<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, 2002

                                       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)

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

                            1480 SOUTH HOHOKAM DRIVE
                              TEMPE, ARIZONA 85281
                    (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 March 22, 2002, there were 16,426,642 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     UNAUDITED FINANCIAL STATEMENTS...........................................................       3

                 Condensed Consolidated Balance Sheets as of March 31, 2002 and
                 December 31, 2001........................................................................       3

                 Condensed Consolidated Statements of Operations for Three
                 Months Ended March 31, 2002 and 2001.....................................................       4

                 Condensed Consolidated Statements of Cash Flows for Three
                 Months Ended March 31, 2002 and 2001.....................................................       5

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

      ITEM 2     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS......................................................      10

      ITEM 3     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
                 MARKET RISK..............................................................................      15


PART II      OTHER INFORMATION............................................................................      22


      ITEM 1     LEGAL PROCEEDINGS........................................................................      22

      ITEM 6     EXHIBITS AND REPORTS ON FORM 8-K.........................................................      22


SIGNATURES  ..............................................................................................      23
</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,
                                                                               2002              2001
                                                                               ----              ----
                                                                                    (Unaudited)
<S>                                                                          <C>               <C>
ASSETS

Current assets:
  Cash and cash equivalents........................................          $  1,861          $   5,235
  Restricted cash..................................................               898              1,125
  Accounts receivable, net of allowance of $3,944 and $6,830,
       at March 31, 2002 and December 31, 2001, respectively.......             5,752              4,688
  Unbilled revenues on contracts...................................               135                174
  Prepaid expenses and other current assets........................               340                550
                                                                             --------          ---------
          Total current assets.....................................             8,986             11,772
Property and equipment, net........................................             7,051              8,018
Goodwill...........................................................             7,937              3,187
Other assets.......................................................               949              1,402
                                                                             --------          ---------
                                                                             $ 24,923          $  24,379
                                                                             ========          =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses............................          $  9,742          $   7,476
  Current installments of capital lease obligations................             2,870              3,253
  Deferred revenues on contracts...................................               945                750
                                                                             --------          ---------
          Total current liabilities................................            13,557             11,479

Note payable to bank...............................................             4,695                 --
Other non-current liabilities......................................             1,510                 --
Capital lease obligations, less current installments...............               652                902
                                                                             --------          ---------
          Total liabilities........................................            20,414             12,381

Commitments and contingencies
Shareholders' equity:
   Common stock, $.001 par value, authorized 100,000,000
       shares, issued and outstanding 16,550,688 at
       at March 31, 2002 and December 31, 2001.....................                16                 16
    Additional paid-in capital.....................................            94,154             94,154
    Accumulated deficit............................................           (84,321)           (76,836)
    Accumulated other comprehensive loss...........................               (58)               (54)
                                                                             --------          ---------
                                                                                9,791             17,280
    Treasury stock, at cost, 4,951,800 shares at March 31, 2002
       and December 31, 2001.......................................            (5,282)            (5,282)
                                                                               -------            -------
          Total stockholders' equity...............................             4,509             11,998
                                                                             --------          ---------

                                                                             $ 24,923          $  24,379
                                                                             ========          =========
</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,
                                                                                  2002            2001
                                                                                  ----            ----
                                                                                      (Unaudited)


<S>                                                                             <C>             <C>
         Revenues.............................................................  $  8,267        $ 10,507
         Cost of revenues.....................................................     6,232           9,381
                                                                                --------        --------

                   Gross profit...............................................     2,035           1,126
                                                                                --------        --------

         Operating expenses:
            Selling and marketing.............................................     1,054           1,451
            General and administrative........................................     5,645           8,278
            Asset impairments and restructuring charges.......................     2,751              --
                                                                                --------        --------

                   Total operating expenses...................................     9,450           9,729
                                                                                --------        --------

                   Loss from operations.......................................    (7,415)         (8,603)

         Interest income (expense), net.......................................       (70)            384
                                                                                ---------       --------
         Loss before income taxes.............................................    (7,485)         (8,219)
         Provision for income taxes...........................................        --              --
                                                                                --------        --------

                   Net loss...................................................  $ (7,485)       $ (8,219)
                                                                                ========        ========

         Loss per share:
            Basic and diluted.................................................  $   (.45)       $   (.40)
                                                                                ========        ========
         Weighted average common shares outstanding...........................    16,551          20,497
                                                                                ========        ========
</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,
                                                                   2002              2001
                                                               ------------      -----------
                                                                        (Unaudited)
<S>                                                            <C>               <C>
  Cash flows from operating activities:
    Net loss...............................................       $ (7,485)        $ (8,219)
    Adjustments to reconcile net loss to net cash
       used in operating activities:
       Depreciation and amortization.......................          1,228            2,458
       Asset impairments and restructuring charges.........          2,751               --
       Increase in allowance for doubtful accounts.........            496              500
       Change in assets and liabilities, net of acquisition:
         Accounts receivable...............................           (670)            (207)
         Income tax receivable.............................             --               94
         Unbilled revenues on contracts....................             39              341
         Prepaid expenses and other current assets.........            210             (178)
         Other assets......................................              9             (280)
         Accounts payable and accrued expenses.............          1,099             (576)
         Deferred revenues on contracts....................            116             (179)
                                                                  --------         ---------

            Net cash used in operating activities..........         (2,207)          (6,246)
                                                                  --------         ---------

  Cash flows from investing activities:
    Capital expenditures...................................          (415)             (851)
    Proceeds from disposition of assets....................            58                --
    Cash paid for acquisition..............................          (400)               --
                                                                  --------         ---------

            Net cash used in investing activities..........          (757)             (851)
                                                                  --------         ---------

  Cash flows from financing activities:
    Restricted cash........................................            227           (1,690)
    Repayments of capital lease obligations................           (633)          (1,098)
    Repurchase of common stock.............................             --             (795)
                                                                  --------         ---------

            Net cash used in financing activities..........           (406)          (3,583)
                                                                  --------         ---------

  Effect of exchange rate on cash..........................             (4)             (11)
                                                                  --------         ---------

  Decrease in cash and cash equivalents....................         (3,374)         (10,691)
  Cash and cash equivalents, at beginning of period........          5,235           46,541
                                                                  --------         ---------

  Cash and cash equivalents, at end of period..............       $  1,861         $ 35,850
                                                                  ========         ========
</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, 2001. 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, 2002 are not necessarily indicative of the results to be expected for
any future period or the full fiscal year.

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. Our rapid growth
phase required significant investments in infrastructure, facilities, computer
and office equipment, human resources and working capital in order to meet
perceived demand. Since the third quarter of 2000, the market for our services
has changed and declined significantly.

Our condensed consolidated financial statements are prepared using accounting
principles generally accepted in the United States of America applicable to a
going concern, which contemplate the realization of assets and satisfaction of
liabilities in the normal course of business. We incurred negative cash flows
from operations for each of the three years ended December 31, 2001 and for the
three months ended March 31, 2002. The Company also has an accumulated deficit
of $84,321,000 through March 31, 2002. Management has responded to these changes
by closing unprofitable offices, reducing staff in remaining offices and
recording expenses and charges associated with impairments on assets and idle
facilities. We continue to closely monitor staff utilization and other operating
expenses in order to improve cash flow from operations. Our management believes
that cash receipts may be accelerated through accounts receivable-backed
financing to support growth opportunities, support working capital needs and
address unanticipated contingencies. Additional needed financing may not be
available on terms favorable to us, if at all. If we are unable to raise
additional capital and significantly reduce operating losses, our business
activities may be significantly curtailed. The condensed consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

2. Use of Estimates

The preparation of these financial statements in accordance with accounting
principles generally accepted in the United States of America 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 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 our 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 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.

                                       6
<PAGE>

We recorded goodwill and other intangible assets from acquisitions during 2001
and 2002. We review the acquired businesses on a periodic basis to determine
that projected cash flows are deemed adequate to support the 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 investment that may not be reflected in the current carrying value of the
intangible assets, thereby possibly requiring an impairment charge in the
future.

We record a valuation allowance to reduce our 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 our deferred tax assets in the future in excess
of our net recorded amount, an adjustment to the deferred tax asset would
increase net income in the period such determination was made.

We recorded accruals for the estimated future cash expenditures required from
closing vacated offices and disposal of leases for unused equipment. The
accruals include estimates of future rent payments and settlements until the
obligations are canceled. Should actual cash expenditures differ from our
estimates, revisions to the estimated liability for closing vacated offices and
terminating leases would be required.

We evaluate the requirement for future cash expenditures resulting from
contingencies and litigation. We 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.

3. Revenue Recognition

We recognize revenue when each of the following four criteria are met:

     o    Persuasive evidence of an arrangement exists;

     o    Delivery has occurred or services have been rendered;

     o    The seller's price to the buyer is fixed or determinable; and

     o    Collectibility is reasonably assured.

Revenues for time-and-material contracts are recognized as the services are
rendered. Revenues pursuant to fixed fee contracts are 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. Revenues for services rendered are not recognized until
collectibility is reasonably assured.

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.

In 2001, the Emerging Issues Task Force of the Financial Accounting Standards
Board (FASB) concluded that reimbursements for "out of pocket" expenses should
be classified as revenue and, correspondingly, cost of services, in the income
statement. The new accounting treatment is applicable to us in the first quarter
2002 and requires that comparative financial statements for prior periods be
reclassified in order to ensure consistency for all periods presented.
Accordingly, in the attached statements of operations, we included revenues and
cost of sales from the reimbursements of expenses incurred of $206,000 and
$70,000 for the quarters ended March 31, 2002 and 2001, respectively.

4. Acquisitions

In order to more effectively address the rapidly changing and declining IT
services market, in 2001 we developed and began implementing an aggressive
growth strategy focused on 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 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 ours and are owned by
consultants who remain active in the business.

On August 20, 2001, we completed a series of transactions with K2 Digital, Inc.
("K2"), a publicly held digital services firm based in New York City. In that
transaction, 24 management and consulting employees of K2 were hired, certain
related fixed assets were acquired and the leased office space of K2 in New York
City was assumed. The total purchase price consisted of cash payments of



                                       7
<PAGE>

$544,000 for certain K2 assets and $709,000 for the assumption of liabilities.
In the purchase price allocation, $927,000 was recorded as goodwill.

On September 28, 2001, a similar series of transactions were completed with STEP
Technology, Inc. ("STEP"), a Portland, Oregon-based information technology
consulting firm. In that transaction, 54 management and consulting personnel of
STEP were hired, certain related assets were acquired and a portion of STEP's
office space in Portland was assumed. The total purchase price consisted of cash
payments of $1,140,000 for certain STEP assets and $1,041,000 for the assumption
of liabilities. In the purchase price allocation, $1,433,000 was recorded as
goodwill. In addition to the cash consideration, under the purchase agreement,
if in 2002, 2003, and 2004 annual earnings from STEP operations are positive,
STEP is entitled to additional consideration from this transaction based on a
percentage of the revenues generated and limited to an agreed upon percentage of
earnings.

On October 31, 2001, a series of transactions were completed with INTEFLUX, Inc.
("INTEFLUX"), a privately-owned international technology consulting firm based
in Phoenix, Arizona, with operations in New York City and London, England. In
that transaction, 19 management and consulting employees of INTEFLUX were hired,
certain related assets were acquired and INTEFLUX's office space in Phoenix and
London was assumed. The total purchase price consisted of cash payments of
$50,000 and the issuance of common stock totaling $187,000 for certain INTEFLUX
assets and $319,000 for the assumption of liabilities. In the purchase price
allocation, $346,000 was recorded as goodwill. In addition to the cash and
common stock consideration, under the purchase agreement, if in 2002, 2003 and
2004 annual earnings from INTEFLUX operations are positive, INTEFLUX is entitled
additional consideration from this transaction based on a percentage of the
revenues generated and limited to an agreed upon percentage of earnings or
dollar amount.

On November 16, 2001, a series of transactions were completed with Winfield
Allen, Inc. ("Winfield Allen"), a Denver, Colorado-based information technology
consulting firm. In that transaction, 24 management and consulting personnel of
Winfield Allen were hired, certain related assets were acquired and Winfield
Allen's leased office space in Colorado was assumed. The total purchase price
consisted of cash payments of $84,000 and the issuance of common stock totaling
$136,000 for certain Winfield Allen assets, the assumption of a note payable for
$103,000 and $173,000 for the assumption of liabilities. In the purchase price
allocation, $358,000 was recorded as goodwill. In addition to the cash and
common stock consideration, under the purchase agreement, if in 2002, 2003, and
2004 annual earnings from Winfield Allen operations are positive, Winfield Allen
is entitled to additional consideration from this transaction based on a
percentage of the revenues generated and limited to an agreed upon percentage of
earnings or dollar amount.

On January 25, 2002, we completed a series of transactions with Goliath
Networks, Inc. ("Goliath"), a Madison, Wisconsin-based information technology
consultancy. In that transaction, 81 management and consulting personnel of
Goliath were hired, certain related assets acquired and the leased office space
of Goliath in Madison and Milwaukee, Wisconsin was assumed. In the preliminary
purchase price allocation, $4,750,000 was recorded as goodwill and intangibles.
The transaction was paid for with a combination of cash payments totaling
$400,000, the issuance of a note payable for $4,250,000 to a bank and the
assumption of certain liabilities. The amount of the note increased
approximately $445,000, as we purchased some of Goliath's accounts receivables.
The note payable bears interest at 7% per year. Payments on the note are
interest only for the first year. Principal and interest payments for the
second, third and fourth years will be based on a ten-year amortization
schedule. The unpaid principal will be paid in full at the end of the fourth
year. The note payable is collateralized by computer equipment and office
equipment owned by the Company.

As part of these acquisitions, intangible assets totaling $607,000 were acquired
consisting of non-compete agreements of $250,000 and employee agreements of
$357,000. The intangible assets originating from employee agreements will be
amortized over their contractual lives, which are generally five years. The
intangible assets arising from the non-compete agreements will be amortized over
their contractual lives, which are generally less than one year. The total
goodwill recorded for these five acquisitions total $7,937,000, which includes
acquisition related costs of approximately $123,000. 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.

In connection with these acquisitions, we acquired accounts receivable of
$1,305,000 and fixed assets of $471,000. The Company issued 507,108 shares of
common stock valued at $365,000.

Our financial statements reflect the results of operations for each acquisition
from the transaction date. The following summary, prepared on a pro forma basis,
presents the results of operations as if the acquisitions of K2, STEP, INTEFLUX,
Winfield Allen and Goliath had been completed as of January 1, 2001 (amounts in
thousands, except per share amounts):

                                       8
<PAGE>



                                                      Three Months Ended
                                                          March 31,
                                                      2002          2001
                                                      ----          ----
                                                         (unaudited)
        Revenues                                   $9,033        $21,406
        Operating losses                           (7,352)       (11,074)
        Net loss                                   (7,475)       (11,040)
        Net loss per share                           (.45)          (.53)

The pro forma results are not necessarily indicative of what actually would have
occurred if the transactions had been completed as of January 1, 2001. In
addition, they are not intended to be a projection of future results and do not
reflect any synergies that might be achieved from combined operations.

5. Asset Impairments and Restructuring Charges

During 2001, we recorded asset impairments and restructuring charges totaling
$14,882,000. These charges were attributable to a $9,191,000 charge in the
second quarter related to underutilized computer equipment and leasehold
improvements at our data center used for application outsourcing services and a
$5,691,000 charge in the fourth quarter for expenses incurred in connection with
the closing and consolidating of six office locations and abandoned leasehold
improvements in an unoccupied seventh location. The charge for closing and
consolidating offices consisted of an impairment charge totaling $3,556,000 and
an accrual for future cash expenditures, primarily rent-related obligations
offset by estimated future sublease income, totaling $2,135,000. These charges
were included in our operating expenses for the fourth quarter of 2001.

During the first quarter of 2002, commercial real estate markets in some areas
were weaker than we anticipated. As a result, we do not anticipate subleasing
certain closed office locations as quickly or at rates as high as originally
anticipated. 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 impairments and restructuring
charges totaling $2,751,000 for the first quarter of 2002. The charges consisted
of an increase in the accrual to terminate and exit closed facilities totaling
$1,108,000, an accrual totaling $1,039,000 for future cash expenditures
attributable to closing and consolidating three office locations, impairment
charges to fixed assets totaling $482,000 and impairment charges to rent
deposits totaling $122,000.

As of March 31, 2002, we had accrued liabilities for the future cash
expenditures attributable to these restructuring charges totaling $3,433,000. Of
this obligation, $1,923,000 is classified as current accounts payable and
accrued liabilities and $1,510,000 is classified as other non-current
liabilities.

6. Reclassifications

Certain reclassifications have been made to the prior year's condensed
consolidated financial statement amounts to conform to the current year
presentations.

7. Restricted Cash

In October 1999, we signed a lease for a new 71,000 square foot headquarters
facility to be constructed as part of a multi-tenant, mixed-use property in
Tempe, Arizona. In March and May 2001, we deposited a total of $2,500,000 into a
construction escrow account. Through December 31, 2001 and March 31, 2002,
$2,091,000 of the restricted cash had been used to fund the build-out of tenant
improvements at the new facility. In December 2001, in accordance with
provisions of the lease, we terminated our lease for this facility based on
construction delays. See additional information under the caption "Legal
Proceedings" in Part II, Item 1. No additional amounts are expected to be spent
from the escrow account, and we are currently attempting to recover costs
invested in this facility and the construction escrow account balance of
approximately $409,000.

In June 2001, we deposited $1,000,000 into a restricted certificate of deposit
account. The funds in this account serve as collateral against various letters
of credit totaling $1,000,000. During the fourth quarter of 2001 and the first
quarter of 2002, $300,000 and $227,000, respectively, was used in connection
with our closure of excess office space.


                                       9
<PAGE>

8.  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):


                                                    Three Months Ended March 31,
                                                      2002             2001
                                                      ----             ----

     Net loss                                       $ (7,485)        $ (8,219)
                                                    ========         ========

     Weighted average outstanding common shares       16,551           20,497
     Effect of dilutive securities:
          Stock options and warrants                       6              205
          Antidilutive effect of securities               (6)            (205)
                                                    --------         --------
     Weighted average and common equivalent
     shares outstanding                               16,551           20,497
                                                    ========         ========
     Loss per share:
           Basic and diluted                        $   (.45)        $   (.40)
                                                    ========         ========


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 or sought by us. These factors include: a reduced demand for Internet
services; the loss of one or more of our significant clients; an inability to
increase our market share; difficulties in maintaining our technology alliances;
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 Information Technology (IT)
services has changed dramatically and the demand has declined significantly. As
part of our effort to adjust our structure to better address a rapidly changing
and declining IT 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 closed four such
transactions in 2001, a fifth such transaction during January 2002 and
anticipate additional, similar transactions during the remainder of 2002.

We have operated at a loss for each of the last four years and those losses
continue into the first quarter of the current year. The losses, combined with
the current market for IT services, raise substantial doubt about our ability to
continue as a going concern. We are reducing our operating expenses in order to
improve cash flow from operations. Our management believes that cash receipts
may be accelerated through accounts receivable-backed financing to support
growth opportunities, support working capital needs and address unanticipated
contingencies. Additional needed financing may not be available on terms
favorable to us, if at all. If we are unable to raise additional capital and
significantly 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 fee contracts was approximately 32% in the first quarter
of 2002 and 2% in first quarter of 2001. We provide our application outsourcing
services for a


                                       10
<PAGE>

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 and benefits.
Selling 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,
we incurred a net loss in each of the last four years. 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.

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 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. We closed four such transactions
in 2001, a fifth such transaction during January 2002 and anticipate additional,
similar transactions throughout 2002.

On August 20, 2001, we completed a series of transactions with K2 Digital, Inc.
("K2"), a publicly held digital services firm based in New York City. In that
transaction, we hired 24 management and consulting employees of K2, acquired
certain related fixed assets and assumed certain of the leased office space of
K2 in New York City. The transactions were paid for with cash and the assumption
of certain operating expenses of K2.

On September 28, 2001, we completed a similar series of transactions with STEP
Technology, Inc. ("STEP"), a Portland, Oregon-based information technology
consulting firm. In that transaction, we hired 54 management and consulting
personnel of STEP, acquired certain related assets and assumed a portion of
STEP's office space in Portland. The transaction was paid for with cash and the
assumption of certain operating expenses of STEP.

On October 31, 2001, we completed a similar series of transactions with
INTEFLUX, Inc. ("INTEFLUX"), a Phoenix, Arizona-based information technology
consultancy with international operations in London, England. In that
transaction, we hired 19 management and consulting personnel of INTEFLUX,
acquired certain related assets and assumed the leased office space of INTEFLUX
in Phoenix and London. The transaction was paid for with a combination of cash
and restricted shares of our common stock, as well as the assumption of certain
operating expenses of INTEFLUX.

On November 16, 2001, we completed a similar series of transactions with
Winfield Allen, Inc. ("Winfield Allen"), a Denver, Colorado-based information
technology consultancy. In that transaction, we hired 24 management and
consulting personnel of Winfield Allen, acquired certain related assets, and
assumed the leased office space of Winfield Allen. The transaction was paid for
with a combination of cash, a promissory note and restricted shares of our
common stock, as well as the assumption of certain expenses of Winfield Allen.

On January 25, 2002, we completed a series of transactions to hire the executive
management and key professional staff and acquire certain related assets of
Goliath Networks, Inc. ("Goliath"), a Madison, Wisconsin-based information
consulting and services firm. In that transaction, we hired 81 management and
consulting personnel of Goliath, acquired certain related assets, and assumed
the leased office space of Goliath in Madison and Milwaukee, Wisconsin. The
transaction was paid for with a combination of cash and issuance of a promissory
note.

                                       11
<PAGE>

RESULTS OF OPERATIONS

REVENUES. Revenues decreased 21% to $8.3 million for the three months ended
March 31, 2002, compared to $10.5 million in the same period of 2001. Revenues
from our largest customer were approximately $0.8 million for the first three
months of 2002 compared with approximately $3.0 million for the first three
months of 2001. Reductions in billed hours resulted in a decrease in revenues of
approximately $2.5 million for the first three months of 2002 compared to the
comparable period of 2001. This decrease was partially offset by an increase in
average hourly bill rates, which contributed approximately $0.3 million of
additional revenue for the first three months of 2002 compared to the same
period of 2001.

COST OF REVENUES. Cost of revenues decreased 34% to $6.2 million for the three
months ended March 31, 2002, compared to $9.4 million for the same period of
2001. As a percentage of revenue, cost of revenues were 75% in the three months
ended March 31, 2002, compared to 89% for the same period in 2001. This decrease
was due primarily to reductions in project staffing as a result of better
utilization of staff. Additionally, we incurred less depreciation expense for
our data center during the first quarter of 2002 as compared to the first
quarter of 2001 due to the write-down of underutilized computer equipment and
leasehold improvements which resulted in a $9.2 million charge in the second
quarter of 2001.

SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased 27% to
$1.1 million for the three months ended March 31, 2002, compared to $1.5 million
for the same period of 2001. The decrease was due primarily to reductions of
dedicated sales and marketing personnel and decreases in spending for
advertising and promotion for the first three months of 2002, compared to the
same period of 2001. As a percentage of revenues, selling and marketing expenses
decreased to 13% in the first three months of 2002 from 14% for the same period
of 2001 due to our continued focus on cost reductions.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 33% to $5.6 million for the three months ended March 31, 2002,
compared to $8.3 million for the same period of 2001. The decrease was primarily
attributable to reductions in general and administrative personnel and facility
rent expense and depreciation expense from closed offices. As a percentage of
revenues, general and administrative expenses decreased to 69% for the
three-month period ended March 31, 2002, from 79% for the same periods of 2001
due to the Company's continued focus on cost reductions.

ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES. During 2001, we recorded asset
impairments and restructuring charges totaling $14.9 million. These charges were
attributable to a $9.2 million charge in the second quarter related to
underutilized computer equipment and leasehold improvements at our data center
and a $5.7 million charge in the fourth quarter for expenses incurred in
connection with the closing and consolidating of six office locations and
abandoned leasehold improvements in an unoccupied seventh location. The charge
for closing and consolidating offices consisted of an impairment charge totaling
$3.6 million and an accrual for future cash expenditures, primarily rent-related
obligations offset by estimated future sublease income, totaling $2.1 million.
These charges were included in our operating expenses for the fourth quarter of
2001.

During the first quarter of 2002, commercial real estate markets in some areas
were weaker than we anticipated. As a result, we do not anticipate subleasing
certain offices as quickly or at rates as high as originally anticipated.
Accordingly, we re-evaluated our accrual for six closed offices and executed a
series of cost control initiatives closing an additional three offices. These
actions resulted in asset impairments and restructuring charges totaling $2.8
million. The charges consisted of an increase in the accrual to terminate and
exit closed facilities totaling $1.1 million, an accrual totaling $1.0 million
for future cash expenditures attributable to closing and consolidating three
office locations, an impairment charge to fixed assets totaling $0.5 million and
an impairment charge to rent deposits totaling $0.1 million. These charges are
included in our operating expenses for the first quarter of 2002.

INTEREST INCOME (EXPENSE), NET. We incurred interest expense, net of interest
income totaling $70,000 for the three months ended March 31, 2002 compared to
interest income, net of interest expense of $384,000 for the same period of
2001. The change was attributable to less cash available for investment during
the first quarter of 2002 as compared to the same period in 2001.

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 $0.8 million, 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 an initial public offering of
4,945,000 shares of the Company's common stock.



                                       12
<PAGE>

We operate in a highly competitive market. The information technology services
industry has experienced rapid growth followed by rapid and significant
contraction over a relatively short economic cycle. Our rapid growth phase
required significant investments in infrastructure, facilities, computer and
office equipment, human resources and working capital in order to meet perceived
demand. Since the third quarter of 2000, the market for our services has changed
and declined significantly. We incurred negative cash flows from operations for
each of the three years ended December 31, 2001 and for the three months ended
March 31, 2002. These factors, among other things, raise substantial doubt about
our ability to continue as a going concern.

As a result of our negative cash flows, we delayed making payments to many of
our vendors. We are in default of certain operating and capital lease provisions
for failure to make timely payment. We have received several default notices
during 2002. The notices relate primarily to facility lease commitments for
closed offices and capital lease commitments for computer equipment, office
equipment and office furniture.

Our management is pursuing various options in order to provide necessary
financing. Plans to resolve near term cash flow issues include the following:

     o    Restructuring the terms and payments of facility and equipment leases;

     o    Negotiating a new line of credit through accounts receivable backed
          financing;

     o    A private placement of equity financing; and

     o    Projected improvement of operating results.

The projected improvement of operating results includes closing unprofitable
offices that could not become profitable in the near term and reducing staff in
remaining offices. We continue to reduce operating expenses and believe that
the actions taken will improve cash flow from operations.

We believe if we can finalize the financing alternatives that we are pursuing,
together with projected improvement in operating results for 2002, we will
generate sufficient resources to ensure uninterrupted performance of our
operating obligations. Our continuance as a going concern is dependent upon our
ability to generate sufficient cash flow to meet obligations in a timely manner,
to obtain additional financing as required and ultimately to attain
profitability. There can be no assurance, however, that these sources will be
available to us on acceptable terms or when necessary, or that we will be
successful in our efforts to improve our operating results.

At March 31, 2002, we had approximately $1.9 million in cash and cash
equivalents and a deficiency of working capital of approximately $4.6 million,
as compared to $5.2 million in cash and cash equivalents and $0.3 million in
working capital at December 31, 2001.

For the quarters ended March 31, 2002 and 2001, net cash used in operating
activities was $2.2 million and $6.2 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,
non-cash asset impairment and restructuring charges and fluctuations in accounts
receivable, prepaid expenses and other current assets, and accounts payable and
accrued expenses.

For the quarters ended March 31, 2002 and 2001, net cash used in investing
activities was $0.8 million and $0.9 million, respectively. During the first
quarter of 2002, the Company paid $0.4 million in cash to acquire the assets of
another company. Cash used for the purchases of computer equipment, furniture
and leasehold improvements to support growth in our infrastructure during the
three months ended March 31, 2002 and 2001 totaled $0.4 million and $0.9
million, respectively.

For the quarter ended March 31, 2002, net cash used in financing activities was
$0.4 million, compared to net cash used in financing activities for the quarter
ended March 31, 2001 of $3.6 million. During the first quarter of 2002, net
repayments of capital lease obligations totaled approximately $0.6 million. We
also used $0.3 million of our restricted cash during the first three months of
2002 in connection with the Company's closure of excess office space. For the
quarter ended March 31, 2001 we repurchased 760,400 shares of our common stock
for approximately $0.8 million and allocated $1.7 million to restricted cash.
Our net repayments of capital lease obligations totaled approximately $1.1
million for the same period.

                                       13
<PAGE>

Non-cash investing and financing activities for the quarter ended March 31, 2002
consisted of the issuance of a note payable to a bank of approximately $4.7
million. Non-cash investing and financing activities for the quarter ended March
31, 2001 consisted of new capital lease obligations for property and equipment
of $0.2 million.

As of March 31, 2002, we had a note payable to a bank for approximately $4.7
million issued in connection with an acquisition. The note payable bears
interest at 7% per year. Payments on the note are interest only for the first
year. Principal and interest payments for the second, third and fourth years
will be based on a ten-year amortization schedule. The unpaid principal will be
paid in full at the end of the fourth year. The note payable is collateralized
by computer equipment and office equipment owned by the Company.

As of March 31, 2002, we had a master lease agreement to finance computer
equipment with Comerica Bank - California, as successor to Imperial Bank. The
master lease agreement has an implied interest rate of approximately 10.5%. As
of March 31, 2002, approximately $0.8 million was outstanding under this master
lease agreement. The equipment schedules under the master lease agreement expire
on various dates through July 2003. During the first quarter of 2002, we began
negotiating a settlement of one schedule nearing completion and began delaying
payments on the other equipment schedules under the lease. Concurrently, as part
of our company-wide efforts to restructure the terms and payments of facility
and equipment leases and reduce our overall operating cost structure, we
initiated efforts to renegotiate or settle all of the remaining lease payments.
In April 2002, we received a demand from Comerica for approximately $214,000 for
late payments. We are continuing our efforts to renegotiate or settle the future
equipment lease payments, but no assurance can be given that we will be
successful in reducing the equipment lease payments.

In June 2001, we deposited $1.0 million into a restricted certificate of deposit
account. The funds in this account serve as collateral against various letters
of credit. During the fourth quarter of 2001 and the first quarter of 2002, $0.3
million and $0.2 million, respectively, were drawn down to pay current and
future lease obligations.

RECENTLY ISSUED FINANCIAL STANDARDS

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard No. 141, Business Combinations (SFAS 141), and
Statement of Financial Accounting Standard No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 became effective for us as of July 1,
2001. It establishes new standards for accounting and reporting requirements for
business combinations and requires the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. SFAS 142 became
effective for us on January 1, 2002 and requires, among other things, the
cessation of the amortization of goodwill. In addition, the standard includes
provisions for the reassessment of the useful lives of existing recognized
intangibles, a new method of measuring reported goodwill for impairment and the
identification of reporting units for purposes of assessing potential future
impairments of goodwill.

We have recorded $7.9 million of goodwill relating to the five acquisitions
completed after the effective date of SFAS 141, and there has been no
amortization expense recorded in the accompanying financial statements. Our
management performs comprehensive evaluations of the financial performance for
each acquired business. These financial evaluations review actual financial
performance, compare performance against budgeted and forecasted expectations
and update the future projections of each business at least monthly. Management
will continue to evaluate the financial results of the acquired businesses. SFAS
142 also requires us to complete a transitional goodwill impairment test on or
before June 30, 2002. We are in the process of completing this analysis.

In August 2001, the FASB issued Statement of Financial Accounting Standard No.
143, Accounting for Asset Retirement Obligations (SFAS 143), which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and for the associated asset retirement
costs. SFAS 143 requires an enterprise to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a legal
obligation associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development and/or normal use of the
assets. The enterprise also is to record a corresponding increase to the
carrying amount of the related long-lived assets and to depreciate that cost
over the life of the asset. The liability is changed at the end of each period
to reflect the passage of time (i.e., accretion expense) and changes in the
estimated future cash flows underlying the initial fair value measurement. The
provisions of SFAS 143 were effective for us on January 1, 2002 and are to be
applied prospectively. The adoption of SFAS 143 did not have a material impact
on our consolidated financial statements.

In August 2001, the FASB issued Statement of Financial Accounting Standard No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144)
that addresses financial accounting and reporting for the impairment or disposal
of long-lived assets, including discontinued operations. While SFAS 144
supercedes Statement of Financial Accounting Standard No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
it retains many of the fundamental provisions of that Statement. SFAS 144 also
supersedes certain provisions of ABP Opinion No. 30, Reporting the Results of
Operations--Reporting


                                       14
<PAGE>

the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business. The provisions of SFAS 144 were effective for us on
January 1, 2002 and are to be applied prospectively. The adoption of SFAS 144
did not have a material impact on our consolidated financial statements.

In November 2001, the Emerging Issues Task Force of the FASB concluded that
reimbursements for "out of pocket" expenses should be classified as revenue and,
correspondingly, cost of services, in the income statement. The new accounting
treatment is applicable to IIS in the first quarter 2002 and requires that
comparative financial statements for prior periods be reclassified in order to
ensure consistency for all periods presented. Accordingly, in the attached
statements of operations, we included revenues from the reimbursements of
expenses incurred of $206,000 and $70,000 for the quarters ended March 31, 2002
and 2001, respectively.


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 2002. 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.


                                       15
<PAGE>

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.

THE COMPANY IS SEEKING ADDITIONAL CAPITAL WHICH, IF NOT AVAILABLE TO US, WOULD
ALTER OUR BUSINESS PLAN AND 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 2001 and continue to do so in
2002. 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. 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;

     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 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 $7.5 million for the first quarter of 2002, a
net loss of approximately $49.4 million for the year ended December 31, 2001, a
net loss of $25.4 million for the year ended December 31, 2000 and a net loss of
approximately $1.4 million for the year ended December 31, 1999. We expect to
continue to incur losses during 2002. If we do not achieve revenue growth, and
are not able to reduce our obligations for equipment and facilities that we no
longer need or use, we could experience operating losses greater than already
anticipated or for periods after 2002. These losses or any fluctuation in our
operating results could cause the market value of our common stock to decline
further.

IF WE ARE UNABLE TO MAINTAIN A NASDAQ NATIONAL MARKET LISTING OR TRANSFER TO
NASDAQ SMALLCAP MARKET LISTING, OUR COMMON STOCK MAY BECOME EVEN MORE ILLIQUID
AND THE VALUE OF OUR SECURITIES MAY DECLINE FURTHER.

On May 2, 2002, we filed an application to transfer the listing of our common
stock from The Nasdaq National Market to The Nasdaq SmallCap Market. If our
transfer application is not approved, we may appeal the decision. If we do not
appeal or if the appeal is not successful, Nasdaq will delist our common stock.
If this occurs, our common stock will likely trade in the over-the-counter
market on the National Association of Securities Dealers' OTC Bulletin Board or
in the so-called "pink sheets" maintained by Pink Sheets LLC.


                                       16
<PAGE>

Such alternative trading markets are 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 would probably decline
further because smaller quantities of shares would likely be bought and sold,
transactions could be delayed and securities analysts' and news media coverage
of IIS would diminish. 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.

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 currently have a strong
presence. We also seek 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. During 1999 and 2000, we tried to grow revenues, and ultimately
achieve profitability, by opening and equipping regional offices in various
locations across the United States. Many of the regional offices were opened
shortly before significant market contraction, did not contribute significant
revenues and were not profitable. Since the third quarter of 2001, we have
closed and consolidated six regional offices and have undertaken to restructure
the terms and payments of facility and equipment leases and reduce our overall
operating cost structure.

As acquisitions often involve a number of the same risks as opening offices in
new markets, we may not be able to operate profitably. The risks of our
acquisition strategy 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. 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 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. One customer, Goodman Manufacturing
Company, accounted for 10% of our revenue for the three months ended March 31,
2002. Two customers, American Express and NCS Pearson, accounted for 22% and
12%, respectively, of our revenue during 2001, and two customers, American
Express and PartsAmerica.com, Inc., accounted for 24% and 10%, respectively, of
our revenue during 2000.

Virtually all of our client contracts may be canceled by the client after a
short notice period and without economic penalty. Clients remain responsible to
us for fees we earn through the date of contract termination unless a valid
offset exists. Revenues from specific clients are likely to vary from period to
period. A major client in one year may not use our services in a subsequent
year. Our two largest clients in 2001 were not our largest clients in the fourth
quarter of 2001, and each will likely represent a smaller percentage of our 2002
revenues. Revenue from American Express will likely decline both overall and as
a percentage of revenue as a result of their decision to outsource daily
management of many of their IT functions to another larger vendor. 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.

BECAUSE THE MARKET FOR OUR SERVICES MAY NOT GROW DURING 2002, WE MAY BE UNABLE
TO BECOME PROFITABLE.

We offer services in the IT services market, and that market contracted in 2001.
We do not anticipate significant growth in the IT services market in 2002.
During 2000, in anticipation of a continued increase in demand for consulting
and application outsourcing services, we made substantial infrastructure
investment to support the anticipated demand. That demand did not materialize,
and, during 2001, we took a $9.2 million charge for underutilized data center
facility computer equipment and leasehold improvements and a $5.7 million charge
for the expenses we incurred in closing and consolidating six office locations.
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 continue to be burdened with
a larger than necessary infrastructure and may be unable to achieve
profitability.

WE MAY INCUR GREATER THAN ANTICIPATED EXPENDITURES RELATING TO CLOSING AND
CONSOLIDATING OFFICES, WHICH WOULD REQUIRE US TO EXPEND LIMITED FINANCIAL
RESERVES AND ADVERSELY IMPACT OUR LIQUIDITY.


                                       17
<PAGE>

During 2001, we recorded asset impairments and restructuring charges totaling
$14.9 million attributable to underutilized computer equipment and leasehold
improvements at our data center and to expenses incurred in connection with the
closing and consolidating of six office locations and abandoned leasehold
improvements in an unoccupied seventh location. The charge for closing and
consolidating offices consisted of an impairment charge and an accrual for
future cash expenditures, primarily rent-related obligations offset by estimated
future sublease income. In the first quarter of 2002, we have accrued
approximately $1.1 million for future cash expenditures relating to closing and
consolidating offices, in addition to the charges previously accrued. In the
first quarter of 2002, we have also recorded $1.7 million of asset impairment
and restructuring charges for future cash expenditures attributable to closing
and consolidating additional office locations, an impairment charge to fixed
assets and an impairment charge to rent deposits. The $2.8 million in charges
are included in our operating expenses for the first quarter of 2002. The actual
future expenditures related to closing and consolidating offices may be greater
than our accrual, and, in that event, the additional expenses will reduce
earnings and cash for operations in future periods. Any such reduction will
adversely impact our liquidity, operating results and common stock price.

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 a net loss of $7.5
million in the first quarter of 2002 and net losses of $8.2 million, $20.0
million, $8.8 million and $12.5 million in the first, second, third, and fourth
quarters of 2001, respectively.

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 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
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: 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 32% of our consulting revenue was derived from
fixed-price, fixed-time engagements during the three months ended March 31,
2002, 14% of our consulting revenue was derived from fixed-price, fixed-time
engagements in 2001, and approximately 5% of revenues were derived from
fixed-price, fixed-time engagements in 2000. 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

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<PAGE>

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 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 experienced significant consolidation in 2001 and
continues to do so in 2002, 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 for which we
compete. If this occurs, our ability to generate increased revenues may be
limited and we may not achieve profitability.

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<PAGE>

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 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. 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.

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 and Chief Executive Officer. 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


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<PAGE>

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.

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 of our common stock potentially
available for sale in the public market. The sale of a substantial number of
shares 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., our founder, Chairman, President and Chief Executive
Officer, currently owns approximately 64% 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 4,951,800 shares of our common stock at a cost of


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<PAGE>

approximately $5.3 million. We currently have no plans 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.

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
us, certain of our 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 transferred to Judge Scheindlin for coordination with more than 300 similar
cases. The suits generally allege that: (1) the Underwriter Defendants allocated
shares of our 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 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) we 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 our initial public offering. The plaintiffs filed a consolidated
amended complaint in April 2002. We believe that the claims against us are
unfounded and without merit and intend to vigorously defend this matter.

In December 2001, we terminated a lease with MCW Brickyard Commercial, L.LC.
("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 we incurred in preparing to move to the premises and approximately
$410,000 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 asks for indemnity for
construction costs and its attorneys' fees and interest. We believe that the
counterclaims are without merit and we intend to vigorously prosecute our claim
against MCW and to also defend against MCW's counterclaim.

In February 2002, we filed suit against Oracle Corporation ("Oracle") in
Superior Court in Maricopa County, Arizona for breach of contract, breach of
implied covenant of good faith and fair dealing, negligent misrepresentation and
fraud. We have joined Fleet Business Credit, L.L.C. ("Fleet") as a necessary
party. Based upon representations of Oracle, we entered into a lease schedule
for software licenses, a payment plan agreement for payments of approximately
$2.6 million and a related ordering schedule. The payment plan agreement was
purportedly assigned to Fleet. Our suit seeks to recover damages for Oracle's
failure to act as it represented it would or rescission and restoration of the
parties to their respective provisions prior to signing the agreements, asks for
consequential and punitive damages as relief for fraudulent conduct and for
declaratory relief that the purported assignment to Fleet fails because the
underlying obligation is void and unenforceable. We intend to prosecute our
claim against Oracle vigorously. Oracle has filed a motion to dismiss for
improper venue. We have opposed the motion, and the motion is set for argument
in June 2002.

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 6.   EXHIBITS AND REPORTS ON FORM 8-K

  (a)  Exhibits

       10.46   Assignment and Assumption of Lease between the Company,
               INTEFLUX, Inc. and CB Richard Ellis, Manager for SOFI - IV SIM
               Office Investors, L.P. dated February 11, 2002

       10.47   Assignment and Assumption of Lease and Consent to Assignment and
               Assumption of Lease between the Company, Winfield Allen, Inc. and
               A.H. Root, Limited Liability Company dated November 11, 2001

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<PAGE>


  (b)  Reports on Form 8-K

       o  Form 8-K filed February 1, 2002, to file as exhibit 99.1 a press
          release titled "IIS Enters Into Agreements to Hire the Management and
          Professional Staff and Acquire Certain Assets of Goliath Networks."

       o  Form 8-K filed April 12, 2002, to file as exhibit 99.1 as a press
          release titled "Integrated Information Systems Responds to 2001
          Settlement with RIAA."

       o  Form 8-K filed May 2, 2002, to report that the Company had applied to
          The Nasdaq Stock Market, Inc. for a transfer of the listing of its
          common stock from The Nasdaq National Market to The Nasdaq SmallCap
          Market.


                                   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.

Dated:  May 15, 2002

                                           /S/ William A. Mahan
                                           --------------------
                                           William A. Mahan
                                           Executive Vice President and Chief
                                           Financial Officer


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