<PAGE>

                                 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, 2001

                                       or

    [X]   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)

      DELAWARE                                               86-0624332
(State of Incorporation)                               (IRS Employer I.D. No.)

                          1560 W. FOUNTAINHEAD PARKWAY
                              TEMPE, ARIZONA 85282
                    (Address of principal executive offices)

                                 (480) 317-8000
                        (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 11, 2001, THERE WERE 19,014,022 SHARES OF COMMON
                      STOCK, $0.001 PAR VALUE, OUTSTANDING
<PAGE>

              INTEGRATED INFORMATION SYSTEMS, INC. AND SUBSIDIARY



                               TABLE OF CONTENTS
                               -----------------


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

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

           Condensed Consolidated Balance Sheets as of March 31, 2001 and
           December 31, 2000.......................................................            3
`
           Condensed Consolidated Statements of Operations for Three
           Months Ended March 31, 2001 and 2000....................................            4

           Condensed Consolidated Statements of Cash Flows for Three
           Months Ended March 31, 2001 and 2000....................................            5

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

   ITEM 2  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS.....................................            7

   ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
           MARKET RISK.............................................................            9

PART II  OTHER INFORMATION.........................................................           17

   ITEM 2  CHANGES IN SECURITIES AND USE OF PROCEEDS...............................           17

   ITEM 6  EXHIBITS AND REPORTS ON FORM 8-K........................................           17

SIGNATURES.........................................................................           17

SIGNATURE PAGE.....................................................................           17
</TABLE>

                                       2
<PAGE>

PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

                     INTEGRATED INFORMATION SYSTEMS, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                     (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                           MARCH 31,   DECEMBER 31,
                                                                             2001           2000
<S>                                                                       <C>          <C>
                                                                          (UNAUDITED)
ASSETS
Current assets:
  Cash and cash equivalents                                                 $ 35,850       $ 46,541
  Restricted cash                                                              1,690             --
  Accounts receivable, net of allowance of $7,373 and $6,794,
     respectively                                                              6,279          6,572
  Income tax receivable                                                           17            111
  Unbilled revenues on contracts                                                 131            472
  Prepaid expenses and other current assets                                    3,287          3,109
                                                                            --------       --------
          Total current assets                                                47,254         56,805
Property and equipment, net                                                   22,190         23,647
Other assets                                                                   1,152            872
                                                                            --------       --------
                                                                            $ 70,596       $ 81,324
                                                                            ========       ========
LIABILITIES, CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS'  EQUITY
Current liabilities:
  Accounts payable and accrued expenses                                     $  5,918       $  6,494
  Current installments of capital lease obligations                            4,249          4,322
  Deferred revenues on contracts                                                 270            449
                                                                            --------       --------
          Total current liabilities                                           10,437         11,265
Capital lease obligations, less current installments                           3,034          3,909
                                                                            --------       --------
          Total liabilities                                                   13,471         15,174
Series A Convertible Preferred Stock, $.001 par value;
  5,000,000 shares authorized; zero shares issued
  and outstanding at March 31, 2001 and December 31, 2000                         --             --
Series B Convertible Preferred Stock, $.001 par value;
  5,000,000 shares authorized; zero shares issued
  and outstanding at March 31, 2001 and December 31, 2000                         --             --
Series C Convertible Preferred Stock, $.001 par value;
  5,000,000 shares authorized; zero shares issued
  and outstanding at March 31, 2001 and December 31, 2000                         --             --
Stockholders' equity:
  Common stock, $.001 par value, authorized 100,000,000
    shares, issued and outstanding 19,923,522 and
    20,683,922 shares at March 31, 2001
    and December 31, 2000, respectively                                           20             21
  Additional paid-in capital                                                  93,613         93,613
  Accumulated deficit                                                        (35,660)       (27,441)
  Accumulated other comprehensive loss:
        Foreign currency translation                                             (54)           (43)
                                                                            --------       --------
                                                                              57,919         66,150
  Treasury stock, at cost, 760,400 shares at March 31, 2001                     (794)            --
                                                                            --------       --------
          Total stockholders' equity                                          57,125         66,150
                                                                            --------       --------
                                                                            $ 70,596       $ 81,324
                                                                            ========       ========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       3
<PAGE>

                      INTEGRATED INFORMATION SYSTEMS, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                                                  THREE MONTHS ENDED
                                                                                                      MARCH 31,
                                                                                                    2001       2000
                                                                                                  -------    -------
<S>                                                                                               <C>        <C>
                                                                                                     (UNAUDITED)
Revenues.......................................................................................   $10,437    $10,454
Cost of revenues...............................................................................     9,311      5,515
                                                                                                  -------    -------
          Gross profit.........................................................................     1,126      4,939
                                                                                                  -------    -------
Operating expenses:
  Selling and marketing........................................................................     1,451      2,233
  General and administrative...................................................................     8,278      5,132
                                                                                                  -------    -------
          Total operating expenses.............................................................     9,729      7,365
                                                                                                  -------    -------
Loss from operations...........................................................................    (8,603)    (2,426)
Interest income, net...........................................................................       384        159
                                                                                                  -------    -------
Loss before income taxes.......................................................................    (8,219)    (2,267)
Provision for income taxes.....................................................................        --         --
                                                                                                  -------    -------
      Net loss.................................................................................   $(8,219)   $(2,267)
                                                                                                  =======    =======
Loss per share:
  Basic and diluted............................................................................     $(.40)     $(.14)
                                                                                                  =======    =======
  Weighted average number of common shares outstanding.........................................    20,497     15,773
                                                                                                  =======    =======
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       4
<PAGE>

                      INTEGRATED INFORMATION SYSTEMS, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                 THREE MONTHS ENDED
                                                                                                     MARCH 31
                                                                                                  2001       2000
                                                                                                --------    -------
<S>                                                                                             <C>        <C>
                                                                                                    (UNAUDITED)
  Cash flows from operating activities:
    Net loss..................................................................................  $ (8,219)   $(2,267)
    Adjustments to reconcile net loss to net cash
       used in operating activities:
       Depreciation and amortization..........................................................     2,458        595
       Increase in allowance for doubtful accounts............................................       500        150
       Increase (decrease) in cash resulting from changes in:
         Accounts receivable..................................................................      (207)    (3,490)
         Income tax receivable................................................................        94         --
         Unbilled revenues on contracts.......................................................       341        190
         Prepaid expenses and other current assets............................................      (178)      (354)
         Other assets.........................................................................      (280)      (210)
         Accounts payable and accrued expenses................................................      (576)     2,800
         Deferred revenues on contracts.......................................................      (179)      (141)
                                                                                                --------    -------
            Net cash used in operating activities.............................................    (6,246)    (2,727)
                                                                                                --------    -------
  Cash flows from investing activities:
    Capital expenditures......................................................................      (851)    (4,397)
                                                                                                --------    -------
            Net cash used in investing activities.............................................      (851)    (4,397)
                                                                                                --------    -------
  Cash flows from financing activities:
    Restricted cash...........................................................................    (1,690)        --
    Net repayments on lines of credit.........................................................        --     (1,015)
    Long-term debt repayments.................................................................        --        (42)
    Repayment of capital lease obligations....................................................    (1,098)      (191)
    Proceeds of initial public offering, net of expenses......................................        --     62,715
    Issuance of Series C Convertible Preferred Stock, net of expenses.........................        --     19,411
    Issuance of common stock and exercise of stock options....................................        --         35
    Repurchase of common stock................................................................      (795)        --
                                                                                                --------    -------
            Net cash provided by (used in) financing activities...............................    (3,583)    80,913
                                                                                                --------    -------
  Effect of exchange rate on cash.............................................................       (11)         1
                                                                                                --------    -------
  Increase (decrease) in cash and cash equivalents............................................   (10,691)    73,790
  Cash and cash equivalents, at beginning  of period..........................................    46,541        863
                                                                                                --------    -------
    Cash and cash equivalents, at end of period...............................................  $ 35,850    $74,653
                                                                                                ========    =======
  Acquisition of property and equipment and assumption of
     capital lease obligations................................................................  $    150    $ 8,852
                                                                                                ========    =======
</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. Basis of Presentation

  The accompanying unaudited condensed consolidated financial statements have
been prepared by Integrated Information Systems, Inc. (the "Company") pursuant
to the rules and regulations of the Securities and Exchange Commission regarding
interim financial reporting. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000. 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, 2001 are not necessarily indicative of the results to be expected for
any future period or the full fiscal year.

2. Use of Estimates

  The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

3. Revenue Recognition

  Revenues for time-and-material contracts are recognized as the services are
rendered. Revenues pursuant to fixed fee contracts are generally recognized as
services are rendered on the percentage-of-completion method of accounting
(based on the ratio of labor hours incurred to total estimated labor hours).
Revenues from maintenance or post-contract support agreements are recognized as
earned over the terms of the agreements. Revenues from recurring services such
as application management and hosting operations are recognized as services are
provided each month.

  Provisions for estimated losses on uncompleted contracts are made on a
contract-by-contract basis and are recognized in the period in which such losses
are determined. Unbilled revenues on contracts are comprised of earnings on
certain contracts in excess of contractual billings on such contracts. Billings
in excess of earnings are classified as deferred revenues on contracts.

4. Restricted Cash

  In March 2001, the Company deposited $1,690,000 into a construction escrow
account.  The funds in this account are to be used to fund the build-out of
tenant improvements at the Company's new 71,000 square foot facility in Tempe,
Arizona.

5. Repurchase of Common Stock

  During the quarter ended March 31, 2001, the Company repurchased 760,400
shares of its Common Stock at a cost of approximately $795,000. These shares are
reflected as treasury stock in the accompanying financial statements.

                                       6
<PAGE>

6. Net Loss Per Share

  The following table sets forth the computation of shares used in computing
basic and diluted net loss per share (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED MARCH 31,
                                                      2001             2000
    <S>                                            <C>                <C>
    Net loss                                        $(8,219)           $(2,267)
                                                    =======            =======

    Weighted average outstanding common shares       20,497             15,773
    Effect of dilutive securities:
         Stock options and warrants                     205              2,010
         Antidilutive effect of securities             (205)            (2,010)
                                                    -------            -------
    Weighted average and common equivalent
       shares outstanding                            20,497             15,773
                                                    =======            =======
    Loss per share:
          Basic and diluted                           $(.40)             $(.14)
                                                    =======            =======
</TABLE>

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

OVERVIEW

     Since our inception in 1989, we have been a leader in applying emerging
technologies by building and operating integrated information systems that allow
our clients to transform themselves into a digital business model.  Our success
in assisting clients has been accompanied by significant growth in revenue,
personnel, and infrastructure over our twelve-year history.

     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 fee contracts was approximately 5% in 2000
and 11% in 1999.  We provide our application outsourcing services at 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.

     Our cost of revenues consists primarily of employee compensation and
benefits and depreciation of hosting facility property and equipment.  Sales and
marketing expenses consist primarily of compensation and benefits, and the costs
of marketing programs.  General and administrative expenses consist primarily of
compensation and benefits for our executive management and our finance,
administration, 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 will continue to derive a
significant portion of our revenues from a limited number of clients who may
change from year to year.  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.  As a
result of our investments in infrastructure and increase in operating expenses
in 1999 and 2000, we incurred a net loss in 2000 and during the first quarter of
2001.  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 necessarily be
meaningful and should not be relied upon as indications of future performance.

RESULTS OF OPERATIONS

REVENUES. Revenues decreased less than 1% to $10.4 million for the three months
ended March 31, 2001, compared to $10.5 million in the same period of 2000.
Revenues from recurring application outsourcing services increased approximately
$600,000 for the first three months of 2001 compared to the same period of 2000.
Revenues from our largest customer increased to approximately $3.0 million for
the first three months of 2001 compared to approximately $2.3 million for the
same period of 2000. A 9% increase in average hourly bill rates contributed
approximately $800,000 of additional revenue for the first three months of 2001
compared to the

                                       7
<PAGE>

same period of 2000. These increases were offset by a decline in billed hours
and new engagements, which resulted in a decrease of approximately $2.2 million
in revenues for the three months ended March 31, 2001 compared to the same
period of 2000.

COST OF REVENUES. Cost of revenues increased 69% to $9.3 million for the three
months ended March 31, 2001, compared to $5.5 million for the same period of
2000. This increase was due primarily to an increase in project personnel from
322 at March 31, 2000, to 390 at March 31, 2001.  The remainder of the increase
was attributable to depreciation on our data center facility of approximately
$1.3 million.  As a result of these factors, cost of revenues as a percentage of
revenues increased to 89% for the first three months of 2001 from 53% for the
same period of 2000.

SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased 32% to
$1.5 million for the three months ended March 31, 2001, compared to $2.2 million
for the three months ended March 31, 2000. The decrease is due primarily to a
reduction of dedicated sales and marketing personnel and a decrease in spending
for advertising and promotion for the first three months of 2001 compared to the
same period of 2000. As a percentage of revenues, selling and marketing expenses
decreased to 14% in the first three months of 2001 from 21% for the same period
of 2000.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 63% to $8.3 million for the three months ended March 31, 2001,
compared to $5.1 million for the same period of 2000. Of the increase,
approximately $1.0 million was attributable to additional facility rent expense,
approximately $600,000 was due to additional depreciation expense, approximately
$300,000 was due to additional compensation and benefits paid to additional
administrative personnel, and approximately $500,000 was attributable to
additional bad debt expense. The balance of the increase was related to
increases in other expenses such as telecommunications, professional services,
and office administration. As a percentage of revenues, general and
administrative expenses increased to 80% for the three months ended March 31,
2001, from 49% for the three months ended March 31, 2000.

INTEREST INCOME, NET. Interest income, net of interest expenses increased to
$384,000 for the first three months of 2001 compared to $159,000 for the same
period of 2000. The increase for the first three months of 2001 was due
primarily to the timing of the receipt of proceeds from both our preferred stock
financing in January 2000 (which converted to common stock in our initial public
offering) and our initial public offering in March 2000.

LIQUIDITY AND CAPITAL RESOURCES

     Since inception, we have funded our operations and investments in property
and equipment through cash generated from operations, 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
4,945,000 shares of our common stock.

     At March 31, 2001, we had approximately $35.9 million in cash and cash
equivalents and $36.8 million in working capital, as compared to $46.5 million
and $45.5 million at December 31, 2000.

     For the quarters ended March 31, 2001 and 2000, net cash used in operating
activities was $6.2 million and $2.7 million, respectively. Cash used in
operating activities in each of these periods was the result of net losses,
adjusted for non-cash items primarily related to depreciation and amortization,
and fluctuations in accounts receivable, prepaid expenses and other current
assets, and accounts payable and accrued expenses.

     For the quarters ended March 31, 2001 and 2000, net cash used in investing
activities was $851,000 and $4.4 million, respectively.  Cash used in investing
activities in each period consisted primarily of purchases of computer
equipment, furniture and leasehold improvements to support growth in our
infrastructure. During 2000 we invested approximately $7 million, net of leased
furniture and equipment, in our application outsourcing services data center. We
also invested in geographical expansion during 2000.  We anticipate additional
capital expenditures of approximately $7 million in 2001.

     For the quarter ended March 31, 2001, net cash used in financing activities
was $3.6 million, compared to net cash provided by financing activities of $80.9
million for the quarter ended March 31, 2000.  During the first three months of
2001, we repurchased 760,400 shares of our common stock for approximately
$795,000.  Net repayments of capital lease obligations were approximately $1.1
million for the same period.  Cash provided by financing activities in 2000
related to the sale of our preferred stock in a private placement and our common
stock in our initial public offering.

                                       8
<PAGE>

     Non-cash investing and financing activities for the quarters ended March
31, 2001 and 2000 consisted of new capital lease obligations for property and
equipment of $150,000 and $8.9 million, respectively.

     As of March 31, 2001, we had a $2.0 million line of credit and a master
lease agreement to finance up to $3.0 million of computer equipment, both with
Imperial Bank.  These facilities are secured by accounts receivable, inventory,
equipment, furniture, and intellectual property.  The line of credit bears
interest at a rate of prime (8.0% at March 31, 2001) plus 1%. The master lease
agreement has an implied interest rate of approximately 10.5%.  As of March 31,
2001, we had no borrowings outstanding under the line of credit but a balance of
$2.0 million outstanding under the master lease agreement.  The line of credit
requires compliance with certain financial and other covenants.  As of March 31,
2001, we were in compliance with these covenants.  The line of credit is subject
to renewal on September 30, 2001.  The master lease agreement expires on various
dates through June 2002.  As of March 31, 2001 the line of credit was supporting
letters of credit totaling $1.0 million.

     We believe that current cash balances and amounts available under our
credit facilities will be sufficient to meet our working capital and capital
expenditure requirements for the remainder of 2001. We may need additional
financing to fund our cash requirements beyond 2001. In this regard, we expect
to continue to invest in our business in an effort to grow revenues. Such
additional financing, if needed, may not be available on terms acceptable to us,
if at all.

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 2001. 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 "expects," "may," "anticipates,"
"intends," "would," "will," "plans," "believes," "estimates," "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
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, in the future
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.

WE HAVE EXPERIENCED OPERATING LOSSES AND MAY INCUR OPERATING LOSSES IN FUTURE
PERIODS, WHICH COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.

     We had a net loss of approximately $25.4 million for the year ended
December 31, 2000 and a net loss of approximately $8.2 million for the three
months ended March 31, 2001.  We expect to continue to incur losses in 2001.  If
we do not achieve revenue

                                       9
<PAGE>

growth, we could experience operating losses greater than already anticipated or
for periods after 2001. These losses or any fluctuation in our operating results
could cause the market value of our common stock to decline further.

IF OUR COMMON STOCK PRICE REMAINS BELOW $1.00 IN 2001, WE MAY BE DELISTED FROM
NASDAQ, REDUCING THE LIQUIDITY AND VALUE OF OUR COMMON STOCK.

     At various times since March 2001, our common stock has traded for less
than $1.00 per share on the Nasdaq National Market.  If a security listed on
Nasdaq trades for less than $1.00 for thirty consecutive days, Nasdaq begins a
process pursuant to which the issuer's securities may be delisted from the
Nasdaq.  Any delisting of our common stock on Nasdaq would adversely affect the
liquidity of our common stock and further depress the common stock price.

WE RELY ON A SMALL NUMBER OF CLIENTS FOR MOST OF OUR REVENUES AND OUR REVENUES
WILL DECLINE SIGNIFICANTLY IF WE CANNOT RETAIN OR REPLACE, OR IF WE EXPERIENCE
COLLECTION PROBLEMS FROM, THESE CLIENTS.

     We derive, and expect to continue to derive, a significant portion of our
revenues from a limited number of clients.  Our two largest clients accounted
for 38% and 34% of our revenues during the first three months of 2001 and in
fiscal 2000, respectively.

     Virtually all of our client contracts may be canceled by the client
following limited notice and without economic penalty; however, the client is
responsible for fees earned through the date of contract termination unless a
valid offset exists. The revenues derived from specific clients are likely to
vary from period to period, and a major client in one year may not use our
services in a subsequent year. The loss of a large client or project in any
period could result in a decline in our revenues and profitability from period
to period, and cause significant and sudden declines or fluctuations in the
market value of our common stock. In addition, because a large portion of our
receivables relate to a limited number of clients and large projects, write-offs
attributable to one or a few of these clients or projects could exceed our
allowance for doubtful accounts and significantly harm our operating results.

     In the first three months of 2001 and in fiscal 2000, we recorded bad debt
expense of $611,000 and $11.8 million with clients, respectively.  Of the $11.8
million in bad debt expense incurred in 2000, approximately $7.4 million was
attributable to development stage and dot-com clients that have not been able to
pay as a result of the slow-down in funding for start up ventures in 2000.  The
remaining $4.4 million in bad debt expense was attributable to disputes with
clients.  We are currently in arbitration with these clients to resolve these
disputes.

SOME OF OUR CLIENTS ARE EMERGING COMPANIES THAT HAVE LITTLE OR NO OPERATING
HISTORY AND MAY LACK THE RESOURCES TO PAY OUR FEES, WHICH COULD CAUSE US TO
INCUR LOSSES ON THESE ACCOUNTS.

     We provide services to many small emerging companies that have limited
operating histories and resources to pay our fees. Occasionally, we provide
services to select start-up companies in exchange for equity in those clients.
These companies often have little or no earnings or cash flow and their business
is generally at greater risk of failing than more established, traditional
businesses. As a result, these clients may be unable to pay for our services in
a timely manner, or at all. This would reduce our cash flow, making it difficult
to carry on our business without additional funds, and could lead to the
inefficient allocation of our professional and other resources. In addition, if
the equities we receive from these companies decline in value, we may be
required to reduce the value of these equity investments.

THE MARKET FOR OUR SERVICES MAY NOT GROW AS ANTICIPATED AND HURT OUR ABILITY TO
BECOME PROFITABLE.

     While the IT services market in which we compete with our consulting and
application outsourcing services steadily grew in 2000, this growth was lower
than anticipated.  In anticipation of a continued increase in demand for
consulting and application outsourcing services, we have made substantial
infrastructure investments to support these demands.  If demand for either of
these types of services does not grow as anticipated in the future, or if we do
not capture sufficient market share for these services, we may not be able to
achieve profitability.

                                       10
<PAGE>

THE VALUATION MODEL FOR COMPANIES SUCH AS OURS HAS CHANGED AND OUR INABILITY TO
ACHIEVE PROFITABILITY WOULD 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.
Over the past few periods, companies in our sector have been increasingly
measured based 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.

IF WE ARE UNABLE TO ATTRACT AND RETAIN PROFESSIONAL STAFF, WE WILL BE UNABLE TO
PROVIDE OUR SERVICES EFFECTIVELY AND CONSEQUENTLY MAY BE UNABLE TO INCREASE OR
MAINTAIN CURRENT REVENUE LEVELS OR ACHIEVE OR MAINTAIN PROFITABILITY, WHICH
WOULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.

     We derive substantially all of our revenue from the billings of our
professional services personnel on projects. If we fail to attract and retain
professionals, we may not be able to successfully compete for new projects,
timely finish existing projects, or generally carry out our business plan. The
continuing evolution of new technology requires integrated solutions implemented
by professionals qualified in leading and emerging technologies. There is
competition for professionals with the skills required to provide these
solutions. We may lose prospective qualified employees to clients or
competitors. We may not attract a sufficient number of highly skilled
professionals, or retain, train, and motivate the professionals that we do
attract. Failure to do so could impair our ability to adequately manage and
complete our existing projects or obtain new projects. In addition, declines in
the trading price of our common stock could materially and adversely affect
employee morale and retention and other aspects of our business.

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
$25.4 million and $8.2 million for 2000 and the first quarter of 2001,
respectively. In 2000, our quarterly net losses ranged from $2.3 million in the
first quarter to $16.3 in the fourth quarter. You should not rely on period-to-
period comparisons of operations as an indication of future performance.

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

       .  the loss of or failure to replace any significant clients;
       .  variation in demand for our services;
       .  higher than expected bad debt write-offs;
       .  changes in the mix of services that we offer; and
       .  increases 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 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

                                       11
<PAGE>

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:

       .  delayed or lost revenues due to adverse client reaction;
       .  requirements to provide additional services to a client at no or a
          limited charge;
       .  refunds of fees for failure to meet obligations;
       .  negative publicity about us and our services; and
       .  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 5% of our consulting revenue was derived from
fixed-price, fixed-time engagements in 2000, and approximately 2% of revenues
were derived from fixed-price, fixed-time engagements for the quarter ended
March 31, 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.

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

                                       12
<PAGE>

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.

     Since the second half of 2000, many companies have experienced financial
difficulties or uncertainty and have begun to cancel or delay spending on
business and IT consulting initiatives.  The financial difficulties of many dot-
com companies may reduce the urgency of larger companies' IT initiatives.  If
current or potential clients continue to 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.

IF WE ARE UNABLE TO SUCCESSFULLY OPERATE OUR REGIONAL OFFICES, 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 increase revenues delivered
from our offices in Atlanta, Boston, Denver, Las Vegas, Los Angeles, Irvine,
Jacksonville, and San Francisco as well as our solutions development center in
India.  We may not be able to operate our regional offices profitably or
successfully expand these offices. If we do not implement this strategy
successfully, we may incur increased operating expenses without increased
revenues, which would harm our operating results and our stock price.

IF OUR EFFORTS TO DEVELOP BRAND AWARENESS ARE NOT SUCCESSFUL, WE MAY NOT BE ABLE
TO INCREASE OUR REVENUES SUFFICIENTLY TO OFFSET THE MARKETING COSTS THAT WE WILL
INCUR IN THESE EFFORTS.

     Because the information technology professional service industry recently
experienced a decline in demand, an element of our business strategy is to
develop and maintain widespread awareness of our brand name in our target
markets. If our marketing efforts are not successful, we may not experience
increases in revenues.

BECAUSE WE OPERATE IN A HIGHLY COMPETITIVE AND RAPIDLY CHANGING INDUSTRY,
COMPETITORS COULD CAUSE US TO LOSE BUSINESS OPPORTUNITIES OR PROFESSIONAL
PERSONNEL AND LIMIT OUR ABILITY TO INCREASE OR SUSTAIN REVENUE LEVELS.

     The business areas in which we compete are intensely competitive and
subject to rapid change. Consequently, we expect competition to continue and to
intensify.  Competitors could hire professionals or win new client engagements
that we are competing for. If this occurs, our ability to generate increased
revenues may be limited and we may not achieve profitability. Our competitors
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

                                       13
<PAGE>

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.

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 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 or
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, 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. In addition, these agreements increase the
significance of our client selection process because some of our clients compete
in markets where only a limited number of companies gain meaningful market
share. If we agree not to perform services or to utilize intellectual property
rights for a particular client's competitors or competitive projects, we are
unlikely to receive significant future revenues in that particular market.

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.

                                       14
<PAGE>

IF WE ARE UNABLE TO SUCCESSFULLY POSITION AND SELL OUR APPLICATION OUTSOURCING
SERVICES, WE MAY BE UNABLE TO RECOVER OUR INVESTMENT IN PROVIDING THESE
SERVICES, REDUCING OUR PROFITABILITY AND THE PRICE OF OUR COMMON STOCK.

     Our ability to increase revenues and profitability depends in part on the
adoption and acceptance of third-party application hosting services by our
clients. We have only recently begun to offer third-party application
outsourcing services. We have expended significant resources and expect to
continue to invest to increase our data center capacity to accommodate our
hosting services. To date, these services have not been profitable.  If we do
not achieve profitability from these services, our operating results and stock
price will continue to be negatively affected.

THE LOSS OF MR. JAMES G. GARVEY, JR., OUR FOUNDER, 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 President, Chief Executive Officer, and founder. 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 services
of Mr. Garvey 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.

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 2000, and continue to do
so in 2001.  Although we believe that we have sufficient cash to sustain
negative cash flows from operations for the balance of the year, thereafter we
may need to raise additional funds through public or private equity or debt
financings in order to:

        .  support capital expenditures;
        .  take advantage of acquisition or expansion opportunities;
        .  develop new services;
        .  address working capital needs; or
        .  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 acceptable terms, or at all. In addition, if we are able to raise
additional capital through the sale of equity securities, your investment in us
would be diluted, which could cause our stock price to further decline.

THE VOLUME OF TRADING OF OUR COMMON STOCK COULD FLUCTUATE SIGNIFICANTLY,
ADVERSELY AFFECTING OUR STOCK PRICE.

     The stock prices of many technology companies, such as ours, have declined
significantly in recent periods. If investor interest in these stocks continues
to decline generally or does not increase, the price of our common stock could
continue to decline suddenly and significantly.

                                       15
<PAGE>

THE SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK IN THE PUBLIC
MARKET COULD ADVERSELY AFFECT THEIR MARKET PRICE, NEGATIVELY IMPACTING YOUR
INVESTMENT.

     There are a substantial number of shares currently available for sale in
the public market. The sales of a substantial number of shares of our common
stock in the public market could depress the market price of our common stock
and could impair our ability to raise capital through the sale of additional
equity securities.

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., a director, executive officer, and our founder,
currently owns approximately 52% of our outstanding common stock. Mr. Garvey's
stock ownership and management positions enable him to exert considerable
influence over us, 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 Integrated
Information Systems. 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.

OUR CURRENT 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
authorizes us to purchase up to $2 million of our common stock on the open
market in compliance with applicable SEC regulations. If we continue to
repurchase our common stock under this plan, the number of shares of our common
stock outstanding will decrease.  This decrease could reduce the trading volume
of our common stock, which may adversely impact the liquidity and value of our
common stock.

                                       16
<PAGE>

PART II.  OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

  On March 16, 2000, the Securities and Exchange Commission declared effective
our Registration Statement on Form S-1 (File No. 333-94861) for our initial
public offering. On March 22, 2000, IIS closed its offering for 4,600,000 shares
of Common Stock at a public offering price of $15.00 per share. On April 19,
2000, IIS closed an offering of an additional 690,000 shares at the same public
offering price pursuant to exercise of the underwriters' over-allotment option,
345,000 of which shares were sold by IIS, and 345,000 were sold by James G.
Garvey, Jr., the founder, Chairman, CEO, and President of IIS.

  Through March 31, 2001, approximately $30.0 million of IIS' proceeds from the
offering have been applied to working capital, to capital improvements to our
facilities, and to repurchase shares of our common stock. The remaining net
proceeds are being maintained in a portfolio of money market funds and
investment grade securities.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

  3.1  Amended and Restated Certificate of Incorporation (incorporated by
       reference to Exhibit 3.3 of the Company's Quarterly Report on Form 10-Q
       (File No. 333-94861) for the period ending June 30, 2000).

  3.2  Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of
       the Company's Annual Report on Form 10-K (File No. 333-94861) for the
       period ending December 31, 2000).

10.28  Sublease Agreement between the Company and UPS Telecommunications, Inc.
       dated April 19, 2001

10.29  Sublease Agreement between the Company and iTRACS Coporation dated
       February 27, 2001 and Addendum to Sublease Agreement between the Company
       and iTRACS Corporation dated March 5, 2001.

(b)  Reports on Form 8-K

     The Company filed Current Reports on Form 8-K on January 12, 2001, January
     26, 2001, and March 5, 2001 relating to changes in James G. Garvey Jr.'s
     percentage of ownership of common stock of the Company and changes to the
     composition of the Company's board of directors.


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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.
                                            Registrant


                                            /s/ David A. Wirthlin
                                            ---------------------
                                            David A. Wirthlin
                                            Chief Financial and Principal
                                              Accounting Officer
Date:  May 14, 2001

                                       17