PSW TECHNOLOGIES INC, S-3/A, 2000-03-23

PSW TECHNOLOGIES INC
S-3/A, 2000-03-23
COMPUTER INTEGRATED SYSTEMS DESIGN

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As filed with the Securities and Exchange Commission on March 23, 2000

Registration No. 333 -32464
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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AMENDMENT NO. 1

TO
FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933

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PSW Technologies, Inc.
(Exact name of registrant as specified in its charter)

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Delaware 74-2796054
(State or other (I.R.S. Employer
jurisdiction of Identification Number)
incorporation or
organization)

PSW Technologies, Inc.
6300 Bridgepoint Parkway
Building 3, Suite 200
Austin, Texas 78730
(512) 343-6666
(Address, including zip code, and telephone number, including area code, of
the registrant's principal executive offices)

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Timothy D. Webb
President and Chief Executive Officer
PSW Technologies, Inc.
6300 Bridgepoint Parkway
Building 3, Suite 200
Austin, Texas 78730
(512) 343-6666
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

Copies to:
CARMELO M. GORDIAN, P.C. JOSEPH A. HALL
THOMAS R. NELSON Davis Polk & Wardwell
Brobeck, Phleger & Harrison LLP 450 Lexington Avenue
301 Congress Avenue, Suite 1200 New York, New York 10017
Austin, Texas 78701 (212) 450-4000
(512) 477-5495 Facsimile: (212) 450-4800
Facsimile: (512) 477-5813
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [_]

If this Form is filed to register additional securities for an offering pur-
suant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier ef-
fective registration statement for the same offering. [_]________

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]________

If this Form is a post-effective amendment filed pursuant to Rule 462(d) un-
der the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]________

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]________

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The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to such Section 8(a), may determine.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities, and we are not soliciting offers to buy securities, +
+in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

Subject to Completion, Dated March 23, 2000

Prospectus

2,500,000 Shares

[PSW TECHNOLOGIES LOGO]

Common Stock

We are offering 1,250,000 shares of our common stock and the selling
stockholders are selling an additional 1,250,000 shares.

Our common stock is traded on the Nasdaq National Market under the symbol
"PSWT." The last reported sale price of our common stock on the Nasdaq National
Market on March 22, 2000 was $38 1/8 per share.

Investing in our common stock involves risks. See "Risk Factors" beginning on
page 7.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.

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<TABLE>
<CAPTION>
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount PSW Stockholders
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<S> <C> <C> <C> <C>
Per Share $ $ $ $
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Total $ $ $ $
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</TABLE>

We and some of the selling stockholders have granted the underwriters the right
to purchase up to an additional 375,000 shares of common stock to cover over-
allotments.

J.P. Morgan & Co.
Donaldson, Lufkin & Jenrette
SG Cowen
Adams, Harkness & Hill, Inc.

, 2000.
<PAGE>

Art

The outside front gate references that PSW is changing its name to Concero. In
the center of the page is a white circle with the Concero logo and to the right
of the logo is the Concero name and the phrase "Bring on the Future". Under the
name is an explanation of the Concero name as follows:

The name Concero comes from Latin and means "connect, join, bring together".
We have chosen a name that reflects the principles and practices behind our
business. We are an e-business consulting firm that connects customers,
partners, and technologies to the broadband economy.

At Concero, we are committed to transforming business through the creative
application of new technologies.

The inside front cover contains a gatefold with the Concero name enclosed in a
dark circle with lines projecting from the circle through three sections
labeled services, alliances and customers. The services section contains the
following terms encapsulated in dark circles: eStrategy, eSolutions,
ePerformance and eTV and Broadband. The alliances section contains a white arc
with names and logos of three companies Mercury Interactive, Scientific-Atlanta
and Vignette. The customers section contains a white arc with the names and
logos of five companies: Vignette, Tivoli, togglethis, Concur Technologies and
commerce.TV.

The inside back cover has the Concero name enclosed in a dark circle with lines
projecting from the circle through a section labeled E-Business Services which
contains a white arc with the following terms encapsulated in dark circles:
eStrategy, eSolutions, ePerformance and eTV and Broadband.

Projecting from the eStrategy circle is the following text:

Our eStrategy service offers clients the ability to understand the business
possibilities offered by emerging digital technologies and the opportunities
they create. In collaboration with our clients, we employ a structured
process called Digital Rethink(TM) that helps clients understand how to
harness the power of new technologies. The resulting joint development is an
e-business strategy that translates the client's business objectives into
reality.

Projecting from the e-Solutions circle is the following text:

Our eSolutions practice applies emerging Internet and broadband technologies
to develop next-generation e-businesses. We deliver to clients a combination
of information sources, existing systems and business applications that we
call digital backbones. Recent examples of our client solutions include
business-to-business exchanges, vertical industry portals and personalized
business intelligence solutions. To help our clients prosper in the broadband
economy, we develop a pre-integrated set of application frameworks with
partners like Vignette. These alliance frameworks enable our clients to
accelerate their e-business time-to-market.

Projecting from the ePerformance circle is the following text:

Our ePerformance practice is designed for companies that strive to build a
high-quality Internet experience. We provide a complete solution that enables
companies to proactively anticipate and plan for e-business growth. We
partner with leading application providers, such as Mercury Interactive, to
provide clients performance solutions which create the foundation for a
scalable, agile and rapidly evolving digital business.

Projecting from the eTV and Broadband circle is the following text:

Through our eTV and broadband practice, we help clients leverage video, data
and voice to create and extend e-commerce opportunities. Our strong
relationship with Scientific-Atlanta has positioned us to gain leadership in
the broadband economy.
<PAGE>

Table of Contents

<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary...................... 3
Summary Financial Information........... 6
Risk Factors............................ 7
Forward-Looking Statements.............. 13
Use of Proceeds......................... 14
Dividend Policy......................... 14
Price Range of Common Stock............. 14
Capitalization.......................... 15
Selected Financial Data................. 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 17
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Business.............................................................. 22
Management............................................................ 31
Principal and Selling Stockholders.................................... 34
Description of Capital Stock.......................................... 36
Underwriting.......................................................... 38
Legal Matters......................................................... 40
Experts............................................................... 40
Where You Can Find More Information................................... 40
Index to Financial Statements......................................... F-1
</TABLE>

You should rely only on the information contained in or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
any information different from that contained in or incorporated by reference
in this prospectus. This prospectus is not an offer to sell the common stock
and it is not soliciting an offer to buy common stock in any state where the
offer or sale is not permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock.
<PAGE>

Prospectus Summary

You should read this summary together with the more detailed information and
our financial statements and notes appearing elsewhere or incorporated by
reference in this prospectus. Except as otherwise specified, the information in
this prospectus assumes that the underwriters do not exercise the option we
have granted them to purchase additional shares of this offering.

Our Business

We are an e-business services firm that offers strategic consulting skills with
deep technology and integration expertise. This combination enables us to
utilize existing and new technologies to provide reliable, flexible and
scalable e-business solutions. Our alliances with leading Internet and
interactive television technology providers allow us to gain a thorough
understanding of their products and perspective on other products as well as
next-generation technologies. Using our technology insight and skills, we
assist our clients to define, design, develop and deploy e-business solutions
that enhance their competitive position.

In 1999, our new management team began executing a strategy of providing high
value-added e-business services and emphasizing relationships with leading
technology providers aligned with our e-business focus. We have four national
practices:

. eStrategy. We help clients create e-business strategies;

. eSolutions. We design, develop and deploy next-generation e-business
solutions;

. ePerformance. We address the reliability, scalability and manageability
required for e-business solutions; and

.eTV and Broadband. We deliver interactive television and broadband solutions,
extending the reach of e-business to mass audiences.

We form strategic alliances with leading technology providers such as Vignette,
Mercury Interactive and Scientific-Atlanta. We believe the nature of these
alliances enables us to help develop "ecosystems" centered around a leading
technology provider in which we serve as a catalyst for the widespread adoption
of the provider's products. We call these ecosystems "exponential networks" or
"exponets" for short. Exponets allow us to enter new markets, gain early access
to emerging technologies, jointly market products and services and gain
enhanced access to vendor training and support. For example, during the fourth
quarter of 1999, we became a Vignette Consulting Alliance Partner, and now are
engaged by a number of businesses using Vignette's software as part of their e-
business solution. Additionally, in conjunction with Vignette's Professional
Services group, we launched a joint e-performance service offering at
Vignette's international sales meeting.

Our clients include both Fortune 1000 and early stage companies with business
strategies designed and built around the Internet, including 3M, Commerce.TV,
Concur Technologies, Dell, good2cu.com, IBM, living.com, Scientific-Atlanta and
Vignette.

Industry Background

The market for e-business services is characterized by significant e-business
growth and demand for increasingly advanced solutions. The demand for e-
business services is expected to continue growing significantly as the number
of Internet users and enterprises conducting business over the Internet
increases, new technologies emerge and new business models are adopted.
International Data Corporation estimates that total spending by U.S. companies
for Internet consulting, application development and testing and network and
systems migration will expand from $3.6 billion in 1998 to $29.9 billion in
2003, representing a 53% compound annual growth rate.

Many companies now realize that the Internet is transforming how many
businesses operate and that a new Web-centric business model, now commonly
referred to as e-business, is emerging. E-business combines the reach of the
Internet with

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emerging and existing technologies to enable companies to strengthen
relationships with customers and business partners, create new revenue
opportunities, improve operating efficiencies and enhance communication.
Companies now seek to hire e-business services firms that can combine strategic
thinking, consulting skills and technology expertise to rapidly develop
innovative business models and provide solutions that require deeper
integration of existing applications. These skills have become increasingly
important to companies and a key differentiating factor between services firms.

We believe the next generation of e-business will offer dynamic and interactive
content that integrates data, video and audio. Similarly, we believe that
computing will be pervasive as business is transacted across multiple
communication platforms, including television sets, personal computers and
mobile devices. As a result, we believe that companies will need firms that can
develop innovative strategies, design systems that can handle higher volumes of
transactions and traffic, and integrate new technologies across these many
platforms. Additionally, with the proliferation of new technology, companies
will require guidance to select and integrate appropriate technologies.

PSW Solution

We provide our clients with e-business solutions that are reliable, flexible
and scalable and that make innovative use of existing and emerging
technologies. We provide solutions that integrate:

. Extensive Technology Expertise. We are technologists with a deep
understanding of software development and integration. Our technical
expertise enables us to provide solutions that integrate application
architectures, interactive applications, content services and communication
platforms.

. Innovative and Forward Thinking. We help companies understand the business
opportunities offered by adopting an e-business strategy. Using our
technology expertise, we typically work with companies to develop a
sustainable strategy and customized solution that will facilitate their
transition to, and continuing evolution as, an e-business. We develop e-
business solutions that incorporate today's leading interactive applications
and other technologies as well as enable companies to take advantage of
next-generation technologies.

. Rapid and Reliable Execution. Utilizing the PSW Approach and our deep
technology expertise, we deliver e-business solutions in rapid timeframes.
The PSW Approach provides an iterative framework for helping a client
quickly define its strategy and design, develop and deploy an e-business
solution. Our thorough understanding of our alliance partners' technologies
enables us to customize and integrate their products quickly and reduces the
overall time needed to deploy an e-business solution.

Our Strategy

Our goal is to be a leading e-business solutions provider. To achieve this
goal, we are pursuing the following strategies:

. attract new clients and expand existing client relationships;

. expand technology expertise;

. develop exponets;

. enhance brand awareness;

. hire and retain qualified professionals; and

. grow through acquisitions.

Our principal executive offices are located at 6300 Bridgepoint Parkway,
Building 3, Suite 200, Austin, Texas 78730. Our telephone number is (512) 343-
6666.

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The Offering

The following information regarding shares outstanding is as of December 31,
1999.

Common stock offered by PSW........ 1,250,000 shares

Common stock offered by the
selling stockholders.............. 1,250,000 shares

Common stock outstanding after the
offering.......................... 10,916,535 shares

Use of proceeds.................... We intend to use the net proceeds from
the offering to make acquisitions and
strategic investments and for general
corporate purposes.

Nasdaq National Market symbol...... "PSWT"

The outstanding share information set forth above excludes:

. 2,544,231 shares outstanding under our 1996 stock option plan with an
average exercise price of $4.34 per share, of which 614,750 shares are
currently exercisable with an average exercise price of $3.20 per share; and

. 333,271 shares issuable upon exercise of outstanding warrants, with a
weighted average exercise price of $0.04 per share.

5
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Summary Financial Information

The following table contains our summary financial data which should be read
together with our financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

The "As Adjusted" column in the second table below reflects the issuance of
1,250,000 shares of common stock in this offering.

<TABLE>
<CAPTION>
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Year Ended December 31,
1997 1998 1999
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<S> <C> <C> <C>
In thousands, except per share data
Statements of Operations Data:
Revenue........................................... $44,118 $39,101 $45,823
Operating expenses:
Technical staff................................. 22,479 23,440 25,377
Selling and administrative staff................ 8,405 10,121 9,034
Other expenses.................................. 7,979 8,933 9,504
Special compensation expense.................... 268 75 16
Total operating expenses...................... 39,131 42,569 43,931
Income (loss) from operations..................... 4,987 (3,468) 1,892
Interest income (expense), net.................... 431 946 1,018
Income (loss) before provision for income taxes... 5,418 (2,522) 2,910
Provision (benefit) for income taxes.............. 1,900 (1,060) 1,130
Net income (loss)................................. 3,518(1) (1,462) 1,780
Diluted earnings (loss) per share................. $ 0.41 $ (0.16) $ 0.17
Shares used in diluted earnings (loss) per share
calculation...................................... 8,517 9,113 10,501
</TABLE>

<TABLE>
<CAPTION>
--------------------------
As of December 31, 1999
Actual As Adjusted
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<S> <C> <C>
In thousands
Balance Sheet Data:
Working capital.................................... $ 29,260 $ 73,627
Total assets....................................... 37,816 82,183
Total stockholders' equity......................... 33,422 77,789
</TABLE>

(1)Net income for 1997 is presented on a pro forma basis as if we had been
subject to federal and state income taxes.

6
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Risk Factors

Before you invest in our common stock, you should be aware of various risks,
including those described below. You should carefully consider these risk
factors, together with all the other information included or incorporated by
reference in this prospectus, before you decide whether to purchase shares of
our common stock.

Risks that Relate to Our Business Strategy

We are subject to a number of risks related to our business strategy. We
describe some of these risks below. If any of these risks materializes, our
business, financial condition and results of operations could be harmed, and
our stock price could fall.

We have refocused our business strategy. This may not be successful.

In August 1998 we began building a new management team. The new management team
has refocused our business strategy. This strategy is described in the
"Business" section of this prospectus. Some of the changes to our business
strategy include:

. expansion into new and largely untested business areas such as eTV and
broadband services;

. realignment of our internal corporate structure on a geographic basis; and

. a shift in focus of our client base from technology vendors to technology
users, and a shift from longer-term development and maintenance arrangements
to specific, shorter-term e-business project engagements.

Our shift from ongoing development and maintenance engagements to strategic
engagements has favorably affected our average billing rates but negatively
affected our technical staff utilization rates. If we are unable to offset
decreases in our utilization rates through increases in our billing rates, our
profitability will be harmed. Adverse economic conditions, a lack of consumer
acceptance of eTV, broadband and other advanced technologies, increased
competition and other factors could hurt both our utilization rates and our
billing rates. As a result, it is too early to know whether the refocusing of
our business strategy will help us achieve long-term success. Companies that
implement major changes in their business strategy can face more challenging
risks and unexpected difficulties. These risks and difficulties apply
particularly to us because the market for our Internet and e-business
consulting services is new and rapidly evolving.

The success of our business strategy depends on our ability to identify
emerging technologies that will gain wide acceptance in future markets.

Our business strategy requires us to:

. identify promising technologies at an early stage in their development;

. accurately assess their long-term viability; and

. rapidly gain expertise in these technologies.

Our business may suffer if we invest time and resources in technologies that
ultimately do not reach widespread use or commercial success. Even if we
identify the best technologies, their widespread use and deployment may not
occur within a time span that is compatible with our business plans and revenue
expectations.

In particular, some of the technologies that we are focusing on heavily, such
as eTV and broadband, may not achieve business or consumer acceptance in the
near term, or at all. For example, companies promoting eTV and broadband
services may find that consumers are reluctant to use them, for reasons of cost
or complexity. As a result, we may use substantial resources developing
expertise in areas that will not yield substantial revenues or profits for us
in the next few years.

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Our business strategy depends on our ability to create and maintain strategic
alliances with other e-business and technology companies. These alliances may
shift or terminate suddenly.

We currently maintain strategic alliances with other companies that help us to
gain access to new technology and business opportunities. This is one of the
principles of our exponet strategy. Like many in our industry, we sometimes
refer to these companies as our "partners", but they are not partners in a
legal sense. In particular, these companies are under no binding obligation to
remain in relationships with us or to continue to cooperate with us, and these
relationships are generally not exclusive.

Any of our alliance partners may choose to end the alliance, alter the terms of
the alliance in a way that harms our business or increase the level of business
they conduct with our competitors. Similarly, if one of our alliance partners
undergoes a management or ownership change, we could lose access to critical
technology and business opportunities. In addition to a decrease in revenue,
the publicity that could accompany these kinds of changes could have a damaging
effect on our stock price.

Moreover, our brand may be closely associated with the business success or
failure of some of our high-profile alliance partners, many of whom are
pursuing unproven business models in competitive markets. As a result, the
failure or other difficulties of these companies may damage our brand and hurt
our business opportunities.

Some of our clients are emerging companies that have little or no operating
history and may lack the resources to pay our fees.

Because we focus on emerging technologies, we derive some of our revenues from
small companies, particularly start-up companies that have limited operating
histories and resources to pay our fees. Our business model contemplates
increasing the amount of business we do with these companies. These companies
often have little or no earnings or cash flow and are generally considered to
have a greater risk of failing than more established businesses. As a result,
these clients may not be able to pay for our services in a timely manner, or at
all. These effects would lead to an extension of our collection period, which
would harm our liquidity, and an increase in our bad debt expense, which would
harm our profitability.

We may make investments in clients or potential clients that are emerging
companies. These investments are risky, we have limited experience in making
these investments and we could lose all of our investment.

Although not a key part of our strategy, we may make strategic investments in
small, emerging clients or potential clients, either in cash or in kind. We may
also agree to take some or all of our fees in the form of equity securities
issued by these clients as part of our engagement. Investments in such emerging
companies are extremely risky and some or all of our investment could be lost.
We have limited experience in these investments or in managing these
arrangements.

Potential acquisitions could be difficult to integrate, disrupt our business,
dilute stockholder value and hurt our operating results.

As part of our growth strategy, we intend to pursue acquisitions of businesses
and technologies that are complementary to our core businesses. Our ability to
grow through acquisitions will depend on the availability of attractive
acquisition candidates, our ability to successfully compete for these
acquisition candidates and the availability of capital to finance these
acquisitions.

The benefits of an acquisition often may take considerable time to develop, and
the acquisition may never produce the intended benefits. Factors that could
cause an acquisition to be unsuccessful include:

. the loss of employees or clients of the acquired business, and thus a loss
of one of the key rationales for making the acquisition;

. our failure to appreciate the dynamics of markets in which we have limited
or no prior experience;

. the diversion of management's attention from our core businesses;

. any difficulties we experience in assimilating the operations of an acquired
business or in realizing projected efficiencies, cost savings and revenue
synergies;

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. our failure to assess or discover liabilities;

. the dilution of our stockholders' equity and earnings per share,
particularly if we finance the acquisitions with equity; and

. an increase in our debt and contingent liabilities, which in turn could
restrict our ability to access additional capital when needed or to pursue
other important elements of our business plan.

If we fail to manage our growth, our resources may be strained and our ability
to implement our business strategy will be harmed.

Our growth could place significant demands on our management and other
resources. In order to manage our growth effectively, we must continue to
develop and improve our operational, financial and other internal systems, as
well as our business development capabilities, and we must continue to attract,
train, retain, motivate and manage our employees. We may not succeed in these
efforts.

Risks that Relate to Our Business

We are subject to a number of risks that are particular to our business and
that may or may not affect our competitors. We describe some of these below. If
any of these risks materializes, our business, financial condition and results
of operations could be harmed, and our stock price could fall.

Our key employees are critical to our continued success. The loss of any of
these employees could impair our ability to execute our strategy or grow our
business.

Our future success will depend in part upon the continued services of a number
of key management and technical employees. The loss of any of our key personnel
could hurt our ability to execute our strategy and grow our business. We do not
maintain key-person life insurance on any of our employees. In addition, if one
or more of our key employees resigns to join a competitor or to form a
competing business, we could lose existing or potential clients. In the event
we lose any of these employees, we may not be able to prevent the disclosure or
use of our proprietary technical knowledge, practices and procedures.

We need to recruit, train and retain qualified employees to successfully grow
our business.

Our success depends on our ability to recruit, train, retain, motivate and
manage highly skilled employees. Qualified project managers, software
architects and senior technical and professional staff with the skills we need
are in great demand worldwide and are likely to remain a limited resource for
the foreseeable future. We may not be able to hire a sufficient number of
highly skilled employees. In addition, the highly competitive labor market may
require us to raise salaries faster than we have in the past, and faster than
we raise our billing rates.

We have experienced a high rate of attrition in the past, particularly around
the time of our management change. If we continue to experience high rates of
attrition, it will be even more difficult to execute our growth strategy.

We may also be unsuccessful in training, retaining and motivating our
employees. If our employees do not achieve the required levels of performance,
our ability to manage and staff existing projects and to obtain new projects
might suffer.

We are changing our name.

We are changing our name to Concero Incorporated. Although we have filed a
trademark application for this name, we may be unable to protect our name or
prevent others from using our name. Our planned advertisement of the change and
promotion of our new brand may fail to reach important segments of our
potential customer base, and our marketing campaign may yield little results.

We may not be able to protect our intellectual property and proprietary rights.

Our proprietary intellectual property consists of the business processes and
software that we develop to assist clients. Our efforts to protect our
proprietary rights may not be adequate to deter theft or misuse of our
intellectual property. We may not be able to detect unauthorized use of our
intellectual property and take appropriate steps to enforce our rights. If
third parties infringe, misappropriate or copy our trade secrets, proprietary
processes, copyrights, trademarks or other proprietary information, we could
lose important competitive advantages.

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We could be subject to claims that we infringe the intellectual property rights
of others.

There has been a marked increase in patent and intellectual property litigation
in recent months, particularly involving competitors in the technology sector.
Although we are not aware that any of our activities infringe the patent or
other intellectual property rights of others, we have not sought any formal
assurances that this is the case. Other parties may assert infringement claims
against us or claim that we have violated their intellectual property rights.
These claims, even if not true, could result in significant legal and other
costs and may distract our management. If we are required to stop using a
particular methodology or technology because of an infringement lawsuit, it
could become extremely difficult to carry out our business plans.

We depend on a small number of clients for a significant portion of our
revenues.

In 1999, we derived 51% of our revenue from our five largest clients. Our
largest client in 1999 accounted for 26% of our revenue in that year. The
volume of work performed for specific clients is likely to vary from year to
year, and a major client in one year may not use our services in another year.
The loss or reduction of our revenue due to a decline in services performed for
any large client could harm our business.

Our lack of long-term contracts with clients makes our revenues difficult to
predict.

Our clients retain us on an engagement-by-engagement basis, rather than under
long-term contracts. As a result, the size and number of client engagements are
difficult to predict, and vary markedly from quarter to quarter. At the same
time, our operating expenses are relatively fixed and cannot be reduced on
short notice for unanticipated shortfalls in our revenue. This is because our
most significant operating expense is employee salaries.

Moreover, our clients can generally reduce the scope of our services or cancel
our engagements without penalty and with little or no notice. If a client
postpones, modifies or cancels an engagement or chooses not to retain us for
additional phases of a project, we might not be able to redeploy our employees
quickly to other engagements.

Some of our client contracts are on a fixed-price basis. If we fail to
accurately estimate the resources required for a fixed-price project, our
profitability could be harmed.

During 1997, 1998 and 1999, we generated approximately 20%, 16% and 21%,
respectively, of our revenue on a fixed-price, fixed-delivery-schedule basis,
rather than on a time-and-materials basis. If we fail to accurately estimate
the resources required for a fixed-price project or fail to complete our
obligations on time, our revenues could be harmed and our expenses could
increase. We sometimes must revise project plans after beginning a project
because we failed to accurately estimate the resources required.

Risks that Relate to Our Industry

We are subject to a number of risks that are inherent in the technology
industry. We describe some of these below. If any of these risks materializes,
our business, financial condition and results of operations could be harmed,
and our stock price could fall.

Our industry is intensely competitive.

We expect competition to persist and intensify in the future. We cannot be
certain that we will be able to compete successfully with existing or new
competitors. If we fail to compete successfully, our business would be
seriously harmed. Competition can make it more difficult for us to:

. attract and retain customers;

. expand our sales and marketing activities;

. create and maintain the strategic relationships that are vital to success in
the Internet and e-business marketplace, and thus develop and acquire
knowledge of leading-edge technologies; and

. recruit and maintain the highly skilled technical staff that our business
model demands.

We compete against numerous companies that offer Internet services, software
engineering, systems integration, or management consulting, as well as the
consulting divisions of large accounting firms. Because relatively low barriers
to

10
<PAGE>

entry characterize the market, we expect other companies to enter our market.
Some large information technology firms have announced that they will focus
more resources on e-business opportunities.

Many of our current competitors have longer operating histories, larger client
bases, larger professional staffs, greater brand recognition and greater
financial, technical, marketing and other resources than we do. This may place
us at a disadvantage in responding to our competitors' pricing strategies,
technological advances, advertising campaigns, strategic partnerships and other
initiatives. In addition, many of our competitors have well established
relationships with our current and potential clients and have extensive
knowledge of our industry. As a result, our competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements, and they may also be able to devote more resources to the
development, promotion and sale of their services than we can. Competitors that
offer more standardized or less customized services than we do may have a
substantial cost advantage, which could force us to lower our prices, adversely
affecting our operating margins.

Current and potential competitors also have established or may establish
cooperative relationships among themselves or with third parties to increase
their ability to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. In addition, some of our competitors may develop
services that are superior to, or have greater market acceptance than, the
services that we offer.

Our success depends on the continued growth and acceptance of advanced
technologies.

Our future success depends heavily on the further widespread use of the
Internet as a means for commerce, and consumer and commercial acceptance of eTV
and broadband. Despite the large amount of investor and media attention these
technologies have received, they are in early stages of development and it is
difficult to predict whether or how they will continue to develop. Development
of these technologies could be hindered by a number of factors, such as
government regulation, taxation, general economic conditions and lack of
consumer acceptance. If these new technologies fail to gain widespread
acceptance or grow more slowly than expected, our business opportunities will
diminish.

Risks that Relate to Our Stock and this Offering

Our stock price is subject to a number of risks. We describe some of these
below. If any of these risks materializes, our stock price could fall.

Our quarterly operating results will vary, which may affect the market price of
our common stock in a manner unrelated to our long-term performance.

Our quarterly operating results have varied in the past and we expect that they
will continue to vary in the future depending on a number of factors, many of
which are outside of our control. Factors that may cause our quarterly
operating results to vary include:

. the number, size and scope of projects in which we are engaged;

. the contractual terms and degree of completion of these projects;

. any delays incurred in connection with a project;

. our success in earning bonuses or other contingent payments;

. our employee hiring and utilization rates;

. the adequacy of provisions for losses;

. the accuracy of our estimates of resources required to complete ongoing
projects;

. customer budget cycles and spending priorities; and

. general economic conditions.

A high percentage of our operating expenses, particularly personnel and rent,
are fixed in advance of any particular quarter. As a result, unanticipated
variations in the number of our projects, in our progress on projects or in our
employee

11
<PAGE>

utilization rates may cause significant variations in operating results in any
particular quarter. Given the possibility of these quarterly fluctuations, we
believe that comparisons of our quarterly results are not necessarily
meaningful and that results for one quarter should not be relied upon to
predict our future performance.

Nevertheless, any quarterly shortfall in revenue or earnings from expected
levels, or other short-term failures to meet the expectations of securities
analysts or the market in general, can have an immediate and damaging effect on
the market price of our common stock.

Our common stock may experience extreme price and volume fluctuations.

The stock market, from time to time, has experienced extreme price and volume
fluctuations. The market prices of the securities of Internet and technology
companies have been especially volatile, including fluctuations that often are
unrelated to the operating performance of the affected companies. Broad market
fluctuations of this type may adversely affect the market price of our common
stock.

The market price of our common stock has fluctuated since we became a public
company. Our stock price could continue to fluctuate significantly due to a
variety of factors, including:

. public announcements concerning us, our competitors or the technology
industry;

. fluctuations in our operating results;

. introductions of new products or services by us or our competitors;

. changes in analysts' revenue or earnings estimates; and

. announcements of technological innovations.

In the past, companies that have experienced volatility in the market price of
their stock have been the target of securities class action litigation. If we
were sued in a securities class action, we could incur substantial costs and
suffer from a diversion of our management's attention and resources.

Our management has broad discretion regarding the use of proceeds from this
offering.

Our management will have broad discretion in how we use the net proceeds of
this offering and could spend the proceeds in ways with which you may not
agree. Pending deployment of the funds, the proceeds may be invested in ways
that do not yield favorable returns. Please see the "Use of Proceeds" section
of this prospectus for more information about how we plan to use our proceeds
from this offering.

Future sales of shares of our common stock may negatively affect our stock
price.

After this offering, 10,916,535 shares of our common stock will be outstanding.
Of our outstanding shares, 5,876,411 will be freely tradable, and a further
5,040,124 can be sold in the public market 90 days after the offering. We have
granted registration rights that may require us to register up to 4,396,833
shares of our common stock for a public offering. In addition, we may issue
additional common stock at any time 90 days after the offering.

If we or our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. In addition, sales of substantial amounts of our common stock after
this offering might make it more difficult for us to sell equity or equity-
related securities in the future at a time and place that we deem appropriate.

We have implemented anti-takeover methods that could delay or prevent an
acquisition of our company.

Provisions of our certificate of incorporation and our bylaws, as well as
Delaware law, could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. Please see the
"Description of Capital Stock--Delaware Anti-Takeover Law and Certain Charter
Provisions" section of this prospectus for a description of these provisions.

12
<PAGE>

Forward-Looking Statements

This prospectus contains forward-looking statements, within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, that involve substantial risks and uncertainties. You can
identify these statements by forward-looking words such as "may," "will,"
"expect," "intend," "anticipate," "believe," "estimate" and "continue" or
similar words. These forward-looking statements and other statements made
elsewhere in this prospectus are made in reliance on the Private Securities
Litigation Reform Act of 1995. You should read statements that contain these
words carefully because they discuss our future expectations, contain
projections of our future results of operations or of our financial condition
or state other "forward-looking" information. We believe that it is important
to communicate our future expectations to our investors. However, there may be
events in the future that we are not able to accurately predict or control. The
factors listed in the sections captioned "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as any cautionary language in this prospectus, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. Before you
invest in our common stock, you should be aware that the occurrence of the
events described in the "Risk Factors" section and the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section and
elsewhere in this prospectus could have a material adverse effect on our
business, operating results and financial condition.

13
<PAGE>

Use of Proceeds

We estimate that our net proceeds from our sale of 1,250,000 shares of common
stock will be approximately $44.4 million at an assumed public offering price
of $38.125 per share and after deducting estimated offering expenses and
estimated underwriting discounts payable by us. If the underwriters exercise
their over-allotment option in full, we will receive an additional $6.8 million
in net proceeds.

We currently intend to use the net proceeds of this offering to acquire
complementary businesses and technologies, to make strategic investments in
clients or potential clients, including investments in connection with new
engagements, and for general corporate purposes. While we have no current
commitments with respect to any material transactions, we evaluate acquisition
and investment opportunities from time to time. Our management will have
significant flexibility in applying the net proceeds of this offering. Pending
these uses, we intend to invest the net proceeds in government securities and
other short-term, investment-grade, interest-bearing instruments.

We will not receive any proceeds from the sale of common stock by the selling
stockholders. See "Principal and Selling Stockholders."

Dividend Policy

Since becoming a public company, we have not paid any dividends on our capital
stock and do not intend to pay any cash dividends on our common stock in the
foreseeable future. We currently intend to retain our earnings to finance
future growth of our business.

Price Range of Common Stock

Our common stock has been quoted on the Nasdaq National Market under the symbol
"PSWT" since June 5, 1997. The following table sets forth, for the fiscal
periods indicated, the high and low sale prices per share of our common stock
as reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
-------------
High Low
------ ------
<S> <C> <C>
Year Ended December 31, 1998:
First Quarter.............................................. $15.50 $ 6.00
Second Quarter............................................. 9.63 5.50
Third Quarter.............................................. 7.38 1.94
Fourth Quarter............................................. 4.50 1.88
Year Ended December 31, 1999:
First Quarter.............................................. $ 4.75 $ 2.50
Second Quarter............................................. 4.25 2.63
Third Quarter.............................................. 6.50 3.56
Fourth Quarter............................................. 25.25 4.50
Year Ending December 31, 2000:
First Quarter (through March 22, 2000)..................... $54.50 $16.50
</TABLE>

On March 22, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $38.13 per share.

When we change our name to Concero, we plan to change our Nasdaq stock symbol
to "CERO."

14
<PAGE>

Capitalization

The following table sets forth our capitalization as of December 31, 1999 on an
actual basis and as adjusted to reflect our estimated proceeds from this
offering, at an assumed public offering price of $38.125 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and notes thereto appearing elsewhere in this
prospectus.

<TABLE>
<CAPTION>
----------------------------
As of December 31, 1999
Actual As Adjusted
----------- --------------
<S> <C> <C>
In thousands, except share data
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000
shares authorized; none outstanding actual
and as adjusted.............................. $ -- $ --
Common stock, $0.01 par value, 34,000,000
shares authorized; 9,666,535 shares issued
and outstanding; and 10,916,535 shares issued
and outstanding as adjusted.................. 97 109
Paid-in capital............................... 30,491 74,846
Accumulated and other comprehensive income.... (39) (39)
Retained earnings............................. 2,873 2,873
------------ --------------
Total stockholders' equity.................. 33,422 77,789
------------ --------------
Total capitalization........................ $ 33,422 $ 77,789
============ ==============
</TABLE>

The outstanding share information set forth above excludes:

. 333,271 shares issuable upon exercise of outstanding warrants, with a
weighted average exercise price of $0.04 per share.

15
<PAGE>

Selected Financial Data

We commenced operations as a corporation effective October 1, 1996. Prior to
that date, we conducted our business and operations as the software division of
Pencom Systems Incorporated. The selected financial data presented below have
been derived from our audited financial statements and those of our predecessor
and include the portion of a software contract that had previously been
allocated to Pencom. The statements of operations data for the years ended
December 31, 1997, 1998 and 1999 and the balance sheet data as of December 31,
1998 and 1999 are derived from our financial statements that appear herein. The
statements of operations data for the years ended December 31, 1995 and 1996
and the balance sheet data as of December 31, 1995, 1996 and 1997 are derived
from our audited financial statements that do not appear herein. The
information presented below does not necessarily reflect what our financial
condition and results of operations would have been had we operated as a
separate, stand-alone company for the periods presented prior to October 1,
1996, nor is it necessarily indicative of future results. The following should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements and notes
thereto appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
------------------------------------------
Year Ended December 31,
------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
In thousands, except per share data
Statements of Operations Data:
Revenue............................. $21,147 $31,274 $44,118 $39,101 $45,823
Operating expenses:
Technical staff................... 11,193 16,444 22,479 23,440 25,377
Selling and administrative staff.. 3,755 5,622 8,405 10,121 9,034
Other expenses.................... 3,976 5,684 7,979 8,933 9,504
Special compensation expense...... -- 2,193 268 75 16
------- ------- ------- ------- -------
Total operating expenses........ 18,924 29,943 39,131 42,569 43,931
------- ------- ------- ------- -------
Income (loss) from operations....... 2,223 1,331 4,987 (3,468) 1,892
Interest income (expense), net...... (84) (170) 431 946 1,018
------- ------- ------- ------- -------
Income (loss) before provision
(benefit) for income taxes......... 2,139 1,161 5,418 (2,522) 2,910
------- ------- ------- ------- -------
Provision (benefit) for income
taxes:
Nonrecurring charge for
termination of Subchapter S
election......................... -- -- 1,200 -- --
C corporation taxes................. -- -- 1,000 (1,060) 1,130
------- ------- ------- ------- -------
Net income (loss)................... $ 2,139 $ 1,161 $ 3,218 $(1,462) $ 1,780
======= ======= ======= ======= =======
Diluted earnings (loss) per share... $ (0.16) $ 0.17
======= =======
Unaudited pro forma information:
Historical income before provision
for income taxes................... $ 2,139 $ 1,161 $ 5,418
Pro forma provision for income
taxes............................ 813 441 1,900
------- ------- -------
Pro forma net income................ $ 1,326 $ 720 $ 3,518
======= ======= =======
Pro forma diluted earnings per
share............................ $ 0.20 $ 0.11 $ 0.41
======= ======= =======
Shares used in diluted earnings
(loss) per share calculation....... 6,635 6,689 8,517 9,113 10,501
<CAPTION>
------------------------------------------
December 31,
------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
In thousands
Balance Sheet Data:
Working capital..................... $ 2,756 $ 1,648 $28,074 $27,379 $29,260
Total assets........................ 4,982 11,943 35,420 33,351 37,816
Total stockholders' equity.......... 3,684 3,444 31,859 31,068 33,422
</TABLE>

16
<PAGE>

Management's Discussion and Analysis
of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our
financial statements and the related notes appearing elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those set forth under "Risk Factors" and elsewhere in this
prospectus.

Overview

In late 1998, we hired our current chief executive officer and began building
our current management team. In 1999, this team redefined our focus from
providing primarily software development services to providing primarily e-
business solutions. We also began to develop alliance relationships with
leading providers of e-business technologies. We believe this allows us to
leverage our strengths and experience, in addition to expertise developed
providing services to our alliance partners, to offer our clients high value
strategic e-business solutions. We have restructured our line operations
geographically into three areas: East, Central and West. We intend to broaden
our management team in 2000 to further drive our service offerings aggressively
throughout the United States. Each area is supported by our national eStrategy,
eSolutions, ePerformance and eTV and Broadband practices to ensure that our
service offerings incorporate the newest technologies and to facilitate
knowledge capture and transfer throughout the company. See "Business" for a
more comprehensive discussion.

Given our shift in strategy, our results of operations prior to 1999 do not
necessarily reflect our current business. The shift resulted in an improvement
in our average hourly bill rate from the fourth quarter of 1998 to the fourth
quarter of 1999. As we focus on strategic engagements, our technical staff
should be able to command higher billing rates than they could have when
providing software development services. However, our utilization rates trended
lower in 1999 from historical levels primarily because of the higher technical
staff hours devoted to training and to selling e-business solutions. In the
future, the shorter time frames of these engagements mean that our technical
staff may spend more time focusing on marketing and training activities between
projects. Nonetheless, overall revenue per billable headcount improved from the
fourth quarter of 1998 to the fourth quarter of 1999. Although the net effect
for us in 1999 was positive, we cannot be sure that this will continue in
future periods.

We are changing our name to Concero and launching a national branding campaign.
We have engaged a national branding agency and a public relations firm to
assist with the launch of our branding campaign and other on-going awareness
activities. We believe that our name change and related advertising and
promotional activities will enable us to communicate our capabilities as an e-
business solutions provider to prospective clients and employees. Moreover, we
intend to pursue acquisitions that provide access to complementary skills or
additional talented professionals, allow us to expand our geographic presence
or increase our client base.

Revenue

We derive our revenues from fees for services that are generated on an
engagement-by-engagement basis. In 1999, we derived approximately 79% of
revenues from time and materials contracts. We recognize revenues generated
under time and materials contracts as the services are provided. For fixed
price contracts, which accounted for the balance of our 1999 revenues, we
recognize revenues using the percentage-of-completion method. Using this
method, we recognize revenue proportionate to the percentage of units of labor
incurred to the date of measurement relative to the estimated total units of
labor for completion. Revenues exclude expenses reimbursed by clients. Software
licensing fees do not constitute a material portion of our revenue base.

Our largest client, IBM, accounted for 35% and 26% of revenue in 1998 and 1999,
respectively. Our work for IBM decreased to 20% of revenue in the fourth
quarter of 1999 and is expected to decline further in 2000. The IBM revenue is
with three different IBM organizations, IBM, Tivoli and Lotus.

17
<PAGE>

Expenses

Our technical staff expenses consist of the cost of salaries, payroll taxes,
health insurance and workers' compensation for technical staff personnel
assigned to client engagements and unassigned technical staff personnel, and
fees paid to any subcontractors for work performed in connection with a client
engagement. We expect that our technical staff expenses will increase over time
due to increased hiring, inflation and wage increases resulting from the highly
competitive labor market.

Selling and administrative staff expenses consist of the cost of salaries,
payroll taxes, health insurance and workers' compensation for selling,
marketing and administrative personnel, and all commissions and bonuses whether
paid to technical or administrative staff. We expect selling and administrative
staff expenses to increase in absolute dollars as our business increases to
support the growth in our revenues and technical staff.

Other expenses consist of all non-staff related costs, such as occupancy costs,
travel, business insurance, business development, recruiting, training and
depreciation. We expect other expenses to increase in absolute dollars as we
increase our recruiting efforts, open new offices, continue branding
initiatives, and incur additional costs related to the growth of our business.

Results of Operations

The following table sets forth the percentage of revenue of certain items
included in our statements of income for the periods indicated:

<TABLE>
<CAPTION>
-----------------
Year ended
December 31,
-----------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenue...................................................... 100% 100% 100%
Operating expenses:
Technical staff............................................. 51 60 55
Selling and administrative staff............................ 19 26 20
Other expenses.............................................. 18 23 21
Special compensation expense................................ 1 -- --
---- ---- ----
Total operating expenses................................... 89 109 96
---- ---- ----
Income (loss) from operations................................ 11 (9) 4
Interest income (expense), net............................... 1 2 2
Provision (benefit) for income taxes......................... 4 (3) 2
---- ---- ----
Net income (loss)............................................ 8% (4)% 4%
==== ==== ====
</TABLE>

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Revenue. Our revenue was $45.8 million in 1999, up 17% from 1998 revenue of
$39.1 million, principally due to the improvement in our average hourly bill
rate. This improvement in our average hourly bill rate resulted from our shift
from performing primarily software development support services to developing
strategic e-business and eTV solutions. This was partially offset by a decrease
in our average technical personnel utilization rate.

IBM, including its wholly owned subsidiaries, Tivoli and Lotus, accounted for
26% and 35% of revenue in 1999 and 1998, respectively. No other customer
accounted for more than 10% of revenue in 1999 or 1998.

Technical Staff. Technical staff expenses were $25.4 million in 1999, an
increase of 8% over 1998 technical staff expenses of $23.4 million. Technical
staff expenses decreased to 55% of revenue in 1999 from 60% in 1998 primarily
as a result of higher revenues offset slightly by an increase in average
salaries.

Selling and Administrative Staff. Selling and administrative staff expenses
were $9.0 million in 1999, a decrease of 11% from $10.1 million in 1998. The
decrease in selling and administrative staff expenses was primarily due to
higher efficiency as a result of the restructuring that aligned sales and
marketing with service delivery. This resulted in a decreased headcount
assigned to sales and proposal development. Selling and administrative staff
expenses decreased to 20% of revenue in 1999 from 26% of revenue in 1998. The
decrease in selling and administrative staff expenses as a percentage of
revenue is due primarily to the increase in revenues and the increased
efficiencies described above.

18
<PAGE>

Other Expenses. Other expenses were $9.5 million in 1999, an increase of 6%
over other expenses of $8.9 million in 1998. The increase is principally due to
facility additions, and higher recruiting, training, legal and travel costs.
Other expenses were 21% of revenue in 1999 compared to 23% in 1998.

Income (Loss) from Operations. We recorded income from operations of $1.9
million in 1999, up from a loss of $3.5 million from operations in 1998.

Income Taxes. The provision for income taxes of $1,130,000 attributable to
December 31, 1999 is computed using an effective tax rate of 39%, which differs
from the federal statutory rate of 34% as a result of state taxes. The tax
benefit for income taxes of $1,060,000 attributable to December 31, 1998 is
computed using an effective tax rate of 42% which differs from the federal
statutory rate of 34% as a result of state taxes and tax-exempt income. The
1998 net operating loss was carried back to 1997 and was fully utilized.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Revenue. Revenue was $39.1 million in 1998, down 11% from 1997 revenue of $44.1
million, principally due to the decrease in services we performed for IBM and a
decrease in technology user revenue during 1998.

IBM, including its wholly owned subsidiaries, accounted for 35% and 39% of
revenue in 1998 and 1997, respectively. No other customer accounted for more
than 10% of revenue in 1998 or 1997.

Technical Staff. Technical staff expenses were $23.4 million in 1998, an
increase of 4% over 1997 technical staff expenses of $22.5 million. The
increase in technical staff expenses was primarily due to our overestimating
the number of personnel required for client engagements.

Selling and Administrative Staff. Selling and administrative staff expenses
were $10.1 million in 1998, an increase of 20% from $8.4 million in 1997. The
increase in selling and administrative staff expenses was primarily due to an
increase in the number of sales and marketing personnel in 1998.

Other Expenses. Other expenses were $8.9 million in 1998, an increase of 12%
over other expenses of $8.0 million in 1997. The increase is principally due to
facility additions, travel and bad debt expenses and severance costs.

Income (Loss) from Operations. We recorded a loss from operations of $3.5
million in 1998, down from $5.0 million of income from operations in 1997.

19
<PAGE>

Quarterly Results of Operations

The following table presents unaudited quarterly results of operations data for
each of the quarters in the two-year period ended December 31, 1999. This
information has been prepared on the same basis as our audited financial
statements and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the quarterly information when read in conjunction with all the information
included or incorporated by reference in this prospectus. The results of
operations for any quarter are not necessarily indicative of the results
expected for any future period.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
Quarter Ended
-------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
In thousands --------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 9,758 $ 9,867 $ 9,255 $10,221 $10,394 $11,006 $11,632 $12,791
Operating expenses:
Technical staff........ 5,803 5,523 6,009 6,105 6,070 6,035 6,392 6,880
Selling and
administrative staff.. 2,549 2,759 2,853 1,960 2,229 2,304 2,208 2,293
Other expenses......... 1,927 1,980 2,772 2,254 2,093 2,440 2,457 2,514
Special compensation
expense............... 43 38 36 (42) -- -- -- 16
--------- -------- --------- -------- --------- -------- --------- --------
Total operating
expenses............. 10,322 10,300 11,670 10,277 10,392 10,779 11,057 11,703
--------- -------- --------- -------- --------- -------- --------- --------
Income (loss) from
operations............. (564) (433) (2,415) (56) 2 227 575 1,088
Interest income
(expense), net......... 252 223 215 256 250 237 259 272
--------- -------- --------- -------- --------- -------- --------- --------
Income (loss) before
provision (benefit) for
income taxes........... (312) (210) (2,200) 200 252 464 834 1,360
--------- -------- --------- -------- --------- -------- --------- --------
Provision (benefit) for
income taxes........... (100) -- (1,070) 110 100 180 320 530
--------- -------- --------- -------- --------- -------- --------- --------
Net income (loss)....... $ (212) $ (210) $(1,130) $ 90 $ 152 $ 284 $ 514 $ 830
========= ======== ========= ======== ========= ======== ========= ========
</TABLE>

Liquidity and Capital Resources

Our operating activities provided cash of $1.7 million and $3.1 million in 1999
and 1997, respectively. Our operating activities used cash of $1.7 million in
1998. Total repayments of borrowings were $5.1 million in 1997. We purchased
approximately $2.1 million, $1.8 million and $2.6 million of computer and
office equipment in 1999, 1998 and 1997, respectively. At December 31, 1999, we
had cash and cash equivalents and short-term investments totaling $20.3
million.

At December 31, 1999, we did not have any material commitments for capital
expenditures. We have budgeted approximately $4 million for capital
expenditures for fiscal 2000. Our capital expenditures normally consist
primarily of purchases of laptop computers, computer servers and furniture, the
amount of which fluctuates based on the number of additional employees we hire
and the number of new offices that we open in any period.

The number of days of revenue in our accounts receivable balance fluctuated
from 65 days to 84 days during 1999 and was 84 days at December 31, 1999. We
may experience longer collection periods if the work we perform for smaller
companies increases as a percentage of our total services.

We anticipate that our existing cash and cash equivalents balances, proceeds
from this offering and potential cash flows from operations will be adequate to
fund our working capital and capital expenditure requirements for at least the
next 12 months. However, changes may occur that could consume available capital
resources before such time. Our capital requirements depend on numerous
factors, including potential acquisitions, the timing of the receipt of
accounts receivable, employee growth and the percentage of projects performed
at our facilities.

We currently do not maintain any committed credit facilities. We cannot assure
you that commercial credit, if necessary, will be available to us on favorable
terms, or at all.

20
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Year 2000 Compliance

Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately distinguish pre-2000 from post-2000 dates
due to the two-digit date fields used by many systems. Most indications to
date, however, are that computer systems are functioning normally and the
compliance and remediation work accomplished leading up to 2000 was effective
to prevent any problems. Computer experts have warned that there may still be
residual consequences of the change in dates. Any of these residual
difficulties could result in a decrease in sales of our services, an increase
in allocation of resources to address Year 2000 problems of our customers
without additional revenue commensurate with such dedication of resources, or
an increase in litigation costs relating to losses suffered by our customers
due to Year 2000 problems. We have experienced no significant Year 2000
problems or incurred any material costs related to Year 2000 issues.
Furthermore, we do not expect any material expenditures related to residual
Year 2000 difficulties and thus have no contingency plan to address any Year
2000 problems.

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Business

Overview

. eStrategy. We help clients create e-business strategies;

. eSolutions. We design, develop and deploy next-generation e-business
solutions;

.ePerformance. We address the reliability, scalability and manageability
required for high volume e-business solutions; and

.eTV and Broadband. We deliver interactive television and broadband solutions,
extending the reach of e-business to mass audiences.

We form strategic alliances with leading technology providers such as Vignette,
Mercury Interactive and Scientific-Atlanta. We believe the nature of these
alliances enables us to help develop "ecosystems" centered around leading
technology providers in which we serve as a catalyst for the widespread
adoption of the provider's products. We call these ecosystems "exponential
networks" or "exponets" for short. Exponets allow us to enter new markets, gain
early access to emerging technologies, jointly market products and services
with leading technology providers and gain enhanced access to vendor training
and support. For example, during the fourth quarter of 1999, we became a
Vignette Consulting Alliance Partner, and now are engaged by a number of
companies using Vignette's software as part of their e-business solution.
Additionally, in conjunction with Vignette's Professional Services group, we
launched a joint e-performance service offering at Vignette's international
sales meeting.

Our clients include both Fortune 1000 and early stage companies whose business
strategies are designed and built around the Internet. For example:

. Concur Technologies. We built a universal engine for document exchange which
would enable users with different protocols to use Concur's business-to-
business procurement network, called Concur Commerce Network. The Concur
Commerce Network was named one of Information Week's 1999 Products of the
year.

. Commerce.TV. We designed, built and tested Commerce.TV's set-top box based
software and developed an e-commerce application that allows cable televi-
sion subscribers to buy products and services over the television.

. good2cu.com. good2cu.com engaged us to create a portal that could be used by
its credit union clients. Our solution enables good2cu.com to provide its
client members with access to marketing, content and competitive analysis
tools through one on-line destination.

Industry Background

The market for e-business services is characterized by significant e-business
growth and demand for increasingly advanced solutions.

Significant e-Business Growth. The Internet has fundamentally changed the way
consumers and businesses communicate, obtain information, purchase goods and
services and transact business. International Data Corporation estimates that
the amount of worldwide e-commerce conducted over the Web will increase from
$50 billion in 1998 to $1.3 trillion in 2003.

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<PAGE>

The demand for e-business services is expected to continue growing
significantly as the number of Internet users and enterprises conducting
business over the Internet increases, new technologies emerge and new business
models are adopted. International Data Corporation estimates that total
spending by U.S. companies for Internet consulting, application development and
testing, and network and systems migration will expand from $3.6 billion in
1998 to $29.9 billion in 2003.

Demand for Increasingly Advanced Solutions. Initially, companies used the
Internet as a means of advertising or promoting their business. These companies
typically published Web sites with static information referred to as "brochure-
ware" with the objective of enhancing internal and external communication.
Companies either used their own internal design and information technology
resources or hired on-line advertising agencies and Web design firms to create
their initial Web presence.

The next stage involved the development of Web sites that allowed processing of
limited types of transactions over the Internet. Companies generally viewed the
Internet as another channel or extension of their core business. These Internet
solutions often integrated enterprise-wide client/server applications into
front-end Web sites. Companies typically hired traditional services or systems
integration firms in conjunction with Web design shops to build these Web
sites.

Many companies now recognize that the Internet has become strategic and
important for maintaining competitive advantage in a dynamic marketplace. They
realize that the Internet is transforming how many businesses operate and that
a new Web-centric business model, now commonly referred to as e-business, is
emerging. E-business combines the reach of the Internet with emerging and
existing technologies to enable companies to strengthen relationships with
customers and business partners, create new revenue opportunities, improve
operating efficiencies and enhance communication. Companies now seek to hire e-
business services firms that can combine strategic thinking, consulting skills
and technology expertise to rapidly develop innovative business models and
provide solutions that require deeper integration of existing applications.
These skills have become increasingly important to companies and a key
differentiating factor between services firms.

We believe the next-generation of e-business will offer dynamic and interactive
content that integrates data, video and audio. Similarly, we believe that
computing will be pervasive as business is transacted across multiple
communication platforms, including television sets, personal computers and
mobile devices. As a result, we believe that companies will need firms that can
develop innovative strategies and design systems that integrate new
technologies across these many platforms and can handle higher volumes of
transactions and traffic. Additionally, with the proliferation of new
technology, companies will require guidance to select and integrate appropriate
technologies.

PSW Solution

Extensive Technology Expertise: We Understand. We are technologists with a deep
understanding of software development and integration. Our technical expertise
enables us to provide solutions that integrate:

. Application Architectures. We develop open architectures that allow
companies to integrate new applications and the flexibility to easily add
and change content sources in order to quickly respond to changing market
conditions. These application architectures are configured to maximize
scalability and flexibility using common operating systems such as Unix and
NT.

. Interactive Applications. We identify the appropriate interactive
applications needed to fulfill our clients' business requirements. Our
technology expertise allows us to select the appropriate pre-packaged
applications, design and build custom applications and combine and integrate
them to create the desired functionality, including the presentation of
personalized content and e-commerce capability.

. Content Services. We enable interactive applications to utilize many types
of content, including information from internal databases and external
complementary service providers as well as external data, video and audio
feeds.

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. Communication Platforms. We design our solutions to enable our clients to
reach a large audience by delivering content and services over the Internet
and through television. We intend to expand our expertise to enable our
clients to deliver content and services to mobile devices as these
technologies develop.

Innovative and Forward Thinking: We Envision. We help companies understand the
business opportunities offered by adopting an e-business strategy. Using our
technology expertise, we typically work with companies to develop a sustainable
strategy and customized solution that will facilitate their transition to, and
continuing evolution as, an e-business. We evaluate interactive applications
and other technologies currently available in order to help our clients select
the ones most appropriate. Through our alliances with technology providers such
as Vignette, Mercury Interactive and Scientific-Atlanta, we have gained a
thorough understanding of their market leading products and, more importantly,
valuable insight into the creation and application of other next-generation
technologies. We use our technological insight to help companies develop e-
business solutions that incorporate today's leading interactive applications
and other technologies as well as enable companies to take advantage of next-
generation technologies.

Rapid and Reliable Execution: We Deliver. Utilizing the PSW Approach and our
deep technology expertise, we deliver e-business solutions in rapid timeframes.
The PSW Approach provides an iterative framework for helping a client quickly
define its strategy and design, develop and deploy an e-business solution. Our
thorough understanding of our alliance partners' technologies enables us to
customize and integrate their products quickly and reduces the overall time
needed to deploy an e-business solution. To further accelerate a client's
adoption and implementation of an e-business solution, we have also developed
the Digital Rethink Framework. This framework is a ready-to-use package of
integrated, interactive applications that can be quickly deployed with minimum
customization. To further increase the speed and reliability of our execution,
we employ knowledge management systems and processes to capture the
intellectual capital we gain through our collective experiences and to
disseminate it throughout our organization.

Strategy

Our goal is to be a leading e-business solutions provider. To achieve this
goal, we are pursuing the following strategies:

Attract New Clients and Expand Existing Client Relationships. We must continue
to target and attract clients that are innovators, early technology adopters
and market leaders. Through new and existing alliance partnerships, we hope to
gain referrals and to attract clients that seek solution providers with
extensive knowledge of our partners' products and technologies. We will also
seek to gain new clients through our informal relationships with venture
capital firms that are funding emerging technology companies. We believe that
our established record of delivering high-quality e-business solutions will
increase the amount, scope and sophistication of services requested by existing
clients. We believe client satisfaction reinforces our growing reputation as an
innovative provider of e-business solutions.

Expand Technology Expertise. We will continue to enhance our technology
expertise by identifying new technologies that we believe will have significant
impact on the evolution of e-business and by expanding existing product
development relationships with selected leading technology providers. We
believe our participation in the product development process gives us a deep
and thorough understanding of a provider's products and underlying technologies
and insight into next-generation technologies. Our Digital Rethink Center,
Benchmarking Center and regional ePerformance Centers of Excellence will
continue to serve as knowledge centers that fuel strategic and technical
innovation by accelerating the exchange of ideas.

Develop Exponets. We believe our alliance partner model provides us with a
competitive advantage. Our alliances are deeper and more strategic than a
traditional vendor relationship. We form partnerships with technology providers
who we believe offer products that have significant market potential and
enhance our ability to provide innovative solutions. These relationships can
include a range of activities, including joint marketing, product development
services, product deployment and integration of their products into e-business
solutions and providing client feedback to help our partners enhance their
products. We believe the nature of these alliances enables us to help develop
"ecosystems" centered around a leading technology provider in which we serve as
a catalyst for the widespread adoption of the provider's products. We call
these ecosystems "exponential networks" or "exponets" for short. By nurturing
exponets and fostering interconnections between them, we will create an
opportunity to access more potential clients, generate additional revenue and
establish ourselves as a thought leader.

Enhance Brand Awareness. We believe that enhancing market recognition of our
solutions will increase our visibility with potential clients, alliance
partners and prospective employees. We believe that maintaining a reputation
for delivering

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innovative e-business solutions will enhance our ability to win repeat business
from our existing clients and to attract new clients. We are currently in the
process of changing our name to Concero to brand our company and our services
to reflect our e-business capabilities. Our brand development programs will be
designed to reinforce our position as a national company with a proven record
of delivering e-business solutions.

Hire and Retain Qualified Professionals. Attracting and retaining professionals
is essential to our growth. We attract, hire, develop and retain personnel by
emphasizing the skills and values required to provide our services. We have
increased our team of dedicated recruiters to support our growth and have
implemented an employee referral program which provides many new hires. To
retain our professionals, we will continue to foster our company culture,
provide ongoing training and career development opportunities and provide
competitive compensation.

Grow Through Acquisitions. We intend to pursue acquisitions that provide access
to complementary skills or additional talented professionals, expand our
geographic presence and increase our client base. Acquisitions will be driven
by market opportunity and client need.

Services

We deliver our services through our eStrategy, eSolutions, ePerformance and eTV
and Broadband practices.

eStrategy. We help clients develop e-business strategies. By using our Digital
Rethink process, clients are able to explore the business opportunities offered
by emerging technologies. Through Digital Rethink, we work with clients to
develop e-business strategies that address their business objectives.

eSolutions. We define, design, develop and deploy innovative, custom e-business
solutions to meet our clients' business needs. Our solutions utilize open
architectures that allow clients to integrate new interactive applications and
quickly respond to changing market conditions. Using our technology expertise,
we identify and select the appropriate technology products, design and build
custom applications and combine and integrate them to meet the client's desired
functionality. We also integrate interactive applications to enable the use of
many types of content, including information from internal databases and
external complementary service providers as well as external data, video and
audio feeds. Additionally, our solutions often incorporate application
architectures that allow clients to reach a large audience by delivering
content and services over the Internet, through television and through mobile
devices as these technologies develop.

To further accelerate a client's adoption and implementation of our e-business
solution, we have developed the Digital Rethink Framework that consists of a
ready-to-use package of integrated, interactive applications that can be
quickly deployed with minimum customization. The Digital Rethink Framework
substantially reduces the time required to define an architecture and select
and integrate interactive and other applications. The framework enables the key
elements of e-business solutions, including e-commerce transaction platforms,
site analysis, content management, data management, security and interactive
capabilities.

ePerformance. We approach performance evaluation from the perspective of the
client's customer. We help companies enhance scalability, improve reliability
and manageability and ensure proper functioning of Web-based business
applications. We use leading testing tool software providers such as Mercury
Interactive and Segue to provide clients with attractive ePerformance
solutions. Our best practice life-cycle approach helps us to reduce the time
needed to test for and fix performance problems. ePerformance services are
delivered at the client location, our Benchmarking Center in Austin, and at our
three regional ePerformance Centers of Excellence.

eTV and Broadband. We deliver interactive television and other broadband
solutions to clients. We assist companies to integrate audio, video and data
and deliver that content over the Internet, through television, or, in the
future, through mobile devices. We have built an eTV Development Center where
we design, construct and showcase our eTV and cable network applications. We
believe we are positioned to be a leader in this industry through our work with
Scientific-Atlanta and others companies in the interactive television and
broadband industries. For example, Scientific-Atlanta named us the third-party
certification provider for their Explorer 2000 digital set-top box platform.

We also provide three of our clients with maintenance and support services for
their existing software products.

PSW Approach

Our solutions are delivered using a phased development process and documented
methodologies which together we call the PSW Approach. We believe that
successful solutions require a well designed development process and
methodologies to organize the project team to efficiently accomplish numerous
interrelated tasks. This phased approach also provides the

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<PAGE>

client with several cost/benefit checkpoints and helps to align client
expectations with solution objectives. The methodologies are independent of any
specific technology and, therefore, provide a common structure across solutions
allowing our consultants to tap the experience, ideas and measurements of other
teams that have worked on similar engagements or on projects with technology
vendors. In addition, our methodologies documentation includes a description of
the team structure, roles and responsibilities of both us and our client
personnel, as well as templates, samples, tools, tips and techniques for
completing deliverables.

The PSW Approach accelerates deployment of e-business solutions, improves the
quality of the solution and addresses business and technological evolution. The
methodology not only benefits the solution through the development process, but
also assists the client in maintaining and extending the solution after
deployment. The PSW Approach is designed to reduce risks to ourselves and our
client, to maximize client satisfaction and to allow us to efficiently transfer
expertise to the client.

The development process consists of the following phases: Digital Rethink,
Define, Design, Develop and Deploy.

Digital Rethink. During the Digital Rethink phase, we help companies define
their strategies, business models and action plans for using Internet,
interactive TV and Broadband technologies. We educate clients on the key
principles of the digital economy, covering areas such as branding,
personalization techniques, technology options and customer acquisition and
retention strategies.

Define. During the Define phase, we develop an operational plan and technology
architecture that supports the client's strategy. Our teams use one of two
architectural approaches in this phase, the Digital Rethink Framework or a
custom architecture. We develop custom architectures for clients if their needs
dictate a different set of software products or if they are already using
components that are not part of the Digital Rethink Framework.

Design. During the Design phase, we develop the detailed design specifications
and complete a baseline configuration of the software products needed to create
the technical solution. The project team designs components that will be
developed to complete the architecture. During this phase, we deliver
prototypes that help clients visualize their new e-businesses. This process is
typically iterative with feedback and testing results incorporated throughout
the process.

Develop. During the Develop phase, we build the technical solution that will be
deployed and perform tasks such as coding, testing and software integration.
Once the technical solution has been built, we use our ePerformance expertise
to thoroughly test it. At the end of this phase, we are in position to deploy
our solution.

Deploy. During the Deploy phase, we launch the completed technical solution
and we educate the client to provide ongoing support and maintenance. In
addition, we monitor the Web site and identify functional, technical and
performance improvements that can be incorporated into the next generation of
the Web site. This discovery process culminates in a project work plan for the
design and development of the next generation of the client's e-business
solution.

Alliances

We believe that our alliances with leading technology providers such as
Vignette, Mercury Interactive and Scientific-Atlanta enable us to develop
extensive knowledge of their technologies and other applications as well as
provide additional insight into developing and deploying e-business solutions.
We believe our alliances are deeper and more strategic than a traditional
vendor relationship due to our involvement with our partners' product
development. These relationships encompass a range of activities, including:

. joint marketing;

. product development services;

. product deployment and integration of our alliance partners' products into
our clients' e-business solutions;

. providing client feedback to help our partners enhance their products; and

. integration and certification of third party applications for use with our
partners' products.

We have substantial alliances with:

Vignette Corporation.

Vignette supplies software applications for building e-businesses. Vignette's
software applications are used by more than 500 dot.com and Fortune 500
companies.

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Our relationship with Vignette began in 1999 when they engaged us to provide
them with software development services. During the fourth quarter of 1999, we
became a Vignette Consulting Alliance Partner, and we are now engaged by a
number of companies using Vignette's software as part of their e-business
solutions. In January 2000, we launched, in conjunction with Vignette's
Professional Services group, a joint e-performance service offering at
Vignette's international sales meeting.

We share a number of clients with Vignette, including SBC Communications,
Nationwide Insurance, Entrepreneur.com, Miller Freeman PSN and good2cu.com.
Vignette software is incorporated into our Digital Rethink Framework.

Mercury Interactive Corporation.

Mercury Interactive provides Internet application testing products designed to
help businesses evaluate and enhance their customers' experiences.

We began working with Mercury in 1998 and we partnered with Mercury to beta
test Topaz, Mercury's application performance management solution for Web
sites. We also help our clients assess their e-business performance using
Mercury's tools. We are now one of Mercury's Channel Alliance Program partners
and a National Certified Service Provider. Our Mercury relationship includes
joint marketing and sales campaigns. We participated in Mercury's national
sales meeting in January 2000. In February 2000, we jointly sponsored a
national seminar series for optimizing e-business performance.

We share a number of clients with Mercury, including Tivoli Systems, Inc., Kana
Communications and living.com. We also feature Mercury tools in our Digital
Rethink Framework.

Scientific-Atlanta, Inc.

Scientific-Atlanta supplies broadband communications systems, satellite-based
video, voice and data communications networks and worldwide customer service
and support.

Scientific-Atlanta has been our customer since 1991. We have provided
Scientific-Atlanta with a variety of services, including systems architecture
consulting, software development strategy and assessment, assistance with their
development of analog network solutions for set-top boxes, and system and
network management projects related to the Scientific-Atlanta Explorer family
of digital set-top systems.

Scientific-Atlanta has chosen us as the third party certification provider for
their CreativEdge Application Developers program. We award CreativEdge
certification to an application after completing an extensive testing process
to ensure that the application, such as enhanced broadcasting or e-mail, is
stable within Scientific-Atlanta's digital set-top box environment. Our
participation in Scientific-Atlanta's CreativEdge Developers Program has
provided us access to interactive television application software providers
seeking expertise and assistance. As a result, we have been engaged by
companies such as Commerce.TV, DIVA and Intertainer to develop and assist with
the development of interactive, interactive set-top box applications.

We have a number of other alliance relationships with leading technology
vendors including Segue, Tivoli, Open Market and Microsoft. Our strategy is to
initiate, create and manage alliances with leading technology vendors with
products that we anticipate will have significant market opportunities.

Case Studies

The following case studies describe four representative engagements:

Commerce.TV.

Commerce.TV provides an interactive television solution designed to enable
companies to sell products directly to consumers using cable and satellite
television.

We were engaged to develop an e-commerce application for Commerce.TV that would
allow cable TV subscribers to conduct commerce over the television. We
designed, built and tested Commerce.TV's set-top based software. In addition,
we are collaborating with Commerce.TV to help them establish the broadband
infrastructure required to handle the high volumes of traffic these
capabilities are expected to generate.

We initially designed this application to run on Scientific-Atlanta's Explorer
2000 set-top box and have been engaged to design the application to run on the
General Instruments digital cable platform. We expect that future phases of the
project will include the development of an electronic buying guide system that
provides commerce capabilities to television viewers.

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<PAGE>

Concur Technologies.

Concur is a provider of business-to-business workplace e-commerce solutions.

Concur engaged us to build a universal engine for document exchange which would
enable users with different protocols to use Concur's business-to-business
procurement network, called Concur Commerce Network. As a result of our work,
purchasers and vendors are able to communicate using various established
commercial protocols without having to rearchitect their internal systems to
specific communication standards. This allows a greater number of suppliers and
buyers into the community, greatly expanding the procurement network. The
Concur Commerce Network was named one of Information Week's 1999 Products of
the Year.

good2cu.com.

good2cu.com is a strategic Internet partner for credit unions, allowing credit
unions to extend their Web presence and serve their on-line members.

good2cu.com engaged us to create a portal that could be used by its credit
union clients.

Our e-business solution incorporated good2cu.com's strategic business and
technology goals into an integrated credit union industry portal. Once
developed and deployed, our solution will enable good2cu.com to fulfill its
commitment to providing its clients' members with access to marketing, content
and competitive analysis tools through one on-line destination.

Togglethis.

Togglethis is an interactive entertainment and advertising company. Its
technology delivers rich media content for on-line marketing and brand
building.

Togglethis engaged us to help create the architecture for the second version of
the toggle player.

We assisted in the technical design, implementation and testing of the engine
player as well as a translation tool for the product. The second version of the
player included increased functionality. As a result, this version is simpler
for users to download, has personalization and advertising-tracking abilities,
and uses audio-visual streaming.

Sales and Marketing

We market e-business professional services through 19 dedicated marketing and
sales professionals who work closely with our regional and practice directors.
The marketing team works with the practice directors to secure new
opportunities and manage the sales process. The regional directors collaborate
with the sales professionals to form a joint sales approach for identifying and
winning new clients and follow-on business.

We approach sales on a regional basis. Our regional model enables the people
closest to the clients to perform both the sales and delivery functions and to
have complete account ownership. We believe that this regional focus will help
us develop strong market presence and name recognition in our local markets.

We believe that the opportunities afforded through the creation of e-business
span a broad range of industries. Accordingly, we market our services both to
Fortune 1000 corporations and to early stage companies whose business models
are designed and built around the Internet. We also selectively market to
technology providers.

We supplement our business development efforts with marketing and
communications activities. These activities include:

. direct mail and e-mail campaigns targeting corporate executives;

. public speaking engagements;

. attendance at industry conferences;

. participation in industry organizations; and

. joint marketing activities with alliance partners.

We are changing our name to Concero and launching our first major branding
campaign. Concero is a Latin word that means to connect, join or bring
together. We believe our new name reflects our business strategy of building
exponets where we connect our clients and alliance partners in broad and
interlocking technology ecosystems. We have engaged a national branding agency
and a public relations firm to assist with the branding and on-going awareness
activities.

The purpose of our ongoing marketing activities will be to deliver our message
to prospective and existing clients and to create awareness around the new
Concero brand. We believe increased market awareness will provide access to a
larger sales pipeline and recruiting pool and additional public relations
opportunities.

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Clients

The following is a representative list of our clients for each of our
practices:

<TABLE>
<CAPTION>
eTV and
eStrategy eSolutions ePerformance Broadband
---------------- ------------------- ------------------- ------------------
<S> <C> <C> <C>
3M Concur Technologies Concur Technologies Commerce.TV
Crowley Maritime Dell Dell ICTV
good2cu.com good2cu.com living.com Intertainer
Miller Freeman
PSN Vignette Tivoli Scientific-Atlanta
Traq Wireless Warburg Dillon Read Warburg Dillon Read WebTV
</TABLE>

In addition, we provide maintenance and support services to IBM, including
Lotus, Northern Telecom and Compaq. In 1999, our five largest clients accounted
for 51% of our revenues.

Employees and Culture

As of February 29, 2000, we had 404 employees, 314 of whom were technical staff
performing consulting services and 90 were management and administrative
personnel performing marketing, sales, human resources, finance, accounting,
legal, information technology and administrative functions.

We must continue to identify, recruit, hire, develop and retain outstanding
professionals. We believe our success in doing this will depend on our ability
to maintain our company culture, to provide ongoing training and career
development opportunities and to offer competitive compensation.

Recruiting. We dedicate significant resources to recruiting. We employ a team
of nine full-time recruiting professionals in several of our offices so they
can stay closely aligned with our local business needs. We emphasize technical
skills, teamwork, professionalism, commitment to learning and leadership. We
believe our employees provide the best source for strong candidates and have
developed an innovative employee referral program that results in many new
hires.

Career Development and Training. Our success depends on keeping our workforce
aware of the latest technologies and tools. We utilize many different
techniques, including classroom, self-paced and Web-based training. We have
made significant investments in educating our consultants on new technologies,
including XML and Java, and products from our technology provider clients,
Vignette and Mercury Interactive. We also concentrate on developing project
management, communication and people management skills. We are committed to
helping people grow and succeed in their careers. We have defined multiple
career paths so that our people can grow into senior technology, project
management and business development roles.

Compensation. We offer compensation packages that include competitive salaries,
benefits and bonuses. We believe that linking a portion of the employee's
compensation to our success through bonuses and stock options fosters an
entrepreneurial culture and encourages behavior that benefits our clients, our
team members and our company.

Culture. We cultivate our company culture through communicating and nurturing
the same values emphasized in our recruiting process. We hold a two-day new
employee orientation in Austin that focuses on describing our culture and
values, meeting other employees from all our locations and learning about our
strategic business initiatives. Each office conducts "all-hands" meetings on a
quarterly basis. We also utilize internal email newsletters to communicate
important events, news from client projects, and other key project information
as well as rewards and promotions. Periodic employee surveys help us target new
programs appropriately.

Competition

We compete in the e-business services market, which is relatively new and
intensely competitive. We expect competition to intensify as the market evolves
and consolidates. We compete with companies in the following categories:

. Internet services firms, such as iXL, Proxicom, Razorfish, Scient, US Web
and Viant;

. software engineering firms, such as Cysive;

. large systems integrators, such as Cambridge Technology Partners, EDS, IBM
and Sapient;

. management consulting firms, such as McKinsey and Boston Consulting Group;

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<PAGE>

. the consulting divisions of Big Five accounting firms; and

. internal IT departments of current and potential clients.

Many of our competitors have longer operating histories, larger client bases,
longer relationships with clients, greater brand or name recognition and
significantly greater financial, technical, marketing and public relations
resources than we do. Several competitors have announced their intention to
offer a broader range of services than they currently provide.

We believe that the main competitive forces in the e-business services industry
are:

. the quality of e-business solutions;

. the speed of development;

. technical and business expertise;

. project management skills;

. referenceable customer base;

. integrated methodologies;

. effectiveness of business development efforts; and

. brand recognition.

We believe that we compete favorably with respect to these factors.

Our industry has low barriers to entry. We do not own any technologies that
effectively preclude or inhibit competitors from entering our industry.
Existing or future competitors may develop solutions that are superior or
substantially similar to ours. The cost to develop and provide information
technology consulting services are relatively low. Therefore, we expect to
continue to face additional competition from new entrants into our industry.

Intellectual Property Rights

We have developed proprietary methodologies, tools, processes and software in
connection with delivering our services. We believe the intellectual capital we
gain by our participation in the product development process of our alliance
partners and other technology providers gives us a competitive advantage. We
also have developed the Digital Rethink Framework as well as reusable object-
based applications for interactive and enhanced television applications. We
rely on a combination of trade secret, nondisclosure and other contractual
arrangements, and copyright and trademark laws, to protect our proprietary
rights. Existing trade secret and copyright laws afford us only limited
protection. We do not possess any patents.

We typically enter into confidentiality and non-disclosure agreements with our
employees and generally require that our clients enter into similar agreements.
These agreements are intended to limit access to and distribution of our
proprietary information. We cannot assure you that the steps we have taken in
this regard will be adequate to deter misappropriation of our proprietary
information or that we will be able to detect unauthorized use and take
appropriate steps to enforce our intellectual property rights.

Legal Proceedings

We are involved from time to time in routine legal proceedings incidental to
the conduct of our business. We are not currently a party to any material legal
proceedings.

30
<PAGE>

Management

Executive Officers and Directors

The following table sets forth certain information concerning our executive
officers and directors as of February 29, 2000:

<TABLE>
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Name Age Position
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Timothy D. Webb......... 39 President, Chief Executive Officer and Director
Keith D. Thatcher....... 41 Chief Financial Officer, Treasurer and Senior Vice President of Finance
Dean H. Blythe.......... 41 Senior Vice President, Corporate Development
Ted L. Downey........... 50 Senior Vice President, Western Area
Pedro A. Fernandez...... 34 Senior Vice President of Corporate Strategy and Marketing
John M. Velasquez....... 36 Senior Vice President, Central Area
Mary Anne Clement....... 40 Vice President, People and Culture
Kenneth L. Drake,
Ph.D. ................. 48 Vice President, ePerformance
Cathy S. Hetzel......... 48 Vice President, eTV
Nancy A. Richardson,
Esq. .................. 40 General Counsel, Secretary and Vice President
Wade E. Saadi........... 50 Chairman of the Board
Edward C. Ateyeh, Jr. .. 47 Director
Thomas A. Herring....... 49 Director
W. Frank King, Ph.D. ... 60 Director
Kevin B. Kurtzman....... 52 Director
Michael J. Maples....... 57 Director
</TABLE>

Timothy D. Webb has served as our President, Chief Executive Officer and a
director of PSW since August 1998. Prior to joining PSW, Mr. Webb was Vice
President, Enterprise Solutions for Syntel, Inc., an applications management
company. From June 1995 through February 1998, Mr. Webb was employed by Oracle
Corporation, last serving as a Regional Vice President for Oracle's Consulting
Services Division. From 1983 through May 1995, Mr. Webb was employed by
Andersen Consulting rising to the level of Associate Partner before leaving to
join Oracle. Mr. Webb holds a bachelor's degree in systems management
engineering from Princeton University.

Keith D. Thatcher was promoted to Senior Vice President of Finance in February
2000. Mr. Thatcher continues to serve as our Chief Financial Officer and
Treasurer, positions he has held since May of 1998 and October 1996,
respectively. From October 1994 to June 1996, Mr. Thatcher was Chief Financial
Officer, Secretary and Treasurer of Tanisys Technology, Inc., a technology
start-up company involved in developing commercial applications for capacitive
touch technology. Mr. Thatcher served as Vice President and Treasurer for
Kinetic Concepts, Inc., a medical services and products company, from 1987 to
1994. Mr. Thatcher holds a bachelor's degree in accountancy from Northern
Arizona University.

Dean H. Blythe joined PSW in February 2000 to serve as Senior Vice President,
Corporate Development. From October 1994 to March 2000, Mr. Blythe was Senior
Vice President, Corporate Development for Hearst-Argyle Television, Inc. Prior
to that, Mr. Blythe was Vice President, Business Development at A.H. Belo
Corporation. Mr. Blythe holds a bachelor's degree in economics from Miami
University and a J.D. from Duke University.

Ted L. Downey was named Senior Vice President, Western Area in February 2000,
after joining us in December 1999. From February 1996 to December 1999, Mr.
Downey was a Vice President with Oracle Corporation. Prior to joining Oracle,
Mr. Downey was with Intergraph Corporation. Mr. Downey holds a master's degree
in economics and a bachelor's degree in political science from the University
of Illinois.

Pedro A. Fernandez was named Senior Vice President of Corporate Strategy and
Marketing in February 2000, having served previously as our Vice President of
Corporate Strategy and Marketing since January 1999. Prior to joining PSW,
Mr. Fernandez served as Vice President, People Soft Solutions for Syntel, Inc.
from April 1998 to November 1998. Mr. Fernandez was a Director for Cambridge
Technology Partners from January 1994 to April 1998 and prior to that was
employed by Andersen Consulting. Mr. Fernandez holds a bachelor's degree in
computer engineering from the University of Miami.

John M. Velasquez was named our Senior Vice President, Central Area in February
2000, having previously served as our Vice President of Enterprise Solutions
since January 1999. Prior to joining PSW, Mr. Velasquez served as Vice
President, Data Warehousing for Syntel, Inc. from April 1998 until January
1999. From 1994 to 1998, Mr. Velasquez was

31
<PAGE>

president of a consulting firm specializing in systems design and management
and prior to that was employed by Andersen Consulting. Mr. Velasquez holds a
bachelor's degree in industrial engineering from Stanford University.

Mary Anne Clement was named our Vice President, People and Culture in February
2000, after joining us in August 1999 as Associate Vice President, Special
Operations. From December 1993 to August 1999, Ms. Clement was a Director with
McCall Consulting Group. Ms. Clement holds a MBA from Southern Methodist
University and a bachelor's degree from Randolph-Macon Woman's College.

Kenneth L. Drake, Ph.D. was named our Vice President, ePerformance in February
2000, having previously served as our Vice President of Software Research and
Development Services since February 1999, and as our Vice President of
Enterprise Solutions Migration Services since May 1998. Prior to joining PSW,
Mr. Drake served as President of Technology Business Ventures and Savantage,
Inc., both of which were start-up companies in the software industry, from
October 1994 to April 1998. From 1991 to 1994, Mr. Drake was a Manager of
Business Development for Microelectronics and Computer Technology Corp. Mr.
Drake holds a Ph.D. degree in electrical engineering from the University of
Michigan.

Cathy S. Hetzel was named Vice President eTV in February 2000 after serving as
Senior Vice President, Residential Business of Digital Cable Radio Associates
in 1998 and 1999. Ms. Hetzel had previously served as Senior Vice President,
Affiliate Sales & Marketing and Sales and Affiliate Relations for Digital Cable
Radio Associates between 1994 and 1998. Ms. Hetzel attended San Diego State
University.

Nancy A. Richardson, Esq. was named our General Counsel, Secretary and Vice
President in May 1998 after providing legal services to us since May 1997. Ms.
Richardson had previously been a sole practitioner from November 1995 to May
1997. Ms. Richardson began her career with Ernst & Young. Ms. Richardson holds
JD and MBA degrees from the University of Texas and a bachelor's degree in
accounting from St. Edwards University.

Wade E. Saadi has served on our board of directors since October 1996. He is
the founder of Pencom Systems Incorporated, a privately held New York
corporation, and has served as its President and Chief Executive Officer since
its inception in 1973. In 1996, Mr. Saadi won the Technology Entrepreneur of
the Year Award in New York City. Mr. Saadi is a governor of the Board of
Collectors Club and a regional vice president of the United States Philatelic
Classes Society. Mr. Saadi attended the Polytechnic Institute of Brooklyn where
he majored in chemical engineering.

Edward C. Ateyeh, Jr. has served on our board of directors since October 1996.
He currently serves as the Executive Vice President of Pencom Systems
Incorporated, where he has been employed since 1977. Mr. Ateyeh served as
President of Pencom's software division, the predecessor to PSW, from 1989 to
1992. In 1994, Mr. Ateyeh founded Collective Technologies, Pencom's systems
management consulting division where he currently serves as President and Chief
Executive Officer. Mr. Ateyeh is a board member of the Economic Development
Council of the Greater Austin Chamber of Commerce, a member of the Austin
Community College Software Industry Advisory Council, as well as the Austin
Software Council's President/CEO Peer Group. Mr. Ateyeh holds a bachelor's
degree from the University of Notre Dame.

Thomas A. Herring has served on our board of directors since January 1997.
Since October 1998, he has served as a Partner in Polaris Venture Partners.
From December 1997 to October 1998, Mr. Herring served as Senior Vice President
of Compuware Corp., which acquired Numega Technologies, Inc. From May 1996 to
December 1997, Mr. Herring served as Chief Executive Officer of Numega
Technologies, Inc. From July 1995 to May 1996, Mr. Herring was Vice President
of Corporate Marketing of Sybase, Inc., a software company. Mr. Herring was
selected as the 1995 Software Industry Sales and Marketing Executive of the
Year by Upside Magazine. He serves on the board of directors of Allaire
Corporation. Mr. Herring holds a bachelor's degree in marketing and a master's
degree in mathematics from Texas Tech University.

W. Frank King, Ph.D. has served on our board of directors since October 1996.
From 1992 to August 1998, Dr. King served as our President and Chief Executive
Officer. From 1988 to 1992, Dr. King was Senior Vice President of the Software
Business Group of Lotus, a software publishing company. Dr. King serves on the
boards of directors of Excalibur Technologies Corporation, Auspex Systems,
Inc., Natural Microsystems, Inc., Eon Communications, Inc. and Perficient. Dr.
King holds a doctorate in electrical engineering from Princeton University, a
master's degree in electrical engineering from Stanford University and a
bachelor's degree in electrical engineering from the University of Florida.

Kevin B. Kurtzman has served on our board of directors since December 1996. He
has served as the Chief Financial Officer of Pencom Systems Incorporated since
July 1997. Prior to that, Mr. Kurtzman had been with Margolin, Winer & Evens
LLP, a certified public accounting firm, since 1972 and was a Partner and a
member of its executive committee and an Audit and Business Advisory Partner.
Mr. Kurtzman is a former officer and director of CPA Associates International.
Mr. Kurtzman holds a bachelor's degree in accounting from Queens College of the
City University of New York.

32
<PAGE>

Michael J. Maples has served on our board of directors since December 1996. Mr.
Maples held several positions with Microsoft Corporation, a technology company,
from April 1988 through July 1995, where his last position was Executive Vice
President of Worldwide Products. Mr. Maples serves on the boards of directors
of Lexmark International Inc., Mission Critical Software, and J.D. Edwards and
Company. Mr. Maples holds a master's degree from Oklahoma City University and a
bachelor's degree in electrical engineering from the University of Oklahoma.

33
<PAGE>

Principal and Selling Stockholders

This table sets forth, as of February 29, 2000, information regarding the
beneficial ownership of our outstanding common stock, both before this offering
and immediately following this offering by:

. each person who is known by us to own beneficially more than five percent of
our outstanding common stock;

. each of our directors and each of our executive officers who constitute
"named executive officers" under Item 402 of Regulation S-K;

. each person who is selling stock in this offering; and

. all directors and executive officers as a group.

The following calculations of the percentage of outstanding shares are based on
9,785,163 shares of common stock outstanding as of February 29, 2000 and
assumes no exercise of the underwriters' over-allotment option. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities, subject to community property laws, where applicable.
Shares of common stock subject to options and warrants that are presently
exercisable or exercisable within 60 days of February 29, 2000 are deemed to be
outstanding and beneficially owned by the person holding that option or warrant
for the purpose of computing the percentage of ownership of that person, but
they are not deemed outstanding for the purpose of computing the percentage of
any other person.

<TABLE>
-------------------------------------------------------------
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Before the Number of Owned After the
Offering Shares to Offering
-------------------- Be Sold in --------------------
Name and Address of Beneficial Owner Number Percentage the Offering Number Percentage
- ------------------------------------ --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Officers and Directors:
Edward C. Ateyeh, Jr. .. 1,658,115 16.9% 339,876 1,318,239 11.9%
Kenneth L. Drake,
Ph.D. ................. 16,500 * 6,600 9,900 *
Pedro A. Fernandez...... 36,250 * -- 36,250 *
Thomas A. Herring....... 29,421 * 8,269 21,152 *
W. Frank King, Ph.D. ... 573,046 5.8 117,878 455,168 4.1
Kevin B. Kurtzman....... 34,010 * 9,206 24,804 *
Michael J. Maples....... 55,278 * 13,551 41,727 *
Wade E. Saadi........... 1,658,114 16.9 339,876 1,318,238 11.9
Brent R. Terry.......... 17,798 * -- 17,798 *
John M. Velasquez....... 85,000 * 10,000 75,000 *
Timothy D. Webb......... 468,216 4.6 58,250 409,966 3.6
All directors and
executive officers as a
group (17 persons)..... 4,667,040 44.3 914,306 3,752,734 31.8
Other 5% Stockholders:
Edgar G. Saadi.......... 1,640,257 16.7 335,069 1,305,188 11.8
Other Selling
Stockholders:
Nancy A. Richardson,
Esq. .................. 7,000 * 3,300 3,700 *
Kasaundra L. Smith...... 625 * 625 -- *
Genevieve Thatcher...... 28,292 * 1,900 20,792 *
Keith D. Thatcher....... 28,292 * 5,600 20,792 *
</TABLE>
- -------
* Indicates less than 1%

Officers and Directors. Additional information regarding the beneficial
ownership of shares held by our officers and directors is contained below.
Except as indicated below, the address for each officer and director is c/o PSW
Technologies, Inc., 6300 Bridgepoint Parkway, Building 3, Suite 200, Austin,
Texas 78730.

. Edward C. Ateyeh, Jr. Includes 17,857 shares issuable upon exercise of
options and 24,873 shares issuable upon exercise of warrants. Mr. Ateyeh's
address is c/o Pencom Systems Incorporated, 40 Fulton Street, New York, New
York 10038.

34
<PAGE>

. Kenneth L. Drake, Ph.D. Includes 16,500 shares issuable upon exercise of
options.

. Pedro A. Fernandez. Includes 31,250 shares issuable upon exercise of
options.

. Thomas A. Herring. Includes 29,421 shares issuable upon exercise of options.

. W. Frank King, Ph.D. Includes 80,000 shares issuable upon exercise of
options.

. Kevin B. Kurtzman. Includes 34,010 shares issuable upon exercise of options.
Mr. Kurtzman's address is c/o Pencom Systems Incorporated, 40 Fulton Street,
New York, New York 10038.

. Michael J. Maples. Includes 47,278 shares issuable upon exercise of options.

. Wade E. Saadi. Includes 17,857 shares issuable upon exercise of options and
24,872 shares issuable upon exercise of warrants. Mr. Saadi's address is c/o
Pencom Systems Incorporated, 40 Fulton Street, New York, New York 10038.

. Brent R. Terry. Includes 17,798 shares issuable upon exercise of options.
Mr. Terry's employment with us terminated in February 2000.

. John M. Velasquez. Includes 37,500 shares issuable upon exercise of options.

. Timothy D. Webb. Includes 385,716 shares issuable upon exercise of options.
Of these shares, 285,716 would be unvested and subject to repurchase rights
if exercised.

. All executive officers and directors as a group. Includes the beneficial
ownership of each of the officers and directors listed above and includes
6,070 shares owned by Mr. Thatcher, 1,900 shares owned by Mr. Thatcher's
wife and 20,322 shares issuable upon exercise of options held by Mr.
Thatcher. Also includes 7,000 shares issuable upon exercise of options held
by Ms. Richardson.

Other 5% Stockholders. Mr. Edgar G. Saadi's beneficial ownership includes
24,872 shares issuable upon exercise of warrants. Mr. Saadi's address is c/o
Pencom Systems Incorporated, 40 Fulton Street, New York, New York 10038.

Other Selling Stockholders.

. Nancy A. Richardson, Esq. Includes 7,000 shares issuable upon exercise of
options.

. Kasaundra L. Smith. Includes 625 shares issuable upon exercise of options.

. Genevieve Thatcher. Includes 6,070 shares owed by Keith Thatcher, Mrs.
Thatcher's husband, and 20,322 shares issuable upon exercise of options held
by him.

. Keith D. Thatcher. Includes 20,322 shares issuable upon exercise of options
held by Mr. Thatcher and 1,900 shares owned by Mr. Thatcher's wife.

35
<PAGE>

Description of Capital Stock

Upon completion of this offering, our authorized capital stock will consist of
34,000,000 shares of common stock, $0.01 par value per share, and 1,000,000
shares of preferred stock, $0.01 par value per share, issuable in series. The
following summary is qualified in its entirety by reference to our certificate
of incorporation and bylaws, copies of which are filed as exhibits to or
incorporated by reference in the registration statement of which this
prospectus is a part.

Common Stock

Holders of our common stock are entitled to one vote per share on all matters
to be voted upon by the stockholders. The holders of common stock are not
entitled to cumulate voting rights with respect to the election of directors,
and as a result, minority stockholders will not be able to elect directors on
the basis of their votes alone. Subject to preferences that may be applicable
to any then outstanding shares of preferred stock, holders of common stock are
entitled to receive ratably such dividends as may be declared by the board of
directors out of legally available funds. In the event of our liquidation,
dissolution or winding up, holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities and the
liquidation preference of any then outstanding preferred stock. Holders of our
common stock have no preemptive, conversion or other rights to subscribe for
additional securities. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are, and
all shares of common stock to be outstanding upon completion of the offering
will be, validly issued, fully paid and nonassessable.

As of December 31, 1999, there were outstanding 9,666,535 shares of common
stock, options to purchase 2,544,231 shares of common stock for issuance under
the company's stock option plan and warrants to purchase 333,271 shares of
common stock. Upon completion of this offering, 10,916,535 shares of common
stock will be outstanding, assuming no exercise of the underwriters' over
allotment option and no exercise of options or warrants after December 31,
1999.

Preferred Stock

Our board of directors has the authority, without further action by the
stockholders, to issue up to 1,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of such series, without any
further vote or action by stockholders. The issuance of preferred stock could
adversely affect the voting power of holders of our common stock and the
likelihood that such holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying, deferring or preventing a
change in control of our company. Accordingly, the issuance by us of shares of
preferred stock may discourage bids for our common stock or may otherwise
adversely affect the market price of our common stock. We have no present plan
to issue any shares of preferred stock.

Warrants

We have warrants outstanding for the purchase of 333,271 shares of our common
stock with a weighted average exercise price of $0.04 per share. Warrants may
be partially exercised or exercised in full upon payment to us of the exercise
price stated on the face of the warrant. Warrants are adjusted for any stock
dividend, stock split or reverse stock split that we may effect. If we
undertake a reorganization, recapitalization, consolidation or merger, warrant
holders will have the right to purchase the number of securities that the
warrant holder would have been able to receive had the warrant holder been a
common stock holder immediately prior to the reorganization, recapitalization,
consolidation or merger. Warrant holders have also been granted registration
rights, as described below, for all common stock they own. We have agreed to
indemnify our warrant holders for any liability they may incur as a result of
our breach of their warrant agreement.

Registration Rights

We have granted registration rights to a number of our stockholders.
Stockholders with registration rights may require us to register their shares
of common stock if we register the common stock of any of our stockholders in
an underwritten public offering, unless shares are registered on Form S-8. All
of these registration rights are subject to conditions and limitations,
including the right of the underwriters of an offering to limit the number of
shares included in the registration. Stockholders must pay expenses related to
the registration and distribution of their shares of common stock.

36
<PAGE>

Delaware Anti-Takeover Law and Certain Charter Provisions

Delaware anti-takeover statute. We are subject to the provisions of Section 203
of the Delaware General Corporation Law, an anti-takeover law. Subject to
certain exceptions, the statute prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless

. prior to such date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;

. upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and
also officers and (y) by employee stock plans in which employee participants
do not have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer; or

. on or subsequent to such date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.

For purposes of Section 203, a "business combination" includes a merger, asset
sale or other transaction resulting in a financial benefit to the interested
stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years prior to the date of
determination whether the person is an "interested stockholder," did own, 15%
or more of the corporation's voting stock.

Certificate of Incorporation. Our certificate of incorporation provides:

. for the authorization of the board of directors to issue, without further
action by the stockholders, up to 1,000,000 shares of preferred stock in one
or more series and to fix the rights, preferences, privileges and
restrictions thereof; and

. that any action required or permitted to be taken by our stockholders must
be effected at a duly called annual or special meeting of the stockholders
and may not be effected by a consent in writing.

These provisions are intended to enhance the likelihood of continuity and
stability in the composition of the board of directors and in the policies
formulated by the board of directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of our
company. These provisions are designed to reduce our vulnerability to an
unsolicited proposal for a takeover that does not contemplate the acquisition
of all of our outstanding shares, or an unsolicited proposal for the
restructuring or sale of all or part of our company. These provisions, however,
could discourage potential acquisition proposals and could delay or prevent a
change in control of our company. These provisions may also have the effect of
preventing changes in our management.

37
<PAGE>

Underwriting

Under the terms and subject to the conditions contained in an underwriting
agreement, the underwriters named below, for whom J.P. Morgan Securities Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation, SG Cowen Securities
Corporation and Adams, Harkness & Hill, Inc. are acting as representatives,
have severally agreed to purchase, and we and the selling stockholders have
agreed to sell to them, the respective number of shares of common stock set
forth opposite their names below.

<TABLE>
<CAPTION>
----------------
Number of Shares
Underwriters ----------------
<S> <C>
J.P. Morgan Securities Inc.................................
Donaldson, Lufkin & Jenrette Securities Corporation........
SG Cowen Securities Corporation............................
Adams, Harkness & Hill, Inc................................
----------------
Total..................................................
================
</TABLE>

The underwriters are offering the common stock subject to their acceptance of
the common stock and subject to prior sale. The underwriting agreement provides
that the obligation of the several underwriters to purchase the common stock is
subject to receipt of an opinion of their counsel and other conditions. If any
of the common stock is purchased by the underwriters under the underwriting
agreement, all of the shares, other than the shares covered by the over-
allotment option described below, must be purchased.

The representatives of the underwriters have advised us and the selling
stockholders that the underwriters propose to offer the common stock to the
public initially at the public offering price set forth on the cover page of
this prospectus, and to selected dealers at that price less a concession not to
exceed $ per share. The underwriters may allow, and the dealers may reallow,
a concession to other dealers not to exceed $ per share. After the initial
public offering of the common stock, the offering price and other selling terms
may be changed from time to time by the representatives of the underwriters.

The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares
offered.

We and some of the selling stockholders have granted the underwriters an
option, exercisable for 30 days from the date of this prospectus, to purchase
up to 375,000 additional shares of common stock, at the same price per share to
be paid by the underwriters for the common stock offered hereby. If the
underwriters exercise this option, we will sell up to 187,500 additional
shares, and some of the selling stockholders will sell up to 187,500 additional
shares, pro rata in proportion to the maximum number of additional shares to be
sold by us and by such selling stockholders. If the underwriters purchase any
additional shares pursuant to the option, each of the underwriters will be
committed to purchase the additional shares in approximately the same
proportion as set forth in the above table. The underwriters may exercise this
option solely to cover over-allotments, if any, made in connection with the
sale of common stock offered hereby.

The following table shows the per share and total underwriting discounts to be
paid to the underwriters by us and the selling stockholders, assuming both no
exercise and full exercise of the underwriters' over-allotment option.

<TABLE>
<CAPTION>
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share.........................................
Total.............................................
</TABLE>

We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, losses and expenses, including liabilities under
the Securities Act of 1933, and to contribute to payments that the underwriters
may be required to make in respect thereof.

We estimate that the total expenses of this offering, excluding underwriting
discounts, will be approximately $ . The selling stockholders will not be
responsible for any of these expenses.

In connection with this offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may over-allot in connection with the offering,
creating a syndicate short position. In addition, the underwriters may bid for,
and purchase, shares of common stock in the open market to cover syndicate
short positions or to stabilize the price of the common stock. Finally, the
underwriting syndicate may reclaim selling concessions allowed for distributing
the common stock in this offering, if the syndicate repurchases

38
<PAGE>

previously distributed common stock in syndicate covering transactions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities, and
may end any of these activities at any time.

We and the selling stockholders have agreed that during the period beginning on
the date of this prospectus and continuing for 90 days, neither we nor they
will offer or sell any shares of our common stock or securities that are
substantially similar to our common stock, without the prior written consent of
J.P. Morgan Securities Inc. This agreement will not prevent us from granting
stock options to our employees, continuing to permit participation in our
employee stock purchase plan and issuing shares of common stock upon exercise
of outstanding warrants.

The common stock is traded on the Nasdaq National Market under the symbol
"PSWT."

From time to time in the ordinary course of business, some of the underwriters
and their affiliates have provided commercial and investment banking services
to us. They may continue to do so in the future.

39
<PAGE>

Legal Matters

The validity of the common stock offered hereby will be passed upon for us by
Brobeck, Phleger & Harrison LLP, Austin, Texas. Certain legal matters in
connection with this offering will be passed upon for the underwriters by Davis
Polk & Wardwell, New York, New York.

Experts

Ernst & Young LLP, independent auditors, have audited our financial statements
at December 31, 1999 and 1998, and for each of the three years in the period
ended December 31, 1999, as set forth in their report. Ernst & Young LLP,
independent auditors, also have audited our financial statement schedule
included in our Annual report on Form 10-K for the year ended December 31,
1999, as set forth in their report, which is incorporated by reference in this
prospectus and elsewhere in the registration statement. We have included our
financial statements in the prospectus and elsewhere in the registration
statement and our financial statement schedule is incorporated by reference in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.

Where You Can Find More Information

We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission, the SEC. You may read
and copy any document we file at the SEC's public reference rooms in Washington
D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-
SEC-0330 for further information on the public reference rooms. Our SEC filings
are also available to the public at the SEC's Web site at http://www.sec.gov.

The SEC allows us to "incorporate by reference" the information we file with
it, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference in this
prospectus is considered to be part of this prospectus, and later information
filed with the SEC or contained in this prospectus updates and supersedes this
information. We incorporate by reference the documents listed below and any
future filings made with the SEC under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until our offering is completed:

. our Annual Report on Form 10-K for the fiscal year ended December 31, 1999;
and

. the description of our common stock contained in our registration statement
on Form 8-A (File No. 000-22327) filed under Section 12(g) of the Securities
Exchange Act of 1934, including any amendments or reports filed for the
purpose of updating such description.

You may request a copy of these filings, at no cost, by writing or telephoning
us at the following address:

PSW Technologies, Inc.
Attention: Keith D. Thatcher
6300 Bridgepoint Parkway
Building 3, Suite 200
Austin, Texas 78730
Telephone: (512) 343-6666

40
<PAGE>

PSW Technologies, Inc.

Index to Financial Statements

<TABLE>
<CAPTION>
Page

<S> <C>
Report of Independent Auditors........................................... F-2

Balance Sheets as of December 31, 1998 and 1999.......................... F-3

Statements of Operations for the years ended December 31, 1997, 1998 and
1999.................................................................... F-4

Statements of Stockholders' Equity for the years ended December 31, 1997,
1998 and 1999........................................................... F-5

Statements of Cash Flows for the years ended December 31, 1997, 1998 and
1999.................................................................... F-6

Notes to Financial Statements............................................ F-7
</TABLE>

F-1
<PAGE>

Report of Independent Auditors

The Stockholders and Board of Directors
of PSW Technologies, Inc.

We have audited the accompanying balance sheets of PSW Technologies, Inc. as of
December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PSW Technologies, Inc. at
December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.

/s/ Ernst & Young LLP

Austin, Texas
January 14, 2000

F-2
<PAGE>

PSW Technologies, Inc.

Balance Sheets

<TABLE>
<CAPTION>
----------------
December 31,
1998 1999
------- -------
<S> <C> <C>
(In thousands, except share and per share data)
Assets
Current assets:
Cash....................................................... $ 1,167 $ 2,108
Short-term investments..................................... 19,136 18,149
Accounts receivable, net of allowance for doubtful accounts
of $260 and $380 in 1998 and 1999, respectively........... 6,171 10,840
Unbilled revenue under customer contracts.................. 1,070 1,150
Income tax receivable...................................... 896 --
Net current deferred income taxes.......................... 334 447
Prepaid expenses and other current assets.................. 572 445
<CAPTION>
------- -------
<S> <C> <C>
Total current assets..................................... 29,346 33,139
Property and equipment, net.................................. 4,005 4,677
<CAPTION>
------- -------
<S> <C> <C>
Total assets................................................. $33,351 $37,816
<CAPTION>
======= =======
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Trade payables............................................. $ 460 $ 925
Accrued expenses and other current liabilities............. 1,507 2,954
<CAPTION>
------- -------
<S> <C> <C>
Total current liabilities................................ 1,967 3,879
Net deferred income taxes.................................... 316 515
Stockholders' equity:
Preferred stock, par value $.01 per share, 1,000,000 shares
authorized and none issued and outstanding.................. -- --
Common stock, par value $.01 per share, 34,000,000 shares
authorized, 9,293,866 and 9,666,535 shares issued and
outstanding at December 31, 1998 and 1999, respectively..... 93 97
Additional paid-in capital................................... 29,995 30,491
Deferred compensation........................................ (44) --
Accumulated other comprehensive income....................... (69) (39)
Retained earnings............................................ 1,093 2,873
<CAPTION>
------- -------
<S> <C> <C>
Total stockholders' equity............................... 31,068 33,422
<CAPTION>
------- -------
<S> <C> <C>
Total liabilities and stockholders' equity................... $33,351 $37,816
======= =======
</TABLE>

See accompanying notes.

F-3
<PAGE>

PSW Technologies, Inc.

Statements of Operations

<TABLE>
<CAPTION>
------------------------
Year ended December 31,
------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
(In thousands, except per share data)
Revenue............................................... $44,118 $39,101 $45,823
Operating expenses:
Technical staff..................................... 22,479 23,440 25,377
Selling and administrative staff.................... 8,405 10,121 9,034
Other expenses...................................... 7,979 8,933 9,504
Special compensation expense........................ 268 75 16
<CAPTION>
------- ------- -------
<S> <C> <C> <C>
Total operating expenses.............................. 39,131 42,569 43,931
<CAPTION>
------- ------- -------
<S> <C> <C> <C>
Income (loss) from operations......................... 4,987 (3,468) 1,892
Interest income (expense), net........................ 431 946 1,018
<CAPTION>
------- ------- -------
<S> <C> <C> <C>
Income (loss) before provision (benefit) for income
taxes................................................ 5,418 (2,522) 2,910
<CAPTION>
------- ------- -------
<S> <C> <C> <C>
Provision (benefit) for income taxes:
Nonrecurring charge for termination of Subchapter S
election........................................... 1,200 -- --
C Corporation....................................... 1,000 (1,060) 1,130
<CAPTION>
------- ------- -------
<S> <C> <C> <C>
Total provision (benefit) for income taxes............ 2,200 (1,060) 1,130
<CAPTION>
------- ------- -------
<S> <C> <C> <C>
Net income (loss)..................................... $ 3,218 $(1,462) $ 1,780
<CAPTION>
======= ======= =======
<S> <C> <C> <C>
Basic earnings (loss) per share....................... $ (0.16) $ 0.19
<CAPTION>
======= =======
<S> <C> <C> <C>
Diluted earnings (loss) per share..................... $ (0.16) $ 0.17
======= =======
Unaudited pro forma information:
Historical income before provision for income
taxes.............................................. $ 5,418
Pro forma provision for income taxes................ 1,900
=======
Pro forma net income................................ $ 3,518
=======
Pro forma basic earnings per share.................. $ 0.48
=======
Pro forma diluted earnings per share................ $ 0.41
=======
Shares used in basic earnings (loss) per share
calculation........................................ 7,384 9,113 9,452
======= ======= =======
Shares used in diluted earnings (loss) per share
calculation........................................ 8,517 9,113 10,501
======= ======= =======
</TABLE>

See accompanying notes.

F-4
<PAGE>

PSW Technologies, Inc.

Statements of Stockholders' Equity

<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Other
Common Stock Compre- Total
$0.01 Par Value Additional hensive Stock-
----------------- Paid-in Deferred Retained Income holders'
Shares Amounts Capital Compensation Earnings (Loss) Equity
--------- ------- ---------- ------------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except
share data)
Balance at December 31,
1996................... 5,538,463 $ 55 $ 4,187 $(641) $ (157) $-- $ 3,444
Issuance of common
stock, net of issuance
costs of $3,816....... 3,285,500 33 25,698 -- -- -- 25,731
Employee stock purchase
plan issuance of
stock................. 53,732 1 410 -- -- -- 411
Exercise of stock
options............... 83,240 1 31 -- -- -- 32
Reclassification upon
termination of S
Corporation status.... -- -- (894) -- 894 -- --
Tax benefit related to
stock option
exercises............. -- -- 182 -- -- -- 182
Forfeiture of stock
options............... -- -- (130) 130 -- -- --
Dividend............... -- -- -- -- (1,400) -- (1,400)
Amortization of
deferred
compensation.......... -- -- -- 268 -- -- 268
Comprehensive Income:..
Net income............. -- -- -- -- 3,218 -- 3,218
Net unrealized loss on
investments........... -- -- -- -- -- (27) (27)
<CAPTION>
--------
<S> <C> <C> <C> <C> <C> <C> <C>
Comprehensive income... -- -- -- -- -- -- 3,191
<CAPTION>
--------- ------- ---------- ------------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... 8,960,935 90 29,484 (243) 2,555 (27) 31,859
Employee stock purchase
plan issuance of
stock................. 93,747 2 417 -- -- -- 419
Exercise of stock
options and warrants.. 239,184 1 63 -- -- -- 64
Tax benefit related to
stock option
exercises............. -- -- 155 -- -- -- 155
Forfeiture of stock
options............... -- -- (124) 124 -- -- --
Amortization of
deferred
compensation.......... -- -- -- 75 -- -- 75
Comprehensive income:..
Net loss............... -- -- -- -- (1,462) -- (1,462)
Net unrealized loss on
investments........... -- -- -- -- -- (42) (42)
<CAPTION>
--------
<S> <C> <C> <C> <C> <C> <C> <C>
Comprehensive income... -- -- -- -- -- -- (1,504)
<CAPTION>
--------- ------- ---------- ------------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998................... 9,293,866 93 29,995 (44) 1,093 (69) 31,068
Employee stock purchase
plan issuance of
stock................. 70,045 1 180 -- -- -- 181
Exercise of stock
options and warrants.. 302,624 3 153 -- -- -- 156
Tax benefit related to
stock option
exercises............. -- -- 191 -- -- -- 191
Forfeiture of stock
options............... -- -- (28) 28 -- -- --
Amortization of
deferred
compensation.......... -- -- -- 16 -- -- 16
Comprehensive income:..
Net income............. -- -- -- -- 1,780 -- 1,780
Net unrealized gain on
investments........... -- -- -- -- -- 30 30
<CAPTION>
--------
<S> <C> <C> <C> <C> <C> <C> <C>
Comprehensive income... -- -- -- -- -- -- 1,810
<CAPTION>
--------- ------- ---------- ------------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1999................... 9,666,535 $ 97 $30,491 $ -- $2,873 $(39) $33,422
<CAPTION>
========= ======= ========== ============ ======== ======= ========
</TABLE>

See accompanying notes.

F-5
<PAGE>

PSW Technologies, Inc.

Statements of Cash Flows

<TABLE>
<CAPTION>
--------------------------
Year ended December 31,
--------------------------
1997 1998 1999
-------- ------- -------
<S> <C> <C> <C>
(In thousands)
Operating activities
Net income (loss)................................. $ 3,218 $(1,462) $ 1,780
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Special compensation............................ 268 75 16
Depreciation and amortization................... 825 1,100 1,363
Bad debt expense, net of recoveries............. 45 249 48
Changes in operating assets and liabilities:
Accounts receivable............................. (1,367) 1,009 (4,717)
Due from related party.......................... (258) -- --
Unbilled revenue under customer contracts....... (174) (652) (80)
Prepaid expenses and other current assets....... (157) (135) 127
Trade payables.................................. (420) (24) 465
Accrued expenses and other current liabilities.. 492 (615) 1,463
Income taxes.................................... 629 (1,206) 1,269
<CAPTION>
-------- ------- -------
<S> <C> <C> <C>
Net cash provided by (used in) operating
activities....................................... 3,101 (1,661) 1,734
<CAPTION>
-------- ------- -------
<S> <C> <C> <C>
Investing activities
Purchase of short-term investments, net........... (22,497) -- --
Proceeds from sale of short-term investments,
net.............................................. -- 3,292 1,017
Acquisition of property and equipment............. (2,646) (1,782) (2,147)
<CAPTION>
-------- ------- -------
<S> <C> <C> <C>
Net cash provided by (used in) investing
activities....................................... (25,143) 1,510 (1,130)
<CAPTION>
-------- ------- -------
<S> <C> <C> <C>
Financing activities
Proceeds from (repayments on) line of credit,
net.............................................. (5,125) -- --
Proceeds from issuance of common stock, net of
issuance costs................................... 26,220 483 337
Dividend paid to S corporation stockholders....... (1,400) -- --
<CAPTION>
-------- ------- -------
<S> <C> <C> <C>
Net cash provided by financing activities......... 19,695 483 337
<CAPTION>
-------- ------- -------
<S> <C> <C> <C>
Net increase (decrease) in cash................... (2,347) 332 941
Cash, beginning of year........................... 3,182 835 1,167
<CAPTION>
-------- ------- -------
<S> <C> <C> <C>
Cash, end of year................................. $ 835 $ 1,167 $ 2,108
<CAPTION>
======== ======= =======
<S> <C> <C> <C>
Supplemental disclosure of cash flow information
Interest paid..................................... $ 137 $ 20 $ 10
Income taxes paid................................. $ 1,571 $ 148 $ 637
Income taxes recovered............................ $ -- $ -- $ 776
Supplemental schedule of non-cash activities
Unrealized gain (loss) on investments............. $ (27) $ (42) $ 30
Reduction of income taxes payable associated with
the exercise of stock options.................... $ 182 $ 155 $ 191
Write-off of fully depreciated property and
equipment........................................ $ -- $ -- $ 112
</TABLE>

See accompanying notes.

F-6
<PAGE>

PSW Technologies, Inc.

Notes to Financial Statements

1. Nature of Business

We are an e-business services firm that offers strategic consulting skills with
deep technology and integration expertise. This combination enables us to
utilize existing and new technologies to provide reliable, flexible and
scalable e- business solutions. Our alliances with leading Internet and
interactive television technology providers allow us to gain a thorough
understanding of their products and perspective on other products as well as
next-generation technologies. Using our technology insight and skills, we
assist our clients to define, design, develop and deploy e-business solutions
that enhance their competitive positions.

2. Summary of Significant Accounting Policies

Revenue Recognition
Revenue from time and materials contracts is recognized during the period for
which the services are provided.

Revenue from fixed price contracts is recognized using the percentage-of-
completion method, measured by the percentage of units of labor incurred to the
date of measurement relative to the estimated total units of labor at
completion. The cumulative impact of revisions in estimates of the percentage
to complete is reflected in the period in which the revisions are made.
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. Revenue earned in excess of billings is classified as
unbilled revenue under customer contracts. Billings in excess of earned revenue
are classified as deferred revenue. Revenue excludes reimbursable expenses.

Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions, including estimates to complete contracts, that
affect the reported amounts in the financial statements and accompanying notes.
Actual results could differ from those estimates.

Costs and Expenses
Technical staff expense consists of the cost of (i) salaries, payroll taxes,
health insurance and workers' compensation for technical staff personnel
assigned to client projects, (ii) unassigned technical staff personnel and
(iii) fees paid to subcontractors for work performed in connection with client
projects.

Selling and administrative staff expense consists of (i) the cost of salaries,
payroll taxes, health insurance and workers' compensation for selling and
administrative personnel and (ii) all commissions and bonuses.

Other expenses consist of all non-staff related costs, such as occupancy costs,
travel, business insurance, business development, recruiting, training and
depreciation.

Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of cash balances, short-term investments and
trade accounts receivable. The Company invests its excess cash in highly liquid
investments (short-term bank deposits) and places its investments in high
quality securities with financial institutions of high credit standing. The
Company does not require collateral from its customers. The Company maintains
allowances for potential credit losses and such losses were not material for
any of the periods presented. The Company's customers are headquartered
primarily in North America.

Computer Software Developed or Obtained for Internal Use
The Company has capitalized certain internal costs related to the
implementation of computer software obtained for internal use in compliance
with the Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use" issued by the Accounting
Standards Executive Committee of the American Institute of Public Accountants.
Internal-use software is capitalized at cost and amortized, when ready for its
intended use, over the estimated useful life, generally three years.

F-7
<PAGE>

PSW Technologies, Inc.

Notes to Financial Statements - (Continued)

2. Summary of Significant Accounting Policies - (Continued)

Depreciation and Amortization
Depreciation and amortization are computed based on the cost of the related
assets, using the straight-line method over the estimated useful lives of the
assets which range from three to seven years. Leasehold improvements are
amortized over the term of the related lease or estimated life of the leasehold
improvements, whichever is shorter.

Advertising Expense
The Company expenses advertising costs when incurred. Total advertising expense
amounted to approximately $175,000, $50,000 and $45,000 in 1997, 1998 and 1999,
respectively.

Stock-Based Compensation
FASB Statement No. 123, or SFAS No. 123, Accounting for Stock-Based
Compensation, prescribes accounting and reporting standards for all stock-based
compensation plans, including employee stock options. As allowed by SFAS No.
123, the Company has elected to continue to account for its employee stock-
based compensation in accordance with Accounting Principles Board Opinion No.
25, or APB No. 25, Accounting for Stock Issued to Employees.

Income Taxes
Upon formation, in August 1996, the Company elected to be treated as a
Subchapter S corporation, under the Internal Revenue Code of 1986 as amended,
whereby federal income taxes are the responsibility of the individual
stockholders. Accordingly, the Company did not provide for federal income
taxes. With the closing of the Company's initial public offering in 1997, the
Company's Subchapter S status was terminated and the Company became subject to
federal corporate income taxes.

In accordance with Statement of Financial Accounting Standards No. 109, or SFAS
No. 109, Accounting for Income Taxes, deferred income taxes were provided for
all temporary differences existing at the date of the Company's termination of
its Subchapter S status. This statement prescribes the use of the liability
method whereby deferred tax asset and liability account balances are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.

Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):

<TABLE>
<CAPTION>
------------------------
1997(a) 1998 1999
------- ------- -------
<S> <C> <C> <C>
Numerator:
Net income (loss).............................. $3,518 $(1,462) $ 1,780
======= ======= =======
Denominator:
Shares used in basic earnings (loss) per share
calculation................................... 7,384 9,113 9,452
Effect of dilutive securities:
Employee stock options....................... 627 -- 634
Warrants..................................... 506 -- 415
------- ------- -------
Shares used in diluted earnings (loss) per
share calculation............................. 8,517 9,113 10,501
======= ======= =======
Basic earnings (loss) per share.................. $ 0.48 $ (0.16) $ 0.19
======= ======= =======
Diluted earnings (loss) per share................ $ 0.41 $ (0.16) $ 0.17
======= ======= =======
</TABLE>

(a) Net income and earnings per share amounts are presented on a pro forma
basis as if the Company had been subject to federal and state income taxes.

F-8
<PAGE>

PSW Technologies, Inc.

Notes to Financial Statements - (Continued)

2. Summary of Significant Accounting Policies - (Continued)

Options to purchase 1.74 million shares of Common Stock at an average exercise
price of $2.73 per share and warrants to purchase 505,654 shares of Common
Stock at an exercise price of $0.04 per share were outstanding at December 31,
1998, but were not included in the computation of diluted net loss per share as
its effect would be anti-dilutive.

Pro Forma Earnings Per Share
The unaudited pro forma adjustment on the statement of operations for the year
ended December 31, 1997 reflects an adjustment to record a provision for income
taxes as if the Company had not been an S corporation.

Segment Information
The Company identifies its operating segments based on geographical location
supported by national practices. In accordance with SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", the Company has
aggregated its operating segments for reporting purposes as it operates in a
single business segment providing eBusiness professional services.

Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 137, which is
effective for fiscal years beginning after June 15, 2000. This statement
requires companies to record derivatives on the balance sheet as assets or
liabilities measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS No. 133 will
be effective for the Company's financial statements for the year ending
December 31, 2001. Management believes that this statement will not have a
material impact on the Company's financial position or results of operations.

In March 1999, the FASB issued an exposure draft entitled "Accounting for
Certain Transactions involving Stock Compensation," which is a proposed
interpretation of APB Opinion No. 25. However, the exposure draft has not been
finalized. Once finalized and issued, the current accounting practices for
transactions involving stock compensation may need to change and such changes
could affect the Company's future operating results.

Reclassifications
Certain amounts in the prior year financial statements have been reclassified
to conform with the current year presentation.

3. Property and Equipment

Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
-------------------
As of December 31,
-------------------
1998 1999
--------- ---------
<S> <C> <C>
Furniture and fixtures................................. $ 1,243 $ 1,322
Computer equipment..................................... 3,440 4,078
Computer software...................................... 860 1,725
Leasehold improvements................................. 460 632
--------- ---------
6,003 7,757
Less accumulated depreciation and amortization......... 1,998 3,080
--------- ---------
$ 4,005 $ 4,677
========= =========
</TABLE>

4. Short-term Investments

The Company determines the appropriate classification of investments at the
time of purchase and re-evaluates such designation at each balance sheet date.
The short-term investments have been classified as available-for-sale and are
carried at fair value (quoted market prices), with unrealized holding gains and
losses reported as a separate component of stockholders' equity. The cost of
debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization, interest income, realized gains and
losses and declines in value judged to be other than temporary are included in
net interest and other income.

F-9
<PAGE>

PSW Technologies, Inc.

Notes to Financial Statements - (Continued)

4. Short-term Investments - (Continued)

Information related to the Company's short-term investments at December 31,
1998 and 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
---------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
December 31, 1998 --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Money market funds.................. $ 1,571 $-- $-- $ 1,571
Government issues................... 2,714 -- 4 2,710
Corporate issues.................... 13,294 4 64 13,234
Commercial paper.................... 1,626 -- 5 1,621
--------- ---------- ---------- -------
$19,205 $ 4 $ 73 $19,136
========= ========== ========== =======
<CAPTION>
---------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
December 31, 1999 --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Money market funds.................. $ 2,292 $-- $-- $ 2,292
Corporate issues.................... 15,896 3 42 15,857
--------- ---------- ---------- -------
$18,188 $ 3 $ 42 $18,149
========= ========== ========== =======
</TABLE>

Gross gains and gross losses on the sale of investments were not significant in
1998 and 1999. Short-term investments are generally comprised of variable rate
securities that provide for optional or early redemption within twelve months
and the contractual maturities are generally greater than twelve months. As of
December 31, 1999, the Company's debt securities all have contractual
maturities of less than one year.

5. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in
thousands):

<TABLE>
<CAPTION>
---------
As of
December
31,
---------
1998 1999
---- ----
<S> <C> <C>
Prepaid expenses................................................. $328 $354
Travel and payroll advances...................................... 3 49
Other current assets............................................. 241 42
---- ----
$572 $445
==== ====
</TABLE>

6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in
thousands):

<TABLE>
<CAPTION>
-------------
As of
December 31,
-------------
1998 1999
------ ------
<S> <C> <C>
Accrued vacation............................................. $ 320 $ 370
Accrued bonuses.............................................. 141 837
Payroll and other taxes payable.............................. 124 201
Other accrued expenses and current liabilities............... 922 1,546
------ ------
$1,507 $2,954
====== ======
</TABLE>

7. Significant Customers

One customer and two of its wholly-owned subsidiaries accounted for
approximately 39%, 35% and 26% of total revenue for the years ended December
31, 1997, 1998 and 1999, respectively. This customer accounted for
approximately 9% of accounts receivable at December 31, 1999. No other customer
accounted for more than 10% of revenue in 1997, 1998 or 1999.

F-10
<PAGE>

PSW Technologies, Inc.

Notes to Financial Statements - (Continued)

8. Stockholders' Equity and Employee Benefit Plans

On February 3, 1997, the Company's Board of Directors approved (a) an 8-for-13
reverse stock split, which was effected on April 2, 1997, (b) an increase in
the Company's authorized common stock from 11,250,000 to 34,000,000 shares and
(c) an authorization of 1,000,000 shares of preferred stock of $.01 par value.
All common and preferred stock information has been adjusted to reflect the
stock split as if such split had taken place at the beginning of the periods
presented.

In June 1997, the Company completed an initial public offering of 2,850,000
shares of its authorized but unissued Common Stock at a price to the public of
$9.00 per share. In connection with the initial public offering, the Company
granted the underwriters of the offering an option to purchase up to 427,500
shares of Common Stock to cover over-allotments. On July 2, 1997, the
underwriters exercised their option, purchasing 427,500 shares of the Company's
Common Stock. These transactions resulted in total net proceeds from the
initial public offering of $25.7 million (after deducting offering expenses and
the underwriters discount of approximately $3.8 million). The proceeds of the
offering were used to repay indebtedness, to pay certain corporate income tax
obligations of the Company and to pay dividends to existing stockholders of the
Company in amounts estimated to approximate certain of their 1997 income tax
obligations, and for working capital and other general corporate purposes.

As discussed in Note 11, the Company's S corporation status was terminated
immediately upon completion of its initial public offering. Additionally, the
Company was required to change its method of tax accounting from the cash to
accrual method. During 1997, the Company declared and paid a dividend of $1.4
million to the stockholders of the Company prior to the termination of the S
corporation status to pay the income taxes for the 1997 taxable earnings of the
Company allocated to them. The dividend payment was an estimate based upon
numerous assumptions, including taxable income attributable to the conversion
from the cash to the accrual method of accounting upon the termination of the
Company's S corporation status.

In September 1998, the Company's Board of Directors authorized the repricing of
options to purchase 737,495 shares of Common Stock effective as of the close of
business on September 29, 1998 to the then fair market value of $1.94 per
share. Under the terms of the repricing, the repriced options shall become
exercisable in four successive equal annual installments from the September 29,
1998 grant date. The repriced options have a maximum term of ten years measured
from this date of grant. The Chief Executive Officer did not participate in the
repricing.

At December 31, 1999, the Company has reserved 333,271 shares of Common Stock
for issuance in connection with warrants outstanding and 2,947,000 shares of
Common Stock for issuance under the Company's stock purchase and stock option
plans.

Stock Option Plan
Effective October 1, 1996, the Company's Board of Directors and stockholders
approved and adopted the PSW Technologies, Inc. 1996 Stock Option/ Stock
Issuance Plan (the "1996 Plan"). The aggregate number of shares issuable under
the 1996 Plan has been increased to 3,215,000 shares of the Company's common
stock for issuance to employees, directors and consultants of the Company.
Incentive stock options as defined in Section 422A of the Internal Revenue Code
of 1986 and nonqualified stock options may be issued under the 1996 Plan. The
exercise price for incentive stock options may not be less than fair market
value on the date of grant, or such greater amount necessary to qualify as an
incentive stock option. The options outstanding under the 1996 Plan generally
vest in four equal annual installments commencing on the first anniversary of
the grant and expire 10 years after the date of grant. Certain of these options
are subject to acceleration clauses.

Pursuant to the organization of the Company and the contribution of net assets
of the Software Division, the Company granted replacement options for shares of
its common stock under the 1996 Plan to its employees who participated in the
Pencom Option Plan and the Pencom Option Plan was terminated. The replacement
options were granted for the same number of shares and at the same exercise
price as those options granted to the employees under the Pencom Option Plan.
The grant date determining vesting was the original grant date under the Pencom
Option Plan. Under APB No. 25, the difference between the estimated fair market
value of the Company's common stock and the options' exercise prices on the
date of issuance was determined to be approximately $2,179,000. This charge is
being amortized for financial reporting purposes over the vesting period of the
options and the amount recognized as expense during the years ended December
31, 1997, 1998 and 1999 amounting to approximately $268,000, $75,000 and
$16,000, respectively, is included in special compensation expense. A deferred
tax benefit is recorded for the amortized compensation expense.

F-11
<PAGE>

PSW Technologies, Inc.

Notes to Financial Statements - (Continued)

8. Stockholders' Equity and Employee Benefit Plans - (Continued)

The following table summarizes stock option activity under the 1996 Plan:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Range of Exercise Prices
---------------------------------------------------------
$0.04- $2.75-
$2.65 $9.00 $10.25-$20.00 Total
------------------ ------------------- ------------------ --------------------
Weighted Weighted Weighted Weighted
Number Average Number Average Number Average Number Average
of Exercise of Exercise of Exercise of Exercise
shares Price shares Price shares Price shares Price
-------- -------- --------- -------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... 506,572 $0.43 717,757 $6.16 175,801 $12.35 1,400,130 $4.86
Granted during the year
(a).................... 780,745 1.96 983,082 4.77 12,800 11.15 1,776,627 3.59
Exercised during the
year................... (229,452) 0.11 (7,732) 4.98 -- -- (237,184) 0.27
Cancelled during the
year (a)............... (72,896) 1.50 (963,760) 6.40 (163,665) 12.31 (1,200,321) 6.90
<CAPTION>
-------- -------- --------- -------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998................... 984,969 1.63 729,347 3.98 24,936 11.76 1,739,252 2.73
Granted during the
year................... 71,603 2.63 1,173,662 3.83 220,500 14.06 1,465,765 5.32
Exercised during the
year................... (120,560) 0.86 (9,666) 4.79 -- -- (130,226) 1.15
Cancelled during the
year................... (365,838) 1.96 (164,722) 3.98 -- -- (530,560) 2.59
Balance at December 31,
1999................... 570,174 $1.71 1,728,621 $3.88 245,436 $13.88 2,544,231 $4.34
<CAPTION>
======== ======== ========= ======== ======== ======== ========== ========
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exercisable at December
31, 1997............... 380,883 $0.20 130,693 $4.19 4,723 $13.08 516,299 $1.33
<CAPTION>
======== ======== ========= ======== ======== ======== ========== ========
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exercisable at December
31, 1998............... 203,536 $0.46 149,093 $4.55 17,994 $11.75 370,623 $2.65
<CAPTION>
======== ======== ========= ======== ======== ======== ========== ========
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exercisable at December
31, 1999............... 258,421 $1.43 337,293 $4.06 19,036 $11.87 614,750 $3.20
<CAPTION>
======== ======== ========= ======== ======== ======== ========== ========
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted average fair
value of options
granted during 1999.... $2.63 $3.83 $14.06 $5.32
<CAPTION>
======== ======== ======== ========
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted average
remaining contractual
life in years, at
December 31, 1999...... 7.89 8.83 9.78 8.71
======== ======== ======== ========
</TABLE>

(a) Amount includes 737,495 shares pertaining to options repriced in September
1998.

Warrants
In connection with the spin-off of the Company from Pencom in October 1996, the
Company issued 5,538,463 shares of common stock and warrants to purchase an
aggregate of 507,669 shares of common stock at an exercise price of $0.04 per
share. As of December 31, 1999, there were 333,271 warrants outstanding. The
warrants may be exercised in whole or in part, at any time prior to October 1,
2006. In exchange for the shares and warrants issued, PSW received an
assignment of a 26.67% interest in the proceeds to be received from the
accounts receivable as of September 30, 1996 and substantially all the other
assets and liabilities.

Employee Stock Purchase Plan
On February 3, 1997, the Board of Directors adopted the Company's Employee
Stock Purchase Plan (the "Purchase Plan") that allows eligible employees to
purchase shares of Common Stock, at semi-annual intervals, through periodic
payroll deductions under the Purchase Plan. A reserve of 400,000 shares of
common stock has been established for this purpose. The stockholders of the
Company approved the Purchase Plan on March 17, 1997.

The Purchase Plan incorporates a series of successive offering periods, each
generally with a duration of six months. The initial purchase period began on
the date of the initial public offering and ended on October 31, 1997.
Thereafter, purchase periods begin on the first business day in November and
May of each year and end on the last business day of April and October,
respectively. Shares of Common Stock are purchased for each participant at the
end of each purchase period. The Company sold 53,732, 93,747 and 70,045 shares
of Common Stock to employees through the Purchase Plan in 1997, 1998 and 1999,
respectively.

Payroll deductions may not exceed 15% of base salary for each purchase period
and each employee's purchases are limited to 500 shares per purchase period.
The purchase price per share is eighty-five percent of the lower of (a) the
fair market

F-12
<PAGE>

PSW Technologies, Inc.

Notes to Financial Statements - (Continued)

8. Stockholders' Equity and Employee Benefit Plans - (Continued)

value of the Common Stock on the start date of the purchase period or (b) the
fair market value at the end of the semi-annual purchase period. The Purchase
Plan will terminate on the last business day of April, 2007.

Employee Retirement Plan
The Company maintains a defined contribution plan (the "Plan") pursuant to
Section 401(k) of the Internal Revenue Code for employees who are at least 21
years of age. Eligible employees can elect to reduce their current compensation
up to the statutory prescribed limit and have the amount of such reduction
contributed to the Plan. The Plan also allows for the Company to make
contributions on behalf of eligible employees. The Company contributed
approximately $132,000 and $180,000 to the Plan in 1998 and 1999, respectively.
No contributions were made to the Plan in 1997 by PSW.

Pro Forma Information

Pro forma information regarding net income and earnings per share is required
by SFAS No. 123, and has been determined as if the Company had accounted for
option grants under the 1996 Plan and purchases of Common Stock under the
Purchase Plan using the fair value method of that Statement. The fair value of
the options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions:

<TABLE>
<CAPTION>
-------------------------
1997 1998 1999
Option Option Option
Grants Grants Grants
Assumption ------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate........................ 6.34% 6.00% 6.00%
Dividend yield................................. 0% 0% 0%
Volatility factor of the market price of the
Company's common stock........................ 0.521 0.771 1.14
Average life................................... 6 years 6 years 6 years
</TABLE>

For purposes of pro forma disclosure, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands, except per share data):

<TABLE>
<CAPTION>
-------------------------
Year ended December 31,
-------------------------
1997 1998 1999
------- -------- -------
<S> <C> <C> <C>
Pro forma stock-based compensation expense...... $ 1,074 $ 2,175 $ 2,986
Pro forma net income (loss)..................... $ 2,693 $ (4,697) $ (41)
Pro forma basic earnings (loss) per share....... $ 0.36 $ (0.52) $ 0
Pro forma diluted earnings (loss) per share..... $ 0.32 $ (0.52) $ 0
</TABLE>

F-13
<PAGE>

PSW Technologies, Inc.

Notes to Financial Statements - (Continued)

9. Related Party Transactions

The Company utilizes non-exclusive recruiting services provided by Pencom. Two
of Pencom's majority shareholders and its chief financial officer are members
of the Board of the Company (one of whom is the chairman of the Board).
Management believes that the terms and fees paid in connection with such
recruiting services are comparable to agreements maintained by the Company with
other unrelated recruiting firms and will continue to use these recruiting
services on a non-exclusive basis pursuant to an agreement entered into with
Pencom. In addition, certain expenses were allocated by Pencom to the Company
in 1997. Management believes that the allocations were reasonable. Services
provided and rental expenses allocated to PSW were as follows (in thousands):

<TABLE>
<CAPTION>
-------------------------
Year ended December 31,
-------------------------
1997 1998 1999
-------- -------- -------
<S> <C> <C> <C>
Services performed by related party:
Recruiting services............................. $ 60 $ -- $ 53
Contracted technical services................... 9 62
Legal and accounting............................ 28 -- --
Allocated expenses:
Rent............................................ 37 -- --
-------- -------- -------
Total related party expenses.................. $ 134 $ 62 $ 53
======== ======== =======
</TABLE>

10. Commitments

The Company leases its office space through noncancellable operating lease
arrangements, which contain escalating lease payments. Future minimum rental
commitments are as follows:

<TABLE>
<CAPTION>
Years ending December 31 (Amounts in thousands):
<S> <C>
2000............................................ $2,207
2001............................................ 2,043
2002............................................ 1,937
2003............................................ 1,877
2004............................................ 387
Thereafter...................................... 26
------
Total......................................... $8,477
======
</TABLE>

Minimum future rentals receivable under the noncancelable operating subleases
at December 31, 1999 amounted to $850,000.

The premises previously occupied by the Company in Texas were leased by Pencom.
In connection with the office relocation in January 1997, the Company
transferred leasehold improvements with a net book value of approximately
$69,000 to Pencom. Pencom has subleased these premises. However, the Company
entered into an agreement with Pencom to guarantee Pencom's sublease income.
Future minimum sub-lease rental income that the Company has guaranteed is
$285,000 for the year ended 2000 as the lease ends in September 2000.

Rent expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $1,258,000, $1,566,000 and $1,673,000, respectively.

11. Income Taxes

From commencement through June 5, 1997, the Company had elected to be treated
as an S Corporation under Subchapter S of the Internal Revenue Code of 1986, as
amended. As such, federal income taxes attributable to income through June 5,
1997, were the responsibility of the individual stockholders.

As a result of the initial public offering in June of 1997, the Company's
Subchapter S status was terminated for federal and state tax purposes and the
Company recorded a deferred tax charge against income of approximately
$1,200,000 for the

F-14
<PAGE>

PSW Technologies, Inc.

Notes to Financial Statements - (Continued)

11. Income Taxes - (Continued)

cumulative differences between the financial reporting and income tax basis of
certain assets and liabilities existing at that date. Additionally, the Company
was required to change its method of accounting from the cash basis to the
accrual basis for income tax reporting purposes.

The Company's stockholders were obligated to pay the 1997 income taxes related
to the period up to the completion of the offering. The Company declared and
paid a dividend of $1,400,000 to its stockholders of record immediately prior
to the completion of the public offering for the amount estimated to approxi-
mate the 1997 income taxes payable by the stockholders.

The pro forma disclosures on the statements of operations reflect adjustments
to record provisions for income taxes as if the Company had not been an S
Corporation.

Significant components of the provision (benefit) for income taxes are as
follows:

<TABLE>
<CAPTION>
---------------
1998 1999
------- ------
<S> <C> <C>
Current:
Federal................................................... $ (505) $ 959
State..................................................... (44) 85
------- ------
Total current............................................. (549) 1,044
Deferred:
Federal................................................... (470) 79
State..................................................... (41) 7
------- ------
Total deferred.......................................... (511) 86
------- ------
$(1,060) $1,130
======= ======
</TABLE>

The Company's effective tax rate from continuing operations differs from the
U.S. statutory income tax rate as set forth below:

<TABLE>
<CAPTION>
-------------------------------------
Pro forma Historical
1997 1997 1998 1999
--------- ---------- ----- ----
<S> <C> <C> <C> <C>
U.S. statutory income tax rate..... 34.0% 34.0% (34.0)% 34.0%
State taxes, net of federal income
tax benefit....................... 4.0% 3.8% (3.4)% 3.1%
Permanent differences.............. (3.0)% (0.7)% (4.8)% 1.4%
Nonrecurring charge due to
Subchapter S termination.......... -- 22.1% -- --
S Corporation income not subject to
tax............................... -- (20.7)% -- --
Other.............................. -- 2.1% 0.2% 0.3%
--------- ---------- ----- ----
Effective tax rate................. 35.0% 40.6% (42.0)% 38.8%
========= ========== ===== ====
</TABLE>

F-15
<PAGE>

PSW Technologies, Inc.

Notes to Financial Statements - (Continued)

11. Income Taxes - (Continued)

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred taxes as of December 31 are as follows:

<TABLE>
<CAPTION>
----------
1998 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Allowances and reserves........................................ $122 $146
Accrued expenses............................................... 278 274
Stock option compensation expense.............................. 286 176
Deferred revenue............................................... -- 46
---- ----
Total deferred tax assets...................................... 686 642
Deferred tax liabilities:
Fixed assets................................................... (263) (239)
Prepaid expenses and other..................................... (405) (471)
---- ----
Total deferred tax liabilities................................. (668) (710)
---- ----
Net deferred tax assets (liabilities).......................... $ 18 $(68)
==== ====
</TABLE>

The exercise of certain stock options which have been granted under the
Company's stock option plan give rise to compensation which is includable in
the taxable income of the applicable option holder and deductible by the
Company for federal and state income tax purposes. Any realized tax benefit
arising from exercised options in excess of the benefit previously recorded, as
discussed in Notes 8 and 12, is credited to additional paid-in capital.

12. Comprehensive Income

As of January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or stockholders'
equity. SFAS No. 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in shareholders' equity, to be included in other comprehensive income.

The components of comprehensive income for the years ended 1997, 1998 and 1999
are as follows:

<TABLE>
<CAPTION>
------------------------
1997(a) 1998 1999
------- ------- ------
<S> <C> <C> <C>
Net income (loss)............................... $3,518 $(1,462) $1,780
Unrealized gain (loss) on short-term invest-
ments.......................................... (41) (74) 52
Income tax (expense) benefit related to items of
other comprehensive income..................... 14 32 (22)
Comprehensive income (loss)..................... $3,491 $(1,504) $1,810
</TABLE>

(a) Net income and comprehensive income amounts are presented on a pro forma
basis as if the Company had been subject to federal and state income taxes.

The components of accumulated other comprehensive income at December 31, 1998
and 1999 are as follows:

<TABLE>
<CAPTION>
----------
1998 1999
---- ----
<S> <C> <C>
Unrealized loss on short-term investments...................... $(69) $(39)
==== ====
</TABLE>

F-16
<PAGE>

PSW Technologies, Inc.

Notes to Financial Statements - (Continued)

13. Quarterly Information (Unaudited)

Summarized quarterly financial information for 1997, 1998 and 1999 is as
follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
--------------------------------------------
Quarter ended
--------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1997
Total revenues................. $10,307 $10,702 $11,258 $11,851
Operating income............... 1,057 1,177 1,417 1,336
Pro forma net income........... 600 721 1,111 1,086
Pro forma diluted earnings per
share......................... $ 0.09 $ 0.10 $ 0.11 $ 0.11
Shares used in diluted earnings
per share calculation......... 6,740 7,290 9,973 10,063
1998
Total revenues................. $ 9,758 $ 9,867 $ 9,255 $10,221
Operating loss................. (564) (433) (2,415) (56)
Net income (loss).............. (212) (210) (1,130) 90
Diluted earnings (loss) per
share......................... $ (0.02) $ (0.02) $ (0.12) $ 0.01
Shares used in diluted earnings
(loss) per share calculation.. 8,990 9,057 9,146 10,053
1999
Total revenues................. $10,394 $11,006 $11,632 $12,791
Operating income............... 2 227 575 1,088
Net income..................... 152 284 514 830
Diluted earnings per share..... $ 0.01 $ 0.03 $ 0.05 $ 0.08
Shares used in diluted earnings
per share calculation......... 10,230 10,202 10,549 11,022
</TABLE>

14. Subsequent Events (unaudited)

On February 22, 2000, the Board of Directors adopted and approved the 2000 Non-
Officer Stock Option/Stock Issuance Plan and reserved 250,000 shares of common
stock for issuance thereunder.

In March 2000, the Company's Board of Directors authorized management to file a
registration statement on form S-3 with the Securities and Exchange Commission
to permit the Company to sell shares of its common stock to the public.

F-17
<PAGE>

Part II

Information Not Required in Prospectus

Item 14. Other Expenses of Issuance and Distribution.

The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the registrant in connection with the sale of
common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD fee and the Nasdaq National Market listing fee.

<TABLE>
<S> <C>
SEC registration fee............................................. $ 40,322
NASD fee......................................................... 30,500
Nasdaq National Market listing fee............................... 17,500
Printing and engraving expenses.................................. 175,000
Legal fees and expenses.......................................... 125,000
Accounting fees and expenses..................................... 75,000
Blue sky fees and expenses....................................... 10,000
Transfer agent fees.............................................. 15,000
Miscellaneous.................................................... 180,000
--------
Total.......................................................... $668,322
========
</TABLE>

Item 15. Indemnification of Directors and Officers.

Section 145 of the Delaware General Corporation Law (the "DGCL") provides, in
effect, that any person made a party to any action by reason of the fact that
he is or was a director, officer, employee or agent of PSW may and, in certain
cases, must be indemnified by PSW against, in the case of a non-derivative
action, judgments, fines, amounts paid in settlement and reasonable expenses
(including attorneys' fees) incurred by him as a result of such action, and in
the case of a derivative action, against expenses (including attorneys' fees),
if in either type of action he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of PSW. This
indemnification does not apply, in a derivative action, to matters as to which
it is adjudged that the director, officer, employee or agent is liable to PSW,
unless upon court order it is determined that, despite such adjudication of
liability, but in view of all the circumstances of the case, he is fairly and
reasonably entitled to indemnity for expenses, and, in a non-derivative action,
to any criminal proceeding in which such person had reasonable cause to believe
his conduct was unlawful.

Article VIII of PSW's certificate of incorporation, as amended, provides that
no director of PSW shall be liable to PSW or its stockholders for monetary
damages for breach of fiduciary duty as a director to the fullest extent
permitted by the DGCL.

Article IX of PSW's certificate of incorporation, as amended, also provides
that PSW shall indemnify to the fullest extent permitted by Delaware law any
and all of its directors and officers, or former directors and officers, or any
person who may have served at PSW's request as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise.

Reference is made to Section 7 of the underwriting agreement to be filed as
Exhibit 1.1 hereto, pursuant to which the Underwriters have agreed to indemnify
officers and directors of PSW and the selling stockholders against certain
liabilities under the Securities Act.

PSW has entered into Indemnity Agreements with each director of PSW. Pursuant
to such agreements, PSW will be obligated, to the extent permitted by
applicable law, to indemnify such directors against all expenses, judgments,
fines and penalties incurred in connection with the defense or settlement of
any actions brought against them by reason of the fact that they were directors
of PSW or assumed certain responsibilities at the direction of PSW. PSW also
maintains directors and officers liability insurance.

II-1
<PAGE>

Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits.
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.

4.1** Specimen Common Stock Certificate.

5.1 Opinion of Brobeck, Phleger & Harrison LLP.

23.1*** Consent of Independent Auditors, Ernst & Young LLP.

23.2 Consent of Brobeck, Phleger & Harrison LLP. Reference is made to
Exhibit 5.1.

24.1*** Power of Attorney (see page II-3).
</TABLE>

* To be included by amendment.
** Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (File No. 333-21565).

*** Previously filed as an exhibit to this Registration Statement.

Item 17. Undertakings.

The undersigned registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act, each filing of the registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Exchange Act (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Exchange Act), that is incorporated by
reference in this registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer, or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the registrant
will unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

II-2
<PAGE>

Signatures

Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Austin,
State of Texas, on March 23, 2000.

PSW Technologies, Inc.

/s/ Timothy D. Webb
By: ____________________________________
Timothy D. Webb
President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Timothy D. Webb President, Chief Executive March 23, 2000
______________________________________ Officer and Director
Timothy D. Webb (principal executive
officer)

/s/ Keith D. Thatcher* Chief Financial Officer, March 23, 2000
______________________________________ Vice President of Finance
Keith D. Thatcher and Treasurer (principal
financial officer)

/s/ Kasaundra L. Smith* Controller (principal March 23, 2000
______________________________________ accounting officer)
Kasaundra L. Smith

/s/ Wade E. Saadi* Chairman of the Board March 23, 2000
______________________________________
Wade E. Saadi

/s/ Edward C. Ateyeh, Jr.* Director March 23, 2000
______________________________________
Edward C. Ateyeh, Jr.

/s/ Thomas A. Herring* Director March 23, 2000
______________________________________
Thomas A. Herring

/s/ W. Frank King* Director March 23, 2000
______________________________________
W. Frank King

/s/ Kevin B. Kurtzman* Director March 23, 2000
______________________________________
Kevin B. Kurtzman

/s/ Michael J. Maples* Director March 23, 2000
______________________________________
Michael J. Maples
</TABLE>

/s/ Timothy D. Webb

*By: _____________________

Timothy D. Webb

Attorney-in-Fact

II-3

<PAGE>

EXHIBIT 5.1

March 23, 2000

PSW Technologies, Inc.
6300 Bridgepoint Parkway
Building 3, Suite 200
Austin, Texas 78730

Re: PSW Technologies, Inc.
Registration Statement on Form S-3
for 2,875,000 Shares of Common Stock

Ladies and Gentlemen:

We have acted as counsel to PSW Technologies, Inc., a Delaware
corporation (the "Company"), in connection with the proposed issuance and sale
by the Company of up to 1,437,500 shares of the Company's Common Stock (the
"Company Shares"), and the sale by stockholders of the Company of an aggregate
of up to 1,437,500 shares of the Company's Common Stock (the "Selling
Stockholder Shares") pursuant to the Company's Registration Statement (No. 333-
32464) on Form S-3 (the "Registration Statement") filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the "Act").
The Company Shares and the Selling Stockholder Shares are hereinafter referred
to as the "Shares".

This opinion is being furnished in accordance with the requirements of
Item 16 of Form S-3 and Item 601(b)(5)(i) of Regulation S-K.

We have reviewed the Company's charter documents and the corporate
proceedings taken by the Company in connection with the issuance and sale of the
Shares. Based on such review, we are of the opinion that the Shares have been
duly authorized, and the Selling Stockholder Shares are, and if, as and when
issued in accordance with the Registration Statement and the related prospectus
(as amended and supplemented through the date of issuance), the Company Shares
will be, legally issued, fully paid and nonassessable.

We consent to the filing of this opinion letter as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus which is part of the Registration Statement.
In giving this consent, we do not thereby admit that we are within the category
of persons whose consent is required under Section 7 of the Act, the rules and
regulations of the Securities and Exchange Commission promulgated thereunder, or
Item 509 of Regulation S-K.

This opinion letter is rendered as of the date first written above and
we disclaim any obligation to advise you of facts, circumstances, events or
developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinion expressed herein. Our opinion is expressly
limited to the matters set forth above and we render no opinion,
<PAGE>

PSW Technologies, Inc.
Page 2

whether by implication or otherwise, as to any other matters relating to the
Company or the Shares.

Very truly yours,

BROBECK, PHLEGER & HARRISON LLP