INTERNATIONAL NETWORK SERVICES, 424B4, 1996-09-19

INTERNATIONAL NETWORK SERVICES
424B4, 1996-09-19
MISCELLANEOUS BUSINESS SERVICES

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<PAGE>

FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-09287

PROSPECTUS

2,500,000 Shares

[LOGO OF INS APPEARS HERE]

COMMON STOCK

---------------

ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY
THE COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC
MARKET FOR THE COMMON STOCK OF THE COMPANY. SEE
"UNDERWRITERS" FOR A DISCUSSION OF THE
FACTORS CONSIDERED IN DETERMINING
THE INITIAL PUBLIC OFFERING PRICE.
---------------

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 5 HEREOF.

---------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

---------------

PRICE $16 A SHARE

---------------

<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- -----------
<S> <C> <C> <C>
Per Share................................ $16.00 $1.12 $14.88
Total(3)................................. $40,000,000 $2,800,000 $37,200,000
</TABLE>
- -------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."

(2) Before deducting expenses payable by the Company estimated at $860,000.

(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of 375,000
additional Shares at the price to public less underwriting discounts and
commissions for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total price to public,
underwriting discounts and commissions and proceeds to Company will be
$46,000,000, $3,220,000 and $42,780,000, respectively. See
"Underwriters."

---------------

The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Gray Cary Ware & Freidenrich, counsel for the Underwriters. It is expected
that delivery of the Shares will be made on or about September 23, 1996 at the
office of Morgan Stanley & Co. Incorporated, New York, New York, against
payment therefor in immediately available funds.

---------------

MORGAN STANLEY & CO.
Incorporated
ALEX. BROWN & SONS
Incorporated
ROBERTSON, STEPHENS & COMPANY

September 18, 1996

<PAGE>

NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR
SUCH PERSON TO MAKE SUCH AN OFFERING OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.

----------------

UNTIL OCTOBER 13, 1996 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

----------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
The Company.............................................................. 4
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 11
Dividend Policy.......................................................... 11
Capitalization........................................................... 12
Dilution................................................................. 13
Selected Financial Data.................................................. 14
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 15
Business................................................................. 21
Management............................................................... 32
Certain Transactions..................................................... 38
Principal Shareholders................................................... 39
Description of Capital Stock............................................. 41
Shares Eligible for Future Sale.......................................... 43
Underwriters............................................................. 45
Legal Matters............................................................ 46
Experts.................................................................. 46
Additional Information................................................... 47
Index to Financial Statements............................................ F-1
</TABLE>

----------------

International Network Services, INS, EnterprisePRO, "Providing the Power of
Operable Networks" and "Providing the Power of Predictable Networks" are
trademarks of the Company. This Prospectus also includes product names and
other trade names and trademarks of the Company and of other organizations.

----------------

Except as otherwise noted herein, all information in this Prospectus (i)
assumes the conversion of all outstanding shares of the Company's Mandatorily
Redeemable Convertible Preferred Stock (the "Preferred Stock") into shares of
Common Stock, which will occur automatically upon the closing of this
offering, (ii) assumes no exercise of the Underwriters' over-allotment option,
(iii) assumes the issuance of 237,053 shares upon the exercise of warrants
upon the closing of this offering and (iv) reflects an increase in the
authorized number of shares of Common Stock from 45,000,000 to 75,000,000
shares and the authorization of 5,000,000 shares of blank check Preferred
Stock which will be effected upon the closing of this offering. See
"Description of Capital Stock" and "Underwriters." The Company's fiscal year
is composed of four 13-week quarters, each of which ends on the last Sunday of
the final fiscal month of the quarter, with the fiscal year ending on the
Sunday closest to June 30th. For presentation purposes, each fiscal quarter
and year is titled as ending on the last date of the applicable month.

----------------

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE>

THE NETWORK WIZARDS . . .
PROVIDING THE POWER OF OPERABLE NETWORKS.

[INS LOGO AND GRAPHIC OF WIZARD APPEARS HERE]

THE GROWTH OF NETWORK TRAFFIC . . .

More businesses are increasingly using client/server based applications, e-
mail, remote access, the Internet, corporate Intranets, video, graphics and
audio. The increase in the amount of data generated by these applications
combined with the large number of users connected to networks has increased
traffic and placed higher demands on networks.

[PHOTOGRAPH OF LARGE ROOM OF WORKERS USING COMPUTERS APPEARS HERE]

HAS LED TO INCREASINGLY COMPLEX NETWORKS . . .

Network hardware and software companies are rapidly developing sophisticated
new technologies such as routers, inverse multiplexers, switches, ATM and
virtual LANs to accommodate the increase in data traffic. In addition, the
complexity of networks is magnified by the need to integrate these new
technologies with legacy network systems.

[GRAPHIC OF NETWORKS APPEARS HERE]

THAT REQUIRE A FULL RANGE OF SERVICES AND EXPERTISE.

[GRAPHIC SHOWING LIFE CYCLE OF SERVICES, PLANNING, DESIGN,
IMPLEMENTATION, OPERATIONS AND OPTIMIZATION APPEARS HERE]

INS TECHNOLOGY EXPERTISE

.Wide area networks
.Network management
.Network and host security
.Frame relay
.High performance LANs and Virtual LANs
.ATM
.TCP/IP
.SNA
.Switching
.SNMP

<PAGE>

SERVING A RANGE OF CLIENTS REQUIRES COLLABORATION BY EXPERTS . . .

The Company's network systems engineers together have expertise in a wide array
of computer and network systems. Knowledge Network, the Company's on-line
solutions resource, enables the Company to leverage the collective talents of
its experts to provide solutions to clients' network services needs.

[PHOTOGRAPH OF ENGINEER LOOKING AT INS KNOWLEDGE
NETWORK ON A COMPUTER APPEARS HERE]

FROM A NETWORK SERVICE PROVIDER.

With 435 employees and offices in 17 cities, INS is a provider of services for
complex enterprise networks.

[GRAPHIC OF MAP OF UNITED STATES WITH DOT FOR EACH
CITY IN WHICH THE COMPANY HAS AN OFFICE APPEARS HERE]

<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus, including under "Risk Factors."

THE COMPANY

International Network Services ("INS" or the "Company") is a provider of
services for complex enterprise networks. The Company provides services for the
full life cycle of a network, including planning, design, implementation,
operations and optimization, and maintains expertise in the most complex
network technologies and multivendor environments. Areas of expertise include
WANs, network management, network and host security and high performance LANs
and VLANs. As a services only provider, the Company believes that it is able to
provide unbiased assessments and optimal solutions for its clients. The Company
offers its services on a long or short term basis in any or all phases of the
network life cycle. As a result, the Company's services are particularly well
suited to clients who out-task a portion of their information technology
infrastructure. The Company has developed an on-line solutions resource,
Knowledge Network, through which the Company's network systems engineers
communicate and collaborate to provide solutions to clients' complex enterprise
network needs. In addition, the Company is leveraging its expertise in complex
networks to develop electronic services for certain repetitive network
management tasks, such as network monitoring and network performance reporting.
The Company's current electronic service, EnterprisePRO, is designed to collect
data, generate reports and compile network information for use in the
optimization of networks. The Company's clients include AT&T, Ascend
Communications, Cable and Wireless, Continental Cablevision, Countrywide Home
Loans, Cox Communications, Georgia Pacific, Kaiser Permanente, Lam Research,
MCI, MFS Datanet, NCR, Robert Half, SAIC, Sprint and UJB Financial. Together,
these clients, with whom the Company has ongoing relationships, represented
approximately 43% of the Company's fiscal 1996 revenues, ranging from a high of
17% of revenue to a low of .2%. Fourteen of these sixteen clients individually
represented less than 3% of the Company's fiscal 1996 revenues. The Company
serves its clients, many of which have multi-location enterprise networks,
through its nationwide network of 17 offices. As of June 30, 1996, the Company
had 344 network systems engineers.

THE OFFERING

Common Stock offered............. 2,500,000 shares
Common Stock to be outstanding 30,909,977 shares(1)
after the offering.............. For repayment of debt and general corporate
Use of proceeds.................. purposes, including working capital and
capital expenditures
INSS
Nasdaq National Market symbol....

SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 19, 1991 YEAR ENDED JUNE 30,
(INCEPTION) TO ----------------------------------
JUNE 30, 1992 1993 1994 1995 1996
--------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue.................... $ 186 $ 1,479 $ 7,565 $15,549 $44,092
Total operating expenses... 877 3,556 8,929 14,733 39,378
Net income (loss).......... (701) (2,161) (1,394) 775 2,877
Net income (loss)
attributable to Common
Stock..................... (701) (2,194) (1,797) (108) 1,742
Net income (loss) per share
(2)....................... $(0.08) $ (0.21) $ (0.07) $ 0.03 $ 0.09
Net income (loss)
attributable to Common
Stock per share (2)....... $(0.08) $ (0.22) $ (0.09) $ -- $ 0.06
Shares used to compute net
income (loss) per
share (2)................. 9,287 10,095 19,480 29,523 30,719
Shares used to compute net
income (loss) attributable
to Common Stock per share
(2)....................... 9,287 10,095 19,480 27,173 30,719
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 869 $35,518
Working capital........................................ 6,060 42,108
Total assets........................................... 18,072 52,721
Notes payable, less current portion.................... 316 --
Mandatorily Redeemable Convertible Preferred Stock..... 12,427 --
Shareholders' equity (deficit)......................... (2,544) 46,247
</TABLE>
- -------

(1) Based on shares outstanding as of August 15, 1996. Includes 237,053 shares
of Common Stock to be issued upon the exercise of warrants upon the closing
of this offering. Excludes (i) 2,776,820 shares of Common Stock issuable
upon exercise of options outstanding as of September 13, 1996 at a weighted
average exercise price of $3.50 per share, of which 737,730 shares were
fully vested and exercisable as of September 13, 1996, (ii) 552,455 shares
of Common Stock reserved for future issuance under the Company's Amended
and Restated 1992 Flexible Stock Incentive Plan and (iii) 63,291 shares of
Common Stock issuable upon exercise of outstanding warrants at an exercise
price of $0.79 per share. In July 1996, the Company adopted the 1996 Stock
Plan and 1996 Employee Stock Purchase Plan, under which 5,500,000 shares
and 1,200,000 shares have been reserved for future grant, respectively. See
"Management--Stock Plans," "Description of Capital Stock" and Notes 5 and 9
of Notes to Financial Statements.
(2) See Note 1 of Notes to Financial Statements for an explanation of shares
used to compute net income (loss) per share.

(3) Adjusted to reflect (i) the sale of 2,500,000 shares of Common Stock
offered by the Company hereby at the initial public offering price of
$16.00 per share and application of the net proceeds therefrom (after
deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company), (ii) the exercise of warrants to purchase
237,053 shares of Common Stock at $0.10 per share upon the closing of this
offering and (iii) the conversion of all outstanding Preferred Stock of the
Company into an aggregate of 16,734,889 shares of Common Stock upon the
closing of the offering. See "Capitalization."

3
<PAGE>

THE COMPANY

As network traffic has grown, the technology underlying networks has become
increasingly complex. Network hardware and software companies are rapidly
developing sophisticated new technologies such as routers, inverse
multiplexers, switches, ATM and VLANs to accommodate the increase in data
traffic. The implementation of these technologies requires significant
expertise. In addition, the complexity of networks is magnified by the need to
integrate these new technologies with legacy network systems. As a result, it
is increasingly difficult for network managers to ensure the reliability,
performance and security of these large, heterogeneous networks. Furthermore,
the tools available to manage today's networks are themselves very complex and
require investments in hardware, software, personnel and training.

Although companies have attempted to develop the necessary expertise, this
rapid technological change and increasing complexity has made it difficult for
companies to implement and manage their large multivendor network
environments. In addition, to remain competitive, companies are increasingly
focused on their core business competencies and often turn to third-party
service providers for non-core functions, such as those related to their
computing environments. While some companies "out-source" their entire
computing environment, an increasing number of companies are pursuing an
approach to more actively manage their computing environments by "selectively
out-sourcing" or "out-tasking" only a limited set of services. The rapid
technological changes in networking and the move to out-tasking have created
increased demand for third-party network services.

The Company's objective is to become the premier provider of services for
complex enterprise networks. The Company's strategy to achieve this objective
includes building and strengthening client relationships, expanding its client
base in existing and new markets, attracting and retaining high quality
network systems engineers, developing and expanding its corporate
infrastructure, expanding its electronic services and pursuing strategic
acquisitions.

The Company serves its clients, many of which have multi-location enterprise
networks, through its nationwide network of 17 offices. The Company's clients
represent a broad range of industries, including many of the world's leaders
in telecommunications, technology, financial services, consumer products,
manufacturing and systems integration. These clients include AT&T, Ascend
Communications, Cable and Wireless, Continental Cablevision, Countrywide Home
Loans, Cox Communications, Georgia Pacific, Kaiser Permanente, Lam Research,
MCI, MFS Datanet, NCR, Robert Half, SAIC, Sprint and UJB Financial. Together,
these clients, with whom the Company has ongoing relationships, represented
approximately 43% of the Company's fiscal 1996 revenues, ranging from a high
of 17% of revenue to a low of .2%. Fourteen of these sixteen clients
individually represented less than 3% of the Company's fiscal 1996 revenues.
As of June 30, 1996, the Company had 344 network systems engineers.

The Company was incorporated in California in 1991. The Company's principal
executive office is located at 1213 Innsbruck Dr., Sunnyvale, California 94089
and its telephone number is (408) 542-0100. Except as otherwise noted herein,
all references to "INS" or the "Company" shall mean International Network
Services, a California corporation.

4
<PAGE>

RISK FACTORS

This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus. In evaluating the Company's business, prospective
investors should consider carefully the following factors in addition to the
other information set forth in this Prospectus.

Variability of Quarterly Operating Results. Substantially all of the
Company's revenue is derived from professional services, which are generally
provided on a "time and expenses" basis. Professional services revenue is
recognized only when network systems engineers are engaged on client projects.
In addition, a substantial majority of the Company's operating expenses,
particularly personnel and related costs, depreciation and rent, are
relatively fixed in advance of any particular quarter. As a result, any
underutilization of network systems engineers may cause significant variations
in operating results in any particular quarter and could result in losses for
such quarter. Factors which could cause such underutilization include: the
reduction in size, delay in commencement, interruption or termination of one
or more significant projects; the completion during a quarter of one or more
significant projects; the overestimation of resources required to complete new
or ongoing projects; and the timing and extent of training, weather related
shut-downs, vacation days and holidays. The Company's revenue and earnings may
also fluctuate from quarter to quarter based on a variety of factors including
the loss of key employees, reductions in billing rates, write-offs of work
performed for clients, competition, timing of employment taxes, the initial or
ongoing market acceptance of EnterprisePRO, the development and introduction
of new services and general economic conditions. In addition, the Company
plans to continue to expand its operations by hiring additional network
systems engineers and other employees, and adding new offices, systems and
other infrastructure. The resulting increase in operating expenses would have
a material adverse effect on the Company's operating results if revenue were
not to increase to support such expenses. Based upon all of the foregoing, the
Company believes that quarterly revenue and operating results are likely to
vary significantly in the future and that period-to-period comparisons of its
operating results are not necessarily meaningful and should not be relied on
as indications of future performance. Furthermore, it is likely that in some
future quarter the Company's revenue or operating results will be below the
expectations of public market analysts or investors. In such event, the price
of the Company's Common Stock would likely be materially adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."

Risks Associated with Client Concentration. The Company has derived a
significant portion of its revenue from a limited number of large clients and
expects this concentration to continue. The Company's largest client, MCI
Corp. ("MCI"), accounted for approximately $7.5 million, or 17.0%, of the
Company's revenue in fiscal 1996 and approximately $1.1 million, or 6.8%, of
the Company's revenue in fiscal 1995. In fiscal 1994, First Union National
Bank accounted for approximately $2.3 million, or 30.3% of the Company's
revenue, and AirTouch Cellular Communications accounted for approximately $1.0
million, or 13.3% of the Company's revenue. No other client accounted for more
than 10% of the Company's revenue in fiscal 1996, 1995 or 1994. There can be
no assurance that revenue from MCI or other clients that have accounted for
significant revenue in past periods, individually or as a group, will
continue, or if continued will reach or exceed historical levels in any future
period. The Company does not have a long-term services contract with MCI or
any of its other clients. Any significant reduction in the scope of the work
performed for MCI, any other significant client or a number of smaller
clients, the failure of anticipated projects to materialize, or deferrals,
modifications or cancellations of ongoing projects by any of these clients
could have a material adverse effect on the Company's business, operating
results and financial condition. See "--Absence of Long-Term Agreements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Dependence on Key Employees. The Company's success will depend in part on
the continued services of its key employees. The Company does not have
employment or non-competition agreements with any of its key or other
employees. The loss of services of one or more of the Company's key employees
could have a material adverse effect on the Company's business, operating
results and financial condition. In addition, if one or more

5
<PAGE>

key employees joins a competitor or forms a competing company, the loss of
such employees and any resulting loss of existing or potential clients to any
such competitor could have a material adverse effect on the Company's
business, operating results and financial condition. In the event of the loss
of any such employee, there can be no assurance that the Company would be able
to prevent the unauthorized disclosure or use of the Company's or its clients'
technical knowledge, practices or procedures by such personnel or that such
disclosure or use would not have a material adverse effect on the Company's
business, operating results and financial condition. See "Business--Human
Resources" and "--Intellectual Property."

Need to Attract and Retain Qualified Network Systems Engineers. The
Company's future success will depend in large part on its ability to hire,
train and retain network systems engineers who together have expertise in a
wide array of network and computer systems and a broad understanding of the
industries the Company serves. Competition for network systems engineers is
intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. In particular, competition is intense
for the limited number of qualified managers and senior network systems
engineers. The Company is currently experiencing and is likely to continue to
experience high rates of turnover among its network systems engineers. Any
inability of the Company to hire, train and retain a sufficient number of
qualified network systems engineers could impair the Company's ability to
adequately manage and complete its existing projects or to obtain new
projects, which, in turn, could have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
any inability of the Company to attract and retain a sufficient number of
qualified network systems engineers in the future could impair the Company's
planned expansion of its business. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business--Human
Resources."

Dependence on Professional Services; Uncertainty of Market Acceptance of
Electronic Services. To date, substantially all of the Company's revenue has
been derived from professional services related to complex enterprise
networks. The Company believes that professional services will continue to
represent the substantial majority of its revenue for the foreseeable future.
As a result, the Company's business depends in large part on the continued
growth and acceptance of complex computer networks and the continued trend
among businesses with complex computer networks to use third-party network
support services. In addition, the Company's business will depend on the
Company's ability to fulfill the increasingly sophisticated needs of its
clients. Any decline in demand for the Company's professional services or the
inability of the Company to satisfy its clients' requirements would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Services--Professional Services."

The Company's long-term strategy is to derive a portion of its revenue from
electronic services. The Company has in the past offered, on a limited basis,
an electronic service that has not achieved significant market acceptance or
generated significant revenue. The Company has expended, and expects to
continue to expend, substantial amounts in the development and marketing of
its electronic services. As of June 30, 1996, the Company had expended
approximately $1.5 million on the development and marketing of electronic
services. The Company has recently introduced EnterprisePRO, an enhanced
version of the prior electronic service. The introduction of EnterprisePRO and
any other electronic services that the Company may develop in the future will
be subject to risks generally associated with new service introductions,
including delays in development, testing or introduction, or the failure to
satisfy clients' requirements. There can be no assurance that EnterprisePRO
will gain market acceptance on a timely basis or at all. The failure of
EnterprisePRO, or any other new electronic services that the Company may
develop, to gain market acceptance on a timely basis could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business--Services--Electronic Services."

Management of Growth. The Company has recently experienced a period of rapid
revenue and client growth and an increase in the number of its employees and
offices and the scope of its supporting infrastructure. The Company's revenue
was approximately $7.6 million, $15.5 million and $44.1 million in fiscal
1994, 1995 and 1996, respectively. The Company's headcount was 79, 173 and 435
at the end of fiscal 1994, 1995 and 1996, respectively. The Company does not
believe these rates of growth are sustainable. In addition, the Company opened
four new offices in fiscal 1996 and expects to open additional offices in the
future. This growth

6
<PAGE>

has resulted in new and increased responsibilities for management personnel
and has placed and continues to place a significant strain on the Company's
management and operating and financial systems. The Company will be required
to continue to implement and improve its systems on a timely basis and in such
a manner as is necessary to accommodate the increased number of transactions
and clients and the increased size of the Company's operations. There can be
no assurance that the Company's management or systems will be adequate to
support the Company's existing or future operations. Any failure to implement
and improve the Company's systems or to hire and retain the appropriate
personnel to manage its operations would have a material adverse effect on the
Company's business, operating results and financial condition. In addition, an
increase in the Company's operating expenses from its planned expansion would
have a material adverse effect on the Company's business, operating results
and financial condition if revenue does not increase to support such
expansion. See "--Risks Associated With Potential International Expansion,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Human Resources."

Absence of Long-Term Agreements. The Company's clients are generally able to
reduce or cancel their use of the Company's professional services without
penalty and with little or no notice. As a result, the Company believes that
the number and size of its existing projects are not reliable indicators or
measures of future revenue. The Company has in the past provided, and is
likely in the future to provide, services to clients without a long-term
agreement. When a client defers, modifies or cancels a project, the Company
must be able to rapidly redeploy network systems engineers to other projects
in order to minimize the underutilization of employees and the resulting
adverse impact on operating results. In addition, the Company's operating
expenses are relatively fixed and cannot be reduced on short notice to
compensate for unanticipated variations in the number or size of projects in
progress. As a result, any termination, significant reduction or modification
of its business relationships with any of its significant clients or with a
number of smaller clients could have a material adverse effect on the
Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Sales and Marketing."

Intense Competition. The network services industry is comprised of a large
number of participants and is subject to rapid change and intense competition.
The Company faces competition from system integrators, value added resellers
("VARs"), local and regional network services firms, telecommunications
providers, network equipment vendors and computer systems vendors, many of
which have significantly greater financial, technical and marketing resources
and greater name recognition, and generate greater service revenue than does
the Company. The Company has faced, and expects to continue to face,
additional competition from new entrants into its markets. Increased
competition could result in price reductions, fewer client projects,
underutilization of employees, reduced operating margins and loss of market
share, any of which could materially adversely affect the Company's business,
operating results and financial condition. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors. The failure of the Company to compete successfully would have a
material adverse effect on the Company's business, operating results and
financial condition.

In addition, most of the Company's clients have internal network support
services capabilities and could choose to satisfy their needs through internal
resources rather than through outside service providers. As a result, the
decision by the Company's clients or potential clients to perform network
services internally could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business--
Competition."

Relationship with Cisco Systems. Although the Company is a vendor-
independent provider of network services, the Company has a significant
relationship with Cisco Systems, Inc. ("Cisco") and believes that maintaining
and enhancing this relationship is important to the Company's business due to
Cisco's leading position in the large scale, enterprise internetworking
market. Cisco develops, manufactures, markets and supports high-performance,
multiprotocol internetworking systems that link geographically dispersed LANs
and WANs. The Company has entered into direct relationships with clients as a
result of referrals from Cisco and has from time to time performed pre-sales
and post-sales support services for Cisco. In addition, Cisco is an

7
<PAGE>

investor in the Company and after this offering will own approximately 8.4% of
the Company's Common Stock (8.3% if the Underwriters' over-allotment option is
exercised in full). An officer of Cisco is also a member of the Company's
Board of Directors. Although the Company believes that its relationship with
Cisco is good, there can be no assurance that the Company will be able to
maintain or enhance its relationship with Cisco. Any deterioration in the
Company's relationship with Cisco could have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
should the Company's relationship with Cisco be perceived as compromising the
Company's ability to provide unbiased solutions, the Company's relationship
with existing or potential clients could be materially adversely affected. See
"Business--Sales and Marketing" and "Certain Transactions."

Project Risks. Many of the Company's projects are critical to the operations
of its clients' businesses. The Company has in the past been and may in the
future be required to render additional services at no charge as a result of
the Company's failure to meet its clients' expectations in the performance of
its services. To date, such services have not been significant. The failure to
perform services that meet a client's expectations may result in the Company
not being paid for services rendered and may damage the Company's reputation
and adversely affect its ability to attract new business. In addition, a
liability claim brought against the Company could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company maintains errors and omissions insurance, and to date has not
submitted any claims thereunder. The Company is also subject to claims by its
clients for the actions of its employees arising from damages to clients'
business or otherwise. Such claims could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Services."

Rapid Technological Change. The Company has derived, and expects to continue
to derive, a substantial portion of its revenue from projects based on complex
enterprise networks. The networking and network services markets are
continuing to develop and are subject to rapid change. The Company's success
will depend in part on its ability to offer services that keep pace with
continuing changes in technology, evolving industry standards and changing
client preferences and to hire, train and retain network systems engineers who
can fulfill the increasingly sophisticated needs of its clients. There can be
no assurance that the Company will be successful in addressing these
developments in a timely manner. Any delay or failure by the Company to
address these developments could have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
there can be no assurance that products or technologies developed by third
parties will not render certain of the Company's services noncompetitive or
obsolete. See "Business--Services."

Risks Associated With Potential Acquisitions. As part of its business
strategy, the Company may make acquisitions of, or significant investments in,
complementary companies, products or technologies, although no such
acquisitions or investments are currently pending. Any such future
transactions would be accompanied by the risks commonly encountered in making
acquisitions of companies, products and technologies. Such risks include,
among others, the difficulty associated with assimilating the personnel and
operations of acquired companies, the potential disruption of the Company's
ongoing business, the distraction of management and other resources, the
inability of management to maximize the financial and strategic position of
the Company through the successful integration of acquired personnel,
technology and rights, the maintenance of uniform standards, controls,
procedures and policies, and the impairment of relationships with employees
and clients as a result of the integration of new management personnel. There
can be no assurance that the Company will be successful in overcoming these
risks or any other problems encountered in connection with any such
acquisitions. In addition, future acquisitions by the Company could result in
the issuance of dilutive equity securities, the incurrence of debt or
contingent liabilities, and amortization expenses related to goodwill and
other intangible assets, any of which could have a material adverse effect on
the Company's business, operating results and financial condition or on the
market price of the Company's Common Stock. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Risks Associated With Potential International Expansion. A component of the
Company's long-term strategy is to expand into international markets, although
the Company does not have any immediate or pending

8
<PAGE>

plans to do so. If the Company opens any international offices and the revenue
generated by these offices are not adequate to offset the expense of
establishing and maintaining these foreign operations, the Company's business,
operating results and financial condition could be materially adversely
affected. To date, the Company has provided limited professional services to
certain of its United States clients in foreign locations, but has no direct
international experience. There can be no assurance that the Company will be
able to successfully market, sell and deliver its services in these markets.
In addition to the uncertainty as to the Company's ability to expand into
international markets, there are certain risks inherent in conducting business
on an international level, such as unexpected changes in regulatory
requirements, export restrictions, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, employment laws and
practices in foreign countries, longer payment cycles, problems in collecting
accounts receivable, political instability, fluctuations in currency exchange
rates, imposition of currency exchange controls, seasonal reductions in
business activity during the summer months in Europe and certain other parts
of the world, and potentially adverse tax consequences, any of which could
adversely impact the success of the Company's international operations. There
can be no assurance that one or more of these factors will not have a material
adverse effect on the Company's future international operations and,
consequently, on the Company's business, operating results and financial
condition. There can be no assurance that the Company will be able to compete
effectively in these markets. See "Business--Sales and Marketing."

Dependence on Intellectual Property Rights; Risks of Infringement and
Misappropriation. The Company's success is dependent in part on its
information technology, some of which is proprietary to the Company, and other
intellectual property rights. The Company relies on a combination of
nondisclosure and other contractual arrangements, technical measures, and
trade secret and trademark laws to protect its proprietary rights. The Company
has one patent application pending and holds one registered trademark. The
Company enters into confidentiality agreements with its employees and attempts
to limit access to and distribution of proprietary information. There can be
no assurance that the steps taken by the Company in this regard will be
adequate to deter misappropriation of proprietary information or that the
Company will be able to detect unauthorized use or take appropriate steps to
enforce intellectual property rights. The Company has in the past entered into
services contracts with clients that assign rights to certain aspects of the
work performed under such contracts to such clients. The Company does not
believe that such contracts will limit the Company's ability to render its
services to other clients. However, there can be no assurance that the Company
will not receive communications in the future from third parties or clients
asserting that the Company has infringed or misappropriated the proprietary
rights of such parties. Any such claims, with or without merit, could be time
consuming, result in costly litigation and diversion of technical and
management personnel or require the Company to develop non-infringing
technology or enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company or at all. In the event of a successful claim of infringement or
misappropriation against the Company and failure or inability of the Company
to develop non-infringing technology or license the infringed, misappropriated
or similar technology, the Company's business, operating results and financial
condition could be materially adversely affected. See "Business--Intellectual
Property."

Concentration of Stock Ownership. Upon completion of this offering, the
present directors, executive officers and their respective affiliates will
beneficially own approximately 76.3% of the outstanding Common Stock (75.4% if
the Underwriters' over-allotment option is exercised in full). As a result,
these shareholders will be able to exercise significant influence over all
matters requiring shareholder approval, including the election of directors
and approval of significant corporate transactions. Such concentration of
ownership may also have the effect of delaying or preventing a change in
control of the Company. See "Principal Shareholders" and "Description of
Capital Stock."

No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Company's Common Stock, and
there can be no assurance that an active public trading market for the Common
Stock will develop or be sustained after the offering. The initial public
offering price was determined by negotiation between the Company and the
representatives of the Underwriters based upon several

9
<PAGE>

factors. The market price of the Company's Common Stock is likely to be highly
volatile and could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new services by the Company or its competitors, changes in financial estimates
by public market analysts, or other events or factors. In addition, the stock
market has experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of many
technology companies and that often have been unrelated to the operating
performance of such companies. These broad market fluctuations may adversely
affect the market price of the Company's Common Stock. In the past, following
periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such a
company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which would have a material adverse
effect on the Company's business, operating results and financial condition.
See "Underwriters--Pricing of the Offering."

Possible Adverse Effect of Shares Eligible for Future Sale. Sales of a
substantial number of shares of Common Stock in the public market following
this offering could adversely affect the market price of the Common Stock
prevailing from time to time and could adversely affect the Company's ability
to raise capital. Upon completion of this offering, the Company will have
outstanding an aggregate of 30,909,977 shares of Common Stock, assuming no
exercise of the Underwriters' over-allotment option and no exercise of
outstanding options. Of these shares, the 2,500,000 shares sold in this
offering will be freely tradeable without restriction or further registration
under the Securities Act, unless held by "affiliates" of the Company, if any,
as that term is defined in Rule 144 under the Securities Act ("Affiliates").
The remaining 28,409,977 shares of Common Stock held by existing shareholders
are "restricted securities" as that term is defined in Rule 144 under the
Securities Act ("Restricted Shares"). Restricted Shares may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act. As a result of contractual restrictions and the provisions of Rules 144,
144(k) and 701, additional shares will be available for sale in the public
market as follows: (i) no shares will be eligible for immediate sale on the
date of this Prospectus, (ii) 25,295,648 shares will be eligible for sale upon
expiration of lock-up agreements and other contractual restrictions 180 days
after the date of this Prospectus (March 18, 1997), (iii) 1,331,899 shares
will be eligible for sale thereafter upon expiration of their respective two-
year holding periods and (iv) 1,782,430 shares which are subject to a
repurchase option in favor of the Company will be eligible for sale thereafter
as such shares vest. Upon completion of this offering, the holders of
24,338,052 shares of Common Stock, or their transferees, will be entitled to
certain rights with respect to the registration of such shares under the
Securities Act. Registration of such shares under the Securities Act would
result in such shares, becoming freely tradeable without restriction under the
Securities Act (except for shares purchased by Affiliates, if any) immediately
upon the effectiveness of such registration.

Antitakeover Effect of Certain Charter Provisions. The Board of Directors of
the Company has the authority to issue up to 5,000,000 shares of Preferred
Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further
vote or action by the shareholders. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The issuance
of Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company. The Company has no present plans to issue shares
of Preferred Stock. See "Description of Capital Stock--Preferred Stock."

Immediate and Substantial Dilution. Investors participating in this offering
will incur immediate dilution of $14.50 per share in the net tangible book
value of the Common Stock. The Company believes that to attract and retain
qualified employees it will need to offer a greater number of options as a
percent of total shares outstanding than non-service high technology
companies. The Company has in the past granted a substantial number of options
to purchase Common Stock to employees as part of compensation packages, and
the Company expects that it will continue to grant a substantial number of
options in the future. In addition, the Company has adopted an Employee Stock
Purchase Plan which will provide employees an opportunity to purchase shares
below

10
<PAGE>

prevailing market value. The Company may also issue shares of its Common Stock
in connection with strategic acquisitions or international expansion which
could also result in dilution to shareholders. See "Dilution," "Business--
Human Resources" and "Management--Stock Plans."

Absence of Dividends. The Company has never paid cash dividends on its
Common Stock or other securities and does not intend to pay cash dividends for
the foreseeable future. In addition, the Company's credit facility prohibits
the payment of dividends without the bank's approval.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock being offered hereby are estimated to be approximately
$36,340,000 (approximately $41,920,000 if the Underwriters' over-allotment
option is exercised in full), at the initial public offering price of $16.00
per share. The principal purposes of this offering are to obtain additional
capital, to create a public market for the Company's Common Stock and to
facilitate future access by the Company to public equity markets. The Company
expects to use the net proceeds from this offering to repay approximately $1.7
million of indebtedness outstanding as of June 30, 1996 to Imperial Bank and
for general corporate purposes, including working capital and capital
expenditures. The indebtedness bears interest at rates ranging from the bank's
prime rate (8.25% at June 30, 1996) plus 1.00% to 1.25% per annum and is
otherwise scheduled to be repaid through 1999. A portion of the net proceeds
may also be used to acquire or invest in complementary businesses or products
or to obtain the right to use complementary technologies. The Company has no
present plans, agreements or commitments and is not currently engaged in any
negotiations with respect to any such transactions. Pending use of the net
proceeds for the above purposes, the Company intends to invest such funds in
short-term, interest-bearing, investment grade obligations.

DIVIDEND POLICY

The Company has never paid cash dividends on its Common Stock or other
securities and does not intend to pay cash dividends for the forseeable
future. In addition, the Company's credit facility prohibits the payment of
dividends without the bank's approval.

11
<PAGE>

CAPITALIZATION

The following table sets forth the short-term indebtedness and
capitalization of the Company as of June 30, 1996 and as adjusted to reflect
(i) the sale of 2,500,000 shares of Common Stock offered by the Company hereby
at the initial public offering price of $16.00 per share and application of
the net proceeds therefrom (after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company), (ii) the
exercise of warrants to purchase 237,053 shares of Common Stock at $0.10 per
share upon the closing of this offering and (iii) the conversion of all
outstanding Mandatorily Redeemable Convertible Preferred Stock of the Company
into an aggregate of 16,734,889 shares of Common Stock upon the closing of the
offering.

<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------
ACTUAL AS ADJUSTED
---------- -------------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Short-term indebtedness, including current portion of
notes payable (1)................................... $ 1,399 $ --
========== ==========
Notes payable, less current portion (1).............. $ 316 $ --
---------- ----------
Mandatorily Redeemable Convertible Preferred Stock... 12,427 --
---------- ----------
Shareholders' equity (deficit):
Preferred Stock, no par value; no shares
authorized, issued or outstanding, actual;
5,000,000 shares authorized, no shares issued or
outstanding, as adjusted.......................... -- --
Common Stock, no par value; 45,000,000 shares
authorized, 11,426,875 shares issued and
outstanding, actual; 75,000,000 shares authorized,
30,898,817 shares issued and outstanding, as
adjusted (2)...................................... 2,394 48,731
Accretion of Mandatorily Redeemable Convertible
Preferred Stock................................... (2,454) --
Notes receivable from shareholders................. (1,880) (1,880)
Accumulated deficit................................ (604) (604)
---------- ----------
Total shareholders' equity (deficit).............. (2,544) 46,247
---------- ----------
Total capitalization............................. $ 10,199 $ 46,247
========== ==========
</TABLE>
- --------
(1) See Note 8 of Notes to Financial Statements.
(2) Based on shares outstanding as of June 30, 1996. Includes 237,053 shares
of Common Stock to be issued upon the exercise of warrants upon the
closing of this offering. Excludes (i) 2,169,460 shares of Common Stock
issuable upon exercise of options outstanding as of June 30, 1996 at a
weighted average exercise price of $1.52 per share, of which 720,910
shares were fully vested and exercisable as of June 30, 1996, (ii) 212,879
shares of Common Stock reserved for future issuance under the Company's
Amended and Restated 1992 Flexible Stock Incentive Plan and (iii) 63,291
shares of Common Stock issuable upon exercise of outstanding warrants at
an exercise price of $0.79 per share. In July 1996, the Company adopted
the 1996 Stock Plan and 1996 Employee Stock Purchase Plan under which
5,500,000 and 1,200,000 shares have been reserved for future grant,
respectively. See "Management--Stock Plans," "Description of Capital
Stock" and Notes 5 and 9 of Notes to Financial Statements.

12
<PAGE>

DILUTION

The pro forma net tangible book value of the Company as of June 30, 1996 was
$9.9 million or $0.35 per share of Common Stock. Pro forma net tangible book
value per share is determined by dividing the net tangible book value of the
Company (total tangible assets less total liabilities) by the number of
outstanding shares of Common Stock (assuming the conversion of all outstanding
shares of Preferred Stock into Common Stock and the exercise of warrants to
purchase 237,053 shares of Common Stock upon the closing of this offering.)
After giving effect to the sale by the Company of the 2,500,000 shares of
Common Stock offered hereby (at the initial public offering price of $16.00
per share and after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company), the Company's adjusted
pro forma net tangible book value at June 30, 1996 would have been
approximately $46.2 million or $1.50 per share. This represents an immediate
increase in net tangible book value to existing shareholders of $1.15 per
share and an immediate dilution to new investors of $14.50 per share. The
following table illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share......................... $16.00
Pro forma net tangible book value per share as of June 30,
1996......................................................... $0.35
Increase in pro forma net tangible book value per share
attributable to new investors................................ 1.15
-----
Pro forma net tangible book value per share after this
offering....................................................... 1.50
------
Dilution per share of common stock to new investors............. $14.50
======
</TABLE>

The following table sets forth on a pro forma basis as of June 30, 1996 the
difference between the number of shares of Common Stock purchased from the
Company (assuming conversion of all outstanding shares of Preferred Stock into
Common Stock and the exercise of warrants to purchase 237,053 shares of Common
Stock upon the closing of this offering) of the total consideration paid, and
the average price per share paid by existing shareholders and by the new
investors at the initial public offering price of $16.00 per share (before
deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company).

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.......... 28,398,817 91.9% $12,433,000 23.7% $0.44
New investors.................. 2,500,000 8.1 40,000,000 76.3 16.00
---------- ----- ----------- -----
Total........................ 30,898,817 100.0% $52,433,000 100.0%
========== ===== =========== =====
</TABLE>

The foregoing analysis assumes no exercise of the Underwriters' over-
allotment option and no exercise of stock options outstanding at June 30,
1996. As of June 30, 1996, there were options outstanding to purchase a total
of 2,169,460 shares of Common Stock at a weighted average exercise price of
$1.52 per share, and 212,879 shares were reserved for grant of future options
under the Company's Amended and Restated 1992 Flexible Stock Incentive Plan.
Subsequent to June 30, 1996, the Board of Directors granted options to
purchase an additional 656,700 shares of Common Stock. In addition, in July
1996 the Board of Directors adopted the 1996 Stock Plan and the 1996 Employee
Stock Purchase Plan, under which 5,500,000 and 1,200,000 shares of Common
Stock have been reserved for future grant, respectively. No options or shares
have been issued under either of these plans. As of June 30, 1996, there were
warrants outstanding to purchase a total of 63,291 shares of Common Stock at
$0.79 per share. To the extent that any of these options or warrants are
exercised, there will be further dilution to new investors. See
"Capitalization," "Management--Stock Plans" and Notes 5 and 9 of Notes to
Financial Statements.

13
<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the
Company's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The statement of operations data for
the fiscal years ended June 30, 1994, 1995 and 1996 and the balance sheet data
as of June 30, 1995 and 1996 are derived from financial statements of the
Company that have been audited by Price Waterhouse LLP, independent
accountants, and are included elsewhere in this Prospectus. The balance sheet
data as of June 30, 1994 are derived from financial statements of the Company
that have been audited and are not included herein. The statement of
operations data for the period ended June 30, 1992 and for the fiscal year
ended June 30, 1993 and the balance sheet data as of June 30, 1992 and 1993
are derived from unaudited financial statements of the Company that are not
included herein. The historical results are not necessarily indicative of
future results.

<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 19, 1991 YEAR ENDED JUNE 30,
(INCEPTION) TO ------------------------------------
JUNE 30, 1992 1993 1994 1995 1996
--------------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue.................. $ 186 $ 1,479 $ 7,565 $15,549 $44,092
Operating expenses:
Professional personnel.. 178 876 3,319 6,654 19,892
Sales and marketing..... 407 1,724 2,774 3,843 7,990
General and
administrative......... 131 432 1,588 1,890 5,049
Other costs............. 161 524 1,248 2,346 6,447
------ -------- -------- ------- -------
Total operating
expenses.............. 877 3,556 8,929 14,733 39,378
------ -------- -------- ------- -------
Income (loss) from
operations.............. (691) (2,077) (1,364) 816 4,714
Interest and other, net.. (10) (84) (30) 17 3
------ -------- -------- ------- -------
Income (loss) before
income taxes............ (701) (2,161) (1,394) 833 4,717
Provision for income
taxes................... -- -- -- 58 1,840
------ -------- -------- ------- -------
Net income (loss)........ $ (701) $ (2,161) $ (1,394) $ 775 $ 2,877
====== ======== ======== ======= =======
Net income (loss)
attributable to Common
Stock................... $ (701) $ (2,194) $ (1,797) $ (108) $ 1,742
====== ======== ======== ======= =======
Net income (loss) per
share (1)............... $(0.08) $ (0.21) $ (0.07) $ 0.03 $ 0.09
====== ======== ======== ======= =======
Net income (loss)
attributable to Common
Stock per share (1)..... $(0.08) $ (0.22) $ (0.09) $ -- $ 0.06
====== ======== ======== ======= =======
Shares used to compute
net income (loss) per
share (1)............... 9,287 10,095 19,480 29,523 30,719
====== ======== ======== ======= =======
Shares used to compute
net income (loss)
attributable to Common
Stock per share (1)..... 9,287 10,095 19,480 27,173 30,719
====== ======== ======== ======= =======
</TABLE>

<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------
1992 1993 1994 1995 1996
----- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 90 $ 823 $ 2,414 $ 4,161 $ 869
Working capital (deficit).......... (663) 1,072 2,850 6,103 6,060
Total assets....................... 391 1,852 5,112 9,967 18,072
Notes payable, less current
portion........................... -- -- 447 732 316
Mandatorily Redeemable Convertible
Preferred Stock................... -- 4,007 7,413 11,292 12,427
Shareholders' deficit.............. (454) (2,513) (4,296) (4,395) (2,544)
</TABLE>
- -------
(1) See Note 1 of Notes to Financial Statements for an explanation of shares
used to compute net income (loss) per share.

14
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Since its inception in August 1991, INS has focused on becoming a leading
provider of services for complex enterprise networks. Substantially all of the
Company's revenue is derived from professional services, which are generally
provided to clients on a "time and expenses" basis. Professional services
revenue is recognized as services are performed. Any payments received in
advance of services performed are recorded as deferred revenue. The Company
also performs a limited number of fixed-price projects under which revenue is
recognized using the percentage-of-completion method. The Company's clients
are generally able to reduce or cancel their use of the Company's professional
services without penalty and with little or no notice. The Company also
derives revenue from electronic services; however, such revenue has not been
significant to date. Electronic services revenue is recognized ratably over
the term of the contract. The Company has expended, and expects to continue to
expend, substantial amounts in the development and marketing of its electronic
services.

Since professional services revenue is recognized by the Company only when
network systems engineers are engaged on client projects, the utilization of
network systems engineers is important in determining the Company's operating
results. In addition, a substantial majority of the Company's operating
expenses, particularly personnel and related costs, depreciation and rent, are
relatively fixed in advance of any particular quarter. As a result, any
underutilization of network systems engineers may cause significant variations
in operating results in any particular quarter and could result in losses for
such quarter. Factors which could cause such underutilization include: the
reduction in size, delay in commencement, interruption or termination of one
or more significant projects; the completion during a quarter of one or more
significant projects; the overestimation of resources required to complete new
or ongoing projects; and the timing and extent of training, weather related
shut-downs, vacation days and holidays.

The Company's revenue and earnings may also fluctuate from quarter to
quarter based on a variety of factors including the loss of key employees,
reductions in billing rates, write-offs of work performed for clients,
competition, timing of employment taxes, the initial or ongoing market
acceptance of EnterprisePRO, the development and introduction of new services
and general economic conditions. In addition, the Company plans to continue to
expand its operations by hiring additional network systems engineers and other
employees, and adding new offices, systems and other infrastructure. The
resulting increase in operating expenses would have a material adverse effect
on the Company's operating results if revenue were not to increase to support
such expenses. Based upon all of the foregoing, the Company believes that
quarterly revenue and operating results are likely to vary significantly in
the future and that period-to-period comparisons of its operating results are
not necessarily meaningful and should not be relied on as indications of
future performance. Furthermore, it is likely that in some future quarter the
Company's revenue or operating results will be below the expectations of
public market analysts or investors. In such event, the price of the Company's
Common Stock would likely be materially adversely affected.

15
<PAGE>

ANNUAL RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain financial
data as a percent of revenue:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Revenue................................................ 100.0% 100.0% 100.0%
Operating expenses:
Professional personnel................................ 43.9 42.8 45.1
Sales and marketing................................... 36.7 24.7 18.1
General and administrative............................ 21.0 12.1 11.5
Other costs........................................... 16.5 15.1 14.6
------ ------ ------
Total operating expenses............................. 118.1 94.7 89.3
------ ------ ------
Income (loss) from operations.......................... (18.1) 5.3 10.7
Interest and other, net................................ (0.3) 0.1 --
------ ------ ------
Income (loss) before income taxes...................... (18.4) 5.4 10.7
Provision for income taxes............................. -- 0.4 4.2
------ ------ ------
Net income (loss)(1)................................... (18.4)% 5.0% 6.5%
====== ====== ======
</TABLE>
- --------
(1) Excludes accretion of Mandatorily Redeemable Convertible Preferred Stock.

REVENUE

Substantially all of the Company's revenue is derived from fees for
professional services. The Company also derives revenue from electronic
services; however, such revenue has not been significant to date. Revenue was
$7.6 million, $15.5 million and $44.1 million in fiscal 1994, 1995 and 1996,
respectively, representing increases of 105.5% from fiscal 1994 to fiscal 1995
and 183.6% from fiscal 1995 to fiscal 1996. Revenue increased primarily due to
an increase in the number of professional services projects and secondarily
due to an increase in the size of these projects. During this period, the
number of offices grew from four to 17. The Company does not believe these
rates of growth are sustainable. The Company's largest client, MCI, accounted
for approximately 6.8% and 17.0% of revenue in fiscal 1995 and 1996,
respectively. In fiscal 1994, First Union National Bank and AirTouch Cellular
Communications accounted for approximately 30.3% and 13.3% of the Company's
revenue, respectively. No other client accounted for more than 10% of revenue
in fiscal 1994, 1995 or 1996. The Company's revenue is dependent in large part
on its ability to attract, retain and utilize qualified network systems
engineers. See "Risk Factors--Need to Attract and Retain Qualified Network
Systems Engineers" and "--Risks Associated with Client Concentration."

OPERATING EXPENSES

Professional Personnel. Professional personnel expenses consist primarily of
compensation and benefits of the Company's employees engaged in the delivery
of professional services and electronic services. Professional personnel
expenses were $3.3 million, $6.7 million and $19.9 million in fiscal 1994,
1995 and 1996, respectively, representing increases of 100.5% from fiscal 1994
to fiscal 1995 and 198.9% from fiscal 1995 to fiscal 1996. These increases
were attributable primarily to an increase in the number of network systems
engineers. The number of network systems engineers included in professional
personnel was 53, 121 and 344 at the end of fiscal 1994, 1995 and 1996,
respectively. Professional personnel expenses were 43.9%, 42.8%, and 45.1% of
revenue in fiscal 1994, 1995 and 1996, respectively. Professional personnel
expenses were higher as a percent of revenue in fiscal 1996 than fiscal 1995
due primarily to the implementation of a bonus plan that became effective at
the beginning of fiscal 1996.

Sales and Marketing. Sales and marketing expenses consist primarily of
compensation, including commissions, and benefits of sales and marketing
personnel as well as outside marketing expenses. Sales and marketing expenses
were $2.8 million, $3.8 million and $8.0 million in fiscal 1994, 1995 and
1996, respectively,

16
<PAGE>

representing increases of 38.5% from fiscal 1994 to fiscal 1995 and 107.9%
from fiscal 1995 to fiscal 1996. The increase in each year was due primarily
to the growth in number of sales and marketing employees and secondarily to
commissions resulting from increased revenue. Sales and marketing expenses
were 36.7%, 24.7% and 18.1% of revenue in fiscal 1994, 1995 and 1996,
respectively. The decreases, on a percentage basis, were due primarily to
increases in revenue.

General and Administrative. General and administrative expenses consist of
expenses associated with executive staff, the finance department, corporate
facilities, information systems and the human resources department. General
and administrative expenses were $1.6 million, $1.9 million and $5.0 million
in fiscal 1994, 1995 and 1996, respectively, representing increases of 19.0%
from fiscal 1994 to fiscal 1995 and 167.1% from fiscal 1995 to fiscal 1996.
General and administrative expenses have increased in absolute dollars in each
year as the Company has continued to add personnel in general and
administrative departments to support the Company's growth in operations.
General and administrative expenses are substantially related to the number of
employees as the most significant components are compensation and benefits,
travel and entertainment, recruiting and professional development, corporate
facilities, depreciation, expensed equipment and supplies associated with
administrative personnel. General and administrative expenses were 21.0%,
12.1% and 11.5% of revenue in fiscal 1994, 1995 and 1996, respectively. The
decreases from year to year on a percentage basis were due primarily to
economies of scale achieved as a result of increasing revenue. The Company
expects that general and administrative expenses will continue to increase in
absolute dollars to support the planned expansion of operations.

Other Costs. Other costs consist of expenses related to professional
personnel (other than compensation and benefits), including travel and
entertainment, certain recruiting and professional development expenses, field
facilities, depreciation, expensed equipment, supplies and research and
development expenses related to electronic services. Other costs were $1.2
million, $2.3 million and $6.4 million in fiscal 1994, 1995 and 1996,
respectively, representing increases of 88.0% from fiscal 1994 to fiscal 1995
and 174.8% from fiscal 1995 to fiscal 1996. Other costs increased in absolute
dollars in each year due primarily to increases in the number of professional
personnel employed and to a lesser extent to the costs of field offices
established during the years presented. Other costs were 16.5%, 15.1%, and
14.6% of revenue in fiscal 1994, 1995 and 1996, respectively. Research and
development expenses increased from $78,000 or 0.5% of revenue in fiscal 1995
to $879,000 or 2.0% of revenue in fiscal 1996, as a result of the Company's
development of EnterprisePRO, the Company's electronic service that was
released in July 1996.

INTEREST AND OTHER, NET

Interest and other, net consists of interest income and expense. Interest
income consists primarily of interest on cash and cash equivalents and notes
receivable from shareholders. Interest expense consists of interest associated
with bank borrowings.

PROVISION FOR INCOME TAXES

The Company provides for income taxes using an asset and liability approach
that recognizes deferred tax assets and liabilities for expected future tax
consequences of temporary differences between the book and tax bases of assets
and liabilities. The Company did not provide for income taxes in fiscal 1994
as the Company incurred net operating losses during that period. The effective
tax rates for fiscal 1995 and 1996 were 7% and 39%, respectively. In fiscal
1995, the Company's effective tax rate of 7% was less than the combined
federal and state statutory rates primarily as a result of the utilization of
operating loss carryforwards and represented federal and state alternative
minimum income taxes. The Company's fiscal 1996 effective tax rate
approximated the combined federal and state statutory rates, net of federal
benefits. The Company expects that its fiscal 1997 effective tax rate will
approximate the combined federal and state statutory rates.

17
<PAGE>

QUARTERLY RESULTS OF OPERATIONS

The following tables present quarterly operating results for each quarter of
fiscal 1995 and 1996, as well as such data expressed as a percent of the
Company's revenue for each quarter. This information has been derived from
unaudited financial statements and has been prepared on the same basis as the
Company's audited financial statements which appear elsewhere in this
Prospectus. In the opinion of the Company's management, this information
reflects all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such information in accordance with
generally accepted accounting principles. The operating results for any
quarter are not necessarily indicative of the results for any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------
FISCAL 1995 FISCAL 1996
------------------------------------- -------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1994 1994 1995 1995 1995 1995 1996 1996
--------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $2,566 $3,127 $4,116 $5,740 $7,506 $9,610 $12,170 $14,806
Operating expenses:
Professional
personnel............. 1,155 1,331 1,781 2,387 3,347 4,448 5,435 6,662
Sales and marketing.... 648 737 1,102 1,356 1,449 1,701 2,193 2,647
General and
administrative........ 378 440 542 530 593 922 1,573 1,961
Other costs............ 422 434 623 867 1,180 1,321 1,834 2,112
------ ------ ------ ------ ------ ------ ------- -------
Total operating
expenses.............. 2,603 2,942 4,048 5,140 6,569 8,392 11,035 13,382
------ ------ ------ ------ ------ ------ ------- -------
Income (loss) from
operations............. (37) 185 68 600 937 1,218 1,135 1,424
Interest and other,
net.................... (9) 7 18 1 7 16 (2) (18)
------ ------ ------ ------ ------ ------ ------- -------
Income (loss) before
income taxes........... (46) 192 86 601 944 1,234 1,133 1,406
Provision for income
taxes.................. -- 12 8 38 368 481 442 549
------ ------ ------ ------ ------ ------ ------- -------
Net income (loss)....... $ (46) $ 180 $ 78 $ 563 $ 576 $ 753 $ 691 $ 857
====== ====== ====== ====== ====== ====== ======= =======
Net income (loss)
attributable to Common
Stock.................. $ (259) $ (46) $ (148) $ 345 $ 291 $ 467 $ 405 $ 580
====== ====== ====== ====== ====== ====== ======= =======
Net income (loss) per
share.................. $ -- $ 0.01 $ -- $ 0.02 $ 0.02 $ 0.02 $ 0.02 $ 0.03
====== ====== ====== ====== ====== ====== ======= =======
Net income (loss)
attributable to Common
Stock per share........ $(0.01) $ -- $(0.01) $ 0.01 $ 0.01 $ 0.02 $ 0.01 $ 0.02
====== ====== ====== ====== ====== ====== ======= =======
Shares used to compute
net income per share... 26,283 29,213 29,173 29,972 30,384 30,583 30,671 30,719
====== ====== ====== ====== ====== ====== ======= =======
Shares used to compute
net income (loss)
attributable to Common
Stock per share........ 26,283 27,567 27,407 29,972 30,384 30,583 30,671 30,719
====== ====== ====== ====== ====== ====== ======= =======
AS A PERCENT OF REVENUE:
Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Professional
personnel............. 45.0 42.6 43.3 41.6 44.6 46.3 44.7 45.0
Sales and marketing.... 25.3 23.6 26.8 23.6 19.3 17.7 18.0 17.9
General and
administrative........ 14.7 14.1 13.2 9.2 7.9 9.6 12.9 13.2
Other costs............ 16.4 13.8 15.0 15.1 15.7 13.7 15.1 14.3
------ ------ ------ ------ ------ ------ ------- -------
Total operating
expenses.............. 101.4 94.1 98.3 89.5 87.5 87.3 90.7 90.4
------ ------ ------ ------ ------ ------ ------- -------
Income (loss) from
operations............. (1.4) 5.9 1.7 10.5 12.5 12.7 9.3 9.6
Interest and other,
net.................... (0.4) 0.3 0.4 -- 0.1 0.1 -- (0.1)
------ ------ ------ ------ ------ ------ ------- -------
Income (loss) before
income taxes........... (1.8) 6.2 2.1 10.5 12.6 12.8 9.3 9.5
Provision for income
taxes.................. -- 0.4 0.2 0.7 4.9 5.0 3.6 3.7
------ ------ ------ ------ ------ ------ ------- -------
Net income (loss)....... (1.8)% 5.8% 1.9% 9.8% 7.7% 7.8% 5.7% 5.8%
====== ====== ====== ====== ====== ====== ======= =======
</TABLE>

Although the Company has achieved significant quarter to quarter revenue
growth for the periods presented, the Company does not believe this growth
rate is sustainable. Throughout fiscal 1995 and 1996, the Company's total
number of employees steadily increased each quarter, with total number of
employees increasing from 79 at the end of fiscal 1994 to 435 at the end of
fiscal 1996.

18
<PAGE>

A significant portion of the Company's expenses relate to compensation.
Certain compensation-based employment taxes are limited per employee per
calendar year and, as a result, the Company experiences a decrease in
employment taxes as a percent of revenue through the calendar year and an
increase in employment taxes as a percent of revenue from the second fiscal
quarter to the third fiscal quarter.

As a percent of revenue, professional personnel expenses fluctuated from
quarter to quarter due primarily to fluctuations in utilization and billing
rates and, to a lesser extent, employment taxes. In addition, professional
personnel expenses increased as a percent of revenue in the first quarter of
fiscal 1996 and remained at a higher level throughout fiscal 1996 due
primarily to the implementation of a bonus plan that became effective at the
beginning of fiscal 1996.

As a percent of revenue, sales and marketing expenses generally decreased
over the eight quarters due primarily to increases in revenue. The Company's
commission rates generally increase based upon the level of sales by account
manager, and as a result commissions as a percent of revenue were higher at
the end of the fiscal year than at the beginning. The decrease in sales and
marketing expenses as a percent of revenue from the fourth quarter of fiscal
1995 to the first quarter of fiscal 1996 was due primarily to the reset of
commission rates at the beginning of fiscal 1996. The increase in sales and
marketing expenses as a percent of revenue in the third quarter of fiscal 1995
was due primarily to an increase in marketing expenses and employment taxes.
The increase in sales and marketing expenses as a percent of revenue in the
third quarter of fiscal 1996 was due primarily to an increase in employment
taxes.

General and administrative expenses were lower as a percent of revenue
during the three quarters ended December 31, 1995 because the Company's
revenue base expanded more rapidly than its general infrastructure. In the
third and fourth quarters of fiscal 1996, the Company hired a significant
number of employees to support the growth in its operations, which resulted in
these expenses increasing as a percent of revenue.

Quarterly fluctuations in interest and other, net primarily reflect changes
in cash balances and the timing and magnitude of borrowings.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations primarily through a
combination of cash generated from operations, the private sale of equity
securities, private debt and bank borrowings. As of June 30, 1996, the Company
had raised $10.0 million from the private sale of equity securities. At June
30, 1996, the Company had $869,000 in cash and cash equivalents as well as a
bank credit facility. The credit facility includes a revolving line of credit
that provides for borrowings equal to the lesser of $6.0 million or 80% of
eligible accounts receivable and a term facility that provides for borrowings
up to $3.0 million for capital equipment purchases. Advances under the
revolving line of credit and term facility bear interest at the bank's prime
rate (8.25% at June 30, 1996) plus 1.00% and 1.25% per annum, respectively. As
of June 30, 1996, borrowings under the revolving line of credit totaled $1.0
million. There were no borrowings under the term facility at June 30, 1996.
The credit facility expires in June 1997, is secured by substantially all of
the assets of the Company, and contains customary covenants and restrictions.
As of June 30, 1996, the Company was in compliance with all such covenants and
restrictions.

Net cash used in operations in fiscal 1994 was $1.9 million. Net cash
provided by operations was $359,000 in fiscal 1995 and $347,000 in fiscal
1996. The change in cash provided by operations from fiscal 1994 to fiscal
1995 and fiscal 1996 primarily reflects the Company's increased profitability
offset by increases in accounts receivable. Although the Company believes its
collections experience is within industry standards, the Company's inability
to collect for its services on a timely basis in the future could have a
material adverse effect on the Company's business, operating results and
financial condition. Net cash used in investing activities, primarily for
computer equipment and software, in fiscal 1994, 1995 and 1996 was $553,000,
$1.6 million and $4.4 million, respectively. Financing activities provided
cash of $4.0 million and $3.0 million in fiscal 1994 and 1995, respectively,
primarily from the issuance of capital stock. Financing activities in fiscal
1996 provided cash of $760,000 through borrowings under the Company's credit
facility, which were principally offset by repayments on long-term debt.

19
<PAGE>

The Company believes the net proceeds from this offering, together with
available funds, will be sufficient to meet its capital requirements for at
least the next twelve months. The Company may also utilize cash to acquire or
invest in complementary businesses or to obtain the right to use complementary
technologies, although the Company does not have any pending plans to do so.
The Company may sell additional equity or debt securities or obtain additional
credit facilities. The sale of additional equity or convertible debt
securities will result in additional dilution to the Company's shareholders.

20
<PAGE>

BUSINESS

INS is a provider of services for complex enterprise networks. The Company
provides services for the full life cycle of a network, including planning,
design, implementation, operations and optimization, and maintains expertise
in the most complex network technologies and multivendor environments. Areas
of expertise include WANs, network management, network and host security and
high performance LANs and VLANs. As a services only provider, the Company
believes that it is able to provide unbiased assessments and optimal solutions
for its clients. The Company offers its services on a long or short term basis
in any or all phases of the network life cycle. The Company's services are
particularly well suited to clients who out-task a portion of their
information technology infrastructure. The Company has developed an on-line
solutions resource, Knowledge Network, through which the Company's network
systems engineers communicate and collaborate to provide solutions to clients'
complex enterprise network needs. The Company is leveraging its expertise in
complex networks to develop electronic services for certain repetitive network
management tasks, such as network monitoring and network performance
reporting. The Company's current electronic service, EnterprisePRO, is
designed to collect data, generate reports and compile network information for
use in the optimization of networks. The Company's clients include AT&T,
Ascend Communications, Cable and Wireless, Continental Cablevision,
Countrywide Home Loans, Cox Communications, Georgia Pacific, Kaiser
Permanente, Lam Research, MCI, MFS Datanet, NCR, Robert Half, SAIC, Sprint and
UJB Financial. Together, these clients, with whom the Company has ongoing
relationships, represented approximately 43% of the Company's fiscal 1996
revenues, ranging from a high of 17% of revenue to a low of .2%. Fourteen of
these sixteen clients individually represented less than 3% of the Company's
fiscal 1996 revenues. The Company serves its clients, many of which have
multi-location enterprise networks, through its nationwide network of 17
offices. As of June 30, 1996, the Company had 344 network systems engineers.

BACKGROUND

The ability of businesses to exchange information both internally and
externally is a competitive advantage in many industries. To exchange
information, many businesses are increasingly using client/server based
applications, e-mail, remote access by mobile workers, the Internet, corporate
Intranets, video, graphics and audio. The amount of data generated by these
applications combined with the larger number of users connected to networks,
has increased traffic and placed higher demand on networks. In this
environment, companies that have the most responsive and reliable information
systems networks will have a competitive advantage.

Although companies have attempted to develop the necessary expertise, this
rapid technological change and increasing complexity have made it difficult
for companies to implement and manage their large multivendor network
environments. In addition, to remain competitive, companies are increasingly
focused on their core business competencies and often turn to third-party
service providers for non-core functions, such as those related to their
computing environments. While some companies "out-source" their entire
computing environment, an increasing number of companies are pursuing an
approach to more actively manage their computing environments by "selectively
out-sourcing" or "out-tasking" only a limited set of services. The rapid
technological changes in networking and the move to out-tasking have created
increased demand for third-party network services.

To date, it has been difficult for businesses to find adequate third-party
solutions for their complex network services needs. Although there are many
suppliers of network services, few focus on services for complex multivendor
networks. For example, some computer systems and network equipment vendors
provide services; however they focus on distributing their own products and
often lack the skills to implement solutions in

21
<PAGE>

multivendor environments. Systems integrators and VARs have historically
focused on legacy computing environments and often do not have sufficient
expertise in distributed client/server network environments.
Telecommunications providers are often called upon to provide complex
multivendor data network services as part of total communication solutions;
however, they often do not have adequate or available expertise and therefore
often look to other third-party service providers for complex network
services.

INS SOLUTION

STRATEGY

The Company's objective is to become the premier provider of services for
complex enterprise networks. To achieve its objective, the Company is pursuing
the following strategies:

Build and Strengthen Client Relationships. The Company believes that
delivering dependable, high-quality network services is critical to
strengthening its relationships with existing clients, gaining repeat business
and generating new business from referrals. The Company seeks to establish
long-term relationships with its clients by becoming an integral part of their
network operations. The Company also plans to continue to build and strengthen
relationships with hardware and software vendors, system integrators and
telecommunications providers to assist them in providing total networking
solutions to their customers.

Expand Client Base in Existing and New Markets. The Company's strategy is to
expand its presence in the geographic markets it currently serves and to enter
new markets where it views the opportunity as attractive. The Company
currently offers its services through a network of 17 offices throughout the
United States. The Company believes that a broad presence will strengthen its
competitive position within the network services market and enable it to
better service its clients and enter new markets in the United States and
internationally.

Attract and Retain High Quality Network Systems Engineers. The Company
believes that its network systems engineers are critical to its success. The
Company's strategy is to continue to attract and retain the most qualified
network systems engineers by providing a rich environment and culture and by
offering professional development and financial opportunities. The Company
generally recruits network systems engineers that have significant technical
expertise and offers them professional training as well as the opportunity to
accelerate their career development by working on difficult problems and
collaborating with other network systems engineers to implement sophisticated
technology in complex enterprise networks. The Company promotes its corporate
culture with stated values that encourage employees to be their best, work as
a team and continually learn. The Company intends to continue to build its
nationwide recruiting organization and to invest heavily in training and
development.

Develop and Expand Corporate Infrastructure. The Company believes that its
corporate infrastructure provides it with a competitive advantage in
delivering services while enabling it to expand its operations. This

22
<PAGE>

infrastructure includes services, such as recruiting, training and
professional development, collaboration tools, such as Knowledge Network, and
management information systems to give management the information necessary to
make timely and accurate decisions. The Company believes that by continuing to
develop and refine its employee recruiting and training infrastructure,
strengthening its operational management reporting systems and controls, and
expanding its information resources, it will be well-positioned to deliver
high quality network services and support any growth in its operations.

Expand Electronic Services. The Company intends to leverage its expertise in
complex networks by developing electronic services for certain repetitive
network management tasks, such as network monitoring and network performance
reporting. In addition to the potential of recurring revenue from monthly
service fees, electronic services are designed to build and maintain client
relationships and provide opportunities for additional professional services.
The Company introduced EnterprisePRO, its current electronic service, in July
1996.

Pursue Strategic Acquisitions. The Company intends to pursue acquisitions to
expand within existing markets, enter new markets, increase the range of
services, add industry and technical expertise, and acquire technology that
can be used in electronic services.

No assurance can be given that the Company will be able to implement its
strategy or achieve its objectives. See "Risk Factors."

SERVICES

The Company provides professional services and technology expertise for all
phases of the network life cycle and provides an electronic service for
routine network management tasks.

Professional Services

The Company had 344 network systems engineers engaged in providing services
for complex enterprise networks as of June 30, 1996. The Company has both the
breadth of expertise required to support the full life cycle of a network,
which includes planning, design, implementation, operations and optimization,
and the depth of expertise required to address complex and rapidly changing
technology. The Company offers its services on a long- or short-term basis in
any or all phases of the network life cycle. The Company's services maximize
flexibility in meeting customer requirements, offer added value, and can be
clearly described and presented.

In order to meet the challenge of providing consistent, quality service, the
Company staffs each project with a complement of network systems engineers
with requisite technical and management experience. The Company works with the
client to create a plan that defines what will be delivered as well as how
success or completion will be measured. To encourage quality assurance the
Company involves the service management team in all aspects of delivery and
also coordinates content reviews and progress reviews. Further, the Company
uses Knowledge Network to bring the expertise and experience of many talented
network systems engineers to bear on an assignment.

The Company's services are provided either as discrete projects or as part
of ongoing relationships. Project content and scope range from simple task-
oriented engineering and value-added implementation efforts to large- scale
programs involving multiple resources across several client locations. The
Company generates revenue from its professional services on a time and
expenses basis; however, some projects with well-defined content may be
delivered on a fixed-price basis. The success of the Company's business will
depend on the Company's ability to fulfill the increasingly sophisticated
needs of its clients. The Company's clients are generally able to reduce or
cancel their use of the Company's products without penalty and with little or
no notice. See "Risk Factors--Dependence on Professional Services; Uncertainty
of Market Acceptance of Electronic Services," and "--Absence of Long-Term
Agreements."

23
<PAGE>

Network Life Cycle Services

The Company provides services for any or all phases of the network life
cycle, which includes planning, design, implementation, operations and
optimization.

Network Planning. The network planning phase of the network life cycle
focuses on providing clients with strategic and tactical reviews of their
current network operations and future network requirements. Network planning
services encompass a number of critical planning elements:

. Defining client business requirements

. Developing strategic information architectures

. Performing network baseline audits

. Preparing capacity plans for the physical network, logical transport and
services

. Selecting preferred technology

. Conducting network security audits and planning

Network Design. The network design phase includes services that assist in
the design of physical, logical and operational information infrastructures.
These services involve detailing the network specifications and implementation
tactics necessary to achieve clients' business objectives. The Company
generates a set of working papers that identify the specific technologies to
be used and how these technologies will be configured and implemented. These
services also take into consideration how the new technology will integrate
into the client's existing hardware and software and how it will be managed on
an ongoing basis. Examples of services provided by the Company in the network
design phase include:

. Defining functional requirements

. Developing multivendor integration plans

. Preparing technical design documentation

. Developing engineering specifications and documents

. Preparing RFP specifications or other make/buy criteria

. Providing detailed component purchasing lists

Network Implementation. The network implementation phase includes high
value-added network services, such as IP addressing and router configuration,
and, to a much lesser extent, traditional system integrator functions, such as
hardware installation. The Company believes it has expertise in integrating
new systems without disrupting ongoing business operations, thereby adding
value and reducing risk to clients. The Company customizes an implementation
plan for each client, which may include the following activities:

. Project management

. Integrating new hardware and software products and systems

. Building network operations and management centers

. Re-configuring and upgrading network elements, systems and facilities

. Implementing installation documentation, conformance testing and
compliance certification

Network Operations. The network operations phase includes ongoing tasks
necessary to keep the client's network fully operational. The Company has
experience in delivering operations services to a range of clients, including
those with newer client/server networks running both Internet (TCP/IP) and
workgroup (Novell and Microsoft) protocols intermingled with legacy (SNA)
networks. Specific operations activities are delivered according to individual
client requirements drawing from a well-understood set of operating practices.
Examples of these practices include:

. Network administration, including management of user accounts, service
levels, and client administrative or accounting practices

24
<PAGE>

. Network utilization analysis, involving ongoing measurement of network
activity against established network baselines

. Ongoing management of documentation, including physical assets, logical
topologies, policies and procedures

. Network troubleshooting, involving fault detection, isolation, repair and
restoration

. Alarm management including setting of alarm levels, cross-correlation,
problem diagnosis and dispatch of service resources

. Network backup, including design and supervision of backup processes and
policies, and exercise of disaster recovery procedures

. Routine moves, additions, and changes to network elements, infrastructure
and services

Network Optimization. The network optimization phase involves maximizing the
rate of return of enterprise network investments on behalf of the client by
such methods as reducing operating costs and increasing network utilization.
Although optimization may be viewed as a separate stage of the network life
cycle, optimization is closely linked with the other phases of the network
life cycle. Optimization services can be long-term in nature, address issues
such as cost containment and utilization, and are often aimed at optimizing
LAN infrastructure. These services can also be packaged as discrete projects,
designed to present alternatives for optimization of workgroup, departmental,
building, or campus network investments. Finally, the Company can assist in
optimizing "logical" networks, wherein the Company addresses a protocol,
service or application operating in the larger context of the client's
enterprise network. Examples of the Company's network optimization services
include:

. Recommendations for efficient allocation of bandwidth

. Network traffic analysis, identification of bottlenecks and
recommendations for change

. Network process re-engineering

. Knowledge transfer to client operations personnel on topics, such as
basic practices, or operation of network management tools and stations

Technology Expertise

The Company has developed expertise in a number of areas, including WANs,
network management, network and host security, high performance LANs and
VLANs.

Wide Area Networks. Wide area network design and optimization has special
value in multi-protocol, multi-vendor enterprise network environments. The
Company has substantial expertise in the design and optimization of shared
transport TCP/IP and SNA networks, including emerging and legacy networking
disciplines that span more than 20 years of network technology. Subject matter
expertise includes commercial transport technologies (frame relay, ATM, T1/T3
leased lines with HDLC, SONET, SMDS, ISDN, and X.25), interior and exterior
routing protocols (IGRP, EIGRP, CIDR, BGP-4, OSPF, RIP, and RIPv2), and
commonly used network protocols ( TCP/IP, SNA, IPX, Apple, DECnet, VINES).

Network Management. Network management practices include design and
implementation of network operations/management centers, design of distributed
network management systems, selection, installation, and integration of
network management platforms and integration with alarm managers, trouble
ticket systems and "manager of managers" tools. Subject matter expertise
includes SNMP, SNMPv2, RMON, RMON-II, HPOV, Optivity, Netview 6000, SunNet
Manager, Spectrum, Seagate NerveCenter, Remedy ARS and broad-based skills in
network management concepts and functions (fault, performance, configuration,
accounting, security).

Network and Host Security. Network and host security practices include
research and documentation of security policies, selection and installation of
Internet and Intranet firewalls, secure remote access solutions,
identification and installation of various security tools, audits of server
and workstation security, and training of

25
<PAGE>

clients on security topics. Subject matter expertise includes firewall design,
remote access design, authentication, server, host, and workstation industry
best practices, new security protocols (S/WAN, SHTTP, SSL), cryptography and
encryption, and high performance secure platforms.

High Performance Local Area Networks and Virtual Local Area
Networks. Consulting on design and implementation of high-performance LANs and
VLANs requires maintaining state of the art expertise on a broad array of
topics. The Company has expertise in switching technology and products,
performance tuning, ATM technology and applications, ATM migration, full-
duplex LANs, and other high speed LAN components.

Electronic Services

The Company is leveraging its expertise in complex networks to develop
electronic services for certain repetitive network management tasks, such as
network monitoring and network performance reporting. The Company's current
electronic service, EnterprisePRO, is designed to collect data, generate
reports and compile network information for use in the optimization of
networks. EnterprisePRO enables clients to obtain important network trending
data without investing in costly network performance hardware and software or
devoting valuable staff time. The Company believes that EnterprisePRO can
reduce network administration costs, improve operating efficiencies and
provide a better perspective on network performance.

EnterprisePRO is designed to be a "turn-key" service for network reporting
and analysis. The service includes continuous monitoring of device
availability and network capacity, proactive notification regarding device
availability and 11 daily quality checks customized to clients' networks. The
Company installs the EnterprisePRO server at the client site and connects it
to the INS operations center at the Company's headquarters. The EnterprisePRO
server software provides a proprietary network data collection system and an
intuitive Web-based user interface. A single server polls each device every
five minutes and can monitor up to 5,000 device interfaces. The Web-based
interface provides customizable network views that allow clients to do network
diagnosis, interactive decision support, and management information for fact-
based network architecture and upgrade planning. EnterprisePRO reports include
utilization statistics for frame relay, WAN, LAN and router CPU, device
uptime, and RMON statistics, including top transmitters and protocol
distribution. The INS operations center includes additional proprietary
software. The EnterprisePRO server automatically connects to the operations
center by modem and downloads the data. Operations center personnel back up
the data and view the data in order to do daily quality checks and provide
client support. The operations center also prints summary reports that are
sent to clients on a weekly basis and performs updates to client
configurations, troubleshooting of EnterprisePRO servers and downloads of
software fixes and updates.

EnterprisePRO was introduced in July 1996 and has been installed at 16
client sites nationwide as of July 31, 1996. The Company generally receives a
one-time installation fee and a monthly service fee that varies with the size
of the network being monitored.

The Company has in the past offered on a limited basis an electronic service
that has not achieved significant market acceptance or generated significant
revenue. EnterprisePRO is an enhanced version of the prior service. No
assurance can be given that EnterprisePRO, or any other electronic service
that the Company may develop in the future, will achieve market acceptance on
a timely basis, or at all.

The Company believes that its professional services and electronic services
complement one another. The cumulative expertise of the Company's professional
services staff provides valuable information upon which electronic services
may be based. Electronic services are designed to build and maintain client
relationships and provide opportunities for additional professional services.

KNOWLEDGE NETWORK

Knowledge Network is the Company's on-line solutions resource. Knowledge
Network combines the Company's proprietary information stored in a document
management system, a library of industry and

26
<PAGE>

manufacturer product information and specifications, periodicals, databases
and CDs from vendors providing additional technical support, and a means by
which the Company's network systems engineers can communicate and collaborate
in resolving clients' complex enterprise network issues. Network problems
encountered by INS network systems engineers and the ultimate solutions are
catalogued and stored on a confidential central database for use by INS
network systems engineers and management only. INS network systems engineers
are able to query the Knowledge Network for precedents, conversation threads
and other possible solutions for difficult network issues and can send e-mail
through the Knowledge Network to other INS network systems engineers for
assistance in resolving these issues. Knowledge Network enables the Company to
leverage the collective talents and experience of network experts in the
organization to provide clients with proven and cost-effective solutions to
their network services needs. The Company believes that the Knowledge Network
provides it with a competitive advantage over other network services
providers.

CLIENTS

The Company performs professional services for a variety of clients across a
broad range of industries. Set forth below is a representative list of the
Company's clients, each of which represented at least $100,000 in revenue in
fiscal 1996.

TELECOMMUNICATIONS FINANCIAL SERVICES SYSTEMS INTEGRATION
<S> <C> <C>
AT&T Alliance Capital Bell Atlantic Network Integration
AirTouch Cellular Bank of California EDS
BellSouth Citicorp International NCR
Cable and Wireless Countrywide Home Loans Science Applications International
GTE MasterCard International Corporation ("SAIC")
LA Cellular Telephone Pershing SHL Systems House
MCI Quotron Systems Stream International
MFS Datanet UJB Financial Service
Nynex USAA OTHER
Southwestern Bell Telephone
Sprint MEDIA American Honda Motor Co.
WorldCom Network Services Carolina Power and Light
Continental Cablevision The Clorox Company
TECHNOLOGY Cox Communications Kaiser Permanente
Sony Pictures Entertainment McKesson
Ascend Communications Turner Broadcasting System Robert Half International
Cambio Networks The Stride-Rite Corporation
Cascade Communications MANUFACTURING Taylor Made Office Systems
Cisco Systems TransQuest Information Solutions
Compaq Caterpillar UniHealth Information Services
Lam Research Georgia Pacific
Oracle Ford Motor Company
</TABLE>

Although each client project differs, the following examples illustrate how
certain clients of the Company have used the Company's services.

Telecommunications. The Company provides a variety of services to several
telecommunication providers, including support for their managed network
services offerings. Managed network services are carrier-delivered, "turn-key"
solutions which include transport access, equipment procurement and
deployment, management capabilities, and professional services. Interexchange
carriers are experiencing increasing demand for high-speed managed network
services such as frame relay. INS has been retained to accelerate the
development, deployment, and management of frame relay services. The services
provided include pre- and post-sales support, staffing for complex network
engagements and the design and implementation of network operations centers.
Pre-sales support includes network evaluations and designs for the
telecommunications providers' customers. Post-sales

27
<PAGE>

support includes implementation and deployment, project management, staging
and configuration of the routing files, ongoing network management, second-
tier and third-tier helpdesk support and troubleshooting assistance. Staffing
for complex network engagements includes INS consultants working in
conjunction with client account representatives to meet the unique
requirements of the client's major customers.

The Company has derived a significant portion of its revenue from a limited
number of large clients and expects this concentration to continue. The
Company's largest client, MCI, accounted for approximately $7.5 million, or
17.0%, of the Company's revenue in fiscal 1996 and approximately $1.1 million,
or 6.8%, of the Company's revenue in fiscal 1995. In fiscal 1994, First Union
National Bank accounted for approximately $2.3 million, or 30.3% of the
Company's revenue, and AirTouch Cellular Communications accounted for
approximately $1.0 million, or 13.3% of the Company's revenue. No other client
accounted for more than 10% of the Company's revenue in fiscal 1994, fiscal
1995 or fiscal 1996. See "Risk Factors--Risks Associated with Client
Concentration" and "--Absence of Long-Term Agreements."

SALES AND MARKETING

The Company employs account managers who identify and sell to clients and
manage client relationships. Many members of the Company's account management
team have significant experience selling complex network and computer products
and services. The Company also has a marketing group which provides sales
support materials and marketing communications. Account managers generally
identify clients through direct marketing and referrals. The Company employs a
team selling approach, whereby account managers collaborate with field and
technical managers and network systems engineers to assess potential projects
and communicate the specific expertise of the Company's consultants to
potential clients. In addition to other marketing strategies, the Company
believes that delivering dependable, high-quality services is critical to
strengthening its relationships with existing clients, gaining repeat business
and generating new business from referrals. The Company seeks to establish
long-term relationships with its clients by becoming an integral part of their
network operations.

The Company markets its professional services directly to large end-user
clients who have chosen to out-task network services, and indirectly through
third parties, including large telecommunications carriers, systems
integrators, hardware and software vendors, and VARs. In addition, the Company
has developed a significant relationship with Cisco, pursuant to which the
Company has entered into direct relationships with clients as a result of
referrals from Cisco and has from time to time performed pre-sales and post-
sales support services for Cisco, including as a subcontractor. The Company
believes that maintaining and enhancing its relationship with Cisco is
important to the Company's business due to Cisco's leading position in the
large scale, enterprise internetworking market. Cisco develops, manufactures,
markets and supports high-performance, multiprotocol internetworking systems
that link geographically dispersed LANs and WANs. Although the Company
believes that its relationship with Cisco is good, there can be no assurance
that the Company will be able to maintain or enhance its relationship with
Cisco. Any deterioration in the Company's relationship with Cisco could have a
material adverse effect on the Company's business, operating results and
financial condition. Furthermore, although the Company has a relationship with
Cisco, the Company is an independent provider of network services and seeks to
provide the best solution for its clients regardless of network platform or
vendor. Therefore, should the Company's relationship with Cisco be perceived
as compromising the Company's ability to provide unbiased solutions, the
Company's relationship with existing or potential clients could be materially
adversely affected.

The Company's current electronic service, EnterprisePRO, is marketed through
the Company's account managers and through resellers and OEMs. EnterprisePRO
resellers will identify potential clients and negotiate the services contracts
and are responsible for installation and first level support of the client
installation. The Company provides the back office automation and service to
the client. The Company recently entered into reseller agreements with the
network services divisions of each of GE Capital and Pacific Bell to offer
EnterprisePRO to end-users. The success of these contracts will depend in part
on the level of commitment and effort of these resellers. Electronic services
may be sold under the Company's name or under a private label of the reseller.

28
<PAGE>

The Company's clients are generally able to reduce or cancel their use of
the Company's services without penalty and with little or no notice. As a
result, the Company believes that the number and size of its existing projects
are not reliable indicators or measures of future revenue. The Company has in
the past provided, and is likely in the future to provide, services to clients
without a written commitment or contract. When a client defers, modifies or
cancels a project, the Company must be able to rapidly redeploy network
systems engineers to other projects in order to minimize the underutilization
of employees and the resulting adverse impact on operating results. In
addition, the Company's operating expenses are relatively fixed and cannot be
reduced on short notice to compensate for unanticipated variations in the
number or size of projects in progress. As a result, any termination,
significant reduction or modification of its business relationships with any
of its significant clients or with a number of smaller clients could have a
material adverse effect on the Company's business, operating results and
financial condition.

HUMAN RESOURCES

The Company believes that its success in recruiting and retaining
experienced, highly-qualified and highly-motivated personnel will depend in
part on its ability to provide a rich environment and culture and to offer
professional development and financial opportunities. As of June 30, 1996, the
Company employed 435 persons, including 344 network systems engineers and
managers.

Recruiting. The success of the Company is dependent in part on attracting
and retaining talented, creative and motivated personnel at all levels. The
Company dedicates significant resources to its recruiting efforts. The Company
generally seeks to meet its hiring needs through referrals from existing INS
employees, through a nationwide network of recruiters and through the
Company's recently implemented new college graduate program. The Company's
network systems engineers together have expertise in a wide array of computer
and network systems of the Company's clients and a broad understanding of the
industries in which the Company's clients are involved.

Corporate Culture. The Company believes that developing a rich environment
and culture is critical to its success in achieving its mission of becoming
the premier provider of services for complex enterprise networks. The Company
actively fosters a set of basic values which were developed by its employees.
These values include a dedication to being the best, respecting others and
working as a team, continuous learning and development, trustworthiness and
empowerment. The Company encourages employees to use these values in daily
decision making and balance the interests of clients, shareholders and
employees to maximize long-term Company value. The Company believes that its
growth and success are attributable in large part to its high-caliber
employees and the Company's adherence to these values.

Professional Development. Professional development includes career
opportunities and on-the-job challenges, as well as training programs. The
Company has two career tracks for consultants, a technical track and a
management track. The Company has established a training program, called INS
University, which includes national and local consultative approach workshops,
collaboration workshops, new management training and technical training. In
support of its INS University curriculum, the Company offers advanced training
through on-site simulation labs and numerous computer-based training modules.
In addition, Knowledge Network serves as an additional training and
information resource. The Company's personnel keep apprised of technological
advances and developments through a combination of on-the-job exposure to
relevant technology, special training programs, peer review and discussions,
and supervision by seasoned technical personnel.

Compensation. The Company believes that by linking employee compensation to
the success of the Company through its incentive compensation programs, the
Company encourages an owner attitude which the Company believes results in
decisions that maximize Company value and employee retention. The Company's
compensation package consists of a combination of salary, performance-based
incentive compensation, stock options and benefit plans.

29
<PAGE>

The Company's success will depend in part on the continued services of its
key employees. The Company does not have employment or non-competition
agreements with any of its key or other employees. The loss of services of one
or more of the Company's key employees could have a material adverse effect on
the Company's business, operating results and financial condition. In
addition, if one or more key employees joins a competitor or forms a competing
company, the loss of such employees and any resulting loss of existing or
potential clients to any such competitor could have a material adverse effect
on the Company's business, operating results and financial condition. In the
event of the loss of any such employee, there can be no assurance that the
Company would be able to prevent the unauthorized disclosure or use of the
Company's or its clients' technical knowledge, practice or procedures by such
personnel or that such disclosure or use would not have a material adverse
effect on the Company's business, operating results and financial condition.

The Company's future success will also depend in large part on its ability
to hire, train and retain network systems engineers who together have
expertise in a wide array of the network and computer systems and a broad
understanding of the industries the Company serves. Competition for network
systems engineers is intense, and there can be no assurance that the Company
will be successful in attracting and retaining such personnel. In particular,
competition is intense for the limited number of qualified managers and senior
network systems engineers. The Company is currently experiencing and is likely
to continue to experience high rates of turnover among its network systems
engineers. Any inability of the Company to hire, train and retain a sufficient
number of qualified network systems engineers could impair the Company's
ability to adequately manage and complete its existing projects or to obtain
new projects, which, in turn, could have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
any inability of the Company to attract and retain a sufficient number of
qualified network systems engineers in the future could impair the Company's
planned expansion of its business.

COMPETITION

The network services industry is comprised of a large number of participants
and is subject to rapid change and intense competition. The Company faces
competition from system integrators, VARs, local and regional network services
firms, telecommunications providers, network equipment vendors and computer
systems vendors, many of which have significantly greater financial, technical
and marketing resources and greater name recognition and generate greater
service revenue than does the Company. The Company has faced, and expects to
continue to face, additional competition from new entrants into its markets.
Increased competition could result in price reductions, fewer client projects,
underutilization of employees, reduced operating margins and loss of market
share, any of which could materially adversely affect the Company's business,
operating results and financial condition. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors. The failure of the Company to compete successfully would have a
material adverse effect on the Company's business, operating results and
financial condition.

The Company believes that the principal competitive factors in the market in
which it competes include the nature of the services offered, quality of
service, client responsiveness, marketing, management, corporate culture,
client relationships, knowledge base, infrastructure and price. The Company
believes it competes favorably with respect to these factors. The Company
believes that its focus, depth and breadth of expertise and experience,
infrastructure and management distinguish it from its competitors.

30
<PAGE>

INTELLECTUAL PROPERTY

The Company's success is dependent in part on its information technology,
some of which is proprietary to the Company, and other intellectual property
rights. The Company relies on a combination of nondisclosure and other
contractual arrangements, technical measures, and trade secret and trademark
laws to protect its proprietary rights. The Company has one patent application
pending and holds one registered trademark. The Company enters into
confidentiality agreements with its employees and attempts to limits access to
and distribution of proprietary information. There can be no assurance that
the steps taken by the Company in this regard will be adequate to deter
misappropriation of proprietary information or that the Company will be able
to detect unauthorized use or take appropriate steps to enforce intellectual
property rights. The Company has in the past entered into services contracts
with clients that assign rights to certain aspects of the work performed under
such contracts to such clients. The Company does not believe that such
contracts will limit the Company's ability to render its services to other
clients. However, there can be no assurance that the Company will not receive
communications in the future from third parties or clients asserting that the
Company has infringed or misappropriated the proprietary rights of such
parties. Any such claims, with or without merit, could be time consuming,
result in costly litigation and diversion of technical and management
personnel or require the Company to develop non-infringing technology or enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all.
In the event of a successful claim of infringement or misappropriation against
the Company and failure or inability of the Company to develop non-infringing
technology or license the infringed, misappropriated, or similar technology,
the Company's business, operating results and financial condition could be
materially adversely affected.

FACILITIES

The Company's principal administrative, sales, marketing and service
development facilities are located in an approximately 31,000 square foot
building in Sunnyvale, California pursuant to a lease which expires in 2001.
In addition, the Company leases field support offices in 17 cities. The field
offices range from small executive offices to a 2,700 square foot facility.
Lease terms range from month-to-month on certain executive offices to five
years on certain direct leases. Because the Company's professional services
are generally performed at the client site, field facilities are generally
small. Field facilities are generally used for periodic meetings, training and
administration and by account managers. The Company has field facilities in
Atlanta, Georgia; Boston, Massachusetts; Chicago, Illinois; Costa Mesa,
California; Dallas, Texas; Detroit, Michigan; El Segundo, California; Houston,
Texas; Iselin, New Jersey; Mountain View, California; New York, New York;
Raleigh, North Carolina; San Francisco, California; San Ramon, California;
Tulsa, Oklahoma; Washington, D.C. and Woodland Hills, California. The Company
is continually evaluating the adequacy of existing facilities and facilities
in new cities and believes that suitable additional space will be available in
the future on commercially reasonably terms as needed.

31
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The executive officers, directors and key employees of the Company, and
their ages and positions as of June 30, 1996, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Donald K. McKinney............. 47 Chairman of the Board and Chief Executive
Officer
John L. Drew................... 40 President, Chief Operating Officer and
Director
David M. Butze................. 39 Vice President, Western Operations
Fred J. Farinacci.............. 49 Vice President, Central Operations
Kevin J. Laughlin.............. 35 Vice President, Finance, Chief Financial
Officer and Secretary
Noel Marie Leca................ 39 Vice President, Electronic Services
Peter J. Licata................ 49 Vice President, Southern Operations
Ralph S. Troupe................ 35 Vice President, Eastern Operations
Steven R. Umphreys............. 43 Vice President, Human Resources
Steven L. Waldbusser........... 30 Principal Architect, Electronic Services
Vernon R. Anderson(1)(2)....... 65 Director
David Carlick(1)............... 46 Director
Lawrence G. Finch (1).......... 62 Director
Donald A. LeBeau............... 48 Director
Douglas Leone (2).............. 39 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.

Donald K. McKinney. Mr. McKinney, the founder of the Company, served as
President and Chief Executive Officer and Director from the Company's
inception in August 1991 until January 1996 and has since served as Chairman
of the Board and Chief Executive Officer. Mr. McKinney served as the Vice
President of Sales and Marketing of Electronics for Imaging, Inc., a provider
of hardware and software products for the digital color imaging market, from
May 1989 to February 1991. Mr. McKinney has also served in various sales,
management and consulting positions at Sequoia Capital, Silicon Graphics,
Inc., Chromatics and IBM.

John L. Drew. Mr. Drew served as Vice President of Operations from June 1994
to January 1996 and has since served as President and Chief Operating Officer.
Mr. Drew is also a Director of the Company. Prior to joining the Company, Mr.
Drew was Vice President and General Manager for the Network Enable Division of
Unisys Corporation from April 1991 to June 1994. Mr. Drew also served in other
finance, marketing and management positions for Unisys Corporation from July
1984 to March 1991.

David M. Butze. Mr. Butze has been the Vice President of Western Operations
since April 1995. Prior to joining the Company, Mr. Butze was Vice President
of Sales and Marketing of Valence Technology, Inc., a battery technology
company, from May 1992 to March 1995. Mr. Butze was Vice President of JWP
Information Services, a systems integrator, from March 1989 to May 1992. Mr.
Butze has also held sales and sales management positions at Sperry Corporation
and Hercules Incorporated.

Fred J. Farinacci. Mr. Farinacci has been the Vice President of Central
Operations since March 1996. Prior to joining the Company, Mr. Farinacci held
various sales, sales management and general management positions at Unisys
Corporation for 19 years, most recently as Vice President and General Manager
of Transportation Market Segment from April 1995 to March 1996 and Group Vice
President, Central Group from January 1991 to March 1995.

Kevin J. Laughlin. Mr. Laughlin joined the Company in August 1993 as
Director of Finance and Secretary, became Vice President of Finance in August
1994, and became Chief Financial Officer in July 1996. Mr.

32
<PAGE>

Laughlin was Controller of Electronics for Imaging, Inc., a provider of
hardware and software products for the digital color imaging market, from
November 1989 to July 1993. Mr. Laughlin also served as an Accounting Manager
at Oracle Corporation and in various positions at Ernst & Young.

Noel Marie Leca. Ms. Leca has been the Vice President of Electronic Services
since March 1996. Prior to joining the Company, Ms. Leca held various
management positions at Sybase, Inc., a database software company, from
October 1989 to February 1996, most recently as Vice President from September
1995 to February 1996, Vice President, Multimedia Products from September 1993
to August 1995 and Vice President, Tools Products from October 1992 to August
1993.

Peter J. Licata. Mr. Licata joined the Company in February 1992 and has
served in various management positions, most recently Vice President of
Southern Operations. Prior to joining the Company, Mr. Licata was Vice
President of Sales, Marketing and Customer Service at Ultra Network
Technology, a networking company, from April 1987 to January 1992. Mr. Licata
has also held various sales and sales management positions at ROLM
Corporation, Cray Computer and Control Data Corporation.

Ralph S. Troupe. Mr. Troupe joined the Company in January 1993 and has
served in various sales and operations management positions, most recently,
Vice President of Eastern Operations. Prior to joining the Company, Mr. Troupe
was a Regional Manager of Lexcel Network Management Software Company, a
software company, from November 1990 to January 1993. Mr. Troupe has also held
sales and sales management positions at Management Visuals, 3M Corporation and
NCR Corporation.

Steven R. Umphreys. Mr. Umphreys has served as Vice President of Human
Resources since November 1995. Prior to joining the Company, Mr. Umphreys was
Director of Human Resources at Octel Corporation, a voice processing company,
from October 1990 to October 1995. Prior to Octel, Mr. Umphreys held various
human resource positions at 3Com Corporation, Quantum Corporation, and
Hewlett-Packard Company and a consulting position with Towers, Perrin,
Forester & Crosby.

Steven L. Waldbusser. Mr. Waldbusser has served as the Principal Architect,
Electronic Services for the Company since May 1995. Prior to joining the
Company, Mr. Waldbusser was the network architect at Carnegie Mellon
University from June 1987 to April 1995. Mr. Waldbusser is a Working Group
Chair of the Internet Engineering Task Force (IETF) and is the author of the
RMON and RMON-II standards as well as a co-author of the SNMPv2 standard and
many other standards.

Vernon R. Anderson. Mr. Anderson has served as a member of the Company's
Board of Directors since April 1992 and served as Chairman of the Board from
April 1992 to January 1996. Mr. Anderson has been a private investor and
management advisor since January 1994. Mr. Anderson was the President, Chief
Executive Officer and Vice Chairman of Axel Johnson, Inc., a diversified
industrial company, from March 1988 to October 1989, and Vice Chairman from
October 1989 to December 1993. Mr. Anderson was a founder, President and Chief
Executive Officer of Silicon Graphics, Inc., Collagen Corporation and Vidar
Corporation.

David Carlick. Mr. Carlick has served as a member of the Board of Directors
since April 1992. Mr. Carlick was the founder of Carlick Advertising in 1980,
which merged with Poppe Tyson in 1993. Mr. Carlick is currently an Executive
Vice President and Director of Poppe Tyson. Mr. Carlick is on the board of
directors of several privately held companies.

Lawrence G. Finch. Mr. Finch has served as a member of the Board of
Directors since June 1993. Mr. Finch has been a partner of Sigma Partners
since 1989. Mr. Finch is on the Board of Directors of Phoenix Technologies
Ltd. and several privately held companies.

Donald A. LeBeau. Mr. LeBeau has served as a member of the Board of
Directors since October 1994. Mr. LeBeau has served as Senior Vice President,
Worldwide Operations of Cisco, since August 1994 and Vice President of North
American Sales from July 1992 to August 1994. Prior to joining Cisco, Mr.
LeBeau was Vice President of Western Operations at Wang Laboratories.

33
<PAGE>

Douglas Leone. Mr. Leone has served as a member of the Board of Directors
since June 1993. Mr. Leone is a partner of Sequoia Capital and has been with
that firm since July 1988. Mr. Leone is on the Board of Directors of Arbor
Software and several privately held companies.

Certain of the current directors of the Company were nominated and elected
in accordance with voting rights which terminate upon the closing of this
offering.

DIRECTOR COMPENSATION

Members of the Company's Board of Directors do not receive compensation for
their services as directors. Certain directors have been granted options to
purchase Common Stock in the past and options may be granted to directors of
the Company in the future. See "--Stock Plans" and "Certain Transactions."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company's Compensation Committee reviews and approves the compensation
and benefits for the Company's executive officers, administers the Company's
stock purchase and stock option plans and makes recommendations to the Board
of Directors regarding such matters. For fiscal 1996, the Compensation
Committee consisted of Messrs. Anderson and Finch. The committee is currently
composed of Messrs. Anderson and Leone. No interlocking relationship exists
between the Company's Board of Directors or Compensation Committee and the
Board of Directors or compensation committee of any other company, nor has any
such interlocking relationship existed in the past. See "Certain
Transactions."

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Amended and Restated Articles of Incorporation limit the
liability of the Company's directors for monetary damages to the maximum
extent permitted by California law. Such limitation of liability has no effect
on the availability of equitable remedies, such as injunctive relief or
rescission.

The Company's Amended and Restated Bylaws provide that the Company will
indemnify its directors and officers and may indemnify its employees and
agents (other than officers and directors) against certain liabilities to the
maximum extent permitted by California law. The Company has entered into
indemnification agreements with each of its current directors and officers and
certain of its key employees that provide for indemnification of, and
advancement of expenses to, such persons to the maximum extent permitted by
California law, including by reason of action or inaction occurring in the
past and circumstances in which indemnification and advancement of expenses
are discretionary under California law.

At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of
any threatened litigation or proceeding that may result in a claim for such
indemnification.

34
<PAGE>

EXECUTIVE COMPENSATION

The following table sets forth all compensation earned during fiscal 1996 for
(i) the Company's Chief Executive Officer and (ii) the Company's other
executive officers whose salary and bonus for such fiscal year exceeded
$100,000 (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
NAME AND -------------------- UNDERLYING
PRICIPAL POSITION(1)N SALARY ($) BONUS ($) OPTIONS (#)
- --------------------- ---------- --------- ------------
<S> <C> <C> <C>
Donald K. McKinney
Chairman of the Board and Chief Executive
Officer.................................... $200,000 $60,000 600,000
John L. Drew
President and Chief Operating Officer....... 200,000 60,000 250,000
Kevin J. Laughlin
Vice President, Finance, Chief Financial Of-
ficer and Secretary........................ 118,077 24,000 50,000
</TABLE>
- --------
(1) Mr. Drew was appointed President and Chief Operating Officer in January
1996, and Mr. Laughlin was appointed Chief Financial Officer in July 1996.

The following table sets forth for each of the Named Executive Officers
certain information concerning stock options granted during fiscal 1996.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(5)
--------------------------------------------------- ----------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED(1) FISCAL 1996(2) PER SHARE(3) DATE(4) 5% ($) 10% ($)
---- ---------- ---------------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Donald K. McKinney...... 600,000 17.2% $ .25 09/01/00 $ 94,334 $239,061
John L. Drew............ 250,000 7.2 .50 11/15/05 78,612 199,218
Kevin J. Laughlin....... 50,000 1.4 .50 11/15/05 15,722 39,844
</TABLE>
OPTION GRANTS IN FISCAL 1996
- --------
(1) These options were granted pursuant to the Company's Amended and Restated
1992 Flexible Stock Incentive Plan. The options were immediately
exercisable; however, the shares purchased under such options are subject
to repurchase by the Company at the original exercise price paid per share
upon the optionee's cessation of service prior to the vesting of such
shares. In this context, "vesting" means that the shares subject to options
are no longer subject to repurchase by the Company. A total of 24% of the
options vest upon completion of 12 months of service with the Company, and
the remaining shares vest at the rate of two percent per month over the
next 38 months of service.
(2) In fiscal 1996, the Company granted options to purchase an aggregate of
3,486,350 shares.
(3) In determining the fair market value of the Company's Common Stock, the
Board of Directors considered various factors, including the Company's
financial condition and business prospects, its operating results, the
absence of a market for its Common Stock and the risks normally associated
with technology companies.
(4) Options may terminate before their expiration dates if the optionee's
status as an employee or consultant is terminated or upon the optionee's
death or disability.
(5) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the Company's future
Common Stock prices.

35
<PAGE>

The following table sets forth for each of the Named Executive Officers
certain information concerning options exercised during fiscal 1996 and the
number of shares subject to both exercisable and unexercisable stock options
as of June 30, 1996. Also reported are values for "in-the-money" options that
represent the positive spread between the respective exercise prices of
outstanding options and the fair market value of the Company's Common Stock as
of June 30, 1996.

AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF VALUE REALIZED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES (MARKET PRICE AT OPTIONS AT JUNE 30, 1996 (1) JUNE 30, 1996 (1)
ACQUIRED ON EXERCISE LESS ---------------------------------- -------------------------
NAME EXERCISE EXERCISE PRICE) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------------- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald K. McKinney(2)... 600,000 $ -- -- -- $ -- $ --
John L. Drew............ 250,000 -- -- -- -- --
Kevin J. Laughlin....... 200,000 25,500 -- -- -- --
</TABLE>
- --------
(1) The Options granted to the Named Executive Officers under the Company's
Amended and Restated 1992 Flexible Stock Incentive Plan were immediately
exercisable. The Named Executive Officers have exercised all options
granted to them; however, unvested shares are subject to repurchase by the
Company.
(2) Mr. McKinney is a trustee of the McKinney Family Trust which holds a
warrant to purchase 75,949 shares of the Company's Common Stock. Such
warrant was issued in connection with a financing on the same terms as
those received by other investors. See "Certain Transactions."

STOCK PLANS

1992 Flexible Stock Incentive Plan

The Company's 1992 Flexible Stock Incentive Plan (the "1992 Plan") provides
for the granting to employees (including officers and employee directors) of
incentive stock options and for the granting to employees, directors and
consultants of nonstatutory stock options and stock appreciation rights. As of
September 13, 1996, options to purchase an aggregate of 2,776,820 shares of
Common Stock were outstanding under the 1992 Plan and 552,455 shares remained
available for future grants under the 1992 Plan. Options granted under the
1992 Plan before the effective date of the 1996 Plan described below will
remain outstanding in accordance with their terms, but no further options will
be granted under the 1992 Plan after the public offering.

1996 Stock Plan

The Company's 1996 Stock Plan ( the "1996 Plan") was approved by the Board
of Directors in July 1996, subject to shareholder approval, but will not
become effective until the public offering. The 1996 Plan provides for the
granting to employees (including officers and employee directors) of incentive
stock options and for the granting to employees, directors (including non-
employee directors) and consultants of nonstatutory stock options and stock
purchase rights ("SPRs"). A total of 5,500,000 shares of Common Stock has been
reserved for issuance under the 1996 Plan, plus any unused or cancelled shares
under the 1992 Plan.

The 1996 Plan may be administered by the Board of Directors or a committee
designated by the Board (the "Administrator"). Options and SPRs granted under
the 1996 Plan are transferable by the optionee only at the discretion of the
Administrator or by will or by the laws of descent and distribution. Options
that are not transferable are exercisable during the lifetime of the optionee
only by such optionee. Options granted under the 1996 Plan generally must be
exercised within three months of the end of optionee's status as an employee,
director or consultant of the Company, or within twelve months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option term. The exercise price of all nonstatutory stock
options granted under the 1996 Plan will be determined by the Administrator.
With respect to any participant who owns stock possessing more than ten
percent of the voting power of all classes of the Company's

36
<PAGE>

outstanding capital stock (a "10% Shareholder"), the exercise price of any
incentive stock option granted must equal at least 110% of the fair market
value on the grant date. The exercise price of incentive stock options for all
other employees shall be no less than 100% of the fair market value per share
on the date of the grant. The maximum term of an option granted under the 1996
Plan may not exceed ten years from the date of grant (five years in the case
of an incentive stock option granted to a 10% Shareholder). In the case of
SPRs, unless the Administrator determines otherwise, the Company shall have a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
disability). Such repurchase option will lapse at a rate determined by the
Administrator. The purchase price for shares repurchased by the Company will
be the original price paid by the purchaser and may be paid by cancellation of
any indebtedness of the purchaser to the Company.

1996 Employee Stock Purchase Plan

The Company's 1996 Employee Stock Purchase Plan (the "1996 Purchase Plan")
was adopted by the Board of Directors in July 1996, subject to shareholder
approval, but will not become effective until the public offering. The Company
has reserved a total of 1,200,000 shares of Common Stock for issuance under
the 1996 Purchase Plan. Under the 1996 Purchase Plan, which is intended to
qualify under Section 423 of the Internal Revenue Code of 1986, as amended,
eligible employees of the Company are granted the right to purchase Common
Stock through payroll deductions of up to 15% of their compensation (including
commissions, overtime, shift premium, and performance bonuses). The employee's
right to purchase stock may accrue at a rate that does not exceed $25,000 of
stock per calendar year. The maximum number of shares that an employee may
purchase during any six-month purchase period is limited to 2,000 shares.
Generally, the price of Common Stock purchased under the 1996 Purchase Plan
will be 85% of the lower of the fair market value of the Common Stock on the
last trading day prior to the first day of the applicable offering period or
the last trading day of each six-month purchase period. Employees may end
their participation in the 1996 Purchase Plan at any time during an offering
period, and they will be paid their payroll deductions to date. Participation
ends automatically upon termination of employment with the Company. Rights
granted under the 1996 Purchase Plan are not transferable by a participant
other than by will, the laws of descent and distribution, or as otherwise
provided under the plan. The 1996 Purchase Plan will be implemented by an
initial offering period of approximately 26 months commencing on the effective
date of this offering and ending on the last trading day in the period ending
October 31, 1998. Special offering periods that end on the same date as the
first offering period will begin on November 29, 1996 and February 14, 1997.
Subsequent offering periods will last 24 months and will commence on the first
trading day on or after May 1 and November 1 of each year during which the
1996 Purchase Plan is in effect, and will terminate on the last trading day in
the periods ending 24 months later. Each 24-month offering period will consist
of four purchase periods of approximately six months duration. The 1996
Purchase Plan will be administered by the Board of Directors or by a committee
appointed by the Board.

401(k) PLAN

The Company has a 401(k) Plan, pursuant to which eligible employees may
elect to reduce their current salary by up to the statutorily prescribed
annual limit ($9,500 in 1996) and have the amount of such reduction
contributed to the 401(k) Plan. Certain Named Executive Officers participate
in the 401(k) Plan.

37
<PAGE>

CERTAIN TRANSACTIONS

Since inception in August 1991, the Company has issued, in private placement
transactions, shares of its Mandatorily Redeemable Convertible Preferred Stock
(the "Preferred Stock"), consisting of Series A, Series B and Series C
Preferred Stock, as follows: an aggregate of 2,848,000 shares of the Company's
Series A Preferred Stock at a price of $.603 per share in June 1993; an
aggregate of 6,848,922 shares of the Company's Series B Preferred Stock at a
price of $.336 per share in June 1993; and an aggregate of 5,722,178 shares of
the Company's Series C Preferred Stock at a price of $.79 per share in July
1994. Purchasers of the Preferred Stock included the following 5%
shareholders, executive officers, directors and entities affiliated with
directors:

<TABLE>
<CAPTION>
SHARES OF SERIES A SHARES OF SERIES B SHARES OF SERIES C
NAME PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
---- ------------------ ------------------ ------------------
<S> <C> <C> <C>
Canaan Partners enti-
ties................... -- -- 1,708,862
Sequoia Capital enti-
ties................... -- 2,977,792 957,632
Sigma Partners enti-
ties................... -- 2,977,792 957,632
Vernon R. Anderson (1).. -- 297,779 127,408
Donald K. McKinney...... 2,848,000 -- 439,073
Cisco Systems, Inc...... -- -- 1,265,823
</TABLE>
- -------
(1) Does not include 297,779 shares of Series B and 75,875 shares of Series C
Preferred Stock purchased by Brenton Anderson, the son of Vernon R.
Anderson.

The Preferred Stock purchased by these 5% shareholders, executive officers,
directors and affiliates was purchased on the same terms and conditions as the
Preferred Stock purchased by other investors. The holders of Preferred Stock
are entitled to certain dividend, voting, liquidation and redemption rights.
To date, no dividends have been paid. Certain of the current directors of the
Company were nominated and elected in accordance with the voting rights which
terminate upon the closing of this offering. The Preferred Stock is
convertible into Common Stock of the Company at the rate of one share of
Common Stock for each share of Preferred Stock.

In March 1994, the Company borrowed an aggregate of $1,000,000 from the
following holders of its Preferred Stock: Donald K. McKinney, Vernon R.
Anderson, Brenton Anderson, and entities affiliated with Sequoia Capital and
Sigma Partners. The convertible promissory notes bore interest at the rate of
7% per annum. The outstanding principal balance of these notes, plus accrued
interest, was converted into 1,291,798 shares of Series C Preferred Stock on
the closing of the sale of Series C Preferred Stock. In addition to the
convertible promissory notes evidencing the loans, the Company issued to the
lenders, on a pro-rata basis, warrants to purchase an aggregate of 253,163
shares of the Company's Common Stock at an exercise price per share of $.10.
The following shareholders who beneficially own more than 5% of the Company's
outstanding Common Stock, executive officers and directors (or entities
affiliated with directors) hold warrants issued in this transaction: Mr.
McKinney holds a warrant to purchase 75,949 shares of the Company's Common
Stock and entities affiliated with Sequoia Capital and Sigma Partners each
hold warrants to purchase 80,552 shares of the Company's Common Stock. In
addition, Mr. Vernon and his son, Mr. Brenton Anderson, exercised their
warrants and each purchased 8,055 shares of the Company's Common Stock in
August 1995. The remaining warrants terminate upon the closing of this
offering if not exercised. The Company has assumed that each of these warrants
will be exercised in full for purposes of this Prospectus.

In June 1994, the Company issued a warrant to purchase 1,315,789 shares of
Series C Preferred Stock at an exercise price of $1.14 to Cisco. Cisco
exercised the warrant in full in June 1995. The Company recognized revenue of
$741,000 and $207,000 from services provided to Cisco, including as a
subcontractor, in fiscal 1995 and 1996, respectively.

The Company made loans to certain of its executive officers related to the
exercise of stock options. The notes are collateralized by the underlying
stock and the stock is subject to a right of repurchase by the Company in the
event of termination. As of June 30, 1996, the amounts outstanding for
principal and interest on these loans were $157,018 and $162,580 for Messrs.
McKinney and Drew, respectively.

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors and principal shareholders and their
affiliates will be approved by a majority of the Board of Directors, including
a majority of the independent and disinterested directors of the Board of
Directors, and will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.

38
<PAGE>

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of August 15, 1996 and
as adjusted to reflect the sale of the Common Stock offered hereby for (i)
each person or entity who is known by the Company to beneficially own five
percent or more of the outstanding Common Stock of the Company, (ii) each of
the Company's directors, (iii) each of the Named Executive Officers and (iv)
all directors and executive officers of the Company as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
------------------------
NAME OR GROUP OF NUMBER OF SHARES BEFORE AFTER
BENEFICIAL OWNERS BENEFICIALLY OWNED(1) OFFERING OFFERING
- ----------------- --------------------- ---------- ----------
<S> <C> <C> <C>
Donald K. McKinney (2)...... 10,578,182 37.2% 34.2%
c/o International Network
Services
1213 Innsbruck Drive
Sunnyvale, CA 94089
Sequoia Capital (3)......... 4,015,976 14.1 13.0
Douglas Leone
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Sigma Partners (4).......... 4,015,976 14.1 13.0
Lawrence G. Finch
2884 Sand Hill Road
Suite 121
Menlo Park, CA 94025
Cisco Systems, Inc. (5)..... 2,581,612 9.1 8.4
Donald A. LeBeau
170 West Tasman Drive
San Jose, CA 95134
Canaan Partners (6)......... 1,708,862 6.0 5.5
2884 Sand Hill Road, Suite
115
Menlo Park, CA 94025
John L. Drew (7)............ 966,000 3.4 3.1
Vernon R. Anderson (8)...... 462,442 1.6 1.5
Kevin J. Laughlin (9)....... 300,000 1.1 1.0
David Carlick (10).......... 60,000 * *
All directors and executive
officers as a group (8 per-
sons) (11) ................ 23,580,188 83.0 76.3
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of the Company's Common Stock.
(1) Based on 28,409,977 shares outstanding as of August 15, 1996, which
includes 237,053 shares of Common Stock to be issued upon the exercise of
warrants concurrently with the consummation of this offering. Beneficial
ownership is determined in accordance with the rules of the Securities
and Exchange Commission. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person, shares of
Common Stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of August 15, 1996 are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of each other person. The
percentage of shares beneficially owned after the offering assumes no
exercise of the Underwriters' over-allotment option. See "Underwriters."
Except as indicated in the footnotes to this table

39
<PAGE>

and pursuant to applicable community property laws, each shareholder named
in the table has sole voting and investment power with respect to the
shares set forth opposite such shareholder's name.
(2) Includes 10,502,233 shares held by the McKinney Family Trust, of which Mr.
McKinney is a trustee. Of these shares, 420,000 shares were subject to a
repurchase option in favor of the Company as of August 15, 1996. Also
includes 75,949 shares issuable upon exercise of a warrant held by the
McKinney Family Trust.
(3) Includes 3,600,389 shares held by Sequoia Capital V, 177,619 shares held
by Sequoia Technology Partners V, 119,111 shares held by Sequoia XXIII and
38,305 shares held by Sequoia XXIV. Also includes 74,913, 2,417 and 3,222
shares issuable upon exercise of warrants held by Sequoia Capital V,
Sequoia Technology Partners V and Sequoia XXIV, respectively. Mr. Leone is
a partner of Sequoia Capital and disclaims beneficial ownership of all
shares except to the extent of his pecuniary interest in the partnerships.
(4) Includes 276,900 shares held by Sigma Associates II, L.P. and 3,658,524
shares held by Sigma Partners II, L.P. Also includes 5,671 and 74,881
shares issuable upon exercise of warrants held by Sigma Associates II,
L.P. and Sigma Partners II, L.P., respectively. Mr. Finch is a partner of
Sigma Partners and disclaims beneficial ownership of all shares except to
the extent of his pecuniary interest in the partnerships.
(5) Mr. LeBeau, a director of the Company, is Senior Vice President, Worldwide
Operations of Cisco. Mr. LeBeau disclaims beneficial ownership of such
shares.
(6) Includes 182,849 shares held by Canaan Capital Limited Partnership and
1,526,013 shares held by Canaan Capital Offshore Limited Partnership, C.V.
(7) Includes 610,000 shares subject to a repurchase option in favor of the
Company as of August 15, 1996.
(8) Includes 462,442 shares held by the Vernon R. & Lysbeth W. Anderson Family
Trust of which Mr. Anderson is a trustee.
(9) Includes 159,000 shares subject to a repurchase option in favor of the
Company as of August 15, 1996.
(10) Includes 10,000 shares issuable upon exercise of options, all of which
would be subject to a repurchase option in favor of the Company as of
August 15, 1996, if issued.
(11) Includes 10,000 shares issuable upon exercise of options, all of which
would be subject to a repurchase option in favor of the Company as of
August 15, 1996, if issued, 1,189,000 shares subject to a repurchase
option in favor of the Company as of August 15, 1996 and 237,053 shares
issuable upon exercise of warrants.

40
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Upon the closing of this offering, the authorized capital stock of the
Company will consist of 75,000,000 shares of Common Stock, no par value, and
5,000,000 shares of Preferred Stock, no par value, after giving effect to the
amendment of the Company's Amended and Restated Articles of Incorporation to
delete references to Series A, B and C Preferred Stock following the
conversion of such Preferred Stock into Common Stock upon the closing of this
offering.

COMMON STOCK

As of August 15, 1996, there were 28,409,977 shares of Common Stock
outstanding (after giving effect to the conversion of all Preferred Stock and
exercise of all warrants which would otherwise terminate upon the consummation
of this offering) held of record by 93 shareholders. Holders of Common Stock
are entitled to one vote per share on all matters to be voted upon by the
shareholders. Subject to preferences that may be applicable to any outstanding
Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." In
the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior liquidation rights of Preferred
Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are fully paid and non-assessable, and the shares of Common
Stock to be outstanding upon consummation of the offering will be fully paid
and non-assessable.

PREFERRED STOCK

Upon the closing of this offering, 5,000,000 shares of undesignated
Preferred Stock will be authorized, and no shares will be outstanding. The
Board of Directors of the Company has the authority to issue the shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any unissued shares of
Preferred Stock and to fix the number of shares constituting any series and
the designations of such series, without any further vote or action by the
shareholders. Although it presently has no intention to do so, the Board of
Directors, without shareholder approval, can issue Preferred Stock with voting
and conversion rights which could adversely affect the voting power of the
holders of Common Stock. The issuance of Preferred Stock may have the effect
of delaying, deferring or preventing a change in control of the Company.

WARRANTS

Upon the closing of this offering, the Company will have one warrant
outstanding to purchase 63,291 shares of the Company's Common Stock at a
purchase price of $0.79 per share. The warrant expires on July 1, 1999.

CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS

The Company's Amended and Restated Articles of Incorporation provide that
cumulative voting for the election of directors will be eliminated at such
time as (i) the Company's shares of Common Stock are listed on the Nasdaq
National Market and the Company has at least 800 holders of its equity
securities as of the record date of the Company's most recent annual meeting
of shareholders or (ii) the Company's shares of Common Stock are listed on the
New York Stock Exchange or the American Stock Exchange (a "listed
corporation"). The Company's Amended and Restated Articles of Incorporation
also provide that all shareholder action must be effected at a duly called
meeting of shareholders and not by a consent in writing. The Company's Amended
and Restated Bylaws provide that shareholders may only make director
nominations and bring business before the Company's annual meeting upon prior
written notice. Such provisions may have the effect of delaying or preventing
a change in control of the Company.

41
<PAGE>

REGISTRATION RIGHTS

The holders or their permitted transferees (the "Holders") of approximately
24,338,052 shares of Common Stock and warrants to purchase approximately
63,291 shares of Common Stock are entitled to certain rights with respect to
the registration of such shares under the Securities Act. Under the terms of
an agreement between the Company and such holders, if the Company proposes to
register any of its securities under the Securities Act, either for its own
account or for the account of other security holders, the holders are entitled
to notice of the registration and are entitled to include shares of such
Common Stock therein. In addition, the holders of more than 50% of the shares
with registration rights may require the Company at its own expense, on not
more than two occasions, to file a registration statement under the Securities
Act, with respect to their shares of Common Stock, and the Company is required
to use its best efforts to effect the registration, subject to certain
conditions and limitations. Further, the Holders may require the Company, at
its expense, to register the shares on Form S-3 when such form becomes
available to the Company, subject to certain conditions and limitations.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Company's Common Stock is
ChaseMellon Shareholder Services, L.L.C.

42
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect the market price of the Common Stock.
Furthermore, since only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.

Upon completion of this offering, the Company will have outstanding an
aggregate of 30,909,977 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, the 2,500,000 shares sold in this offering will be freely
tradeable without restriction or further registration under the Securities
Act, unless held by Affiliates of the Company, if any. The remaining
28,409,977 shares of Common Stock held by existing shareholders are Restricted
Shares. Restricted Shares may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144, 144(k)
or 701 promulgated under the Securities Act, which rules are summarized below.
As a result of the contractual restrictions described below and the provisions
of Rules 144, 144(k) and 701, additional shares will be available for sale in
the public market as follows: (i) no shares will be eligible for immediate
sale on the date of this Prospectus, (ii) 25,295,648 shares will be eligible
for sale upon expiration of lock-up agreements and other contractual
restrictions 180 days after the date of this Prospectus (March 18, 1997),
(iii) 1,331,899 shares will be eligible for sale thereafter upon expiration of
their respective two-year holding periods and (iv) 1,782,430 shares which are
subject to a repurchase option in favor of the Company will be eligible for
sale thereafter as such shares vest.

Upon completion of this offering, the holders of 24,338,052 shares of Common
Stock, or their transferees, will be entitled to certain rights with respect
to the registration of such shares under the Securities Act. See "Description
of Capital Stock--Registration Rights." Registration of such shares under the
Securities Act would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for shares purchased by
Affiliates, if any) immediately upon the effectiveness of such registration.

All officers and directors and certain other shareholders of the Company
have entered into "lock-up" agreements that provide that they will not sell,
make any short sale of, grant any option for the purchase of, or otherwise
transfer or dispose of, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock for a period
of 180 days after the date of this Prospectus (March 18, 1997), without the
prior written consent of Morgan Stanley & Co. Incorporated. Pursuant to pre-
existing agreements with the Company, all other holders of Common Stock and
options to purchase Common Stock have agreed not to sell shares of Common
Stock for 180 days after the date of this Prospectus (March 18, 1997), and the
Company has agreed in the Underwriting Agreement not to release such holders
without the consent of Morgan Stanley & Co. Incorporated. Morgan Stanley & Co.
Incorporated may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements.
Morgan Stanley & Co. Incorporated currently has no plans to release any
portion of the securities subject to lock-up agreements.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least two years would be
entitled to sell within any three-month period a number of shares that does
not exceed the greater of (i) one percent of the number of shares of Common
Stock then outstanding (which will equal approximately 309,100 shares
immediately after this offering) or (ii) the average weekly trading volume of
the Common Stock on the Nasdaq National Market during the four calendar weeks
preceding the filing of a notice on Form 144 with respect to such sale. Sales
under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information
about the Company. Under Rule 144(k), a person who is not deemed to have been
an Affiliate of the Company at any time during the 90 days preceding a sale,
and who has beneficially owned the shares proposed to be sold for at least
three years, is entitled to sell

43
<PAGE>

such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144. In general, under Rule 701
of the Securities Act as currently in effect, any employee, consultant or
advisor of the Company who purchased shares from the Company in connection
with a compensatory stock or option plan or other written agreement is
eligible to resell such shares 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance with certain
restrictions, including the holding period, contained in Rule 144.

The Securities and Exchange Commission has recently proposed reducing the
initial Rule 144 holding period to one year and the Rule 144(k) holding period
to two years. There can be no assurance as to when or whether such rule
changes will be enacted. If enacted, such modifications will have a material
effect on the times when shares of the Company's Common Stock become eligible
for resale.

The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Company's
1992 Plan, 1996 Plan and 1996 Purchase Plan. Based on the number of options
outstanding and options and shares reserved for issuance under all such plans,
such registration statement would cover approximately 10,029,275 shares. See
"Management--Stock Plans." Such registration statement is expected to be filed
and become effective as soon as practicable after the consummation of this
offering. Shares registered under such registration statement will, subject to
Rule 144 volume limitations applicable to shares acquired by Affiliates, be
available for sale in the open market upon expiration of the lock-up
agreements or contractual restrictions and any vesting restrictions described
above. As of September 13, 1996, options to purchase 2,776,820 shares of
Common Stock were issued and outstanding under the 1992 Plan, and no options
to purchase shares had been granted under the Company's 1996 Plan and 1996
Employee Purchase Plan. See "Management--Director Compensation" and "--Stock
Plans."

44
<PAGE>

UNDERWRITERS

Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below, for whom Morgan
Stanley & Co. Incorporated, Alex. Brown & Sons Incorporated and Robertson,
Stephens & Company LLC are serving as Representatives, have severally agreed
to purchase, and the Company has agreed to sell to them, the respective number
of shares of the Company's Common Stock set forth opposite their respective
names below:

<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated................................. 566,668
Alex. Brown & Sons Incorporated................................... 566,666
Robertson, Stephens & Company LLC................................. 566,666
Adams, Harkness & Hill, Inc. ..................................... 40,000
Advest, Inc. ..................................................... 40,000
The Chicago Corporation........................................... 40,000
Furman Selz LLC................................................... 40,000
Goldman, Sachs & Co. ............................................. 80,000
Hambrecht & Quist LLC............................................. 80,000
Hampshire Securities Corporation.................................. 40,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................ 80,000
Montgomery Securities............................................. 80,000
J.P. Morgan Securities Inc. ...................................... 80,000
Needham & Company, Inc. .......................................... 40,000
Pennsylvania Merchant Group LTD................................... 40,000
Punk, Ziegel & Knoell, L.P. ...................................... 40,000
Soundview Financial Group, Inc. .................................. 40,000
Wessels, Arnold & Henderson, L.L.C. .............................. 40,000
---------
Total........................................................... 2,500,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions. The Underwriters are obligated to take and
pay for all of the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any are taken.

The Underwriters initially propose to offer part of the shares of Common
Stock offered hereby directly to the initial public at the public offering
price set forth on the cover page hereof and part to certain dealers at a
price which represents a concession not in excess of $.68 per share under the
initial public offering price. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $.10 per share to other
Underwriters or to certain other dealers.

Pursuant to the Underwriting Agreement, the Company has granted to the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an additional 375,000 shares of Common Stock at
the initial public offering price set forth on the cover page hereof, less
underwriting discounts and commissions. The Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, incurred in
the sale of the shares of Common Stock offered hereby. To the extent such
option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares as the number set forth next to such Underwriters' name in
the preceding table bears to the total number of shares of Common Stock
offered hereby to the Underwriters.

45
<PAGE>

The Underwriters have reserved up to 160,000 shares of Common Stock for sale
at the initial public offering price to certain employees of the Company and
other parties. In addition, certain other persons with whom the Company has
existing relationships have expressed an interest in purchasing shares from
the Underwriters at the initial public offering price. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase shares from the Underwriters. Any shares not so purchased
will be offered by the Underwriters to the general public on the same basis as
the other shares offered hereby.

The Representatives have informed the Company that the Underwriters do not
intend sales to discretionary accounts to exceed five percent of the total
number of shares of Common Stock offered by them.

The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.

See "Shares Eligible for Future Sale" for a description of certain
arrangements by which all officers and directors of the Company and certain
other shareholders of the Company have agreed not to sell, make any short sale
of, grant any option for the purchase of, or otherwise transfer or dispose of,
any shares of Common Stock or any securities convertible into or exercisable
or exchangeable for Common Stock for a period of 180 days after the date of
this Prospectus (March 18, 1997), without the prior written consent of Morgan
Stanley & Co. Incorporated. Pursuant to pre-existing agreements with the
Company, all other holders of Common Stock and options to purchase Common
Stock have agreed not to sell shares of the Company's Common Stock for 180
days after the date of the Prospectus (March 18, 1997), and the Company has
agreed in the Underwriting Agreement not to release such holders without the
prior consent of Morgan Stanley & Co. Incorporated. The Company has agreed in
the Underwriting Agreement that it will not, directly or indirectly, without
the prior written consent of Morgan Stanley & Co. Incorporated, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of any shares of Common Stock or any securities
convertible into or exchangeable for Common Stock, for a period of 180 days
after the date of this Prospectus (March 18, 1997), except under certain
circumstances.

PRICING OF THE OFFERING

Prior to this offering, there has been no public market for the Company's
Common Stock. The initial public offering price was determined by negotiation
between the Company and the Representatives. Among the factors considered in
determining the initial public offering price were the future prospects of the
Company and its industry in general, sales, earnings and certain other
financial and operating information of the Company in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of securities and
certain financial and operating information of companies engaged in activities
similar to those of the Company.

LEGAL MATTERS

Certain legal matters with respect to the legality of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Gray Cary Ware & Freidenrich, A
Professional Corporation, Palo Alto, California.

EXPERTS

The financial statements of the Company at June 30, 1995 and 1996 and for
each of the three years in the period ended June 30, 1996 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.

46
<PAGE>

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. Certain
items are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement and the
exhibits and schedules filed therewith. Statements contained in this
Prospectus as to the contents of any contract or any other document referred
to are not necessarily complete, and, in each instance, reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. A copy of the Registration Statement, and the exhibits and
schedules thereto, may be inspected without charge at the public reference
facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the Registration Statement may be
obtained from such offices upon the payment of the fees prescribed by the
Commission. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
site is http://www.sec.gov.

47
<PAGE>

INTERNATIONAL NETWORK SERVICES

----------------

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................................ F-2
Balance Sheets at June 30, 1995 and 1996................................. F-3
Statements of Operations for the Years Ended June 30, 1994, 1995 and
1996.................................................................... F-4
Statements of Shareholders' Deficit for the Years Ended June 30, 1994,
1995 and 1996........................................................... F-5
Statements of Cash Flows for the Years Ended June 30, 1994, 1995 and
1996.................................................................... F-6
Notes to Financial Statements............................................ F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
International Network Services

In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' deficit and of cash flows present fairly, in
all material respects, the financial position of International Network
Services at June 30, 1995 and 1996 and the results of its operations and its
cash flows for each of the three years in the period ended June 30, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.

Price Waterhouse LLP
San Jose, California
July 19, 1996

F-2
<PAGE>

INTERNATIONAL NETWORK SERVICES

BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
JUNE 30,
----------------
1995 1996
------- -------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents.................................. $ 4,161 $ 869
Accounts receivable, net................................... 4,164 11,821
Deferred income taxes...................................... -- 857
Prepaid expenses and other assets.......................... 116 386
------- -------
Total current assets..................................... 8,441 13,933
Property and equipment, net.................................. 1,526 4,139
------- -------
$ 9,967 $18,072
======= =======

LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND SHAREHOLDERS' DEFICIT

Current liabilities:
Accounts payable........................................... $ 652 $ 1,908
Accrued expenses........................................... 954 3,704
Income taxes payable....................................... 58 250
Deferred revenue........................................... 342 612
Borrowings under line of credit............................ -- 1,000
Current portion of notes payable........................... 332 399
------- -------
Total current liabilities................................ 2,338 7,873
------- -------
Notes payable, less current portion.......................... 732 316
------- -------
Mandatorily Redeemable Convertible Preferred Stock........... 11,292 12,427
------- -------
Commitments (Notes 7 and 8)

Shareholders' deficit:
Common Stock, no par value, 45,000,000 shares authorized;
8,394,320 and 11,426,875 shares issued and outstanding.... 435 2,394
Accretion of Mandatorily Redeemable Convertible Preferred
Stock..................................................... (1,319) (2,454)
Notes receivable from shareholders......................... (30) (1,880)
Accumulated deficit........................................ (3,481) (604)
------- -------
Total shareholders' deficit.............................. (4,395) (2,544)
------- -------
$ 9,967 $18,072
======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-3
<PAGE>

INTERNATIONAL NETWORK SERVICES

STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenue.............................................. $ 7,565 $15,549 $44,092
------- ------- -------
Operating expenses:
Professional personnel............................. 3,319 6,654 19,892
Sales and marketing................................ 2,774 3,843 7,990
General and administrative......................... 1,588 1,890 5,049
Other costs........................................ 1,248 2,346 6,447
------- ------- -------
Total operating expenses......................... 8,929 14,733 39,378
------- ------- -------
Income (loss) from operations........................ (1,364) 816 4,714
Interest and other, net.............................. (30) 17 3
------- ------- -------
Income (loss) before income taxes.................... (1,394) 833 4,717
Provision for income taxes........................... -- 58 1,840
------- ------- -------
Net income (loss).................................... (1,394) 775 2,877
Accretion of Mandatorily Redeemable Convertible
Preferred Stock................................... 403 883 1,135
------- ------- -------
Net income (loss) attributable to Common Stock..... $(1,797) $ (108) $ 1,742
======= ======= =======
Net income (loss) per share.......................... $ (0.07) $ 0.03 $ 0.09
======= ======= =======
Shares used to compute net income (loss) per share... 19,480 29,523 30,719
======= ======= =======
Net income (loss) attributable to Common Stock per
share............................................... $ (0.09) $ -- $ 0.06
======= ======= =======
Shares used to compute net income (loss) attributable
to
Common Stock per share.............................. 19,480 27,173 30,719
======= ======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4
<PAGE>

INTERNATIONAL NETWORK SERVICES

STATEMENTS OF SHAREHOLDERS' DEFICIT

(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
ACCRETION OF
MANDATORILY
NOTES REDEEMABLE
COMMON STOCK RECEIVABLE CONVERTIBLE
------------------ FROM PREFERRED ACCUMULATED
SHARES AMOUNTS SHAREHOLDERS STOCK DEFICIT TOTAL
---------- ------- ------------ ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1993................... 6,750,000 $ 383 $ -- $ (33) $(2,862) $(2,512)
Issuance of Common
Stock upon exercise
of stock options..... 1,172,800 43 (30) -- -- 13
Accretion of
Mandatorily
Redeemable
Convertible Preferred
Stock................ -- -- -- (403) -- (403)
Net loss.............. -- -- -- -- (1,394) (1,394)
---------- ------ ------- ------- ------- -------
Balance at June 30,
1994................... 7,922,800 426 (30) (436) (4,256) (4,296)
Accretion of
Mandatorily
Redeemable
Convertible Preferred
Stock................ -- -- -- (883) -- (883)
Issuance of Common
Stock upon exercise
of stock options,
net.................. 471,520 9 -- -- -- 9
Net income............ -- -- -- -- 775 775
---------- ------ ------- ------- ------- -------
Balance at June 30,
1995................... 8,394,320 435 (30) (1,319) (3,481) (4,395)
Accretion of
Mandatorily
Redeemable
Convertible Preferred
Stock................ -- -- -- (1,135) -- (1,135)
Issuance of Common
Stock upon exercise
of stock options and
warrants............. 3,032,555 1,959 (1,850) -- -- 109
Net income............ -- -- -- -- 2,877 2,877
---------- ------ ------- ------- ------- -------
Balance at June 30,
1996................... 11,426,875 $2,394 $(1,880) $(2,454) $ (604) $(2,544)
========== ====== ======= ======= ======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5
<PAGE>

INTERNATIONAL NETWORK SERVICES

STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $(1,394) $ 775 $ 2,877
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation...................................... 275 784 1,786
Changes in assets and liabilities:
Accounts receivable.............................. (1,350) (2,245) (7,657)
Deferred income taxes............................ -- -- (857)
Prepaid expenses and other assets................ (41) (37) (270)
Accounts payable................................. 109 352 1,256
Accrued expenses................................. 385 471 2,692
Income taxes payable............................. -- 58 250
Deferred revenue................................. 141 201 270
------- ------- -------
Net cash provided by (used for) operating
activities..................................... (1,875) 359 347
------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment................. (553) (1,610) (4,399)
------- ------- -------
Cash flows from financing activities:
Proceeds from notes payable........................ 2,071 600 --
Borrowings under line of credit.................... -- -- 1,000
Payments on notes payable.......................... -- (607) (349)
Payments on advances from shareholder.............. (48) -- --
Proceeds from issuance of Mandatorily Redeemable
Convertible Preferred Stock....................... 1,983 2,996 --
Proceeds from issuance of Common Stock, net........ 13 9 109
------- ------- -------
Net cash provided by financing activities....... 4,019 2,998 760
------- ------- -------
Increase (decrease) in cash......................... 1,591 1,747 (3,292)
Cash and cash equivalents at beginning of period.... 823 2,414 4,161
------- ------- -------
Cash and cash equivalents at end of period.......... $ 2,414 $ 4,161 $ 869
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................. $ 35 $ 87 $ 103
Cash paid for income taxes......................... $ -- $ -- $ 2,470

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Notes and interest payable to shareholders
exchanged for Mandatorily Redeemable Convertible
Preferred Stock................................... $ 1,020 $ -- $ --
Issuance of Common Stock in exchange for notes
receivable from shareholders...................... $ 30 $ -- $ 1,850
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-6
<PAGE>

INTERNATIONAL NETWORK SERVICES

NOTES TO FINANCIAL STATEMENTS

NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:

THE COMPANY

International Network Services (the "Company") was incorporated in
California in August 1991. The Company is a leading provider of services for
complex enterprise networks. The Company provides services for the full life
cycle of a network and maintains expertise in the most complex network
technologies and multivendor environments. The Company operates in one
industry segment.

SIGNIFICANT ACCOUNTING POLICIES

Fiscal year

The Company's fiscal year is composed of four 13-week quarters, each of
which ends on the last Sunday of the final fiscal month of the quarter, with
the fiscal year ending on the Sunday closest to June 30. For financial
statement presentation purposes, each fiscal year end is titled June 30th.

Cash and cash equivalents

All highly liquid investments with a maturity of three months or less from
the date of purchase are considered cash equivalents. Cash equivalents were
$2,646,000 and $311,000 at June 30, 1995 and 1996, respectively and consisted
of money market deposits with two institutions.

Property and equipment

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets, ranging from two to five years.

Revenue recognition

Substantially all of the company's revenue is derived from professional
services which are generally provided to clients on a "time and expenses"
basis. Revenue is recognized as services are performed. Payments received in
advance of services performed are recorded as deferred revenue. The Company
also performs a limited number of fixed-price engagements under which revenue
is recognized using the percentage-of-completion method (based on the ratio of
costs incurred to total estimated project costs). Provision for estimated
losses on engagements is made during the period in which the loss becomes
probable and can be reasonably estimated. To date, such losses have been
insignificant. The Company reports revenue net of reimbursable expenses which
are billed to and collected from clients. The Company also derives revenue
from electronic services. Electronic services revenue is recognized ratably
over the term of the contract.

OPERATING EXPENSES

Professional personnel

Professional personnel expenses consist primarily of compensation and
benefits of the Company's employees engaged in the delivery of professional
and electronic services.

Other costs

Other costs include expenses related to professional personnel (other than
compensation and benefits), including travel and entertainment, certain
recruiting and professional development expenses, field facilities,

F-7
<PAGE>

INTERNATIONAL NETWORK SERVICES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

depreciation, expensed equipment, supplies and research and development
expenses related to electronic services. Research and development expenses
were $29,000, $78,000 and $879,000 for fiscal years 1994, 1995 and 1996,
respectively. All research and development expenses, including software
development costs, are charged to expense as incurred. Statement of Financial
Accounting Standard No. 86 ("SFAS 86") requires the capitalization of certain
software development costs once technological feasibility is established,
which the Company defines as the completion of a working model. The
capitalized costs are then amortized on a straight line basis over the
estimated product life, or on the ratio of current revenues to total projected
product revenues, whichever is greater. To date, costs incurred subsequent to
achieving technological feasibility and prior to the general commercial
release of the electronic services have not been significant. Accordingly, the
Company has not capitalized any software development costs.

INCOME TAXES

CONCENTRATION OF CREDIT RISK

The Company's accounts receivable are derived from revenue earned from
customers primarily located in the United States. The Company performs ongoing
credit evaluations of its customers and to date has not experienced any
material losses. In fiscal 1994 two customers accounted for 30% and 13%
respectively of revenue. In fiscal 1995 no one customer accounted for more
than 10% of revenues. In fiscal 1996, one customer accounted for 17% of
revenue.

NET INCOME (LOSS) PER SHARE

Net income per share is computed using the weighted average number of common
and common equivalent shares ("weighted average shares") outstanding during
the period. Net loss per share for the year ended June 30, 1994 and net loss
attributable to Common Stock per share for the years ended June 30, 1995 and
1994 exclude common stock equivalents. However, pursuant to the requirements
of the Securities and Exchange Commission, common and common equivalent shares
issued one year prior to the initial public offering date have been included
in the computation as if they were outstanding for all periods presented, even
if antidilutive (using the treasury stock method and the assumed initial
public offering price). Common equivalent shares consist of Mandatorily
Redeemable Convertible Preferred Stock (using the if converted method) and
stock options and warrants (using the treasury stock method).

The effect on net income per share of the reduction of the Company's
indebtedness resulting from the use of proceeds resulting from the proposed
initial public offering of the Company's Common Stock is to increase the
historical net income for the year ended June 30, 1996 by $66,000 for the
interest expense which was recorded associated with amounts owed under the
Company's line of credit and notes payable. Earnings per share for the year
ended June 30, 1996 is not affected by this adjustment as such amount is not
significant.

F-8
<PAGE>

INTERNATIONAL NETWORK SERVICES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long Lived Assets to be
Disposed of." SFAS 121 requires recognition of impairment of long-lived assets
in the event the net book value of such assets exceeds the future undiscounted
cash flows attributable to such assets. SFAS 121 is effective for fiscal years
beginning after December 15, 1995. Adoption of SFAS 121 is not expected to
have a material impact on the Company's financial position or results of
operations.

In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which
establishes a fair value method of accounting for stock based compensation
plans, and requires additional disclosures for those companies who elect not
to adopt the new method of accounting. The Company currently expects to elect
to continue to measure compensation costs using the intrinsic value method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees"
and to comply with the pro forma disclosure requirements of SFAS 123. If the
Company makes this election, SFAS 123 will have no impact on the Company's
financial statements.

MANAGEMENT ESTIMATES AND ASSUMPTIONS

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

PROPOSED PUBLIC OFFERING OF COMMON STOCK (UNAUDITED)

On July 18, 1996, the Board of Directors authorized the Company to proceed
with an initial public offering of the Company's Common Stock (the
"Offering"). If the Offering contemplated by this Prospectus is consummated,
all of the Mandatorily Redeemable Convertible Preferred Stock outstanding as
of the closing date will automatically be converted on a one for one basis
into an aggregate of 16,734,889 shares of Common Stock as of June 30, 1996. In
addition, 237,053 shares of Common Stock will be issued upon the exercise of
Common Stock warrants at $0.10 per share. Unaudited pro forma shareholders'
equity at June 30, 1996, adjusted for the conversion of the Preferred Stock
and issuance of Common Stock upon exercise of outstanding warrants is as
follows (in thousands):

<TABLE>
<S> <C>
Preferred stock, no par value, 5,000,000 shares authorized; no
shares issued and outstanding.................................... $ --
Common stock, no par value, 75,000,000 shares authorized;
28,398,817 shares issued and outstanding......................... 12,391
Notes receivable from shareholders................................ (1,880)
Accumulated deficit............................................... (604)
-------
$9,907
=======
</TABLE>

F-9
<PAGE>

INTERNATIONAL NETWORK SERVICES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 2--BALANCE SHEET COMPONENTS:

<TABLE>
<CAPTION>
JUNE 30,
----------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable:
Trade.................................................... $ 4,385 $12,375
Less: allowance for doubtful accounts.................... (221) (554)
------- -------
$ 4,164 $11,821
======= =======
Property and equipment:
Computer equipment....................................... $ 2,557 $ 6,511
Furniture and fixtures................................... 167 612
------- -------
2,724 7,123
Less: accumulated depreciation........................... (1,198) (2,984)
------- -------
$ 1,526 $ 4,139
======= =======
Accrued expenses:
Accrued compensation and employee benefits............... $ 905 $ 3,356
Other liabilities........................................ 49 348
------- -------
$ 954 $ 3,704
======= =======
</TABLE>

NOTE 3--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:

The Company has authorized 17,000,000 shares of Mandatorily Redeemable
Convertible Preferred Stock, of which 2,848,000, 6,849,000 and 7,037,967
shares were designated as Series A, B and C, respectively.

In March 1994, the Company issued $1,000,000 of convertible notes payable to
existing shareholders which bore interest at 7%. In June, 1994, the notes,
plus accrued interest of $20,000, were converted at $.79 ("Original Issue
Price") per share into 1,291,798 shares of Series C Preferred Stock. In
addition, the Company issued an additional 2,531,645 shares of Series C
Preferred Stock at $.79 per share for aggregate proceeds, net of issuance
costs, of $1,983,000. In connection with the issuance of the Series C
Preferred Stock, the Company issued a warrant to one investor to purchase up
to an additional 1,315,789 shares of Series C Preferred Stock at $1.14 per
share through July 1, 1995. No value was assigned to the warrant as its fair
value at the time of issuance was considered nominal. The warrant was
exercised in June 1995, resulting in aggregate proceeds, net of issuance
costs, of $1,496,000.

In July 1994, the Company issued 1,898,735 shares of Series C Preferred
Stock at a purchase price of $.79 per share for aggregate proceeds of
$1,500,000.

The Series A, B and C Mandatorily Redeemable Convertible Preferred Stock
together are hereinafter referred to as Preferred Stock. The Company has
reserved 16,734,889 shares of Common Stock for the conversion of Preferred
Stock upon the closing of the offering.

F-10
<PAGE>

INTERNATIONAL NETWORK SERVICES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

A summary of Preferred Stock activity is a follows:

<TABLE>
<CAPTION>
SHARES AMOUNT
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
Balance at June 30, 1993......................... 9,696,922 $ 4,007
Issuance of Series C Preferred Stock for cash,
net of expenses............................... 3,823,443 3,003
Accretion of Preferred Stock................... -- 403
---------- -------
Balance at June 30, 1994......................... 13,520,365 7,413
Issuance of Series C Preferred Stock for cash,
net of expenses............................... 3,214,524 2,996
Accretion of Preferred Stock................... -- 883
---------- -------
Balance at June 30, 1995......................... 16,734,889 11,292
Accretion of Preferred Stock................... -- 1,135
---------- -------
Balance at June 30, 1996......................... 16,734,889 $12,427
========== =======
</TABLE>

Holders of Preferred Stock have certain rights, preferences and restrictions
with respect to dividends, redemption, conversion, liquidation and voting as
set forth in the Articles of Incorporation and summarized below.

DIVIDEND RIGHTS

Holders of Preferred Stock are entitled to receive a non-cumulative dividend
of 8% of the respective Original Issue Prices per year, if and when declared
by the Board of Directors.

VOTING RIGHTS

Each share of Preferred Stock is entitled to one vote for each share of
Common Stock into which the Preferred Stock is convertible. Holders of Series
B Preferred Stock are entitled to elect two directors only when and if at
least 4,000,000 shares of Series B Preferred Stock are outstanding. Holders of
Series A Preferred Stock are entitled to elect one director only when and if
at least 1,500,000 shares of Series A Preferred Stock are outstanding. In
addition, certain matters, as defined in the Company's Articles of
Incorporation, require the approval of the holders of Series B and C Preferred
Stock, provided the requisite number of each class are outstanding.

LIQUIDATION RIGHTS

In the event of liquidation and to the extent assets are available, the
holders of Preferred Stock are entitled to a liquidation preference
distribution of an amount equal to the sum of the Original Issue Price plus
all declared but unpaid dividends. After the liquidation preference
distribution, remaining assets shall be distributed to all holders of Common
and Preferred Stock on an as-if-converted basis, except that the maximum total
distribution to holders of Series A, Series B and Series C Preferred Stock
will not exceed $1.007 per share, $1.007 per share, and $1.14 per share,
respectively.

REDEMPTION

At any time after May 19, 1998, a vote of two-thirds of the then outstanding
shares of Series B and Series C Preferred Stock, voting together as a single
class, may require the Company to redeem all outstanding Preferred Stock at a
per share price equal to the Original Issue Price plus a 10% accretion per
year, compounded annually. The redemption amount shall be payable in three
equal annual installments. Accretion of Preferred Stock was $403,000, $883,000
and $1,135,000 for fiscal 1994, 1995 and 1996, respectively.

F-11
<PAGE>

INTERNATIONAL NETWORK SERVICES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

CONVERSION RIGHTS

Each share of Preferred Stock is convertible at any time into one share of
Common Stock, subject to adjustments in the case of certain dilutive events.
Each share of Preferred Stock will automatically convert upon the affirmative
vote of the holders of a majority of the outstanding shares of Series B and
Series C Preferred Stock, voting together as a single class, or upon the
effectiveness of a registration statement under the Securities Act of 1933, as
amended, for which the gross proceeds are at least $7,500,000 and the price
per share is at least $1.65.

NOTE 4--COMMON STOCK:

In connection with the Convertible Notes issued in March 1994, the Company
issued warrants to purchase a total of 253,163 of the Company's Common Stock
at $0.10 per share. The warrants expire on the earlier of the consummation of
the initial public offering or on March 1, 1999. No value was ascribed to
these warrants as their fair value at the time of issuance was considered
nominal. In August 1995, 16,110 shares were issued in connection with the
exercise of certain of these warrants. The Company has reserved 237,053 shares
of Common Stock for issuance upon the exercise of certain of the remaining
warrants.

Certain Common Stock option holders (see Note 5) have the right to exercise
unvested options, subject to a repurchase right held by the Company. At June
30, 1996, 2,394,890 of the shares issued on the exercise of options were
subject to repurchase by the Company at the original purchase price in the
event of employee termination.

NOTES RECEIVABLE FROM SHAREHOLDERS

In exchange for the issuance of Common Stock upon exercise of options in
fiscal 1994 and 1996, the Company received notes receivable from shareholders
which bear interest at rates varying from 5.33% to 5.91% per annum. Principal
and interest are due and payable at different dates between 1998 and 1999. The
outstanding balance of such notes receivable has been included in
shareholders' deficit.

F-12
<PAGE>

INTERNATIONAL NETWORK SERVICES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 5--STOCK OPTION PLAN:

Under the Company's 1992 Flexible Stock Incentive Plan (the "1992 Plan"),
8,000,000 shares of Common Stock have been reserved for issuance pursuant to
options, stock and stock appreciation rights and may be granted to employees,
directors and consultants. Incentive stock options must be granted at fair
market value at the date of grant, and nonstatutory stock options and stock
appreciation rights may be granted at not less than 85% of fair market value
on the date of grant. Options generally vest over a 50 month period and expire
over terms not exceeding ten years from the date of grant.

A summary of stock option activity is as follows:

<TABLE>
<CAPTION>
NUMBER OF EXERCISE
OPTIONS PRICE
---------- ----------
<S> <C> <C>
Balance at June 30, 1993............................ 1,771,500 $0.01-0.04
Granted........................................... 1,599,500 $ 0.04
Exercised......................................... (1,172,800) $0.01-0.04
Canceled.......................................... (217,700) $ 0.01
----------
Balance at June 30, 1994............................ 1,980,500 $0.01-0.04
Granted........................................... 1,441,475 $0.08-0.25
Exercised......................................... (539,520) $0.01-0.08
Canceled.......................................... (205,480) $0.01-0.25
----------
Balance at June 30, 1995............................ 2,676,975 $0.01-0.25
Granted........................................... 3,486,350 $0.25-7.00
Exercised......................................... (3,016,445) $0.01-4.50
Canceled.......................................... (977,420) $0.01-4.50
----------
Balance at June 30, 1996............................ 2,169,460 $0.01-7.00
==========
</TABLE>

At June 30, 1996, 720,910 options were fully vested and exercisable at
prices ranging from $0.01 to $2.50 and 212,879 options were reserved for
future grant.

Subsequent to June 30, 1996, the Company granted options to purchase an
aggregate of 301,200 and 355,500 shares of Common Stock at exercise prices of
$8.00 and $12.00 per share, respectively.

F-13
<PAGE>

INTERNATIONAL NETWORK SERVICES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 6--INCOME TAXES:

No provision for income taxes was recorded for the year ended June 30, 1994
as the Company incurred net operating losses during the period. The provision
for income taxes for the years ended June 30, 1995 and 1996 consists of the
following (in thousands):

<TABLE>
<CAPTION>
JUNE 30,
-----------
1995 1996
---- ------
<S> <C> <C>
Current:
Federal....................................................... $ 22 $1,940
State......................................................... 36 757
---- ------
58 2,697
---- ------
Deferred:
Federal....................................................... -- (757)
State......................................................... -- (100)
---- ------
-- (857)
---- ------
$ 58 $1,840
==== ======
</TABLE>

The provision (benefit) for income taxes differs from the amount determined
by applying the U.S. statutory income tax rate to income (loss) before income
taxes as summarized below (in thousands).

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Tax provision (benefit) at statutory rate............ $ (474) $ 283 $ 1,604
State income taxes, net of federal benefit........... (86) 49 370
Change in valuation allowance........................ 535 (247) (309)
Nondeductible expenses............................... 25 5 98
Other................................................ -- (32) 77
------ ----- -------
$ -- $ 58 $ 1,840
====== ===== =======
</TABLE>

Deferred income taxes reflect the tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting and
income tax purposes. The Company provides a valuation allowance for deferred
tax assets when it is more likely than not, based on available evidence, that
some portion or all of the deferred tax assets will not be realized. Based on
a reevaluation of the realizability of future tax benefits based on income
earned in fiscal 1996, creating available tax carrybacks, the Company reversed
the previously established valuation allowance during fiscal 1996. Significant
components of the Company's deferred tax assets are as follows (in thousands):

<TABLE>
<CAPTION>
JUNE 30,
-----------
1995 1996
----- ----
<S> <C> <C>
Depreciation.................................................... $ 177 $355
State income taxes.............................................. 3 177
Allowance for doubtful accounts and other reserves.............. 129 325
----- ----
309 857
Valuation allowance............................................. (309) --
----- ----
$ -- $857
===== ====
</TABLE>

F-14
<PAGE>

INTERNATIONAL NETWORK SERVICES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 7--COMMITMENTS:

The Company leases office space for its corporate headquarters and various
field offices.

Future annual minimum lease payments under all noncancellable operating
leases as of June 30, 1996 are as follows (in thousands):

<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1997................................................................ $ 788
1998................................................................ 774
1999................................................................ 693
2000................................................................ 630
2001................................................................ 515
Thereafter.......................................................... 29
------
$3,429
======
</TABLE>

Total rent expense for the years ended June 30, 1994, 1995 and 1996 was
approximately $314,000, $374,000 and $545,000, respectively.

NOTE 8--LINES OF CREDIT AND NOTES PAYABLE:

The Company has a $6.0 million revolving line of credit with a bank which
expires in June 1997. Borrowings under the revolving line of credit are
limited to 80% of eligible domestic accounts receivable, and bear interest at
the bank's prime rate plus 1.00%, 9.25% at June 30, 1996. Borrowings under the
revolving line of credit at June 30, 1996 totaled $1.0 million. The Company
also has a $3.0 million term facility with the same bank which expires in June
1997. Borrowings under the term facility bear interest at the bank's prime
rate plus 1.25%, 9.50% at June 30, 1996 and are payable in 36 monthly
installments. There were no borrowings under the term facility at June 30,
1996.

Long term debt of $1,064,000 and $715,000 at June 30, 1995 and 1996,
respectively, relates to two notes payable of $600,000 each, dated April 18,
1994 and April 5, 1995, respectively. These notes bear interest at the bank's
prime rate plus 1.25% and are payable in 36 equal monthly installments.
Scheduled principal payments for fiscal 1997, 1998 and 1999 are $399,000,
$266,000 and $50,000, respectively.

These financing arrangements are secured by substantially all of the
Company's assets and require the Company to comply with certain financial
covenants. At June 30, 1996, the Company was in compliance with these
financial covenants. In conjunction with these financing arrangements, the
Company issued the bank a warrant on July 1, 1994 to purchase up to 63,291
shares of Series C Preferred Stock at $0.79 per share. The warrant expires on
July 1, 1999 and will convert into Common Stock warrants upon consummation of
an initial public offering prior to July 1, 1999. No value was assigned to
this warrant as its fair value at the time of issuance was not material.

NOTE 9--SUBSEQUENT EVENTS:

CERTAIN EQUITY TRANSACTIONS

In July 1996, the Company's Board of Directors, subject to shareholder
approval, approved an increase in the number of common shares authorized to
75,000,000 subject to completion of the proposed Offering. In addition,
subject to shareholder approval and effective upon the closing of the proposed
Offering, the Company will be authorized to issue 5,000,000 shares of
undesignated preferred stock.

F-15
<PAGE>

INTERNATIONAL NETWORK SERVICES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

EMPLOYEE STOCK PURCHASE PLAN

Effective July 18, 1996, the Company's Board of Directors adopted, the
Employee Stock Purchase Plan (the "Purchase Plan"), subject to shareholder
approval, which will become effective upon the effective date of the proposed
Offering. The Purchase Plan provides for the issuance of a maximum of
1,200,000 shares of Common Stock. Eligible employees can have up to 15% of
their earnings withheld to be used to purchase shares of the Common Stock on
specified dates determined by the Board of Directors. The price of Common
Stock purchased under the Purchase Plan will be equal to 85% of the lower of
the fair market value of the Common Stock on the commencement date of each
offering period or the specified purchase date.

1996 STOCK OPTION PLAN

Effective July 18, 1996, the Company's Board of Directors approved the 1996
Stock Option Plan (the "1996 Plan") as a successor to the "1992 Plan", subject
to shareholder approval. The 1996 Plan will become effective upon the
effective date of the proposed Offering and provides for the granting to
employees (including officers and employee directors) of incentive stock
options and for the granting to employees, directors (including non-employee
directors) and consultants of nonstatutory stock options and stock purchase
rights. In conjunction therewith, the Company's Board of Directors authorized
an additional 5,500,000 shares for issuance under the 1996 Plan. The 1996 Plan
may be administered by the Board of Directors or a committee designated by the
Board (the "Administrator"). The exercise price of all incentive and
nonstatutory stock options granted under the 1996 Plan shall be determined by
the Administrator. With respect to any participant who owns stock possessing
more than ten percent of the voting power of all classes of the Company's
outstanding capital stock (a "10% Shareholder"), the exercise price of any
incentive stock option granted must equal at least 110% of the fair market
value on the grant date. The exercise price of incentive stock options for all
other employees shall be no less than 100% of the fair market value per share
on the date of the grant. The maximum term of an option granted under the 1996
Plan may not exceed ten years from the date of grant (five years in the case
of an incentive stock option granted to a 10% Shareholder). In the case of
stock purchase rights, unless the Administrator determines otherwise, the
Company shall have a repurchase option exercisable upon the voluntary or
involuntary termination of the purchaser's employment with the Company for any
reason (including death or disability). Such repurchase option lapses at a
rate determined by the Administrator. The purchase price for shares
repurchased by the Company shall be the original price paid by the purchaser
and may be paid by cancellation of any indebtedness of the purchaser to the
Company.

F-16
<PAGE>

BEING A SERVICE PROVIDER REQUIRES A CLEAR MISSION AND CULTURE . . .

OUR MISSION:
Be the premier provider of services for complex enterprise networks.

OUR VALUES:
At INS, we
. STRIVE TO BE THE BEST AT WHAT WE DO
. RESPECT EACH OTHER AND WORK AS A TEAM
. CONTINUALLY LEARN AND DEVELOP
. ARE TRUSTWORTHY
. EMPOWER EACH OTHER

OUR GOALS:
Use our values to guide our decisions and balance the interests of
shareholders, clients and employees to maximize long-term Company value.

(Graphic of INS Values logo. The logo is a triangle with "Employee", "Client"
and "Shareholder" written on each respective side and "INS Values" in the
middle)

INVESTMENT IN PEOPLE . . .

In order to recruit and retain experienced, highly-qualified and highly-
motivated personnel, INS provides a rich environment and culture, professional
development and financial opportunities. Professional development includes
career opportunities and on-the-job challenges, as well as training programs.
The Company has established a training program, INS University, which includes
a wide range of management and technical training. Compensation programs
include cash compensation and stock programs that encourage an owner attitude
and decisions by employees that maximize Company value.

[PHOTOGRAPH OF TRAINING CLASS APPEARS HERE]

AND DEVELOPMENT OF INNOVATIVE SERVICES.

The EnterprisePRO service is designed to collect data, generate reports and
compile network information used in the optimization of networks.
EnterprisePRO enables clients to obtain important network trending data
without investing in network performance hardware and software, or devoting
valuable staff time. EnterprisePRO provides interactive decision support for
network performance management.

[GRAPHIC OF ENTERPRISEPRO SERVICE ARCHITECTURE]

<PAGE>

(Insert Logo of International Network Services)