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Filed Pursuant to Rule 424(b)(4)

4,600,000 Shares

Common Stock

        Integrated Information Systems, Inc. is offering 4,600,000 shares of its common stock. This is our initial public offering and no public market currently exists for our shares. Our common stock has been approved for quotation on the Nasdaq National Market under the symbol “IISX.” The initial public offering price will be $15.00 per share.

Investing in our common stock involves risks.

      The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

      The underwriters may purchase up to an additional 690,000 shares of common stock from a selling stockholder and us to cover over-allotments. FleetBoston Robertson Stephens Inc. expects to deliver the shares of common stock to purchasers on March 22, 2000.

Robertson Stephens

The date of this prospectus is March 17, 2000

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INSIDE FRONT COVER

      Planetary illustration with “INFORMATION IS THE ONE TRUE GLOBAL CURRENCY. SPEND IT WISELY.” superimposed thereon. Surrounding the illustration is a line of repeating text which reads “INNOVATIONS FOR THE NEW E-CONOMY.” Company’s logo is located in the bottom right hand corner of the illustration.

GATEFOLD

First Page of Gatefold:

      Graphic of an arc area covering approximately  1/3 of the left side of the page. In the top half of the arc is the heading “IIS POSITIONING.” The text below this heading reads “IIS is a full-service provider of integrated Internet solutions focused exclusively on the digital transformation of business.” In the bottom half of the page is the heading “IIS PROMISE.” The text below this heading reads “We are committed to helping businesses understand the full potential of the Internet. By developing innovative e-business solutions with a focus on speed-to-market, we enable them to realize this potential.”

      Graphic of three dimensional pyramid in the middle of the remainder of page. Above triangle is written “IIS APPROACH, We offer a unique integrated full-service approach that goes beyond the traditional Internet service model.”

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Second Page of Gatefold:

      The page includes five bullets. The first bullet, “STRATEGY CONSULTING,” is followed by the text “Comprehensive e-business transformation planning.”

      The second bullet is titled “CUSTOMER EXPERIENCE DESIGN” and is followed by the text “Information architecture and front-end creative design.”

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      The third bullet is titled “APPLICATION DEVELOPMENT AND INTEGRATION” and is followed by the text “Engineering and implementation of e-business systems.”

      The fourth bullet is titled “NETWORK INFRASTRUCTURE SERVICES” and is followed by the text “Network and Security evaluation, architecture, and implementation.”

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      The fifth bullet is titled “APPLICATION MANAGEMENT SERVICES” and is followed by the text “Hosting and ongoing applications support.”

Inside Back Cover

      Graphic of an arc area covering approximately 1/3 of the right side of the page. At the top of this graphic is a paragraph titled “THE REACH OF OUR INDUSTRY EXPERTISE IS AS WIDE AS THE WEB ITSELF” which reads as follows:

	“From retail to financial services to health care, we’re helping businesses realize the full potential of the Internet.”

      At the bottom of this graphic is the Company’s logo.

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      The left  2/3 of the page contains screen shots of two Web sites. At the top of the page is a series of tiled screen shots from Checker Auto Parts’ Web site. To the right of this is the following text:

	“CSK is one of the largest retailers of automotive parts and accessories in the western United States.

      In the middle of the page is a series of tiled screen shots from the Alloutdoors.com Web site. To the left of this is the following text:

	“Alloutdoors.com is an on-line community and retail site for hunting, fishing, camping, and general outdoor enthusiasts.”

      You should only rely on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are 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 our common stock.

      Until April 11, 2000 (25 days after the date of this prospectus), all dealers that buy, sell, or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers’ obligations to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

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      We have filed for trademark registration of “Integrated Information Systems,” “Dimensions,” “Innovations for the new economy,” “nextdimension,” and other trademarks. All other trademarks or trade names referred to in this prospectus are the property of their respective owners.

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SUMMARY

      You should read the following summary together with the more detailed information appearing elsewhere in this prospectus, including in our consolidated financial statements and related notes.

Integrated Information Systems, Inc.

Our Business

      We are a full-service provider of integrated Internet solutions focused exclusively on the digital transformation of businesses. By partnering closely with our clients and leveraging their existing assets and technology base, we are able to deliver customized solutions that fulfill each client’s unique needs. Our service offerings go beyond the traditional service model of strategy consulting, creative design, and Internet application development to include the critical elements of network infrastructure and application management and hosting services. Utilizing our proprietary service delivery methodology, we provide our clients with a framework in which innovative Internet solutions can be conceptualized, enhanced, and implemented with the speed-to-market necessary to succeed in the rapidly evolving Internet environment. We maintain relationships with a number of leading technology companies, including Cisco Systems, IBM, Microsoft, Oracle, Sun Microsystems, and Vignette, to facilitate our service delivery to clients. Through these relationships, we obtain training and certification in their products, integrate their products into our client solutions, and provide cross-referrals of new business opportunities.

Our Market

      The rapidly emerging use of the Internet has significantly altered the business environment of a broad array of companies in numerous industries and is increasingly driving these businesses to employ Internet solutions in order to compete. To effectively execute their transitions to a digital environment, companies are increasingly turning to Internet professional service organizations for assistance. This has created significant opportunity for a fully integrated Internet service provider possessing comprehensive strategy consulting, customer experience design, application development and integration, network infrastructure, and application management and hosting services. According to International Data Corporation, the demand for Internet services is predicted to grow from $7.8 billion in 1998 to $78.5 billion in 2003, representing a compound annual growth rate of approximately 59%.

Our Solution

      We believe that we are one of the few Internet professional services firms offering the full range of services necessary to rapidly transform businesses to a digital environment. The fundamental elements of our solution include:

	•	Integrated Full-Service Approach. We provide the broad range of services necessary to meet our clients’ complex e-business needs. The key capabilities underlying our integrated, full-service approach are:

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	•	Advanced e-Business Expertise. We provide our clients with the most current e-business technologies through our unique internal knowledge sharing process that we call our Centers of Excellence. Through these Centers of Excellence, our senior technology specialists identify, assess, and deploy new technologies throughout our organization. Our Centers of Excellence program ensures the timely integration of new technologies into our service delivery capabilities, enabling our consultants to transfer these technologies across multiple client engagements.
	•	Industry-Specific Expertise. We seek to deliver superior solutions for our clients by combining our leading edge Internet technology expertise with an in-depth business knowledge of the industries in which our clients compete. By understanding our clients’ businesses, our consultants effectively act as a liaison between the client and our technology implementation team, reducing the time and personnel commitment otherwise required by a client to convey and translate their unique business concerns.
	•	Rapid Implementation Solutions. Using our proprietary service delivery methodology, which we call Dimensions, we are able to rapidly provide comprehensive solutions that incorporate our knowledge of the most current leading edge technologies and leverage our extensive expertise in specific vertical markets. Our Dimensions methodology is a framework involving six distinct steps through which we conceive, explore, design, create, support, and evolve our clients’ transition to a web-based environment. This framework facilitates the delivery of clearly conceptualized, enhanced, and implemented solutions with the speed-to-market demanded in today’s rapidly changing e-business environment.

Our Strategy

      Our objective is to become an integral component of our clients’ business success by providing high quality digital solutions. By providing the technologically advanced, customer-specific, and rapidly implemented services demanded in today’s dynamic e-business environment, we seek to build upon our position as a comprehensive provider of Internet professional services. Key elements of our business strategy include:

	•	create and expand long-term client relationships;
	•	continue to provide leading edge technology expertise;
	•	expand geographic presence;
	•	strengthen and create key alliances;
	•	attract and retain professionals by maintaining our innovative culture; and
	•	promote and expand brand recognition.

Our Clients

      Our current clients include many leading and emerging companies in the financial services, health care, local government, manufacturing, and retail industries. Over the past year, we have performed services for clients such as American Express (which accounted for 35% of our 1999 revenues), CSK Auto, CommercialWare, DentalTown.com, EMC, Employee Solutions, Frederick’s of Hollywood, goracing.com, Intel, PCS Health Systems, and visitalk.com.

Our Offices

      Our executive offices are located at 1560 West Fountainhead Parkway, Tempe, Arizona 85282, and our telephone number is (480) 317-8000. Within the past year, we have commenced operations in Atlanta, Boston, Denver, Las Vegas, and Los Angeles and opened a solutions development center in Bangalore, India. Our Web site can be located at www.iisweb.com. Information contained on our Web site should not be considered a part of this prospectus.

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The Offering

•	no exercise of the underwriters’ over-allotment option; and
•	the automatic conversion of all outstanding shares of our Series A, B, and C preferred stock into an aggregate of 4,538,170 shares of common stock.

Except as otherwise indicated, the total number of shares to be outstanding after this offering excludes:

•	2,503,593 shares of common stock issuable upon the exercise of stock options outstanding at February 21, 2000 at a weighted average exercise price of $2.16 per share;
•	1,991,082 shares of common stock reserved for future grants under our stock option plan;
•	400,000 shares of common stock reserved for future issuances under our employee stock purchase plan; and
•	117,000 shares of common stock issuable upon the exercise of outstanding warrants at an exercise price of $2.00 per share.

Recent Developments

      We recently entered into a letter of intent to sublease facilities and assume leases of equipment for an application hosting center currently operated as an in-house facility by a customer. In connection with the transaction, we would provide hosting services for the customer’s web site and related applications. Payments for the facilities and capital equipment total approximately $18 million over up to 10 years. The transaction would accelerate expansion of our application hosting facilities as contemplated in “Use of Proceeds” below. Completion of the transaction is subject to a number of conditions including preparation and execution of definitive agreements, consents of third parties, and other matters.

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Summary Consolidated Financial Data

      The summary financial information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus. Prior to August 24, 1998, we elected to be taxed as an S corporation under the Internal Revenue Code and were not subject to income taxes. Pro forma net earnings (loss) reflects the income taxes that would have been recorded had we been taxed at an effective tax rate of 40%. The earnings (loss) per share and pro forma net earnings (loss) per common share reflect the conversion of our Series A preferred stock as of April 1999 and our Series B preferred stock as of November 1999, when the shares were issued, and the accrual of dividends on the preferred stock. The pro forma balance sheet data gives effect to our issuance of 2,119,625 shares of Series C preferred stock on January 14, 2000 for net cash proceeds of $19,411,000. The pro forma as adjusted balance sheet data gives effect to the automatic conversion of all of the outstanding shares of our preferred stock into 4,538,170 shares of common stock upon consummation of this offering and our sale of 4,600,000 shares to be sold in this offering at an initial public offering price of $15.00 per share, less the underwriters’ discounts and commission and estimated expenses of the offering.

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RISK FACTORS

      This offering involves a high degree of risk. You should carefully consider the risks described below before you decide to buy our common stock. If any of the following risks actually occurs, our business, results of operations, or financial condition would likely suffer. In this case, the market price of our common stock could decline and you could lose all or part of your investment.

Risks Related to Our Business

We have experienced recent operating losses and may incur operating losses in future periods, which could cause the price of our common stock to decline.

      We had a net loss of approximately $1.2 million for the year ended December 31, 1998 and a net loss of approximately $1.4 million for the year ended December 31, 1999. We expect to incur significantly greater losses in 2000 and 2001 as we grow our business. If we do not achieve continued revenue growth, we could experience operating losses greater than already anticipated or for periods after 2001. These losses or any fluctuation in our operating results could cause the market value of our common stock to decline.

We rely on a small number of clients for most of our revenues and our revenues will decline significantly if we cannot retain or replace, or if we experience collection problems from, these clients.

      We derive, and expect to continue to derive, a significant portion of our revenues from a limited number of clients. In 1997, our two largest clients accounted for approximately 40% of our revenues. In 1998, our three largest clients accounted for approximately 42% of our revenues. One of our current clients, American Express, which first engaged us in the fourth quarter of 1998 and is responsible for a total of 20 active projects as of December 31, 1999, accounted for 35% of our revenues during 1999.

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

If we are unable to attract and retain professional staff, we will be unable to provide our services effectively and consequently may be unable to increase or maintain current revenue levels or achieve or maintain profitability, which would cause the price of our common stock to decline.

      We derive substantially all of our revenue from the billings of our professional services personnel on projects. If we fail to attract and retain professionals, we may not be able to successfully compete for new projects, timely finish existing projects, or generally carry out our business plan. The emergence of the Internet and the growth in e-commerce requires integrated solutions implemented by Internet and network professionals qualified in leading and emerging technologies. There is significant competition for professionals with the skills required to provide these solutions, as businesses quickly adopt and seek to implement their e-commerce strategies. Internet professional service providers who are unable to attract and retain qualified professionals will have difficulty competing in today’s marketplace. We may lose prospective qualified employees to clients or competitors. We may not attract a sufficient number of highly skilled professionals, or retain, train, and motivate the professionals that we do attract. Failure to do so could impair our ability to adequately manage and complete our existing projects or obtain new projects. In addition, declines in the trading price of our common stock could materially and adversely affect employee morale and retention and other aspects of our business.

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

      Our revenues and results of operations have fluctuated significantly in the past and could fluctuate significantly in the future. For example, in 1998 our pro forma quarterly net earnings ranged from a loss of $574,000 in the first quarter to earnings of $67,000 in the second quarter. In 1999, our pro forma quarterly net earnings ranged from a loss of $2.2 million in the fourth quarter to earnings of $559,000 in the second quarter. You should not rely on period-to-period comparisons of operations as an indication of future performance.

      Our results may fluctuate due to the factors described in these “Risk Factors” as well as:

	•	demand for our services;
	•	changes in the mix of services offered by us; and
	•	increases in our operating expenses.

      A substantial portion of our operating expense is related to personnel costs, marketing programs, and overhead, which cannot be adjusted quickly and is therefore relatively fixed in the short term. Our operating expenses are based, in significant part, on our expectations of future revenues. If actual revenues are below our expectations, we may not achieve our anticipated operating results. Moreover, it is possible that in some future periods our results of operations may be below the expectations of analysts and investors. In this event, the market price of our common stock is likely to decline.

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

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

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

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

	•	delayed or lost revenues due to adverse client reaction;
	•	requirements to provide additional services to a client at no or a limited charge;
	•	refunds of fees for failure to meet obligations;
	•	negative publicity about us and our services; and
	•	claims for substantial damages against us.

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

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

      Although we provide consulting services primarily on a time and materials compensation basis, approximately 11% of our consulting revenue was derived from fixed-price, fixed-time engagements in 1999, and approximately 43% of our revenues were derived from fixed-price, fixed-time engagements in 1998. Our failure to accurately estimate the resources required for a fixed-price, fixed-time engagement or our failure to complete our contractual obligations in a manner consistent with our projections or contractual commitments could harm our overall profitability and our business. From time to time, we have been required to commit unanticipated additional resources to complete some fixed-price, fixed-time engagements, resulting in losses on these engagements. We believe that we may experience similar situations in the future. In addition, we may negotiate a fixed price for some projects before the design specifications are finalized, resulting in a fixed price that is too low and causing a decline in our operating results.

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

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

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

      We have vendor alliances with over 75 companies. We have written agreements with about one-third of these companies. All of our other relationships rely on oral arrangements. Although these relationships generally entail only the supply of technologies or solutions used in our clients’ solutions, we also rely on these relationships for client referral and marketing opportunities, access to advanced technology and training as well as other benefits. These relationships are non-exclusive and the vendors are free to enter into similar or more favorable relationships with our competitors. Whether written or oral, many of the agreements underlying our technology alliance relationships are general in nature, do not legally bind the parties to transact business with each other or to provide specific client referrals, cross-marketing opportunities, or other intended benefits to each other, have indefinite terms, and may be ended at the will of either party. We may not be able to maintain our existing strategic relationships and may fail to enter into new relationships. If we are unable to maintain these relationships, the benefits that we derive from these relationships, including the receipt of important sales leads, cross-marketing opportunities, access to emerging technology training and certifications, and other benefits, may be lost. Consequently, we may not be able to offer desired solutions to

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If we are unable to successfully open new regional offices, we may incur increased operating expenses without corresponding increased revenues, which may limit our ability to achieve or maintain profitability and cause the price of our common stock to decline.

      A key component of our business strategy is to open regional offices in new geographic locations. We may be unable to select appropriate locations for these offices, to open them efficiently, or to manage them profitably. If we do not implement this strategy successfully, we may incur increased operating expenses without increased revenues, which would hurt our stock price.

If our efforts to develop brand awareness are not successful, we may not be able to increase our revenues sufficiently to offset the marketing costs that we will incur in these efforts.

      Because the Internet professional service provider industry is expanding rapidly, an element of our business strategy is to develop and maintain widespread awareness of our brand name in our target markets. To promote our name, we plan to increase our marketing expenses. If our marketing efforts are not successful, we may not experience increases in revenues to offset the increase in our marketing expenses, causing our operating margins to decline. In addition, if we are unable to further develop our brand awareness, we may not attain the growth in revenues that we seek.

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

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

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

      Our success is dependent, in part, upon our intellectual property rights. We rely upon a combination of trade secret, confidentiality and nondisclosure agreements, and other contractual arrangements, as well as copyright and trademark laws to protect our proprietary rights. We have no patents or pending patent applications. We enter into confidentiality agreements with our employees, generally require that our consultants and clients enter into these agreements, and attempt to limit access to and distribution of our proprietary information. Nevertheless, we may be unable to deter misappropriation of our proprietary information or to detect unauthorized use and take appropriate steps to enforce our intellectual property rights or proprietary information.

      We attempt to retain significant ownership or rights to use our internally developed software applications and to build applications which we can market and adapt through further customization for other client projects. Under some of our client contracts, all of our project developments are the property of the client and

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

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

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

      In order to secure particularly large engagements or engagements with industry leading clients, we have agreed on limited occasions not to perform services, or not to utilize some of our intellectual property rights developed for clients, for competitors of those clients for limited periods of time ranging from one to three years. In our agreement with American Express, our largest client, we have agreed not to perform services for competitors of American Express for one year after each project completion date and not to assign consultants who have worked on American Express projects to other clients’ competitive projects for six months after completing work for American Express. These non-compete provisions reduce the number of our prospective clients and our potential sources of revenue. These agreements also may limit our ability to execute a part of our business strategy of leveraging our business expertise in discreet industry segments by attracting multiple clients competing in those industries. In addition, these agreements increase the significance of our client selection process because some of our clients compete in markets where only a limited number of companies gain meaningful market share. If we agree not to perform services or to utilize intellectual property rights for a particular client’s competitors or competitive projects, we are unlikely to receive significant future revenues in that particular market.

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

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

If businesses do not adopt and accept application hosting services, we may be unable to recover our investment in providing these services, reducing our profitability and the price of our common stock.

      Our ability to increase revenues and profitability depends in part on the adoption and acceptance of third-party application hosting services by our clients. We have only recently begun to offer third-party application hosting services. We intend to expend significant resources to increase our data center capacity to accommodate our hosting services. If we do not generate sufficient revenues from these services, our operating results and stock price could be negatively affected.

Some of our clients are emerging companies that have little or no operating history and may lack the resources to pay our fees, which could cause us to incur losses on these accounts.

      We derive a significant portion of our revenues from small emerging companies, particularly start-up e-venture companies that have limited operating histories and resources to pay our fees. In addition, we

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

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

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

      We may need to raise additional funds through public or private equity or debt financings in order to:

	•	support additional capital expenditures;
	•	take advantage of acquisition or expansion opportunities;
	•	develop new services; or
	•	address additional working capital needs.

      Our inability to obtain financing on terms acceptable to us, or at all, may limit our ability to increase revenues or to achieve profitability. In addition, if we are able to raise additional capital through the sale of equity securities, your investment in us would be diluted, which could cause our stock price to decline.

We may not be able to maintain adequate personnel, systems, or other resources to effectively manage our planned growth, which could impair our ability to deliver project work and cause our employee and client relations to suffer.

      Our recent growth at times has strained our managerial and operational resources by diverting management attention from client project implementation to personnel recruitment, training, and infrastructure development. We cannot assure you that we will be able to manage our planned growth effectively. To manage future growth, we must continue to improve our operating and financial systems, procedures, and controls, and to expand, train, retain, and manage our employee base. If our systems, procedures, and controls are inadequate to support our operations, we would not be able to attract new clients or employees and our planned expansion could be impaired.

Our revenues may decline and we may not achieve profitability if growth in the use of the Internet declines.

      Our business is dependent upon continued growth in the use of the Internet by our clients, prospective clients and their customers, suppliers, and other business constituents. If use of the Internet does not increase

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	•	actual or perceived lack of security of information;
	•	lack of access and ease of use;
	•	congestion of Internet traffic;
	•	increases in access costs to the Internet;
	•	excessive or new governmental regulation;
	•	uncertainty regarding intellectual property ownership;
	•	reluctance to adopt new business methods; and
	•	costs associated with the obsolescence of existing infrastructure.

Risks Related to our Stock and this Offering

The volume of trading and price of our common stock could fluctuate significantly, adversely affecting our stock price.

      Currently there is no public market for our common stock. Many publications and market commentators indicate that the stock of technology companies focused on the Internet trade at overly inflated prices. If investor interest in these stocks declines generally, the price of our common stock could drop suddenly and significantly.

The sale of a substantial number of shares of our common stock in the public market could adversely affect their market price, negatively impacting your investment.

      If our stockholders sell substantial amounts of our common stock, including shares issuable upon the exercise of outstanding options and warrants, in the public market following this offering, the market price of our common stock could decline. Any sales of our common stock also might make it more difficult for us to sell our securities in the future at a time and price that we deem appropriate, if at all. Immediately after this offering, we will have outstanding 20,051,545 shares of common stock. Of these shares, the 4,600,000 shares being offered in this offering will be freely tradable. Some holders of shares of our common stock who held our preferred stock outstanding immediately prior to the offering and one of our warrant holders have registration rights relating to a total of 4,638,170 shares of our common stock, enabling them to require us to register their shares for sale under the Securities Act beginning 180 days after the completion of this offering. Our directors, executive officers, and most of our stockholders have signed lock-up agreements stating that they will not sell, directly or indirectly, any common stock without the prior written consent of the underwriters for a period of 180 days from the date of this prospectus. However, the underwriters may, in their sole discretion and at any time or from time to time, without notice, release all or a portion of the securities subject to the lock-up agreements.

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

      At the completion of this offering, James G. Garvey, Jr., a director, executive officer, and our founder, will own approximately 50% of our outstanding common stock (48% if Mr. Garvey sells a portion of his shares upon exercise of the underwriters’ over-allotment option). Mr. Garvey’s stock ownership and management positions enable him to exert considerable influence over us, including in the election of

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If our management team does not effectively allocate the proceeds of this offering, we may fail to achieve our business plan and our stock price may decline.

      Our management has significant flexibility in applying the proceeds that we receive in this offering. We intend to use a portion of the proceeds from this offering to fund expansion of and improvements to our facilities, geographic expansion, increases in our marketing initiatives, hiring of additional personnel, and potential acquisitions. Because the proceeds are not required to be allocated to any specific investment or transaction, you cannot determine the value or propriety of our management’s application of the proceeds. If we do not allocate the proceeds of the offering effectively, we may fail to achieve our business plan and our stock price may decline.

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

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

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

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

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FORWARD-LOOKING STATEMENTS; MARKET DATA

      Some of the assertions in this prospectus contain “forward-looking” information as that term is defined by the federal securities laws. These assertions include, among others, those found under “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Forward-looking assertions may be identified by use of the terms “may,” “will,” “expect,” “anticipate,” “estimate,” and similar words, although some forward-looking assertions are expressed differently. You should be aware that our actual results could differ materially from those contained in the forward-looking assertions due to a number of factors, some of which are beyond our control. Factors that could materially and adversely affect our results and cause them to differ from those contained in this prospectus include, but are not limited to:

	•	the competitive environment in which we operate;
	•	our ability to attract or retain qualified personnel and maintain good employee relations; and
	•	any legal claims asserted against us.

      You should also consider carefully the statements under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and other sections of this prospectus which address additional factors that could cause our actual results to differ from those set forth in this prospectus.

      This prospectus contains market data related to the Internet professional services industry prepared by International Data Corporation, Forrester Research, and META Group, Inc. did not retain these firms to provide this information, nor have we obtained their consents to use this information. These market data projections are based on a number of assumptions. If these assumptions turn out to be incorrect, actual results may differ from the projections based on these assumptions. As a result, our markets may not grow at the rates projected by these data, or at all. The failure of these markets to grow at these projected rates may have a material adverse effect on our business, results of operations and financial condition, and the market price of our common stock.

      The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

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USE OF PROCEEDS

      The net proceeds from the sale of the shares of common stock we are offering will be approximately $63.2 million. If the underwriters fully exercise the over-allotment option, the net proceeds of the shares sold by us will be approximately $72.8 million if the selling stockholder does not participate in the over-allotment option, or approximately $69.0 million if the selling stockholder participates in the over-allotment option in full. “Net proceeds” is what we expect to receive after paying underwriting discounts and commissions and estimated offering expenses. Net proceeds are calculated using the initial public offering price of $15.00 per share.

      We expect to use the proceeds from this offering for general corporate and working capital purposes, including approximately $15.0 million to fund capital improvements to our existing facilities, approximately $3.0 million to obtain additional office space, approximately $5.0 million to continue development of our data center for our applications hosting operations, approximately $5.0 million to increase our marketing efforts, and an undetermined amount to fund possible acquisitions of other entities. We are not currently in discussions with any other entities regarding acquisitions and have not identified any specific acquisition candidates. Pending such uses, we will invest the net proceeds in investment grade, interest-bearing securities.

      Other than to generate working capital funds for the purposes outlined above, the principal purposes of this offering are:

	•	to increase our equity capital;
	•	to enhance our ability to use common stock to attract, motivate, and retain professionals and other employees;
	•	to increase our visibility and brand awareness in our markets;
	•	to provide liquidity to existing stockholders;
	•	to facilitate our access to public capital markets for future financing needs; and
	•	to enhance our ability to use our capital stock as consideration for any future acquisitions.

      We will not receive any proceeds from the sale of common stock by Mr. Garvey, a selling stockholder, if the underwriters exercise their over-allotment option.

      Prior to August 24, 1998, we were a subchapter S corporation under the Internal Revenue Code. Although we made distributions to our stockholders as an S corporation, we have not paid any cash dividends since terminating our S corporation status. We do not intend to pay cash dividends. We intend to retain all available funds for use in the operation and expansion of our business. In addition, our current bank loan facility contains covenants limiting the payment of cash dividends without the bank’s consent.

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CAPITALIZATION

      The following table sets forth our capitalization as of December 31, 1999. Our capitalization is presented:

	•	On an actual basis.
	•	On a pro forma basis to reflect the issuance of our Series C preferred stock in January 2000 and the filing of an amended and restated certificate of incorporation in connection with our reincorporation in Delaware.
	•	On a pro forma as adjusted basis to reflect:

	•	The sale of the 4,600,000 shares offered hereby (excluding the over-allotment option) at the initial public offering price of $15.00 per share, after deducting discounts and estimated offering expenses payable by us.
	•	The automatic conversion of all outstanding shares of our preferred stock into 4,538,170 shares of common stock upon the closing of this offering. The following table assumes the conversion of our outstanding shares of preferred stock into shares of common stock on a one-for-one basis.

The foregoing table does not include stock options and warrants to purchase common stock, which are more fully described in “Description of Capital Stock.”

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DILUTION

      Our pro forma net tangible book value as of December 31, 1999 was $23.3 million or $1.51 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of common stock outstanding after giving effect to the conversion of all outstanding shares of preferred stock into shares of common stock (including preferred stock issued in January 2000). Please see “Capitalization.”

      After giving effect to the sale of 4,600,000 shares of common stock offered by this prospectus at the initial public offering price of $15.00 per share and receipt of the estimated net proceeds therefrom, our pro forma net tangible book value as of December 31, 1999 would have been $86.5 million or $4.31 per share. This represents an immediate increase in pro forma net tangible book value of $2.80 per share to existing stockholders and an immediate dilution of $10.69 per share to the new investors. If the initial public offering price is higher or lower, the dilution to new investors will be, respectively, greater or less. The following table illustrates this per share dilution.

      The following table summarizes on a pro forma basis, as of December 31, 1999, the differences between the number of shares of common stock purchased from us, the aggregate consideration paid to us, and the average price per share paid by existing stockholders and new investors purchasing shares of common stock in this offering, after giving effect to the conversion of preferred stock into common stock.

      The foregoing discussion and tables assume no sale of shares of common stock, including shares held by an existing stockholder, pursuant to the underwriters’ over-allotment option. The information presented with respect to existing stockholders excludes as of December 31, 1999, 2,285,043 shares subject to outstanding options, under our 1997 Plan at a weighted average exercise price of $1.53 per share and 117,000 warrants to purchase common stock at a weighted average exercise price of $2.00 per share. To the extent all of these options and warrants had been exercised as of December 31, 1999, pro forma net tangible book value per share after this offering would be $3.85 and total dilution per share to new investors would be $11.15.

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SELECTED CONSOLIDATED FINANCIAL DATA

      The selected consolidated financial data set forth below should be read in conjunction with our consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. The selected financial data in this section is not intended to replace the consolidated financial statements. The balance sheet data as of December 31, 1998 and 1999 and statement of operations data for each of the three years ended December 31, 1999 have been derived from our audited consolidated financial statements and the notes thereto included elsewhere in this prospectus. Those consolidated financial statements were audited by KPMG LLP, independent auditors. The balance sheet data as of December 31, 1995, 1996 and 1997 and statement of operations data for the years ended 1995 and 1996 are derived from our historical consolidated financial statements not included in this prospectus.

      Prior to August 24, 1998, we elected to be taxed as an S corporation under the Internal Revenue Code. As an S corporation, we were not subject to income taxes. Pro forma net earnings (loss) reflect the income taxes that would have been recorded had we been subject to income taxes as a C corporation for all periods assuming an effective tax rate of 40%. Provision for income taxes and net loss for the year ended December 31, 1999 are actual as we were a C corporation for this entire period.

      All outstanding shares of preferred stock automatically convert into common stock upon completion of this offering. Due to the significance of the conversion of the preferred stock, net earnings (loss) per share using only common shares would not be meaningful. The pro forma earnings (loss) per common share reflect the conversion of Series A and Series B preferred shares as of April 1999 and November 1999, respectively, when the shares were issued.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

      The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this prospectus.

Overview

      We began operations in 1989 to assist clients in adopting new technologies. Initially focused on the microcomputer industry, we shifted our focus to client/ server technologies in 1993, and then to Internet-related technologies beginning in 1997.

      Our revenues have increased rapidly in recent periods. To meet increasing requirements resulting from our revenue growth, and in anticipation of further growth, we have significantly expanded our infrastructure. We have hired senior executives, increased our sales and marketing efforts, established new regional offices, expanded our physical facilities, including the development of a data center which houses our application hosting services, and initiated efforts to increase our brand awareness.

      We derive our revenues primarily from the delivery of professional services. We offer our services to clients under time and materials contracts or under fixed-price contracts. For time and material projects, we recognize revenues based on the number of hours worked by consultants at a rate per hour agreed upon with our clients. We recognize revenues from fixed-price contracts on a percentage-of-completion method based on project hours worked. The percentage of our revenues from fixed fee contracts was 11% in 1999 and 43% in 1998. As we have shifted our technology focus to the Internet, we expect to provide a greater portion of our services on a time and materials basis as our customers’ Internet solutions tend to have less clearly defined scopes and objectives. We provide and recognize our application hosting services at a minimum monthly fee, and charge extra for services that exceed agreed upon parameters. In addition, we charge our application hosting clients a one time set-up fee, which we recognize when set-up is complete.

      Our cost of revenues consist primarily of employee compensation and benefits for project personnel. Sales and marketing expenses consist primarily of compensation and benefits, and the costs of marketing programs. General and administrative expenses consist primarily of compensation and benefits for our executive management and our finance, administration, information technology, recruiting, and human resources personnel. General and administrative expenses also include research and development expense, depreciation, and operating expenses such as rent, insurance, telephones, office supplies, travel, outside professional services, training, and facilities costs. We expect all of our costs to increase as we add additional personnel, expand our sales and marketing efforts, open new offices, increase our recruiting efforts, enhance our information systems, and incur additional costs related to the growth of our business and operations as a public company.

      We have historically derived and believe that we will continue to derive a significant portion of our revenues from a limited number of clients who may change from year to year. Any cancellation, deferral, or significant reduction in work performed for our principal clients could harm our business and cause our operating results to fluctuate significantly from period to period. In addition, we plan to continue to expand our operations by hiring additional consultants and other employees, and adding new offices, systems, and other infrastructure. As a result of our continued infrastructure buildup and increase in operating expenses, we anticipate incurring a net loss in the fourth quarter of 1999 that will result in a net loss for the year, as well as net losses for the years 2000 and 2001. Further, our quarterly revenue, cost of revenues, and operating results have varied in the past due to fluctuations in the utilization of project personnel and are likely to vary significantly in the future. Therefore, we believe that period-to-period comparisons of our operating results may not necessarily be meaningful and should not be relied upon as indications of future performance.

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Results of Operations

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

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

      Revenues. Revenues increased 178% to $21.2 million in 1999 from $7.6 million in 1998. The increase in revenues reflects increases in the average rate per hour charged for services, increases in the size and number of typical client engagements reflecting engagements involving more complex Internet applications, and a significant increase in revenues from American Express. Our 30% increase in average hourly rates accounted for approximately $2.0 million of the increase. This increase in our average hourly rates is primarily attributable to an increased demand for our services and the more complex nature of our Internet applications services. The number of new client engagements contributed approximately $3.9 million for the year. Revenues from American Express were $7.5 million in 1999, compared to $251,000 in 1998.

      Cost of Revenues. Cost of revenues increased 167% to $11.3 million in 1999 from $4.3 million in 1998. This increase was due primarily to an increase in project personnel from 89 at December 31, 1998 to 252 at December 31, 1999. As a percentage of revenues, cost of revenues decreased from 56% in 1998 to 54% in 1999, primarily due to the increases in pricing.

      Selling and Marketing Expenses. Selling and marketing expenses increased 129% to $2.9 million in 1999 from $1.3 million in 1998. An increase of approximately $870,000 was due primarily to the addition of personnel in the sales and marketing departments in 1999. Additionally, the increase was due to increased advertising and promotional expenses of approximately $745,000 in 1999. As a percentage of revenues, selling and marketing expenses decreased to 14% in 1999 from 17% in 1998. The percentage decrease is due to the significant growth in revenues in 1999, which included substantial additional business from existing clients.

      General and Administrative Expenses. General and administrative expenses increased 164% to $8.1 million in 1999 from $3.1 million in 1998. Of the increase, $1.2 million was attributable to compensation paid to administrative personnel added in 1999. The balance was related to increases in recruiting and training expenses as well as additional insurance, depreciation, and rent expense. Because of our revenue growth, as a percentage of revenues, general and administrative costs decreased to 38% in 1999 from 40% in 1998.

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      Interest Expense. Interest expenses are related to borrowings under our credit facility and capital leases. Interest expense increased to $237,000 in 1999 from $212,000 in 1998.

      Pro Forma Income Tax Expense. The 1999 income tax benefit results primarily from the conversion of accrual to cash-based tax accounting while the 1998 income tax expense results primarily from nondeductible permanent differences.

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

      Revenues. Revenues increased 41% to $7.6 million in 1998 from $5.4 million in 1997. The increase in revenues was due primarily to increases in both the size and number of client projects.

      Cost of Revenues. Cost of revenues increased 27% to $4.3 million in 1998 from $3.3 million in 1997. The increase was due primarily to an increase in project personnel to 89 at December 31, 1998, from 56 at December 31, 1997. As a percentage of revenues, cost of revenues decreased from 62% in 1997 to 56% in 1998. The decrease reflects that a smaller portion of our revenues in 1998 were derived from product sales, which typically have a higher percentage cost of revenue than consulting revenues. Our mix of revenues in 1997 included an unusually high portion of product sales primarily due to one customer engagement.

      Selling and Marketing Expenses. Selling and marketing expenses increased 150% to $1.3 million in 1998 from $510,000 in 1997. An increase of approximately $500,000 was due primarily to the addition of sales and marketing personnel as well as increased advertising and promotional expenses of approximately $270,000 in 1998. As a percentage of revenues, selling and marketing expenses increased to 17% in 1998 from 9% in 1997.

      General and Administrative Expenses. General and administrative expenses increased 130% to $3.1 million in 1998 from $1.3 million in 1997. Of the increase, $360,000 was attributable to compensation paid to administrative personnel added in 1998. The balance was related to increases in recruiting and training expenses, as well as additional insurance, depreciation, and rent. As a percentage of revenues, general and administrative costs increased to 40% in 1998 from 25% in 1997.

      Interest Expense. Interest expense increased to $212,000 in 1998 from $144,000 in 1997. The increase was due to increased borrowings under our credit facility and increased borrowings through capital leases.

      Pro Forma Income Tax Expense. Our 1998 and 1997 income tax expense results primarily from nondeductible permanent differences, such as meals, entertainment, and life insurance premiums.

Quarterly Results of Operations

      The following table sets forth a summary of our unaudited quarterly operating results for each of the eight quarters ended December 31, 1999 and the percentage of our revenues represented by each item in the respective quarters. This data has been derived from our unaudited interim financial statements which, in our opinion, have been prepared on substantially the same basis as the audited consolidated financial statements contained elsewhere in this prospectus and include all normal recurring adjustments necessary for a fair presentation of the financial information for the periods presented. These unaudited quarterly results should be read in conjunction with our audited consolidated financial statements and notes thereto included elsewhere in this prospectus. The operating results in any quarter are not necessarily indicative of the results that may be expected for a full year or in any future period. Provision for income tax expense and net earnings (loss) for the quarters ended December 31, 1998, and thereafter are actual as we were a C corporation for these periods.

      Cost of revenues varies significantly from quarter to quarter, reflecting primarily differences in personnel utilization. In this regard, the decrease in gross profit in the fourth quarter of 1999 primarily reflects lower utilization of project personnel. We increased our project personnel by 39 persons during the quarter, many of whom did not engage in full-time revenue producing activities until the first quarter of 2000. The increase in

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Liquidity and Capital Resources

      Since inception, we have funded our operations and investments in property and equipment through cash generated from operations, capital lease financing arrangements, bank borrowings, and equity financings. At December 31, 1999, we had approximately $863,000 in cash and cash equivalents and $662,000 in working capital. In January 2000, we raised $20.2 million, before expenses, through a private placement of Series C preferred stock to institutional and other accredited investors.

      Net cash used in operating activities for the years ended December 31, 1999, 1998, and 1997 was $2.3 million, $1.3 million, and $247,000, respectively. Cash used in operating activities in each of these periods was the result of increases in accounts receivable and unbilled revenues on contracts, partially offset by increases in accounts payable and accrued expenses related to our growth. In 1999 and 1998, cash used in operating activities was also the result of net losses, adjusted for non-cash items primarily related to depreciation and amortization.

      Net cash used in investing activities for the years ended December 31, 1999, 1998, and 1997 was $2.3 million, $64,000, and $236,000, respectively. Cash used in investing activities in each period consisted

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      Net cash provided financing activities for the years ended December 31, 1999, 1998, and 1997 was $5.1 million, $1.6 million, and $570,000, respectively. In 1999, cash provided by financing activities was from the sale of our common stock, sale of our preferred stock, and borrowings under our credit facility. In 1998, cash provided by financing activities was from the sale of our common stock and borrowings under our credit facility. In 1997, the cash provided by financing activities was almost entirely from borrowings under our credit facility.

      Non-cash investing and financing activities for the years ended December 31, 1999, 1998, and 1997 consisted of new capital lease obligations for property and equipment of $1.9 million, $464,000, and $452,000, respectively.

      As of December 31, 1999, we had a $2.0 million line of credit, a $2.1 million multiple advance term loan, and a master lease agreement to finance up to $1.7 million of computer equipment, all with Imperial Bank. These facilities are secured by substantially all of our assets. The line of credit and the term loan bear interest at a rate of prime plus 1% (9.5% at December 31, 1999). The master lease agreement has an implied interest rate of approximately 10.5%. As of December 31, 1999, there was approximately $1.0 million outstanding under the line of credit, $885,000 under the term loan, and $1.4 million pursuant to the master lease agreement. The line of credit and term loan require compliance with certain financial and other covenants. The line of credit is subject to renewal on April 30, 2000, the term loan matures on June 30, 2004, and the master lease agreement expires on various dates through June 2002. We used the proceeds from the private placement of our Series C preferred stock to pay down the outstanding balance on the line of credit and the term loan.

      We believe that the net proceeds from this offering, combined with current cash balances and amounts available under our credit facilities, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. We may need additional financing to fund our cash requirements beyond 12 months. In this regard, we expect to continue to invest aggressively in our business in an effort to grow revenues. Such additional financing, if needed, may not be available on terms acceptable to us, if at all.

Market Risk

      To date, we have not utilized derivative financial instruments or derivative commodity instruments. We do not expect to employ these or other strategies to hedge market risk in 2000. We invest our cash in money market funds, which are subject to minimal credit and market risk. We believe that the market risks associated with these financial instruments are immaterial.

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

Year 2000

      Many currently installed computer systems and software products were coded to accept only two-digit year entries in the date code field. Consequently, subsequent to December 31, 1999, many of these systems became subject to failure or malfunction. Although we are not aware of any material Year 2000 issues at this time, Year 2000 problems may occur or be made known to us in the future. Year 2000 issues may possibly affect software solutions developed by us or third-party software incorporated into our solutions. We generally do not guarantee that the software licensed from third parties by our clients is Year 2000 compliant, but we sometimes do warrant that the solutions developed by us are Year 2000 compliant.

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BUSINESS

Overview

      We are a full-service provider of integrated Internet solutions focused exclusively on the digital transformation of businesses. By partnering closely with our clients and leveraging the client’s existing assets and technology base, we are able to deliver customized solutions that fulfill each client’s unique needs. Our service offerings go beyond the traditional service model of strategy consulting, creative design, and application development to include the critical elements of network infrastructure and application management and hosting services. Utilizing our proprietary service delivery methodology, Dimensions, we provide our clients with a framework in which innovative Internet solutions can be conceptualized, enhanced, and implemented with the speed-to-market necessary to succeed in the rapidly evolving Internet environment.

      We enhance our service and technology capabilities through our relationships with a number of leading technology providers, including Cisco Systems, IBM, Microsoft, Oracle, Sun Microsystems, and Vignette. We focus on developing relationships with key technology companies that add value to our portfolio of service offerings and provide services or benefits complementary to our solutions. We believe these relationships provide us with many benefits, including cross-marketing and sales opportunities, advanced professional training, and certifications in emerging technologies.

      Our primary offices are based in the Phoenix metropolitan area. During the past year we commenced operations in Atlanta, Boston, Denver, Las Vegas, and Los Angeles, and opened a solution development center in Bangalore, India. Our clients include many leading and emerging companies in the financial services, healthcare, manufacturing, and retail industries. Over the past year, we have performed services for clients such as American Express, CSK Auto, CommercialWare, DentalTown.com, EMC, Employee Solutions, Frederick’s of Hollywood, goracing.com, Intel, PCS Health Systems, and visitalk.com.

Industry Background

      The broad acceptance of the Internet among businesses and consumers has fundamentally changed the management and communication of information and the way that companies transact business. The rapidly emerging use of the Internet encompasses both business-to-consumer and business-to-business communications and transactions. Forrester Research projects that the market for business-to-business e-commerce will grow from $43 billion in 1998 to $1.3 trillion in 2003. The emergence of the Internet is redefining the core economics of business and is forcing companies to change the way in which they interact with customers, suppliers, and distribution partners.

      The ability to capitalize on this opportunity requires effective Internet-based solutions. These solutions involve not only implementing and managing the latest technologies, but also encompass business strategy and organizational transformation. Effective solutions include e-commerce capabilities, network services, customer relationship and supply chain management applications, and business intelligence systems, as well as the hosting and performance management of the applications. The growth in network-dependent activities requires complex network solutions that integrate a variety of systems and technologies from multiple vendors.

      Many companies are finding it increasingly difficult to address their rapidly expanding informational and transactional requirements primarily because of the shortage of experienced Internet and network professionals needed to design, integrate, implement, manage, and monitor complex solutions. In a recent study by META Group, Inc., an independent research firm, over 80% of the participating companies indicated that their “e” initiatives were currently constrained or delayed by infrastructure issues. Consequently, many businesses are choosing to focus on their core competencies and outsource their technology needs to third-party professional services providers. This trend toward outsourcing has driven rapid growth of the Internet services market. According to International Data Corporation, this market will grow from $7.8 billion in 1998 to $78.5 billion in 2003, representing a compound annual growth rate of 59%. The shortage of network services professionals is also driving rapid growth in the market for application management services and hosting. According to

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      In response to market demand for Internet professional services, numerous providers have entered the market, including traditional information technology service firms, systems integrators, and strategic consulting firms. The ability to deliver a comprehensive solution which includes network services and application management services and hosting provides the basis to develop long-term client relationships by increasing speed-to-market and reducing clients’ needs for engaging multiple service providers. Newly formed Internet professional service firms typically lack the industry-specific knowledge and experience to address the integration needs of complex network infrastructure and legacy systems. This has created a significant opportunity for a fully integrated Internet services provider which can offer Web-centric strategy consulting, customer experience design, application development and integration, network infrastructure services, and application management and hosting services.

Our Solution

      We believe that we are one of the few Internet professional services firms offering the full range of services necessary to rapidly transform businesses to a digital environment. The fundamental elements of our solution include:

  Integrated Full-Service Approach

      We provide the broad range of service offerings necessary to meet our clients’ complex e-business needs. Our service capabilities go beyond the traditional service model of strategy consulting, creative design, and application development to include the critical elements of network infrastructure, and application management and hosting services. By partnering closely with our clients, we are able to deliver customized solutions that fulfill our clients’ unique needs. The key capabilities underlying our integrated, full-service approach are:

  Advanced e-Business Expertise

      We continue to provide our clients with the most current e-business technologies through a unique, internal knowledge sharing process. Through our Centers of Excellence program, senior technology specialists identify, assess, and deploy new technologies throughout our organization. Our Centers of Excellence program ensures the timely integration of new technologies into our service delivery capabilities, enabling our consultants to transfer these technologies across multiple client engagements. In addition to this internal knowledge sharing, our relationships with leading technology providers facilitate the ongoing development of our technology expertise through early exposure to new solutions, additional training, and support opportunities.

  Industry-Specific Expertise

      We seek to deliver superior solutions for our clients by combining our leading edge Internet technology expertise with an in-depth business knowledge of the industries in which our clients compete. Our project teams include senior business consultants who have significant industry-specific expertise. By understanding

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  Rapid Implementation Solutions

      Our proprietary service methodology, Dimensions, enables us to rapidly provide comprehensive solutions that incorporate our knowledge of the most current leading edge technologies and leverage our extensive expertise in specific vertical markets. This framework facilitates the delivery of clearly conceptualized, enhanced, and implemented solutions with the speed-to-market demanded in today’s rapidly changing e-business environment. To further expedite the efficient deployment of technology, we conduct the majority of our project work at our solution centers. By working from central locations, our consultants remain engaged in our innovative culture while having access to a broad range of specialists.

Our Strategy

      Our objective is to become an integral component of our clients’ business success by providing high quality digital solutions. By providing the technologically advanced, client-specific, and rapidly implemented services demanded in today’s dynamic e-business environment, we seek to build upon our position as a comprehensive provider of Internet professional services. Key elements of our business strategy include:

  Create and Expand Long-Term Client Relationships

      We intend to grow our business by pursuing opportunities with our existing clients and by attracting new client engagements. To expand our business and foster close relationships with existing clients, we attempt to identify new services required by our clients, actively cross-sell our services, and provide critical long-term services for clients such as our application management and hosting services. To generate business from new clients, we are continuing to build our national sales and marketing capabilities, expanding our consultant base, opening regional offices in selected locations, expanding our technology provider relationships, and extending our vertical market expertise. By providing additional services to our existing client base and aggressively pursuing new client relationships, we intend to capitalize on the rapidly growing demand for Internet professional services.

  Continue to Provide Leading Edge Technology Expertise

      Given the rapid development of new technologies, Internet professional services organizations must maintain a constant focus on emerging trends. We have a successful history of identifying new technology waves, developing expertise, and rapidly deploying the new technologies through our professional services teams. We intend to continue to provide leading edge technology expertise through the further development and higher utilization of our Centers of Excellence program. We currently have over a dozen Centers of Excellence teams focused on emerging needs such as wireless solutions, multimedia development, appliance interfaces, e-business intelligence applications, advanced systems security, electronic bill payment and presentment, and on-line customer service solutions.

  Expand Geographic Presence

      While we already engage and service clients on a national level, we believe that significant revenue growth opportunities exist through our expansion into additional geographic regions. Over the last year we commenced operations in Atlanta, Boston, Denver, Las Vegas, and Los Angeles and established a solutions development center in India. This expansion will allow us to improve our service delivery, develop closer relationships with our existing clients, capitalize on new client opportunities in high growth markets, and provide us with greater access to professional talent. New locations will conduct client sales, service, and

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  Strengthen and Create Key Alliances

      The development and management of key alliances is an integral part of our marketing strategy and the evolution of our high-technology solutions. We currently derive a significant portion of our new client engagements from referrals from technology providers such as Cisco Systems, CommercialWare, IBM, Microsoft, Oracle, Sun Microsystems, and Vignette. Through these relationships, we incorporate the technologies and products of these companies and our specialized training in their technologies into our client solutions. We are expanding our relationships with these and other companies to create increased visibility and sales opportunities. We focus on developing relationships with partners who add value to our portfolio of service offerings and provide services complementary to our solutions. We have organized a dedicated group to formulate a joint business plan with each partner outlining marketing efforts, education and training programs, and lead sharing processes as well as establishing partners for key strategic initiatives such as e-business intelligence, supply chain, and knowledge management.

  Attract and Retain Professionals by Maintaining Our Innovative Culture

      Attracting, developing, and retaining outstanding professional talent is essential to our continued growth. We will therefore devote significant resources toward nurturing our culture and fostering innovation, creativity, professional growth, and long-term professional retention. We have developed a unique professional development model, the Excellence Dimension, which embodies elements of recruiting talent and ongoing development and mentoring of our employees. As our professionals advance within the Excellence Dimension they are offered various career paths ranging from design and engineering roles to sales positions. Our entrepreneurial culture has enabled us to attract highly qualified professionals and to maintain retention rates exceeding industry norms. Over 40% of our professionals hold post-graduate degrees in business administration, computer science, engineering, information management and other disciplines.

  Promote and Expand Brand Recognition

      We intend to build awareness of our brand by augmenting the reputation that we have built from successfully implementing Internet business solutions for our clients. We plan to expand our national marketing and advertising efforts, particularly in the regions we have targeted for expansion. Our goal is to create national recognition of Integrated Information Systems as the leading provider of fully integrated Internet professional services designed to transform businesses to the digital environment. We believe that our success in expanding awareness of our brand will also enhance our visibility with technology partners and further improve our professional recruitment efforts.

Our Methodology

      We utilize our Dimensions methodology, our nextdimension workshops, and a centralized development approach to deliver our services and maintain our emerging technology expertise. We believe that our service delivery model facilitates the effective and rapid implementation of a full range of complex Internet solutions. In order to continue delivering leading-edge professional services and to sustain long-term growth, we believe that we must focus on the ongoing refinement of our methodologies and workshops and on the maintenance of our centralized development approach.

  Dimensions Methodology

      Our dynamic Dimensions delivery methodology focuses primarily on achieving our clients’ desired business results. This methodology is designed to provide a flexible yet consistent framework for efficiently and successfully delivering our services to meet our clients’ objectives in transitioning to a Web-based

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[METHODOLOGY GRAPH]

  nextdimension Workshops

      Our proprietary nextdimension workshops, Innovations and FastTrack, are designed to provide clients a unique, innovative framework to fully conceptualize and design their web futures. The Innovations workshop leads clients through an interactive session that assists them in developing their strategy as they transition to a Web-based business model and establishes a framework for the development process. This workshop utilizes a series of creativity tools that help the client innovate beyond the digital solutions that currently prevail in their industry. We offer our FastTrack workshop to clients that have extremely sensitive speed-to-market schedules. Using a sequence of unique tools and exercises, FastTrack takes the client through the entire initial design stage within one week, versus an average of eight weeks.

  Centralized Development Approach

      To further enhance the rapid and efficient deployment of technology expertise throughout our organization, we conduct our project work primarily at our solution centers, unlike many competitors who place their consultants at the client’s site for the duration of the project. By working from a central location, our consultants remain engaged in our innovative culture while having access to a range of specialists unavailable at dispersed client locations. In addition, we believe that our centralized solution development benefits our clients by eliminating the need to provide facilities and expensive equipment for large project teams or set up and maintain complex development and testing environments.

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Our Services

      We provide an integrated, full-service approach to Internet professional services. To meet the varying needs of our clients, we customize our service offerings based on each client’s requirements. The following descriptions highlight our core offerings.

  Strategy Consulting

      We provide e-commerce strategy consulting services to assess our clients’ transition to, and creation of, a Web-based environment as well as evaluating and planning for the impact of this transition on their business model. With significant experience in custom software solutions, we are able to implement the intricacies of Web development in a rapid timeframe. Our strategy consulting services include:

	•	e-business transformation planning;
	•	competitive uses of the Internet;
	•	Web presence planning; and
	•	business process evaluation.

  Customer Experience Design

      The customer experience is a primary consideration in the development of Web-enabled systems. Our customer experience design services combine technical expertise with creative design to provide a highly effective Web site experience for the client’s customers while capturing information necessary for the client to make critical business decisions. Our design services contain a combination of information architecture and creative design services, including:

	•	definition of navigation and interactivity requirements;
	•	interface information architecture; and
	•	creative design of user interface.

  Application Development and Integration

      The environment in which Web solutions are developed is highly complex, often requiring significant integration with several of the client’s other systems as well as possible integration with suppliers or fulfillment providers. As a result, application development is conducted with the entire enterprise information technology framework in mind. We offer the following types of application development and integration services:

	•	e-business system development and implementation;
	•	integration of new Internet solutions with legacy systems;
	•	order management and fulfillment integration;
	•	customer relationship management; and
	•	business intelligence systems to provide dynamic analysis and presentation of dispersed information.

  Network Infrastructure Services

      As Internet technologies enable businesses to expand beyond traditional physical confines, the capability and flexibility of networking systems becomes increasingly important. Network capabilities allow businesses to link geographically dispersed offices, communicate from remote locations, and deliver information rapidly

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	•	network design and architecture;
	•	information security;
	•	software selection, implementation, and migration strategies;
	•	remote network monitoring and systems management;
	•	performance analysis and optimization recommendations;
	•	enterprise storage; and
	•	business continuation.

  Application Management Services

      We provide clients with full application management and hosting services through our professional staff and state-of-the-art data center. These services provide recurring revenue and strengthen our long-term client relationships while providing value to our clients by allowing them to implement Internet strategies without investing in and maintaining the associated complex and expensive infrastructure underlying these endeavors. Our application management and hosting services include:

	•	monitoring and support 24 hours a day, seven days a week;
	•	backup and disaster recovery services;
	•	load balancing; and
	•	application development and content management.

Clients

      We seek to maintain a diversified client base from selected market segments, including e-venture Internet companies, mid-market entities, and Fortune 1000 companies. We target prospects based both on their vertical market segment and their commitment to a digital transition. We have developed vertical market expertise in several industries, including financial services, health care, local government, manufacturing, and retail. Following is a list of past and current clients in each vertical market segment:

      We currently are working on ongoing projects for American Express, CommercialWare, CSK Auto, DentalTown.Com, EMC, Frederick’s of Hollywood and PCS Health Systems. Our largest client, American Express, accounted for approximately 35% of our revenues for the year ended December 31, 1999. In 1998, our three largest clients accounted for 42% of our revenues. These three clients included SkyMall, which accounted for 16% of our revenues, the City of Phoenix, which accounted for 14% of our revenues, and Maricopa County, Arizona which accounted for 12% of our revenues. In 1997, SkyMall accounted for 24% of our revenues and the City of Phoenix accounted for 16% of our revenues. We believe that we will continue to derive a significant portion of our revenues from a limited number of clients who may change from year to year.

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Technology Alliances

      We maintain technology and product supply arrangements with a number of technology leaders and industry specialists. Through these alliances, we incorporate their technologies into the solutions that we provide to our clients. These relationships also provide us with the opportunity to remain abreast of the new technology developments applicable to these suppliers as well as advances in vertical applications, although these aspects of our technology alliance relationships are informal and are not governed by written or oral agreements. These relationships also provide opportunities to partner on client engagements and cross-referrals of new business. Among our technology alliances are:

	•	Microsoft — we are a Solution Provider Partner and were awarded the Solution Partner of the Year in both 1998 and 1999 for Microsoft’s Southwest district. Microsoft’s Solution Provider Partner designation is a certification based on technology proficiency and other criteria established by Microsoft. The Solution Partner of the Year is an award given by Microsoft based on our commitment to Microsoft technology, ability to deliver solutions on a Microsoft platform, and working relationships with Microsoft sales and consulting personnel.
	•	IBM — we are a Premier partner, a certification based on demonstrated technological proficiency and other criteria established by IBM.
	•	Sun Microsystems — we are a Web Integrator partner and are completing the process of becoming a Solution Partner with Sun/ Netscape Alliance. These are various levels of certifications based on criteria established by Sun Microsystems primarily related to demonstrated technical capabilities in Sun’s software solutions.

      Additionally, we have established technology alliances with other leading technology companies, including Ariba, Broadvision, Cisco Systems, Commerce One, CommercialWare, EMC, Oracle, and Vignette.

Client Case Studies

	The following sets forth case studies that we believe reflect the range of services that we provide:
	American Express — a worldwide financial services organization
	Challenge: The American Express interactive technologies development lab had more than 75 servers supporting a large portion of the company’s interactive application development environment. The network had grown tenfold in the past year, placing increased demand on the system and giving little time to standardize and document the growth. During the same time, developers from around the world continued to design and implement additional interactive applications into this highly stressed network infrastructure. American Express sought a provider that could assess its enterprise-wide system, make recommendations, standardize and document processes, and improve the system’s overall performance.
	Services Engaged:
	Strategy Consulting
	Network Infrastructure Services