in cash and cash equivalents .........................       (685)      (3,374)
Cash and cash equivalents, at beginning of period .............      1,145        5,235
                                                                   -------     --------
Cash and cash equivalents, at end of period ...................    $   460     $  1,861
                                                                   =======     ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                       5
<PAGE>

               INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

(1)   Nature of Business and Basis of Presentation

      Integrated Information Systems, Inc. ("IIS") and its wholly owned
subsidiary provides information technology related professional services to
businesses seeking to utilize technology to strengthen relationships with
customers and business partners.

      We operate in a highly competitive, consolidating market. The information
technology services industry has experienced rapid growth followed by rapid and
significant contraction over a relatively short economic cycle. In past periods,
our rapid growth phase had required significant investments in infrastructure,
facilities, computer and office equipment, human resources and working capital
in order to meet the perceived demand. The increased demand did not materialize
and since the third quarter of 2000, the market for our services has changed and
declined significantly.

      We have prepared the accompanying unaudited condensed consolidated
financial statements pursuant to the rules and regulations of the Securities and
Exchange Commission regarding interim financial reporting. (In this report, "we"
or "the Company" means Integrated Information Systems, Inc. and its wholly owned
subsidiary.) Accordingly, they do not include all of the information and notes
required by accounting principles generally accepted in the United States of
America for complete financial statements and should be read in conjunction with
the condensed consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2002.
The accompanying condensed consolidated financial statements reflect all
adjustments (consisting solely of normal, recurring adjustments), which are, in
the opinion of management, necessary for a fair presentation of results for the
interim periods presented. The results of operations for the three month period
ended March 31, 2003 are not necessarily indicative of the results to be
expected for any future period or the full fiscal year.

(2)   Liquidity and Continued Operations

      We have incurred significant losses from operations over the past three
years, have a substantial working capital deficit and an accumulated deficit of
$90,395,000 as of March 31, 2003. We were also in default under the terms of our
factoring agreement with our primary lender on March 31, 2003 and may have been
in technical default on other borrowing arrangements with this lender. However,
all such defaults and potential defaults were waived by the bank. As a result of
these and other factors, there are concerns about our liquidity at March 31,
2003.

      The continuation of the Company is dependent upon our efforts to raise
additional capital, increase revenues, reduce expenses, and ultimately, to
achieve profitable operations. We have reduced our obligations and expenses
through settlements with creditors, landlords and lessors, reduced our work
force, and made substantial reductions to general and administrative expenses
throughout 2002 and through the first quarter of 2003.

      Subsequent to March 31, 2003, we obtained the following:

      o     A $500,000 increase to our term loan;

      o     A $1,000,000 Line of Credit with our primary lender; and

      o     $800,000 of additional proceeds from the sale of preferred stock to
            an individual who is the major stockholder and an officer and
            director of the Company. (In February 2003, we also received
            $200,000 from the sale of preferred stock from this same
            shareholder.)

      During March and April of 2003, we also consummated new settlements with
creditors resulting in the settlement of $1,535,000 of obligations for $667,000
in cash and deposits and the issuance of 100,000 shares of Common Stock at $0.95
per share. Furthermore, we have made our cost structure significantly more
variable and believe we can continue to reduce expenses if it is required.

      While we cannot give any assurances that the above actions will be
sufficient to ultimately alleviate our liquidity concerns, or that additional
borrowings or capital could be obtained under satisfactory terms if they become
required, we do believe these actions will enable us to continue as a going
concern through December 31, 2003.

(3)   Use of Estimates

      The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an


                                       6
<PAGE>

on-going basis, we evaluate our estimates, including those related to long-term
service contracts, bad debts, intangible assets, income taxes, restructuring,
and contingencies and litigation. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.

      We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of these condensed
consolidated financial statements. We recognize revenue and profit as work
progresses on long-term, fixed price contracts using the
percentage-of-completion method, which relies on estimates of total expected
contract revenue and costs. We follow this method since reasonably dependable
estimates of the revenue and costs applicable to various stages of a contract
can be made. Recognized revenues and profit are subject to revisions as the
contract progresses to completion. Revisions in profit estimates are charged to
income in the period in which the facts that give rise to the revision become
known. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. We recorded goodwill and other intangible assets from acquisitions
during 2002 and 2001. We review our intangible assets on a periodic basis to
determine if the fair value supports the carrying value of goodwill and other
intangible assets. Future adverse changes in market conditions or poor operating
results could result in an inability to recover the carrying value of the
investments that may not be reflected in the current carrying value of the
intangible assets, thereby possibly requiring material impairment charges in the
future. The determination of reporting units is integral to the intangible asset
impairment test, and requires significant judgments to be made. We record a
valuation allowance to reduce the deferred tax assets to the amount that is more
likely than not to be realized. In the event we were to determine that we would
be able to realize the deferred tax assets in the future in excess of its net
recorded amount, an adjustment to the deferred tax asset would increase income
in the period such determination was made. We record accruals for the estimated
future cash expenditures required from closing our vacated offices. The accruals
include estimates of future rent payments and settlements until the obligation
is canceled. Should actual cash expenditures differ from our estimates,
revisions to the estimated liability for closing vacated offices would be
required. We evaluate the requirement for future cash expenditures resulting
from contingencies and litigation and record an accrual for contingencies and
litigation when exposures can be reasonably estimated and are considered
probable. Should the actual results differ from our estimates, revisions to the
estimated liability for contingencies and litigation would be required.

(4)   Supplemental Non-Cash Disclosures

      Non-cash investing and financing activities for the three months ended
March 31, 2003 and 2002 consisted of new capital lease obligations for property
and equipment of $0 and $362,000, respectively. In addition, as a result of
acquisitions during the first quarter of 2002, the Company assumed capital lease
obligations totaling $24,000 and issued Common Stock totaling $400,000.

      In 2002, the Company assumed a $4,750,000 note in conjunction with the
acquisition of certain assets of Goliath Networks, Inc.

(5)   Net Loss Per Share

      For the three months ended March 31, 2003 and 2002 there were 626,472 and
988,398 stock options outstanding, respectively. Because of the Company's net
loss in each quarter, all of these options, as well as all warrants, have been
excluded from the net loss per share calculation because their effect would be
antidilutive.

      All options granted had an exercise price equal to the market price on the
date of grant. Per share weighted average fair values are based on the date of
grant using the Black-Scholes Method. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
123, the Company's net loss would have been increased to the pro forma amounts
indicated below (amounts in thousands):

<TABLE>
<CAPTION>
                                                          Three Months Ended March 31,
                                                          ---------------------------
                                                                2003         2002
                                                              -------     --------
<S>                                                           <C>         <C>
Net loss as reported .....................................    $(1,745)    $(10,672)
Effect of recording stock options at fair value ..........         (4)         (15)
                                                              -------     --------
Pro forma ................................................     (1,749)     (10,687)
                                                              =======     ========
Net loss per share, as reported ..........................       (.50)       (3.22)
Net loss per share, pro forma ............................       (.50)       (3.23)
</TABLE>


                                       7
<PAGE>

(6)   Accounts Receivable


      In October 2002, we entered into a financing agreement with a bank to
provide a revolving loan facility. The agreement permits us to sell with
recourse trade accounts receivable up to $4,200,000, is due on demand and is
subject to certain collateral limitations and covenants primarily related to
borrowing issuances. We pay a fee of 1.95% of the face amount of the factored
receivables. The agreement is collateralized by substantially all of our assets.
The agreement expires on October 14, 2003 with automatic one-year renewals. At
March 31, 2003, we had outstanding borrowings of $2,217,000. For financial
presentation purposes, the related receivable and outstanding recourse liability
have been included as an asset and liability, respectively, on the balance
sheet.

(7)   Asset Impairments, Restructuring and Other Charges

      During 2001, we recorded asset impairments and restructuring charges
totaling $14,882,000. These charges included a charge in the second quarter of
2001, related to underutilized computer equipment and leasehold improvements at
our data center used for application outsourcing services and a charge in the
fourth quarter of 2001 for expenses incurred in connection with the closing and
consolidating of six office locations and abandoned leasehold improvements in an
unoccupied seventh location. Additionally, we recorded other charges related to
the impairment of inventoried software licenses in the second quarter of 2001.

      During the first quarter of 2002, commercial real estate markets in some
areas continued to be weaker than anticipated, and, accordingly, we re-evaluated
our accrual for future cash expenditures for closed office locations. In
addition, we executed a series of cost control initiatives to close and
consolidate three additional office locations. These activities resulted in
asset impairment and restructuring charges totaling $2,751,000 for the first
quarter of 2002. In the second quarter of 2002, we recorded additional asset
impairment charges totaling $133,000 relating to the closure of an office.

      During the third quarter of 2002, negotiations with the landlords of each
of the closed facilities and the remaining facilities resulted in a
restructuring of certain obligations and favorable settlements ultimately
consummated in October 2002. Accordingly, we again re-evaluated our accrual for
closed office locations resulting in a reduction of the restructuring charge of
$2,773,000.

      During the fourth quarter of 2002, we completed a restructuring which
satisfied the obligations for certain real estate and equipment leases, certain
trade payables and accrued expenses for less than their recorded value. The
Company agreed to immediately pay $1,995,000 in cash and $1,221,000 in periodic
payments over the next five years satisfying $2,686,000 of recorded accounts
payable and accrued expenses, $3,074,000 of capital lease obligations and
$229,000 of other non-current liabilities. As a result of the comprehensive
settlement, a total of approximately $23.0 million of contractual obligations
were satisfied and a reduction of the restructuring reserve of $2,427,000 was
recognized in the fourth quarter due to the change in estimation of
restructuring charges. We also recognized a gain of $1,268,000 from the
settlement of trade payables for less than the face amount. The completion of
the comprehensive settlement with creditors was funded by a revolving bank
credit facility of $4,200,000 funded through the sale of accounts receivable at
a discount of 1.95%, of which $2,481,000 was used to fund the settlement,
including a $422,000 cash reserve account related to the receivables financing.
To obtain the financing, we pledged substantially all of our assets to the bank
as collateral. Additionally, our key-man life insurance policy of $5,000,000 was
assigned to the bank, and the bank was given a warrant to purchase 60,000 shares
of our Common Stock at $5.00 per share. Our major stockholder and Chief
Executive Officer gave a $1.0 million personal guaranty to the bank as credit
support, and, in consideration of his guaranty, we have agreed to make quarterly
payments to him at an annual rate of 3% of the average outstanding balance under
the facility and to issue him, quarterly, warrants to acquire 4,000 shares of
our Common Stock for each $1.0 million in average outstanding balance under the
facility during the quarter. The warrants will have an exercise price of $5.00
per share and will remain exercisable as long as any amount is guaranteed and
for a period of one year thereafter, but for not less than five years from
issuance.

      In April 2003, in accordance with the terms of the acquisition agreement
with Cunningham Technology Group (CTG), we agreed to indemnify the CTG
principals against losses related to the early termination of the lease for
their office space. The loss is estimated to be $160,000. Additionally, we
reached a settlement with regard to the escrow account that was held as
restricted cash. Accordingly, we again re-evaluated the accrual for closed
office locations resulting in a reduction of the restructuring charge of
$434,000 in the first quarter of 2003.

      As of March 31, 2003, we had accrued liabilities for the future cash
expenditures attributable to these restructuring charges totaling $203,000 which
is classified as current accounts payable and accrued liabilities.


                                       8
<PAGE>

       The activity for the three months ended March 31, 2003 is summarized as
follows:

                                                          Accrued
                                                          Closed
                                                        Facilities
                                                         Reserves
                                                        ----------
        Balance, January 1, 2002 ...................       477,000
           Reserves accrued ........................       160,000
           Changes in previous estimates ...........      (434,000)
                                                         ---------
        Balance, March 31, 2003 ....................     $ 203,000
                                                         =========

(8)   Note Payable to Bank

      At March 31, 2003, we owed $4,750,000 under a long-term note with a bank.
The note bears interest at 7.0%, payable quarterly with principal payments
beginning in 2004. This amount is reflected net of a $13,000 discount on our
Balance Sheet. The note is collateralized by accounts receivable, inventory,
equipment, furniture and intellectual property. Subsequent to March 31, 2003, we
reached an agreement to extend the payment of principle. Future principle
payments, as amended on the note are (amounts in thousands):

                    2003 ..................    $ --
                    2004 ..................       282
                    2005 ..................       329
                    2006 ..................     4,139
                                               ------
                                               $4,750
                                               ======

(9)   Capital Lease Obligations

      We are obligated under capital leases primarily for computer equipment and
furniture that expire in 2003 and 2004. The leases meet the various criteria of
a capital lease and are, therefore, classified as capital lease obligations.
Capital lease obligations reflect the present value of future rental payments,
discounted at the interest rate implicit in each of the leases.

      The leased furniture and equipment has been included in property and
equipment at a total cost of $220,000 at March 31, 2003 and December 31, 2002.
Accumulated depreciation related to this furniture and equipment was $194,000
and $189,000 at March 31, 2003 and December 31, 2002, respectively.

      We acquired property and equipment and assumed capital lease obligations
totaling $0 and $362,000 for the three months ended March 31, 2003 and 2002,
respectively. Interest payments under capital lease obligations are generally
paid in the period incurred.

(10)  Operating Lease Commitments

      We have entered into various non-cancelable operating lease agreements for
office space, automobiles, and office equipment. The terms of these agreements
range from 6 months to 5 years and all of the leases require monthly payments.
We are generally responsible for all executory costs including maintenance,
insurance, utilities and taxes. Total rent expense was $342,000 and $843,000 for
the three months ended March 31, 2003 and 2002, respectively.

      A summary of the future minimum lease payments under operating leases
after March 31, 2003 follows (amounts in thousands):

                    2003 .......................    $  476
                    2004 .......................       543
                    2005 .......................       433
                    2006 .......................       305
                    Thereafter .................       167
                                                    ------
                                                    $2,299
                                                    ======

      During 2003, 2002 and 2001, we terminated leases for office space in New
York, Boston, Denver, Santa Monica and Irvine, California; Jacksonville,
Florida; Alpharetta, Georgia; Tempe, Arizona; and Bangalore, India. The above
future minimum lease payments exclude minimum payment amounts for the terminated
leases.


                                       9
<PAGE>

(11)  Income Taxes

      We did not record a provision for federal or state income taxes during the
three months ended March 31, 2003 and 2002 due to the net losses reported during
those periods. We also did not record a benefit for federal and state income
taxes during the three months ended March 31, 2003 and 2002 due to limitations
on the use of net operating loss carryforwards.

      At March 31, 2003, we had net operating loss carryforwards of
approximately $65,000,000 for U.S. federal and state income tax purposes that
expire in years 2018 through 2022. Due to the equity transactions that have
occurred with the Company, it is possible that the use of the net operating loss
carryforward may be limited in accordance with Section 382 of the Internal
Revenue Code. A determination as to this limitation will be made at a future
date as the net operating losses are utilized.

      We have recorded a valuation allowance for the deferred tax assets as of
March 31, 2003 and December 31, 2002. In assessing the realizability of deferred
tax assets, we have considered whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon generation of future
taxable income during the periods in which those temporary differences become
deductible. We considered the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making our
assessment. Based upon the level of historical losses and projections for future
taxable income/losses over the periods in which the deferred tax assets are
deductible, we believe it is more likely than not that we will not realize the
benefits of these deductible differences

(12)  Convertible Preferred Stock

      On February 26, 2003, we sold 20,000 shares of Series A 8% Convertible
Preferred Stock ("Series A 8%") to an officer and director for total proceeds of
$200,000. Series A 8% has a par value of $.001, a liquidation value of $10.00
per share, carries a quarterly dividend of $0.80 per share, is convertible into
Common Stock at an initial conversion price of $2.50, subject to adjustment for
dilutive issuances, and votes only upon conversion. We may require conversion
into Common Stock as soon as the 20-day average of the last reported sale of
Common Stock is $10.00 or higher.

      Additional preferred stock issuances subsequent to March 31, 2003 are
discussed in Note 17.

(13)  Goodwill

      We have determined that we have only one reporting unit. The fair value of
our reporting unit and the related implied fair value of its respective goodwill
was established using a market capitalization approach supported by a discounted
cash flow approach.

      In June 2002, we completed the transitional goodwill impairment test in
accordance with SFAS 142, which resulted in a non-cash charge of $3,187,000. All
of the charge was related to the Company's acquisitions completed in 2001. The
primary factors that resulted in the impairment charge were the difficult
economic environment in the IT professional services sector and the liquidity
and continuation concerns of the Company at that time.

      The fair value and carrying value of the goodwill of $5,241,000, relating
to the acquisitions we completed in the first and fourth quarters of 2002, were
tested during our annual measurement date in the fourth quarter of 2002, which
resulted in no impairment charges.

(14)  Significant Customers

      One customer accounted for 9% of total revenue for the three months ended
March 31, 2003. One customer accounted for 9% of total revenue for the three
months ended March 31, 2002.

      One customer accounted for 7% of the total accounts receivable balance at
March 31, 2003. One customer accounted for 2% of the total accounts receivable
balance at March 31, 2002.

(15)  Contingencies and Related Party Transactions

      During July and August 2001, four purported class action lawsuits were
filed in the United States District Court for the Southern District of New York
against the Company, certain of its current and former officers and directors
(the "Individual Defendants") and the members of the underwriting syndicate
involved in our initial public offering (the "Underwriter Defendants"). All four
lawsuits have been consolidated for coordination with more than 300 similar
cases. The suits generally allege that: (1) the Underwriter Defendants allocated
shares of the Company's initial public offering to


                                       10
<PAGE>

their customers in exchange for higher than standard commissions on transactions
in other securities; (2) the Underwriter Defendants allocated shares of our
initial public offering to their customers in exchange for the customers'
agreement to purchase additional shares of our Common Stock in the after-market
at pre-determined prices; (3) the Company and the Individual Defendants violated
section 10(b) of the Securities Exchange Act of 1934 and/or section 11 of the
Securities Act of 1933; and (4) the Individual Defendants violated section 20 of
the Securities Exchange Act of 1934 and/or section 15 of the Securities Act of
1933. The plaintiffs seek unspecified compensatory damages and other relief. We
have sought indemnification from the underwriters of its initial public
offering. In July 2002, we, as part of the group of issuers of shares named in
the consolidated litigation and the Individual Defendants, filed a motion to
dismiss the consolidated amended complaints. The Underwriter Defendants filed
motions to dismiss as well. Also in July 2002, the plaintiffs offered to dismiss
the Individual Defendants, without prejudice, in exchange for a Reservation of
Rights and Tolling Agreement from each Individual Defendant. All of the
Individual Defendants in our four lawsuits have entered into such an agreement.
On November 1, 2002, the Court heard oral arguments on the motions to dismiss,
and in February 2003, the Court dismissed the section 10(b) claims against the
Company but allowed the plaintiffs to continue to pursue the remaining claims.
We believe that the claims against it are without merit and intend to vigorously
defend this matter.

      In December 2001, we terminated a lease with MCW Brickyard Commercial,
L.L.C. ("MCW") for new office space at 699 South Mill Avenue in Tempe, Arizona
as a result of MCW's failure to deliver the leased premises in a timely manner
and filed suit against MCW in Superior Court in Maricopa County, Arizona to
recover damages it incurred in preparing to move to the premises and funds
remaining in a construction escrow account. MCW filed an answer, denying all
liability and alleging that we caused delays in delivery of the leased premises.
During March 2002, MCW filed an amended answer and supplemental counterclaim for
lost rent, lost parking income, lost expense income, commissions and unpaid
construction costs. MCW also sought indemnity for construction costs and its
attorneys' fees and interest. In August 2002, MCW filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code, and the state court
litigation was stayed as a result. We and MCW signed a settlement agreement
during March 2003, which was approved by the bankruptcy court. Terms of the
settlement included the release of $138,000 in an escrow account to us and the
mutual release of all other claims between the two parties.

      Additionally, we are from time to time, party to various legal proceedings
arising in the ordinary course of business. We evaluate such claims on a
case-by-case basis, and our policy is to vigorously contest any such claims
which we believes are without merit.

      An officer and director has guaranteed our accounts receivable financing,
and we have an ongoing, quarterly obligation to pay him cash and issue him
warrants for the continuing guaranty, based on the amount of financing
guaranteed during the quarter.

      We sold preferred stock to an officer and director in February, March and
April of 2003. See Note 17.

(16)  Recently Issued Accounting Pronouncements

      In June 2002, the FASB issued Statement of Financial Accounting Standards
SFAS No. 146, "Accounting for Exit or Disposal Activities" (SFAS 146). SFAS 146
addresses the recognition, measurement and reporting of costs associated with
exit and disposal activities, including restructuring activities. SFAS 146 also
addresses recognition of certain costs related to terminating a contract that is
not a capital lease, costs to consolidate facilities or relocate employees and
termination of benefits provided to employees that are involuntarily terminated
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred compensation contract. SFAS 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption of SFAS 146 did not have a material impact on the financial
position or results of operations of the Company.

      In August 2002, the FASB issued Statements of Financial Accounting
Standards No. 147, "Acquisitions of Certain Financial Institutions" (SFAS 147).
SFAS 147 requires financial institutions to follow the guidance in SFAS 141 and
SFAS 142 for business combinations and goodwill and intangible assets, as
opposed to the previously applied accounting literature. This statement also
amends SFAS 144 to include in its scope long-term customer relationship
intangible assets of financial institutions. The provisions of SFAS 147 do not
apply to the Company.

(17)  Subsequent Events

      On April 2, 2003, we sold 20,000 shares of Series A 8% Convertible
Preferred Stock ("Series A 8%") to an officer and director for total proceeds of
$200,000. Series A 8% has a par value of $.001, a liquidation value of $10.00
per share, carries a quarterly dividend of $0.80 per share, is convertible into
Common Stock at an initial conversion price of $2.50,


                                       11
<PAGE>

subject to adjustment for dilutive issuances, and votes only upon conversion. We
may require conversion of the Series A 8% into Common Stock as soon as the
20-day average of the last reported sale of Common is $10.00 or higher. This
sale was in addition to the sale of 20,000 shares of preferred stock to the same
officer on February 26, 2003.

      On April 4, 2003, we sold 60,000 shares of Series B 12% Convertible
Preferred Stock ("Series B 12%) to an officer and director for total proceeds of
$600,000 and exchanged 40,000 shares of Series A 8% for 40,000 shares of Series
B 12%. Series B 12% has a par value of $.001, a liquidation value of $10.00 per
share, carries a quarterly dividend of $1.20 per share, is convertible into
Common Stock at an initial conversion price of $1.10, subject to adjustment for
dilutive issuances, and votes only upon conversion. We may require conversion of
the Series B 12% into Common Stock as soon as the 20-day average of the last
reported sale is $4.40 or higher.

      During March and April 2003, we obtained additional credit from our lender
for working capital purposes. The bank has loaned us an additional $500,000,
which was added to the existing note payable, deferred principal payments under
the note for a year, extended an additional one-year $1.0 million revolving line
of credit and allowed us to retain a greater amount of proceeds from assets
sales, with excess proceeds to be applied against the note. To obtain this
financing, we cancelled the warrant given to the bank in October 2002 and gave
the bank a warrant for 300,000 shares at market price and reaffirmed the
security interests previously given and the assignment of the key-man life
insurance. Additionally, our Chief Executive Officer gave a limited guaranty of
$1.0 million for amounts drawn under the revolving line of credit, and, in
exchange, we gave him a warrant for 300,000 shares at market price.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Forward-Looking Statements

      The following discussion contains forward-looking statements based on
current expectations, and we assume no obligation to update these statements.
Because actual results may differ materially from expectations, we caution
readers not to place undue reliance on these statements. These statements are
based on our estimates, projections, beliefs, and assumptions, and are not
guarantees of future performance. A number of factors could cause future results
to differ materially from historical results, or from results or outcomes
currently expected by us. These factors include: the loss of one or more of our
significant clients; an inability to increase our market share; difficulties in
maintaining our technology alliances; a reduced demand for IT services, and a
continued downturn in economic conditions.

      These factors and the other matters discussed below under the heading
"Factors that May Affect Future Results and Our Stock Price" may cause future
results to differ materially from historical results, or from results or
outcomes we currently expect or seek.

Overview

      Since the third quarter of 2000, the market for IT services has changed
dramatically and the demand has declined significantly. As part of our effort to
adjust our structure to better address the general economic business climate and
the slowdown in the IT professional services market, we have closed
underperforming or vacant regional offices, reduced staff in remaining offices,
recorded material charges related to underutilized data center facility computer
equipment and leasehold improvements and developed and began implementing an
aggressive growth strategy through acquiring like-minded peer consultancies. We
completed four such acquisitions in 2001, two such transactions in 2002 and
anticipate additional, similar transactions, in future periods.

      We have operated at a loss for each of the last four years with the
exception of the third and fourth quarters of 2002. The losses, combined with
the current market for IT services, have raised concern about our liquidity and
continued operations. We continue to reduce our operating expenses in order to
improve cash flow from operations. During 2002, we were in default of certain
operating and capital lease provisions for failure to make timely payment, had
received several default notices during 2002 and had been named in a number of
related lawsuits. In May 2002, we implemented a financial restructuring plan
designed to settle obligations for vacated facilities, excess equipment leases
and accounts payable related to facilities and types of services we were no
longer offering to clients, in a manner which would achieve the highest possible
recoveries for all creditors and stockholders consistent with our ability to pay
and to continue our operations. In October 2002, we completed a restructuring
which satisfied the obligations for the related real estate and equipment leases
and for certain trade payables for less than their recorded value. We agreed to
pay $2.0 million in cash at the close of the restructuring and $1.2 million in
periodic payments over the next five years, satisfying $2.9 million of recorded
accounts payable and accrued expenses, $3.1 million of capital lease obligations
and $229,000 of other non-


                                       12
<PAGE>

current liabilities. As a result of the restructuring, a total of approximately
$23.0 million of current and future contractual obligations were satisfied. We
funded the restructuring by selling all of our current accounts receivable,
totaling $2.5 million, through a new bank credit facility at a discount of
1.95%, which left us the ability to sell up to $1.7 million more in current
accounts receivable under the same arrangement. To obtain the financing, we
pledged substantially all of our assets to the bank and we issued to the bank a
warrant to purchase 60,000 shares of our Common Stock at $5.00 per share.
Additionally, the Company's key-man life insurance policy of $5,000,000 was
assigned to the bank. Our Chief Executive Officer gave a $1.0 million personal
guaranty to the bank as credit support, and, in consideration of his guaranty,
we have agreed to make quarterly payments to him at an annual rate of 3% of the
average outstanding balance under the facility and to issue him, quarterly,
warrants to acquire 4,000 shares of our Common Stock for each $1.0 million in
average outstanding balance under the facility during the quarter. The warrants
will have an exercise price of $5.00 per share and will remain exercisable as
long as any amount is guaranteed and for a period of one year thereafter, but
for not less than five years from issuance.

      During March and April 2003, we obtained additional credit from our lender
for working capital purposes. The bank has loaned us an additional $500,000,
which was added to the existing note, deferred principal payments under the note
for a year, extended a one-year $1.0 million revolving line of credit and
allowed us to retain a greater amount of proceeds from assets sales, with excess
proceeds to be applied against the note. To obtain this financing, we cancelled
the warrant given in October 2002 and gave the bank a warrant for 300,000 shares
at market price and reaffirmed the security interests previously given and the
assignment of the key-man life insurance. Additionally, our Chief Executive
Officer gave a limited guaranty of $1.0 million for amounts drawn under the
revolving line of credit. In February and April 2003, we sold 100,000 shares of
preferred stock to an officer and director for total proceeds of $1.0 million.
Although no assurances can be given, we believe that the capital and financing
arrangements received subsequent to December 31, 2002 and the restructuring
accomplished in 2002 and 2003 will allow the Company to continue as a going
concern. The remaining unused balance on the credit facility of $1.4 million is
available to fund future acquisitions and to support working capital needs;
however, availability is dependent upon our ability to generate additional
revenues and increase our accounts receivable base. Accordingly, notwithstanding
the restructuring, if we are unable to raise additional capital, increase
revenues and significantly further reduce operating losses, our business
activities may be significantly curtailed.

      We derive our revenues primarily from the delivery of professional
services. We offer our services to clients under time and materials contracts or
under fixed fee contracts. For time and material projects, we recognize revenues
based on the number of hours worked by consultants at a rate per hour agreed
upon with our clients. We recognize revenues from fixed-price contracts on a
percentage-of-completion method based on project hours worked. The percentage of
our revenues from fixed-price contracts was approximately 23% and 32% in the
first quarter of 2003 and 2002, respectively. We provide our application
outsourcing services for a minimum monthly fee and charge extra fees for
services that exceed agreed-upon parameters. Revenues from these services are
recognized as services are provided. Revenues for services rendered are not
recognized until collectibility is reasonably assured.

      Our cost of revenues consists primarily of employee compensation, outside
consulting services and benefits. Selling and marketing expenses consist
primarily of compensation and benefits. General and administrative expenses
consist primarily of compensation and benefits for our executive management and
our finance, administration, legal, information technology, and human resources
personnel. General and administrative expenses also include research and
development expense, depreciation, bad debt expense and operating expenses such
as rent, insurance, telephones, office supplies, travel, outside professional
services, training, and facilities costs.

      We have historically derived and believe that we may continue to derive a
significant portion of our revenues from a limited number of clients who may
change from period to period (see related discussion below in "Results of
Operations"). Any cancellation, deferral, or significant reduction in work
performed for our principal clients could harm our business and cause our
operating results to fluctuate significantly from period to period. During the
quarter ended March 31, 2003, revenues from our five largest clients
represented, when added together, approximately 34.2% of revenues compared with
32.3% of revenues in the corresponding period in 2002.

      We incurred a net loss in the first quarter of 2003 and in each of the
last five years as a result of decreases in revenues (after 2000), investments
in infrastructure, and increases in operating expenses and, more recently, as a
result of not timely decreasing operating expenses. Our quarterly revenue, cost
of revenues, and operating results have varied in the past due to fluctuations
in the utilization of project personnel and are likely to vary significantly in
the future. Therefore, we believe that period-to-period comparisons of our
operating results may not be indicative of future performance and should not
necessarily be relied upon.


                                       13
<PAGE>

Recent Acquisitions

      As part of our effort to adjust our structure to better address a rapidly
changing and declining IT services market, we developed and began implementing
an aggressive growth strategy through acquiring like-minded peer consultancies.
The acquisition target companies ideally have leading competitive positions in
regional and vertical markets, a proven track record of providing
Microsoft-based and Novell solutions, a booked backlog of project work for
premier clients, managers in place who are capable of leading a regional
division for the Company, a working culture and ethic similar to our own and are
owned by consultants who remain active in the business.

      During 2001, we completed a series of transactions with four companies
that met our acquisition criteria. To complete these acquisitions we used a
combination of cash payments, issuance of our common stock and assumption of
liabilities and in return hired a total of 121 management and consulting
personnel, acquired certain related assets and acquired lease arrangements for
office space in the markets in which these consultancy practices operated. In
the purchase price allocation, a total of $3,064,000 was recorded as goodwill.

      During 2002, in connection with the effective date of Statement of
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets,"
we were required to assess the impairment of our recorded goodwill relating to
the above acquisitions. As discussed in Note 17 of the Notes to Consolidated
Financial Statements, all of the goodwill recorded through December 31, 2001
totaling $3,064,000 and related acquisition costs of $123,000 were written off
as a non-cash, cumulative effect of a change in accounting principle.

      During 2002, we completed a series of transactions with two additional
companies, again using a combination of cash payments, issuance of our common
stock and assumption of liabilities and bank loans. Through these two
acquisitions we hired 98 management and consulting personnel and acquired
related assets and lease agreements for office space and equipment. In the
purchase price allocation, a total of $5,241,000 was recorded as goodwill.

      As part of the 2001 and 2002 acquisitions, intangible assets excluding
goodwill totaling $682,000 were acquired consisting of non-compete agreements of
$325,000 and employee agreements of $357,000. The non-compete intangible assets
will be amortized over their contractual lives, which are generally five years.
The employee agreements' intangible assets were amortized over their contractual
lives, which were less than one year. The total goodwill recorded for the 2002
acquisitions was $5,240,000. It is estimated that most of this goodwill will be
deductible for tax purposes, subject to the utilization of the Company's net
operating losses. See note 12.

      In connection with these acquisitions, the Company acquired accounts
receivable of $1,773,000 and fixed assets of $520,000. The Company issued
214,000 shares of Common Stock valued at $577,000, of which $43,000 was used to
repay a portion of an assumed note payable.

Critical Accounting Policies and Estimates

      The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis we evaluate our estimates, including those
related to intangible assets, long-term service contracts, bad debts, income
taxes, restructuring, and contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

      We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements. We recognize revenue and profit as work progresses on
long-term, fixed price contracts using the percentage-of-completion method,
which relies on estimates of total expected contract revenue and costs. We
follow this method because reasonably dependable estimates of the revenue and
costs applicable to various stages of a contract can be made. Recognized
revenues and profit are subject to revisions as the contract progresses to
completion. Revisions in profit estimates are charged to income in the period in
which the facts that give rise to the revision become known. We maintain
allowances for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. If the financial condition
of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required. We record
goodwill and other intangible assets from acquisitions. We review the Company's
intangible assets on a periodic basis to determine if the fair value supports
the carrying value of goodwill and other intangible assets. Future adverse
changes in market conditions or poor operating results could result in an
inability to recover the carrying value of the investments that may not be
reflected in the current carrying value of the intangible assets, thereby
possibly requiring material impairment charges in the future. The determination
of reporting units needed for the impairment calculation also involves a
significant amount of judgment. We record a valuation allowance to reduce the
Company's deferred tax assets to the amount that is more likely than not to be
realized. In the event we were to determine that the Company would be able to
realize its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made. We recorded accruals for the estimated
future cash expenditures required from closing our vacated offices. The
accruals, through December 31, 2002, include estimates of future rent payments
and settlements until the obligation is canceled. Should actual cash
expenditures differ from our estimates, revisions to the estimated liability for
closing vacated offices would be required. We evaluate the requirement for
future cash expenditures resulting from the Company's contingencies and
litigation. Should the actual results differ from our estimates, revisions to
the estimated liability for contingencies and litigation would be required.


                                       14
<PAGE>

Results of Operations

      The following table sets forth selected financial data for the periods
indicated expressed as a percentage of revenues:

<TABLE>
<CAPTION>
                                                                  Three Months Ended
                                                                      March 31,
                                                                  ------------------
                                                                  2003         2002
                                                                  -----       -----
<S>                                                               <C>         <C>
        Revenues .............................................    100.0%      100.0%
        Cost of revenues .....................................     70.0        75.4
                                                                  -----       -----
              Gross profit ...................................     30.0        24.6
                                                                  -----       -----
        Operating expenses:
            Selling and marketing ............................     22.5        12.7
            General and administrative .......................     88.4        68.3
            Asset impairments, restructuring
              charges and other ..............................     --          33.3
            Gain on settlement of lease termination agreement
              and other liabilities  .........................    (26.8)       --
                                                                  -----       -----
              Total operating expenses .......................     84.1       114.3
                                                                  -----       -----
              Loss from operations ...........................    (54.1)      (89.7)
        Interest and other income (expense), net .............     (5.6)        (.8)
                                                                  -----       -----
              Loss before cumulative effect of a change
                in accounting principle ......................    (59.7)%     (90.5)%
                                                                  =====       =====
</TABLE>

Quarter Ended March 31, 2003 Compared to Quarter Ended March 31, 2002

      Revenues. For the three months ended March 31, 2003, revenues decreased
65.1% to $2.9 million compared to $8.3 million in the corresponding period of
2002. The decrease is primarily due to continuing weakness in demand in the
information technology sector which has resulted in the closure of several of
our offices, and recent general economic conditions caused by geopolitical
influences.

      Cost of Revenues. Cost of revenues decreased 67.7% to $2.0 million for the
three months ended March 31, 2003 compared to $6.2 million for the corresponding
period of 2002. The decrease in cost of revenues for the first quarter resulted
from a decrease in overall firm staffing. Utilization of consultants in the
first quarter decreased 8.3% to 55%, compared to 60% for the corresponding
quarter in 2002.

      Selling and Marketing Expenses. Selling and marketing expenses decreased
30% to $.7 million in the first quarter of 2003 from $1.0 million in the
corresponding period in 2002 and as a percentage of revenues increased to 22.5%
in 2003 from 12.7% in 2002. The decrease in selling and marketing expenses in
2003 was due primarily to the reduction of dedicated sales and marketing
personnel in 2003 compared to 2002 as a part of management's cost reduction
plan.

      General and Administrative Expenses. General and administrative expenses
decreased 54.4% to $2.6 million in the first quarter of 2003 from $5.7 million
in the corresponding period in 2002 and as a percentage of revenues decreased to
88.4% in 2003 from 68.3% in 2002. The decrease in general and administrative
expenses in 2003 was primarily due to management's implementation of its cost
reduction plan and are attributable to a reduction in rent and equipment lease
expense of $785,000, salary expense of $554,000, legal expense of $362,000,
depreciation and amortization expense of $609,000, telephone expense of
$188,000, consulting services of $145,000, general office expense of $212,000, a
net change in the provision for bad debt expense of $537,000 and other net cost
reductions of $352,000, and an increase in taxes and permits expense of
$119,000. During the first quarter of 2003, we terminated the office leases for
our Denver and Boston operations and in conjunction with the settlement of those
leases, sold property and equipment to the lessors incurring a loss of $525,000.

      Asset Impairments and Restructuring Charges and Loss on Disposition of
Assets. During 2001, we recorded a $9.2 million impairment charge related to
underutilized data center facility computer equipment and leasehold improvements
and a $5.7 million charge for expenses incurred in connection with closing and
consolidating six office locations. During 2002, in connection with our
restructuring efforts and the resulting favorable settlement of certain
obligations and lease agreements, we re-evaluated our reserve for closed office
locations and recorded a $1.0 million reduction of the restructuring reserve. We
also recorded a gain on the settlement of payables of $1.2 million relating to
these favorable settlement agreements.


                                       15
<PAGE>

      During the first quarter of 2003, as a result of additional restructuring
efforts and the resulting favorable settlement of certain obligations, we
recorded a gain on settlement of debt of $783,000.

      Interest Expense Net. Interest expense, net of interest income increased
134.3% to $164,000 in the first quarter of 2003 from $70,000 in the
corresponding period in 2002. The change was due to interest on bank financing
used for acquisitions and financing accounts receivable.

Liquidity and Capital Resources

      Since inception, we have primarily funded our operations and investments
in property and equipment through cash, capital lease financing arrangements,
bank borrowings, and equity financings. In January 2000, we raised $20.2
million, before expenses of $800,000, through a private placement of Series C
preferred stock to institutional and other accredited investors. In March and
April 2000, we raised an additional $67.5 million (net of underwriting discounts
and other offering expenses) through our initial public offering of 989,000
shares of our Common Stock.

      At March 31, 2003, we had approximately $460,000 in cash and cash
equivalents and a $3.8 million working capital deficit, as compared to $1.1
million in cash and cash equivalents and a $2.8 million working capital deficit
at December 31, 2002.

      Net cash used in operating activities for the three months ended March 31,
2003 and 2002 was $360,000 and $2.2 million, respectively. Cash used in
operating activities in each of these periods was the result of net losses,
adjusted for non-cash items related to depreciation, amortization and asset
impairment, and fluctuations in receivables, unbilled and deferred revenues on
contracts, prepaid expenses and other current assets, and accounts payable and
accrued expenses.

      Net cash provided by investing activities for the three months ended March
31, 2003 was $258,000, primarily from the sale of excess furniture and
equipment. Net cash used in investing activities for the three months ended
March 31, 2002 was $757,000. Cash used in investing activities in the first
quarter of 2003 consisted primarily of purchases of computer equipment,
furniture and leasehold improvements and in an acquisition of assets of another
company totaling $400,000.

      In the first quarter of 2003, net cash used in financing activities was
$583,000, compared to $406,000 in the corresponding period of 2002. During the
first quarter of 2003, we sold 20,000 shares of preferred stock for $200,000. In
the first quarter of 2002, we assumed a note for $4,500,000 in conjunction with
an acquisition.

      Non-cash investing and financing activities for the three months ended
March 31, 2003 and 2002 consisted of new capital lease obligations for property
and equipment of $0 and $362,000, respectively. In 2002, we also assumed a note
for $4,750,000 in conjunction with an acquisition.

      A summary of our contractual cash obligations at March 31, 2003 (adjusted
for settlements reached subsequent to quarter end) follows (amounts in
thousands):

<TABLE>
<CAPTION>
                                            Fixed
                                          Settlement
                                          Agreements   Capital   Operating
                              Bank Note       $        Leases    Leases       Total
                              ---------   ----------   -------   ---------    ------
<S>                             <C>            <C>         <C>      <C>       <C>
      2003 ...............      $ --           $180        $46      $  755    $  981
      2004 ...............         282           76         17         639     1,014
      2005 ...............         329           38         --         433       800
      2006 ...............       4,139           38         --         305     4,482
      2007 ...............        --             35         --         167       202
      Thereafter .........        --            --          --        --        --
                                ------       -------    ------      ------    ------
                                $4,750         $367        $63      $2,299    $7,479
                                ======       =======    ======      ======    ======
</TABLE>

      We have incurred significant losses from operations over the past three
years. We have a substantial working capital deficit and an accumulated deficit
of $90.4 million as of March 31, 2003. We were also in default under the terms
of a factoring agreement with our primary lender on March 31, 2003 and may have
been in technical default on other borrowing arrangements with this lender.
However, all such defaults and potential defaults were waived by the bank. As a
result of these and other factors, there are concerns about the liquidity of the
Company at March 31, 2003.

      Our continuation is dependent upon our efforts to raise additional
capital, increase revenues, reduce expenses, and ultimately, to achieve
profitable operations. We have reduced our obligations and expenses through
settlements with creditors, landlords and lessors, reduced our work force, and
made substantial reductions to general and administrative expenses throughout
2002 and through the first quarter of 2003.


                                       16
<PAGE>

      Subsequent to March 31, 2003, we obtained the following:

      o     A $500,000 increase to our term loan;

      o     A $1,000,000 Line of Credit with our primary lender; and

      o     $800,000 of additional proceeds from the sale of preferred stock to
            an officer and director of the Company. (In February 2003, we also
            received $200,000 from the sale of preferred stock from this same
            shareholder.)

      We also reached a new settlement with a primary creditor resulting in the
settlement of $901,000 of obligations for a one-time payment of $200,000 and the
issuance of 100,000 shares of Common Stock at $0.95 per share. Furthermore, we
have made our cost structure significantly more variable and we believe we can
continue to reduce expenses if it is required.

      While we cannot give any assurances that the above actions will be
sufficient to ultimately alleviate our liquidity concerns, or that additional
borrowings or capital could be obtained under satisfactory terms if they become
required, we do believe these actions will enable us to continue as a going
concern through December 31, 2003.

Recently Issued Accounting Pronouncements

      In June 2002, the FASB issued Statement of Financial Accounting Standards
SFAS No. 146, "Accounting for Exit or Disposal Activities" (SFAS 146). SFAS 146
addresses the recognition, measurement and reporting of costs associated with
exit and disposal activities, including restructuring activities. SFAS 146 also
addresses recognition of certain costs related to terminating a contract that is
not a capital lease, costs to consolidate facilities or relocate employees and
termination of benefits provided to employees that are involuntarily terminated
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred compensation contract. SFAS 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption of SFAS 146 did not have a material impact on our financial
position or results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

      To date, we have not utilized derivative financial instruments or
derivative commodity instruments. We do not expect to employ these or other
strategies to hedge market risk in 2003. We invest our cash in money market
funds, which are subject to minimal credit and market risk. We believe that the
market risks associated with these financial instruments are immaterial.

      All of our revenues are realized currently in U.S. dollars and are from
customers primarily in the United States. Therefore, we do not believe that we
currently have any significant direct foreign currency exchange rate risk.

Factors that May Affect Future Results and Our Stock Price

      This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Act of 1934. Forward-looking statements give our current
expectations or forecasts of future events. Words such as "expect," "may,"
"anticipate," "intend," "would," "will," "plan," "believe," "estimate,"
"should," and similar expressions identify forward-looking statements.
Forward-looking statements in this Form 10-Q include express or implied
statements concerning our future revenues, expenditures, capital or other
funding requirements, the adequacy of our current cash and working capital
balances to fund our present and planned operations and financing needs,
expansion of and demand for our service offerings, and the growth of our
business and operations, as well as future economic and other conditions both
generally and in our specific geographic and product and services markets. These
statements are based on our estimates, projections, beliefs, and assumptions and
are not guarantees of future performance. From time to time, we also may provide
oral or written forward-looking statements in other materials we release to the
public.

      We caution that the following important factors, among others, could cause
our actual results to differ materially from those expressed in forward-looking
statements made by or on behalf of us in filings with the Securities and
Exchange Commission, press releases, communications with investors, and oral
statements. Any of these factors, among others, could also negatively impact our
operating results and financial condition and cause the trading price of our
Common Stock to decline or fluctuate significantly. We undertake no obligation
to publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise. You are advised, however, to consult
any further disclosures we make in our reports filed with the Securities and
Exchange Commission and in future public statements and press releases.


                                       17
<PAGE>

We have experienced operating losses and may incur operating losses in future
periods, which could cause the price of our Common Stock to decline further.

      We had a net loss of approximately $1.7 million for the three months ended
March 31, 2003, a net loss of $11.8 million for the year ended December 31,
2002, a net loss of $49.4 million for the year ended December 31, 2001 and a net
loss of approximately $25.4 million for the year ended December 31, 2000. If we
do not achieve revenue growth and maintain our current cost of structure (or
reduce costs further), we could experience continuing operating losses. These
losses or any fluctuation in our operating results could cause the market value
of our Common Stock to decline further.

We have not been able to maintain a Nasdaq SmallCap listing, so our Common Stock
has become even more illiquid and the value of our securities may decline
further.

      Nasdaq has, effective April 10, 2003, delisted our Common Stock, and our
Common Stock is currently trading on the National Association of Securities
Dealers' OTC Bulletin Board (OTCBB). The OTCBB is generally considered less
liquid and efficient than Nasdaq, and although trading in our stock is already
relatively thin and sporadic, the liquidity of our Common Stock will probably
decline further because smaller quantities of shares will likely be bought and
sold, meaning that transactions could be delayed. These factors could result in
lower prices and larger spreads in the bid and ask prices for our Common Stock.
Reduced liquidity may reduce the value of our Common Stock and our ability to
generate additional funding.

There Is a Limited Market For Our Common Stock.

      Currently only a very limited trading market exists for Integrated
Information Systems common stock. Our common stock trades on the OTC Bulletin
Board under the symbol "IISX." The Bulletin Board is a limited market and
subject to substantial restrictions and limitations in comparison to the NASDAQ
system. Any broker/dealer that makes a market in our stock or other person that
buys or sells our stock could have a significant influence over its price at any
given time. Effective sometime in 2003 or early 2004, the OTC Bulletin Board
will no longer offer companies a market on which to trade. The new BBX Exchange,
which is intended to replace the OTC Bulletin Board, will have stricter listing
standards. Management intends to apply to be listed on the BBX Exchange as soon
as applications become available but there is no assurance that we will meet the
minimum criteria required. If we fail to meet the BBX Exchange listing
requirements, then we will be forced to trade solely on the pink sheets, a
market with very limited liquidity and minimal listing standards. We cannot
assure our shareholders that a market for our stock will be sustained. There is
no assurance that our shares will have any greater liquidity than shares which
do not trade on a public market.

Our Common Stock May Be Subject To Penny Stock Regulation.

      Our shares may be subject to the provisions of Section 15(g) and Rule
15g-9 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
commonly referred to as the "penny stock" rule. Section 15(g) sets forth certain
requirements for transactions in penny stocks and Rule 15g-9(d)(1) incorporates
the definition of penny stock as that used in Rule 3a51-1 of the Exchange Act.
The Commission generally defines penny stock to be any equity security that has
a market price less than $5.00 per share, subject to certain exceptions. Rule
3a51-1 provides that any equity security is considered to be penny stock unless
that security is: registered and traded on a national securities exchange
meeting specified criteria set by the Commission; authorized for quotation on
The NASDAQ Stock Market; issued by a registered investment company; excluded
from the definition on the basis of price (at least $5.00 per share) or the
registrant's net tangible assets; or exempted from the definition by the
Commission. Since our shares are deemed to be "penny stocks", trading in the
shares will be subject to additional sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors.

We may need additional capital which, if not available to us, may alter our
business plan or limit our ability to achieve growth in revenues and which, if
available and raised, would dilute your ownership interest in us.

      We incurred negative cash flows from operations in 2002 and, to date, have
continued to do so in 2003. Although we believe that we have sufficient cash to
fund existing operations for the balance of the year, we are pursuing sources of
working capital. Even after consideration of the additional funds raised in
2003, we may need to raise additional funds through public or private equity or
debt financings in order to:

      o     address working capital needs if collection of accounts receivable
            declines;

      o     take advantage of acquisition or expansion opportunities;


                                       18
<PAGE>

      o     develop new services; or

      o     address unanticipated contingencies.

      Our inability to obtain financing on terms acceptable to us, or at all,
may limit our ability to increase revenues or to achieve profitability. Our
stock price, like the stock price of many competitors in our industry, has been
depressed in recent periods, which could limit our ability to obtain any needed
financing on favorable or acceptable terms. In addition, if we are able to raise
additional capital through the sale of equity securities or through taking on
debt with an equity component, your investment in us would be diluted, which
could cause our stock price to further decline.

We anticipate acquiring more businesses, and we may incur increased operating
expenses without corresponding increased revenues, which may limit our ability
to achieve or maintain profitability and cause the price of our Common Stock to
decline.

      A key component of our business strategy is to acquire like-minded peer
consultancies in geographic areas where we do not have a strong presence. We
also look for acquisition opportunities, without focusing on increasing our
geographic diversity, if there is an opportunity to strengthen a current service
offering or add a service offering which complements our current service
offerings. The risks of acquisitions include retaining clients, retaining key
employees, incurring higher than anticipated transaction expenses and other
unexpected expenses and diverting management's attention from daily operations
of our business. Acquiring businesses, especially in markets in which we have
limited prior experience, is risky. If we do not implement this strategy
successfully, we may incur increased operating expenses without increased
revenues, which could materially harm our operating results and stock price.

We face challenges in the integration of the businesses we have recently
acquired and those we may acquire in the future.

      We may not experience the anticipated results from the integration of
businesses we have acquired. The strategies of cross-marketing service
offerings, the opportunities of expanded markets and clients, the development of
additional revenue streams, the enhanced ability to raise capital, and the
availability of public currency for making strategic acquisitions may not prove
to be as advantageous as we expect. This could affect the results of our
operations, negatively impact our financial performance and harm our business.

Because the market for our services may not grow during 2003, we may be unable
to become profitable.

      We offer services in the IT services market, and that market has
contracted significantly in recent years. We do not anticipate significant
growth in the IT services market in 2003. If demand for our services does not
grow in the future, or if we do not capture sufficient market share for these
services, we may be unable to achieve profitability.

Our results of operations may vary from quarter to quarter in future periods
and, as a result, we may not meet the expectations of our investors and
analysts, which could cause our stock price to fluctuate or decline.

      Our revenues and results of operations have fluctuated significantly in
the past and could fluctuate significantly in the future. We incurred net losses
of $10.7 million and $2.5 million in the first and, second quarters of 2002,
respectively, and reported earnings of $0.9 million and $0.5 million in the
third and fourth quarters of 2002, respectively and incurred a net loss of $1.7
million in the first quarter of 2003.

       Our results may fluctuate due to the factors described in this Form 10-Q,
as well as:

      o     the loss of or failure to replace any significant clients;

      o     variation in demand for our services;

      o     higher than expected bad debt write-offs or impairment of our
            assets, including goodwill;

      o     changes in the mix of services that we offer; and

      o     variation in our operating expenses.

      A substantial portion of our operating expense is related to personnel
costs and overhead, which cannot be adjusted quickly and is, therefore,
relatively fixed in the short term. Our operating expenses are based, in
significant part, on our


                                       19
<PAGE>

expectations of future revenues. If actual revenues are below our expectations,
we may not achieve our anticipated operating results. Moreover, it is possible
that in some future periods our results of operations may be below the
expectations of analysts and investors. In this event, the market price of our
Common Stock is likely to decline.

If we fail to keep pace with the rapid technological changes that characterize
our industry, our competitiveness would suffer, causing us to lose projects or
clients and consequently reducing our revenues and the price of our Common
Stock.

      Our market and the enabling technologies used by our clients are
characterized by rapid, frequent, and significant technological changes. If we
fail to respond in a timely or cost-effective way to these technological
developments, we may not be able to meet the demands of our clients, which would
affect our ability to generate revenues and achieve profitability. We have
derived, and expect to continue to derive, a large portion of our revenues from
creating solutions that are based upon today's leading and developing
technologies and which are capable of adapting to future technologies. Our
historical results of operations may not reflect our new service offerings and
may not give you an accurate indication of our ability to adapt to these future
technologies.

Our failure to meet client expectations or deliver error-free services could
damage our reputation and harm our ability to compete for new business or retain
our existing clients, which may limit our ability to generate revenues and
achieve or maintain profitability.

      Many of our engagements involve the delivery of information technology
services that are critical to our clients' businesses. Any defects or errors in
these services or failure to meet clients' specifications or expectations could
result in:

      o     delayed or lost revenues due to adverse client reaction;

      o     requirements to provide additional services to a client at no or a
            limited charge;

      o     refunds of fees for failure to meet obligations;

      o     negative publicity about us and our services; and

      o     claims for substantial damages against us.

      In addition, we sometimes implement critical functions for high profile
clients or for projects that have high visibility and widespread usage in the
marketplace. If these functions experience difficulties, whether or not as a
result of errors in our services, our name could be associated with these
difficulties and our reputation could be damaged, which would harm our business.

We may lose money on fixed-price contracts because we may fail to accurately
estimate at the beginning of projects the time and resources required to fulfill
our obligations under our contracts; the additional expenditures that we must
make to fulfill these contract obligations may cause our profitability to
decline or prevent us from achieving profitability and could reduce the price of
our Common Stock.

      Although we provide consulting services primarily on a time and materials
compensation basis, approximately 27% of our consulting revenue was derived from
fixed-price, fixed-time engagements in 2002, and approximately 14% of revenues
were derived from fixed-price, fixed-time engagements in 2001. The percentage of
our revenues derived from fixed-price, fixed time engagements may increase in
the future, as influenced by changes in demand and market conditions. Our
failure to accurately estimate the resources required for a fixed-price,
fixed-time engagement or our failure to complete our contractual obligations in
a manner consistent with our projections or contractual commitments could harm
our overall profitability and our business. From time to time, we have been
required to commit unanticipated additional resources to complete some
fixed-price, fixed-time engagements, resulting in losses on these engagements.
We believe that we may experience similar situations in the future. In addition,
we may negotiate a fixed price for some projects before the design
specifications are finalized, resulting in a fixed price that is too low and
causing a decline in our operating results.


                                       20
<PAGE>

Our lack of long-term contracts with clients and our clients' ability to
terminate contracts with little or no notice reduces the predictability of our
revenues and increases the potential volatility of our stock price.

      Our clients generally retain us on an engagement-by-engagement basis,
rather than under long-term contracts. In addition, our current clients can
generally reduce the scope of or cancel their use of our services without
penalty and with little or no notice. As a result, our revenues are difficult to
predict. Because we incur costs based on our expectations of future revenues,
our failure to predict our revenues accurately may cause our expenses to exceed
our revenues, which could cause us to incur increased operating losses. Although
we try to design and build complete integrated information systems for our
clients, we are sometimes retained to design and build discrete segments of the
overall system on an engagement-by-engagement basis. Since the projects of our
large clients can involve multiple engagements or stages, there is a risk that a
client may choose not to retain us for additional stages of a project or that
the client will cancel or delay additional planned projects. These cancellations
or delays could result from factors related or unrelated to our work product or
the progress of the project, including changing client objectives or strategies,
as well as general business or financial considerations of the client. If a
client defers, modifies, or cancels an engagement or chooses not to retain us
for additional phases of a project, we may not be able to rapidly re-deploy our
employees to other engagements and may suffer underutilization of employees and
the resulting harm to our operating results. Our operating expenses are
relatively fixed and cannot be reduced on short notice to compensate for
unanticipated variations in the number or size of engagements in progress. The
slowing in spending on business and IT consulting initiatives that began in the
second half of 2000 continues, and if current or potential clients cancel or
delay their IT initiatives, our business and results of operations could be
materially adversely affected.

We may not be successful in retaining our current technology alliances or
entering into new alliances, which could hamper our ability to market or deliver
solutions needed or desired by our clients and limit our ability to increase or
sustain our revenues and achieve or maintain profitability.

      We rely on vendor alliances for client referral and marketing
opportunities, access to advanced technology and training as well as other
important benefits. These relationships are non-exclusive and the vendors are
free to enter into similar or more favorable relationships with our competitors.
Whether written or oral, many of the agreements underlying our relationships are
general in nature, do not legally bind the parties to transact business with
each other or to provide specific client referrals, cross-marketing
opportunities, or other intended benefits to each other, have indefinite terms,
and may be ended at the will of either party. We may not be able to maintain our
existing strategic relationships and may fail to enter into new relationships.
If we are unable to maintain these relationships, the benefits that we derive
from these relationships, including the receipt of important sales leads,
cross-marketing opportunities, access to emerging technology training and
certifications, and other benefits, may be lost. Consequently, we may not be
able to offer desired solutions to clients, which would result in a loss of
revenues and our inability to effectively compete for clients seeking emerging
or leading technologies offered by these vendors.

Because we operate in a highly competitive and rapidly changing industry,
competitors could cause us to lose business opportunities and limit our ability
to increase or sustain revenue levels.

      Although our industry is experiencing significant consolidation, the
business areas in which we compete remain intensely competitive and subject to
rapid change. We expect competition to continue and to intensify. Our
competitors currently fall into several categories and include a range of
entities providing both general management and information technology consulting
services and internet services. Many of our competitors have longer operating
histories, larger client bases, and greater brand or name recognition, as well
as greater financial, technical, marketing, and public relations resources. Our
competitors may be able to respond more quickly to technological developments
and changes in clients' needs. Further, as a result of the low barriers to
entry, we may face additional competition from new entrants into our markets. We
do not own any technologies that preclude or inhibit competitors from entering
the general business areas in which we compete. Existing or future competitors
may independently develop and patent or copyright technologies that are superior
or substantially similar to our technologies, which may place us at a
competitive disadvantage. All of these factors could lead to competitors winning
new client engagements that we compete for. If this occurs, our ability to
generate increased revenues may be limited and we may not achieve profitability.

We may not be able to protect our intellectual property rights and, as a result,
we could lose competitive advantages which differentiate our solutions and our
ability to attract and retain clients.

      Our success is dependent, in part, upon our intellectual property rights.
We rely upon a combination of trade secret, confidentiality and nondisclosure
agreements, and other contractual arrangements, as well as copyright and
trademark


                                       21
<PAGE>

laws to protect our proprietary rights. We have no patents or pending patent
applications. We enter into confidentiality agreements with our employees, we
generally require that our consultants and clients enter into these agreements,
and we attempt to limit access to and distribution of our proprietary
information. Nevertheless, we may be unable to deter misappropriation of our
proprietary information or to detect unauthorized use and take appropriate steps
to enforce our intellectual property rights or proprietary information.

      We attempt to retain significant ownership or rights to use our internally
developed software applications which we can market and adapt through further
customization for other client projects. Under some of our client contracts, all
of our project developments are the property of the client and we have no right
or only limited rights to reuse or provide these developments in other client
projects. To the extent that we are unable to negotiate contracts which permit
us to reuse code and methodologies, or to the extent that we have conflicts with
our clients regarding our ability to do so, we may be unable to provide services
to some of our clients within price and timeframes acceptable to these clients.

      Although we believe that our services, trade or service names, and
products do not infringe upon the intellectual property rights of others, claims
could be asserted against us in the future. If asserted, we may be unable to
successfully defend these claims, which could cause us to cease providing some
services or products and limit any competitive advantage we derive from our
trademarks or names.

      If any of these events occur, our ability to differentiate ourselves and
compete effectively could be limited and we may lose revenue opportunities.

We occasionally agree not to perform services for our clients' competitors,
which may limit our ability to generate future revenues and inhibit our business
strategy.

      In order to secure particularly large engagements or engagements with
industry leading clients, we have agreed on limited occasions not to perform
services, or not to utilize some of our intellectual property rights developed
for clients, for competitors of those clients for limited periods of time
ranging from one to three years. In our agreement with American Express, our
largest client in 2001 and 2000, we have agreed not to perform services for
competitors of American Express for one year after each project completion date
and not to assign consultants who have worked on American Express projects to
other clients' competitive projects for nine months after completing work for
American Express. These non-compete provisions reduce the number of our
prospective clients and our potential sources of revenue. These agreements also
may limit our ability to execute a part of our business strategy of leveraging
our business expertise in discreet industry segments by attracting multiple
clients competing in those industries.

Our long sales cycles make our revenues difficult to predict, which could cause
our revenues or profitability to be below analyst or investor expectations,
causing our stock price to fluctuate and decline significantly.

      The timing of our revenues is difficult to predict because of the length
and variance of the time required to complete a sale. Our sales cycle typically
ranges in length from three months to nine months and is sometimes longer. Prior
to retaining us for a project, our clients often undertake an extensive review
of their systems, needs, and budgets and may require approval at various levels
within their organization. The length or unpredictability of our sales cycle
could cause our revenues or profitability to be below the expectations of
analysts or investors and our stock price to fluctuate significantly.

The loss of Mr. James G. Garvey, Jr., our founder, Chairman, President and Chief
Executive Officer, may harm our ability to obtain and retain client engagements,
maintain a cohesive culture, or compete effectively.

      Our success will depend in large part upon the continued services of James
G. Garvey, Jr., our founder, Chairman, President, Chief Executive Officer, and
our majority stockholder. We have an employment contract with Mr. Garvey. Mr.
Garvey is precluded under his agreement from competing against us for one year
should he leave us. The loss of Mr. Garvey's services could harm us and cause a
loss of investor confidence in our business, which could cause the trading price
of our stock to decline. In addition, if Mr. Garvey resigns to join a competitor
or to form a competing company, the loss of Mr. Garvey and any resulting loss of
existing or potential clients to any competitor could harm our business. If we
lose Mr. Garvey, we may be unable to prevent the unauthorized disclosure or use
by other companies of our technical knowledge, practices, or procedures. In
addition, due to the substantial number of shares of our Common Stock owned by
Mr. Garvey, the loss of Mr. Garvey's services could cause investor or analyst
concern that Mr. Garvey may sell a large portion of his shares, which could
cause a rapid and substantial decline in the trading price of our Common Stock.


                                       22
<PAGE>

The holdings of Mr. Garvey may limit your ability to influence the outcome of
director elections and other matters subject to a stockholder vote, including a
sale of our Company on terms that may be attractive to you.

      James G. Garvey, Jr., our founder, Chairman, President and Chief Executive
Officer, currently owns approximately 61% of our outstanding Common Stock. Mr.
Garvey's stock ownership and management positions enable him to exert
considerable influence over our Company, including in the election of directors
and the approval of other actions submitted to our stockholders. In addition,
without the consent of Mr. Garvey, we may be prevented from entering into
transactions that could be viewed as beneficial to other stockholders, including
a sale of the Company. This could prevent you from selling your stock to a
potential acquirer at prices that exceed the market price of our stock, or could
cause the market price of our Common Stock to decline.

Our charter documents could make it more difficult for a third party to acquire
us, which could limit your ability to sell your stock to an acquirer at a
premium price or could cause our stock price to decline.

      Our certificate of incorporation and by-laws may make it difficult for a
third party to acquire control of us, even if a change in control would be
beneficial to stockholders. Our certificate of incorporation authorizes our
board of directors to issue up to 5,000,000 shares of "blank check" preferred
stock. Without stockholder approval, the board of directors has the authority to
attach special rights, including voting and dividend rights, to this preferred
stock. With these rights, preferred stockholders could make it more difficult
for a third party to acquire our Company.

      Our by-laws do not permit any person other than at least three members of
our board of directors, our President, the Chairman of the Board, or holders of
at least a majority of our stock to call special meetings of the stockholders.
In addition, a stockholder's proposal for an annual meeting must be received
within a specified period in order to be placed on the agenda. Because
stockholders have limited power to call meetings and are subject to timing
requirements in submitting stockholder proposals for consideration at meetings,
any third-party takeover or other matter that stockholders wish to vote on that
is not supported by the board of directors could be subject to significant
delays and difficulties.

      If a third party finds it more difficult to acquire us because of these
provisions, you may not be able to sell your stock at a premium price that may
have been offered by the acquirer, and the trading price of our stock may be
lower than it otherwise would be if these provisions were not in effect.

The valuation model for companies such as ours has changed, and our inability to
achieve profitability may continue to materially adversely affect our stock
price.

      When our stock became publicly traded in 2000, companies in our sector
were valued generally upon revenue growth, with little regard for profitability.
Companies in our sector are now generally measured on cash flows and profits. If
we are unable to achieve profitability and positive cash flow, our stock price
will continue to suffer and could further decline, and the liquidity for our
stock could deteriorate further as well.

Our stock repurchase plan may adversely affect the trading volume and liquidity
of our Common Stock and could cause our stock price to decline.

      In December 2000, our board authorized a stock repurchase plan which
authorized us to purchase up to $2 million of our Common Stock on the open
market in compliance with applicable SEC regulations. In August 2001, our board
authorized an increase in the maximum amount from $2 million to $7 million.
During 2001, we repurchased 990,360 shares of our Common Stock at a cost of
approximately $5.3 million. We currently have no plan to repurchase additional
shares of our Common Stock. However, if we do repurchase more shares of our
Common Stock under this plan, the number of shares of our Common Stock
outstanding will decrease. This decrease would likely reduce the trading volume
of our Common Stock, adversely impacting the liquidity and value of our Common
Stock.

ITEM 4. CONTROLS AND PROCEDURES

      Within the 90 days prior to the date of this quarterly report on Form
10-Q, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be disclosed by us in our
periodic reports to the Securities and Exchange Commission. There have been no
significant changes in our internal controls or in other facts that could
significantly affect our disclosure controls subsequent to the date of their
evaluation.


                                       23
<PAGE>

      Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in Company
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include controls and procedures designed to ensure that information required to
be disclosed in Company reports filed under the Exchange Act is accumulated and
communicated to management, including the Company's Chief Executive Officer and
Chief Financial Officer as appropriate, to allow timely decisions regarding
required disclosure.

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

      During July and August 2001, four purported class action lawsuits were
filed in the United States District Court for the Southern District of New York
against the Company, certain of its current and former officers and directors
(the "Individual Defendants") and the members of the underwriting syndicate
involved in the Company's initial public offering (the "Underwriter
Defendants"). All four lawsuits have been consolidated for coordination with
more than 300 similar cases. The suits generally allege that: (1) the
Underwriter Defendants allocated shares of the Company's initial public offering
to their customers in exchange for higher than standard commissions on
transactions in other securities; (2) the Underwriter Defendants allocated
shares of the Company's initial public offering to their customers in exchange
for the customers' agreement to purchase additional shares of our Common Stock
in the after-market at pre-determined prices; (3) the Company and the Individual
Defendants violated section 10(b) of the Securities Exchange Act of 1934 and/or
section 11 of the Securities Act of 1933; and (4) the Individual Defendants
violated section 20 of the Securities Exchange Act of 1934 and/or section 15 of
the Securities Act of 1933. The plaintiffs seek unspecified compensatory damages
and other relief. We have sought indemnification from the underwriters of its
initial public offering. In July 2002, we, as part of the group of issuers of
shares named in the consolidated litigation and the Individual Defendants, filed
a motion to dismiss the consolidated amended complaints. The Underwriter
Defendants filed motions to dismiss as well. Also in July 2002, the plaintiffs
offered to dismiss the Individual Defendants, without prejudice, in exchange for
a Reservation of Rights and Tolling Agreement from each Individual Defendant.
All of the Individual Defendants in our four lawsuits have entered into such an
agreement. On November 1, 2002, the Court heard oral arguments on the motions to
dismiss, and in February 2003, dismissed the section 10(b) claims against the
Company but allowed the plaintiffs to continue to pursue the remaining claims.
We believe that the claims against the Company are unfounded and without merit
and intend to vigorously defend this matter.

      In December 2001, we terminated a lease with MCW Brickyard Commercial,
L.L.C. ("MCW") for new office space at 699 South Mill Avenue in Tempe, Arizona
as a result of MCW's failure to deliver the leased premises in a timely manner
and filed suit against MCW in Superior Court in Maricopa County, Arizona to
recover damages it incurred in preparing to move to the premises and for funds
remaining in a construction escrow account. MCW filed an answer, denying all
liability and alleging that we caused delays in delivery of the leased premises.
During March 2002, MCW filed an amended answer and supplemental counterclaim for
lost rent, lost parking income, lost expense income, commissions and unpaid
construction costs. MCW also sought indemnity for construction costs and its
attorneys' fees and interest. In August 2002, MCW filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code, and the state court
litigation was stayed as a result. The Company and MCW signed a settlement
agreement during March 2003, which was approved by the bankruptcy court. Terms
of the settlement included the release of $138,000 in an escrow account to the
Company and the mutual release of all other claims between the two parties.

      Additionally, we are, from time to time, party to various legal
proceedings arising in the ordinary course of business. We evaluate such claims
on a case-by-case basis, and our policy is to vigorously contest any such claims
which we believe are without merit.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

      On February 26, 2003 and April 2, 2003, the Company issued to James G.
Garvey, Jr., our major shareholder, Chairman, Chief Executive Officer and
President, an aggregate of 40,000 shares of Series A 8% Convertible Preferred
Stock for aggregate proceeds of $400,000. On April 4, 2003, the Company issued
to Mr. Garvey 40,000 shares of Series B 12% Convertible Preferred Stock in
exchange for a like number of shares of the Series A 8% Convertible Preferred
Stock and an additional 60,000 shares of Series B 12% Convertible Preferred
Stock. The aggregate purchase price for the Series B 12% Convertible Preferred
Stock issued to Mr. Garvey, including the $400,000 invested in the Series A 8%
Convertible Preferred Stock, was $1,000,000. There were no underwriters, and the
Company received proceeds of $1,000,000. In connection with the investment in
the Series B 12% Convertible Preferred Stock, and in consideration of Mr.
Garvey's guarantee of the Company's new $1.0 million revolving line of credit,
the Company issued Mr. Garvey a warrant to purchase 300,000 shares of our Common
Stock at the market price on April 4, 2003. The warrant expires thirty days
after the guarantee has been extinguished. The shares of preferred stock that
were issued on February 26, 2003 were issued by the Company in reliance on the
exemption from registration provided by Section 4(2) or Regulation D of the
Securities Act of 1933. The shares and warrant that were issued on April 2 and
4, 2003 were issued by the Company in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933. Use of
proceeds was for general working capital needs.


                                       24
<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

      (a) Exhibits

          3.1 (d)   Corrected Certificate of Designation of Series B
                    Convertible Preferred Stock of Integrated Information
                    Systems, Inc.

          10.44(a)  Separation Agreement between the Company and Mark N. Rogers
                    dated April 11, 2003.

          10.61     Termination and Settlement Agreement between the Company and
                    A.H. Root, Limited Liability dated April 8, 2003.

          10.62     Termination and Settlement Agreement between the Company
                    and Multi Employer Property Trust dated April 18, 2003.

          99.1      Certification of James G. Garvey, Jr., Chairman, Chief
                    Executive Officer and President.

          99.2      Certification of Donald H. Megrath, SVP, Chief Financial
                    Officer.

      (b) Reports on Form 8-K

            o     Form 8-K filed January 10, 2003, to file as exhibit 99.1 a
                  press release titled "IIS Reports Results for Fourth Quarter
                  2002" and, as exhibit 99.2, a press release titled "Integrated
                  Information Systems, Inc. Issues Letter to Shareholders."

            o     Form 8-K filed January 23, 2003 reporting, under Item 4 that
                  on January 21, 2003, the Company changed its independent
                  auditors.

            o     Form 8-K filed February 28, 2003 reporting, under Item 5 that
                  on February 26, 2003, the Company sold 20,000 of its Series A
                  8% Convertible Preferred Stock to its Chairman and Chief
                  Executive Officer.


                                       25
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                        INTEGRATED INFORMATION SYSTEMS, INC.

Date: May 15, 2003                      /s/ James G. Garvey, Jr.
                                        ----------------------------------------
                                        James G. Garvey, Jr.
                                        Chairman of the Board of Directors,
                                        Chief Executive Officer
                                        and President


                                       26
<PAGE>

                CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER
                             PURSUANT TO SECTION 302
                        OF THE SARBANES-OXLEY ACT OF 2002

I, James G. Garvey, Jr., hereby certify that:

      1. I have reviewed this quarterly report on Form 10-Q of Integrated
Information Systems, Inc. (the Registrant);

      2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

      3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

      4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining internal controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-l4) for the Registrant and have:

            a. designed such internal controls and procedures to ensure that
      material information relating to the Registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this quarterly report is
      being prepared;

            b. evaluated the effectiveness of the Registrant's internal controls
      and procedures as of a date within 90 days prior to the filing date of
      this quarterly report (the "Evaluation Date"); and

            c. presented in this quarterly report our conclusions about the
      effectiveness of the internal controls and procedures based on our
      evaluation as of the Evaluation Date;

      5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent functions):

            a. all significant deficiencies in the design or operation of
      internal controls which could adversely affect the Registrant's ability to
      record, process, summarize and report financial data and have identified
      for the Registrant's auditors any material weaknesses in internal
      controls; and

            b. any fraud, whether or not material, that involves management or
      other employees who have a significant role in the Registrant's internal
      controls; and

      6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: May 15, 2003

                                        /s/ James G. Garvey, Jr.
                                        ----------------------------------------
                                        James G. Garvey, Jr.
                                        Chairman, Chief Executive
                                        Officer and President
                                        (Principal Executive Officer)


                                       27
<PAGE>

                CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER
                             PURSUANT TO SECTION 302
                        OF THE SARBANES-OXLEY ACT OF 2002

I, Donald H. Megrath, hereby certify that:

      1. I have reviewed this quarterly report on Form 10-Q of Integrated
Information Systems, Inc. (the Registrant);

      2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

      3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

      4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining internal controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-l4) for the Registrant and have:

            a. designed such internal controls and procedures to ensure that
      material information relating to the Registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this quarterly report is
      being prepared;

            b. evaluated the effectiveness of the Registrant's internal controls
      and procedures as of a date within 90 days prior to the filing date of
      this quarterly report (the "Evaluation Date"); and

            c. presented in this quarterly report our conclusions about the
      effectiveness of the internal controls and procedures based on our
      evaluation as of the Evaluation Date;

      5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent functions):

            a. all significant deficiencies in the design or operation of
      internal controls which could adversely affect the Registrant's ability to
      record, process, summarize and report financial data and have identified
      for the Registrant's auditors any material weaknesses in internal
      controls; and

            b. any fraud, whether or not material, that involves management or
      other employees who have a significant role in the Registrant's internal
      controls; and

      6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: May 15, 2003                      /s/ Donald H. Megrath
                                        ----------------------------------------
                                        Donald H. Megrath
                                        Senior Vice President,
                                        Chief Financial Officer


                                       28