UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB

(Mark One)

þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2005

o		Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.

(Exact Name of Small Business Issuer as Specified in Its Charter)

South Carolina		57-0910139
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)
1601 Shop Road, Suite E Columbia, South Carolina		29201
(Address of Principal Executive Offices)		(Zip Code)

(803) 736-5595 (Small Business Issuer’s Telephone Number, Including Area Code)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes    o No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No o

At October 18, 2005, the small business issuer had outstanding 32,544,202 shares of no par value common stock, its only class of common equity.

Transitional Small Business Disclosure Format (check one) o Yes þ No

 

 

Integrated Business Systems and Services, Inc.
Form 10-QSB
Quarter Ended September 30, 2005
Table of Contents

						Page
						Number
PART I		FINANCIAL INFORMATION
		Item 1.		Condensed Financial Statements — Unaudited		4
		Item 2.		Management’s Discussion and Analysis or Plan of Operation		11
		Item 3.		Controls and Procedures		18
PART II		OTHER INFORMATION
		Item 3.		Defaults Upon Senior Securities		19
		Item 6.		Exhibits		19
Signatures						20
Ex-31.1
Ex-31.2
Ex-32.1
Ex-32.2

Advisory Note Regarding Forward-Looking Statements

     Statements in this Quarterly Report on Form 10-QSB include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, our competitive strengths and weaknesses, our business strategy and the trends we anticipate in the industry and economies in which we operate and other information that is not historical information. You can identify a forward-looking statement by our use of the words “anticipate,” “estimate,” “expect,” “intend,” “plan,” “may,” “will,” “continue,” “believe,” “objective,” “projection,” “forecast,” “goal,” and similar expressions. No assurance can be given that actual results or events will not differ materially from those projected, estimated, assumed or anticipated in any such forward-looking statements.

     There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report. Factors that might cause such a difference include, but are not limited to, those discussed in this Quarterly Report under the caption “Management’s Discussion and Analysis or Plan of Operation” and the risk factors discussion contained in Exhibit 99.1 of our Annual Report on Form 10-KSB for the year ended December 31, 2004. We do not undertake any obligation to revise these forward looking statements to reflect future events or circumstances.

Additional Information

     We file our Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB, proxy statements, Current Reports on Form 8-K, and other reports filed or furnished pursuant to Section 13(a) or 15(d) under the Exchange Act with the U.S. Securities and Exchange Commission (“Commission” or “SEC”). These reports are available electronically as soon as reasonably practicable after we file such materials with the Commission through the Internet web site maintained by the SEC at http://www.sec.gov or by calling the SEC at its principal offices in Washington, DC at 1-800-SEC-0330.

The reports are also available in print to any shareholder who requests them by contacting our corporate secretary at the address above for the Company’s principal executive offices.

PART I — FINANCIAL INFORMATION

Integrated Business Systems and Services, Inc.
Condensed Balance Sheets
(Unaudited)

		September 30, 2005				December 31, 2004
ASSETS:
Current assets:
Cash and cash equivalents		$	16,341			$	105,084
Accounts receivable, trade			129,547				66,637
Interest receivable			—				3,065
Notes receivable			—				75,000
Prepaid expenses			56,277				19,646
Total current assets			202,165				269,432
Capitalized software costs, net			2,737				10,948
Property and equipment, net			185,853				256,911
Interest receivable, non current			42,978				37,331
Other assets			50,000				50,000
Total assets		$	483,733			$	624,622
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY:
Current liabilities:
Convertible notes payable, net of discount		$	647,184			$	558,439
Shareholder advances			1,151,000				601,000
Current portion of long-term debt			309,872				309,131
Accounts payable			143,360				52,510
Accrued liabilities:
Accrued compensation and benefits			128,663				160,166
Accrued payroll taxes			4,905				29,649
Accrued professional fees			382,068				326,241
Accrued interest			72,265				55,857
Accrued rent			8,000				15,000
Other			9,101				7,090
Deferred revenue			66,597				134,873
Total current liabilities			2,923,015				2,249,956
Long-term debt, net of current portion			2,864,421				2,872,251
Total liabilities			5,787,436				5,122,207
Shareholders’ deficiency:
Preferred stock, undesignated par value, 10,000,000 shares, none authorized or issued			—				—
Common stock, no par value, 200,000,000 shares authorized, 32,544,202 and 32,506,144 shares outstanding at September 30, 2005 and December 31, 2004, respectively			21,702,733				21,683,495
Notes receivable officers/directors			(131,080	)			(131,080	)
Accumulated deficit			(26,875,356	)			(26,050,000	)
Total shareholders’ deficiency			(5,303,703	)			(4,497,585	)
Total liabilities and shareholders’ deficiency		$	483,733			$	624,622

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

Integrated Business Systems and Services, Inc.
Condensed Statements of Operations
(Unaudited)

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2005				2004				2005				2004
Revenues
Services		$	362,223			$	337,754			$	1,216,865			$	1,447,739
Licenses			17,282				—				166,548				16,000
Maintenance and support			64,135				28,428				165,806				85,283
Product resales			425,036				25,402				467,736				106,081
Total revenues			868,676				391,584				2,016,955				1,655,103
Cost of revenues			582,240				253,393				1,024,440				812,704
Gross profit			286,436				138,191				992,515				842,399
Operating expenses
General and administrative			293,173				438,485				974,582				1,213,184
Sales and marketing			90,484				182,824				390,345				616,645
Product development			99,631				140,710				329,319				447,470
Total operating costs			483,288				762,019				1,694,246				2,277,299
Loss from operations			(196,852	)			(623,828	)			(701,731	)			(1,434,900	)
Other income (loss and expenses)
Other income (expenses)			1,987				4,767				6,022				(5,731	)
Interest expense			(46,453	)			(38,398	)			(129,647	)			(117,025	)
Total other expenses			(44,466	)			(33,631	)			(123,625	)			(122,756	)
Net Loss		$	(241,318	)		$	(657,459	)		$	(825,356	)		$	(1,557,656	)
Loss per share
Basic and diluted		$	(0.01	)		$	(0.02	)		$	(0.03	)		$	(0.05	)
Diluted weighted average shares outstanding			32,544,202				31,555,204				32,526,942				29,318,504

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

Integrated Business Systems and Services, Inc.
Condensed Statements of Cash Flows
(Unaudited)

		Nine months ended
		September 30,
		2005				2004
Operating activities
Net loss		$	(825,356	)		$	(1,557,656	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation and amortization			82,346				105,359
Amortization of software costs			8,211				49,488
Non-cash interest expense			97,781				84,340
Issuance of stock in payment of accounts payable and accrued liabilities			18,900				106,290
Provision for uncollectible accounts receivable			—				119,020
Changes in operating assets and liabilities:
Accounts receivable			(62,910	)			(11,451	)
Interest receivable			(2,582	)			(5,692	)
Prepaid expenses and other assets			(5,657	)			6,367
Accounts payable			90,850				32,171
Accrued expenses			9,637				(77,105	)
Deferred revenue			(68,276	)			18,365
Cash used in operating activities			(657,056	)			(1,130,504	)
Investing activities
Purchases of property and equipment			(11,287	)			(9,405	)
Notes receivables			75,000				(75,000	)
Related party receivables, net			—				—
Cash provided by (used in) investing activities			63,713				(84,405	)
Financing activities
Payments on notes payable			(38,650	)			(77,066	)
Shareholder advances, net			550,000				401,000
Payments on long-term debt			(7,088	)			—
Proceeds from issuance of common stock			—				725,000
Proceeds from exercise of common stock options and warrants			338				744
Cash provided by financing activities			504,600				1,049,678
Net decrease in cash			(88,743	)			(165,231	)
Cash and cash equivalents at beginning of period			105,084				214,925
Cash and cash equivalents at end of period		$	16,341			$	49,694

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

Integrated Business Systems and Services, Inc.
Notes To Consolidated Condensed Financial Statements
(Unaudited)

1. Basis of Presentation

     The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for condensed interim financial information and with the instructions to Form 10-QSB and Item 310 of Regulation S-B promulgated by the Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of those of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended September 30, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2005. For further information, please refer to the audited financial statements and footnotes thereto included in the Company’s Form 10-KSB for the year ended December 31, 2004, as filed with the Commission.

2. Going Concern

     The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, Integrated Business Systems and Services, Inc. (“IBSS” or the “Company”) had a working capital deficiency and an accumulated deficit of $2,720,850 and $26,875,356, respectively, at September 30, 2005. In addition, the Company has experienced a significant decline in revenues from its largest customer without a sufficient increase in revenues from other sources. Further, as disclosed below, the Company currently is in default on the payment of principal and interest under a senior secured note issued January 1, 2003, which amended and restated certain notes issued in 2001 and 2002. The holder of this note has demanded payment of principal and interest of $636,859 as of September 30, 2005. The Company cannot make any such payment at this time. Without an increase in revenues from any source or an additional capital infusion, or both, the Company will not be able to meet its current and future financial obligations.

     Ultimately, IBSS’ viability as a going concern is dependent upon its ability to generate positive cash flows from operations, maintain adequate working capital and obtain satisfactory long-term financing. However, there can be no assurance that the Company will be able to generate additional revenues, profits or capital in sufficient amounts or within the time frame necessary to provide the cash required to operate the business. In that event, the Company may be forced to discontinue its operations.

     The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should IBSS be unable to continue as a going concern. IBSS’ plans include the following, although it is not possible to predict the ultimate outcome of IBSS’ efforts:

     Shareholder Advances and Investor Debt. During the third and fourth quarters of 2004, the Company received advances from certain of its existing shareholders of $601,000 in the aggregate for short-term working capital purposes. During the quarters ended March 31, June 30 and September 30, 2005, the Company received additional advances from those shareholders amounting to $225,000, $130,000 and $400,000, respectively, representing aggregate advances of $755,000 for the first nine months of 2005. Total shareholder advances received through September 30, 2005 aggregated $1,356,000. Of the amount received during the first nine months of 2005, the Company has repaid, as of September 30, 2005, $205,000 with interest at 8% per annum amounting to $6,006. The Company has

agreed to repay an additional $50,000, also with interest at 8% per annum, during the fourth quarter of 2005, from the proceeds of accounts receivable collections. Definitive terms for repayment of the remaining $1,151,000 have yet to be agreed upon, though it is expected that the Company will repay these advances using the proceeds from future financings and/or cash generated from future operations, if and when such may occur. Further, the Company received additional advances aggregating $200,000 in October 2005. The Company is not currently paying or accruing any interest related to this remaining balance. Also during the fourth quarter of 2004, the Company raised an additional $50,000 in working capital through the private sale of 250,000 shares of common stock and 125,000 warrants with an exercise price of $0.40 and term of five years.

     On October 1, 2003, IBSS restructured substantially all of its then short-term investor debt. Under the restructured debt instruments, approximately 90% of the principal balance is not payable until the fourth quarter of 2006. In the months since the issuance of IBSS’ currently outstanding convertible debt, holders of a portion of this debt have converted the principal and accrued interest on all or a portion of their debt into common stock. Although these conversions have reduced IBSS’ principal and interest obligations, IBSS is currently faced with principal and interest obligations on the remaining convertible debt that it will not be able to satisfy from currently projected cash flows from operations. In this regard, the holder of a senior secured note with a recorded balance amounting to $636,859 of principal and accrued interest as of September 30, 2005 (the “Note”) representing the largest portion of the remainder of this debt, has demanded payment in full. According to its terms, this Note became due and payable in full on January 1, 2004. The Company has not made, and cannot make, any such payment at this time. The Company is investigating the circumstances surrounding the execution and approval of the Note and disputes the amount it may owe under the Note. The Company will continue in its efforts to negotiate a settlement to this demand that would be mutually acceptable to both parties; however, no assurance can be given that the Company will be successful in this endeavor.

     Additional Capital. IBSS is seeking to raise additional capital during 2005 through the private placement of convertible debt or equity securities, or both. Because of several factors, including the operating, market and industry risks associated with an investment in its common stock, the fact that IBSS’ common stock is no longer traded on the Nasdaq Stock Market and is currently traded on the Over-the-Counter Bulletin Board (“OTCBB”) maintained by the National Association of Securities Dealers , Inc. (“NASD”), and the continued weakness in the capital markets in general and the technology sectors in particular, IBSS may experience difficulty in raising additional financing until its operating results or overall market conditions reflect sustained improvement.

3. New Accounting Standards

     In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 151, Inventory Costs, (“SFAS 151”), an amendment of Accounting Research Bulletin No. 43, Chapter 4, Inventory Pricing. SFAS 51, which is effective for annual periods beginning after June 15, 2005, requires that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) be recognized as current-period charges. The adoption of SFAS 151 is not expected to have a material effect on the Company’s financial position or results of operations.

     In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, (“SFAS 153”) Exchanges of Nonmonetary Assets, an amendment of Accounting Principles Board (“APB”) Opinion No. 29, Accounting for Nonmonetary Transactions (“APB 29”). This Statement amends APB 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The Statement specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.

Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date this Statement is issued. Retroactive application is not permitted. The adoption of SFAS 153 is not expected to have a material effect on the Company’s financial position or results of operations.

     In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (“SFAS 154”), “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3”. SFAS 154 requires, unless impracticable, retrospective application to prior periods’ financial statements of changes in accounting principle. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle should be recognized in the period of the accounting change. The new standard is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will adopt the provisions of SFAS 154, as applicable, beginning in fiscal 2006 and does not anticipate that the adoption of this standard will have a material effect on the Company’s results of operations, financial position, or cash flows.

4. Stock Based Compensation

     The Company accounts for stock options in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Under APB 25, no compensation expense is recognized for stock or stock options issued at fair value. For stock options granted at exercise prices below the estimated fair value, the Company records deferred compensation expense for the difference between the exercise price of the shares and the estimated fair value. The deferred compensation expense is amortized ratably over the vesting period of the individual options. For performance based stock options, the Company records compensation expense related to these options over the performance period.

     In December 2004, the FASB issued Statement No. 123(R), “Share-Based Payment” (“SFAS 123(R)”), effective for the quarter ending March 31, 2006, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” In April 2005, the SEC announced that it had approved a phased in implantation process for SFAS 123(R) that extended the Company’s effective date for adopting this statement an additional six months. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using APB 25’s intrinsic value method and, as such, only recognizes compensation cost for employee stock options to the extent that options have been issued below the fair market value of the underlying stock on the date of grant. Accordingly, the adoption of SFAS 123’s fair value method will have a significant impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position. The impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income below.

     Had compensation cost for options granted under the Company’s stock-based compensation plans been determined based on the fair value at the grant dates consistent with SFAS 123, the Company’s net income and earnings per share would have changed to the pro forma amounts listed below:

		Nine Months Ended September 30,
		2005				2004
Net loss:
As reported		$	(825,356	)		$	(1,557,656	)
Add: stock-based compensation expense included in reported net income			—				—
Deduct: stock based compensation expense determined under the fair value based method for all awards			(69,398	)			(139,943	)
Pro forma net loss		$	(894,754	)		$	(1,697,599	)
Net loss per common share:
As reported:
Basic and diluted		$	(0.03	)		$	(0.05	)
Pro forma:
Basic and diluted		$	(0.03	)		$	(0.06	)

     The pro forma disclosures required by SFAS 123 regarding net loss and net loss per share are stated as if the Company had accounted for stock options using fair values. Compensation expense is recognized on a straight-line basis over the vesting period of each option installment. Using the Black-Scholes option-pricing model, the fair value at the date of grant for these options was estimated using the following assumptions:

		Nine Months Ended September 30,
		2005				2004
Dividend yield			—				—
Expected volatility			182	%			129	%
Risk-free rate of return			2.9-3.4	%			3.02-3.38	%
Expected option life, years			5				5

     No options were granted under the Option Plans during the three months ended September 30, 2005 and 2004.

     The Black-Scholes and other option pricing models were developed for use in estimating fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions. The Company’s employee stock options have characteristics significantly different than those of traded options, and changes in the subjective assumptions can materially affect the fair value estimate. Accordingly, in management’s opinion, these existing models may not necessarily provide a reliable single measure of the fair value of employee stock options.

Item 2. Management’s Discussion and Analysis or Plan of Operation

Overview

          IBSS’ emphasis is on helping businesses mitigate risk as they introduce new software products, extend their existing software applications and systems, or improve the way they do business. The IBSS value proposition provides three valuable assets to corporate clients:

	•		proven expertise in integration, on-line transaction processing and wireless communications-based solutions;
	•		a unique SynapseTM methodology that lets businesses quickly and economically prototype, test drive, validate and deploy new ideas; and
	•		IBSS’ proprietary SynapseTM technology, which gives customers a powerful, secure enterprise framework.

          IBSS’ proprietary Synapse^TM technology enables better security because it is not susceptible to the same hacker activities related to viruses which currently plague today’s commodity technologies. In addition to a new level of control and security, IBSS, by owning and controlling its own technology with which it creates on-line applications, can offer its customers a flexible business relationship that can entertain custom extensions, unique licensing arrangements and certain exclusivities in a customer’s vertical market. This enables IBSS to respond to a customer’s unique set of needs and allows IBSS working with the customer to rapidly produce solutions specific to those needs.

          Although we currently have limited resources, we intend to invest in research and development of our Synapse^TM technology and the associated Synapse^TM project management methodology at such time, if any, that such additional resources become available. The objective of this continuous improvement is to create ever increasing efficiency, effectiveness and ease of use for the benefit of internal IBSS productivity, competitive advantage, and flexibility for our customers and partners.

          Since restructuring most of our short and long-term debt in December 2001, and paying off or converting a significant portion of the same in 2002 and 2003, we have devoted substantial effort to developing our business, enhancing our management team, and focusing on our growth and marketing efforts.

          For the near-term, the Company’s marketing of its Synapse^TM products is aimed primarily at wireless mobile computing applications (radio frequency terminals, PDA’s, wearable computers, laptops, Pocket PCs and tablet computers) and automatic-radio frequency identification, electronic tagging, bar-code data collection, and other on-line real time machine-to-machine (“M2M”) applications in manufacturing, healthcare, government, distribution and other vertical markets. The move of businesses to Radio Frequency Identification (“RFID”) is being facilitated by widespread adoption of electronic product codes that permits tagged objects to be tracked via the Internet. We believe that Synapse^TM has the unique ability to track, analyze and share information on the movement of e-tagged objects across multiple locations, technologies, computer operating systems and networks, giving managers total visibility and the knowledge to more efficiently reach their objectives.

          The Company will also consider opportunities for joint ventures, strategic partnerships, and acquisitions to better leverage our existing market base and expand and improve the capabilities of our current software architecture. However, IBSS currently has limited resources to effect any such opportunities and has no current plans to do so.

     IBSS believes its products and services are gaining recognition and interest in the marketplace. However, the Company continues to have severe cash flow and liquidity concerns and a working capital deficiency. As noted in the Company’s Annual Report on Form 10-KSB, as filed with the Commission, the report of the Company’s independent registered public accounting firm regarding the Company’s financial statements for the three years ended December 31, 2004, indicates that there is substantial doubt about the Company’s ability to continue as a going concern.

     In addition, the Company currently is in default on the payment of principal and interest under a senior secured note issued on January 1, 2003, which amended and restated certain notes issued in 2001 and 2002. The holder of this note has demanded payment in full of principal and interest due under such note amounting to $636,859 as of September 30, 2005. This note is secured by substantially all of the assets of the Company. The Company cannot make any such payment at this time. The Company is investigating the circumstances surrounding the execution and approval of the Note and disputes the amount it may owe under the Note. See “Liquidity and Capital Resources” below.

Results of Operations

Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004

     Revenues. Our total operating revenues increased by $477,092 (or approximately 122%) to $868,676 in the three months ended September 30, 2005, from $391,584 in the comparable prior year period. While all components of revenue increased, revenues from product re-sales contributed almost $400,000, or 84% of this increase. The increase in revenue is primarily attributable to revenue from resales of hardware that we purchase from third parties, enhance by adding our Synapse^TM powered software systems and then resell to our customers. Revenues from additional sales of licenses and related maintenance services also increased.

     Cost of Revenues. Our total cost of revenues increased $328,847 (or approximately 130%) to $582,240 in the three months ended September 30, 2005, from $253,393 in the comparable prior year period. This increase was primarily due to the additional costs associated with the increase in product reselling activities during this period, including the purchase price of the hardware discussed above.

     Gross Profit and Margins. Our gross profit increased $148,245 (or approximately 107%) to $286,436 in the three months ended September 30, 2005, from $138,191 in the comparable prior year period. This increase was primarily attributable to additional sales volume experienced during the period. Gross margin decreased to approximately 33% for the three months ended September 30, 2005 from approximately 35% for the comparable prior year period. This decrease relative to the change in period-to-period revenues was primarily attributable to the higher cost associated with hardware sales.

     General and Administrative Expenses. Our general and administrative expenses decreased $145,312 (or approximately 33%) to $293,173 in the three months ended September 30, 2005, from $438,485 in the comparable prior year period. This decrease is primarily attributable to a nonrecurring provision for uncollectible customer accounts receivable recognized in the three-month period ending September 30, 2004 in addition to the Company’s continued efforts to contain operating costs in all areas. As a percentage of our quarterly revenues, general and administrative expenses in the third quarter of this year decreased to 34% from 112% in the comparable quarter of last year. This decrease was primarily attributable to the overall increase in the Company’s operating revenues combined with the significant reduction in general and administrative expenses in the third quarter of this year as compared to the same period of the prior year.

     Sales and Marketing Expenses. Our sales and marketing expenses decreased $92,340 (or approximately 51%) to $90,484 in the three months ended September 30, 2005, from $182,824 in the comparable prior year period. This decrease is primarily attributable to the Company’s continued efforts to contain costs in all areas. As a percentage of our quarterly revenues, sales and marketing expenses in the third quarter of this year decreased to approximately 10% from approximately 47% for the comparable prior year period. This decrease was primarily attributable to the overall change in the Company’s operating revenues in the third quarter of this year as compared to the same period of the prior year relative to the sales and marketing costs incurred for each period.

     Product Development Expenses. Our product development expenses decreased $41,079 (or approximately 29%) to $99,631 in the three months ended September 30, 2005, from $140,710 in the comparable prior year period. This decrease is primarily attributable to the Company’s continued efforts to contain costs in all areas. As a percentage of our total quarterly revenues, product development expenses in the third quarter of 2005 decreased to 11% from 36% in the comparable prior year quarter. This decrease was primarily attributable to the overall change in the Company’s operating revenues in the third quarter of this year as compared to the same period of the prior year relative to the product development costs incurred for each period.

     Non-Operating Items. Other expenses increased $10,835 (or approximately 32%) to $44,466 in the three months ended September 30, 2005, from $33,631 in the comparable prior year period. The largest expense in this category is interest expense. Interest expense increased $8,055 (or approximately 21%) to $46,453 in the three months ended September 30, 2005 as compared to $38,398 in the comparable prior year period primarily due to additional interest expense incurred related to certain shareholder advances.

Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004

     Revenues. Our total operating revenues increased by $361,852 (or approximately 22%) to $2,016,955 in the nine months ended September 30, 2005, from $1,655,103 in the comparable prior year period. The increase is primarily attributable to revenue from resales of hardware that we purchase from third parties, enhance by adding our Synapse^TM powered software systems and then resell to our customers. Revenues from sales of licenses and related maintenance and hardware also increased due to the installation of Synapse^TM powered software systems in several additional locations during the period for the Company’s second largest customer. This increase was partially offset by decreases in other project related revenues during the period.

     Cost of Revenues. Our total cost of revenues increased $211,736 (or approximately 26%) to $1,024,440 in the nine months ended September 30, 2005, from $812,704 in the comparable prior year period. This increase was primarily due to the additional costs associated with the increase in product reselling activities during this period, including the purchase price of the hardware described above.

     Gross Profit and Margins. Our gross profit increased $150,116 (or approximately 18%) to $992,515 in the nine months ended September 30, 2005, from $842,399 in the comparable prior year period. We experienced a corresponding gross margin decrease to approximately 49% for the nine months ended September 30, 2005 from approximately 51% for the comparable prior year period. This decrease relative to the change in period-to-period revenues was primarily attributable to the higher cost associated with hardware sales.

     General and Administrative Expenses. Our general and administrative expenses decreased $238,602 (or approximately 20%) to $974,582 in the nine months ended September 30, 2005, from $1,213,184 in the comparable prior year period. This decrease is primarily attributable to a non recurring

provision for uncollectible customer accounts receivable recognized in the nine-month period ending September 30, 2004 in addition to the Company’s continued efforts to contain operating costs in all areas. As a percentage of our revenues, general and administrative expenses in the first nine months of this year decreased to 48% from 73% for the comparable prior year period. This decrease was primarily attributable to the overall increase in the Company’s operating revenues combined with the significant reduction in general and administrative expenses in the third quarter of this year as compared to the same period of the prior year.

     Sales and Marketing Expenses. Our sales and marketing expenses decreased $226,300 (or approximately 37%) to $390,345 in the nine months ended September 30, 2005, from $616,645 in the comparable prior year period. As a percentage of our revenues, sales and marketing expenses for the first nine months of this year decreased to 19% from 37% in the comparable prior year period. These decreases are primarily attributable to the Company’s continued efforts to contain operating costs in all areas as well as the overall change in the Company’s operating revenues for the nine months ended September 30, 2005 as compared to the same period of the prior year relative to the sales and marketing costs incurred for each period.

     Product Development Expenses. Our product development expenses decreased $118,151 (or approximately 26%) to $329,319 in the nine months ended September 30, 2005, from $447,470 in the comparable prior year period. As a percentage of our total revenues, research and development expenses in the first nine months of this year decreased to 16% from 27% for the comparable prior year period. These decreases are primarily attributable to the Company’s continued efforts to contain operating costs in all areas as well as the overall change in the Company’s operating revenues for the nine months ended September 30, 2005 as compared to the same period of the prior year relative to the product development costs incurred for each period.

     Non-Operating Items. Other expenses increased $869 (or approximately 0.7%) to $123,625 in the nine months ended September 30, 2005 from $122,756 in the comparable prior year period. This change is primarily due to an increase in interest expense which was almost entirely offset by a reduction in other expenses due to nonrecurring penalties paid in March 2004 related to the final settlement of a delinquent tax obligation.

Liquidity and Capital Resources

     Historical Sources of Liquidity. Prior to 1997, we financed our operations primarily through our revenues from operations, including funded research and development revenues, and occasional short-term loans from our principals, their families and other individuals and entities. Since the middle of 1997, we have financed our operations primarily through private and public offerings of common stock and convertible debt, and to a lesser extent from operating revenues and through borrowings from third parties.

     On December 31, 2001, the Company restructured all of its short-term and long-term debt into convertible debentures and notes. Under the restructured debt instruments as originally in effect, approximately 80% of the entire principal balance of the restructured debt was not payable until January 1, 2004. Substantially all of the remaining 20% was payable during January 2003. Effective January 1, 2003, the holders of substantially all of that remaining 20% agreed to extend the January 2003 maturity date until January 2004.

     On October 1, 2003, the Company restructured substantially all of its short-term investor debt. Under the restructured debt instruments, approximately 90% of the principal balance is not payable until the fourth quarter of 2006. Also during 2003, there continued to be some conversion and satisfaction of

our existing debt and the major portion (86%) of this debt was renegotiated on October 1, 2003 and the notes representing this portion of the debt were converted to non-interest bearing and non-convertible notes and their maturity dates were extended to December 31, 2006. Thirteen percent (13%) of the debt became short-term debt on January 1, 2004. On October 29, 2004 and again on March 15, 2005, the holder of the senior secured note with a recorded balance amounting to $636,859 of principal and accrued interest as of September 30, 2005 (the “Note”) demanded payment in full. On March 15, 2005, the holder of this Note has indicated that, in the absence of immediate resolution of this matter, the holder will explore immediate foreclosure on its secured interest under the Note, which consists of substantially all of the assets of the Company. According to its terms, this Note became due and payable in full on January 1, 2004. As previously disclosed, the Company has not made, and cannot make, any such payment at this time. The Company is investigating the circumstances surrounding the execution and approval of the Note and disputes the amount it may owe under the Note. The Company will continue in its efforts to negotiate a settlement to this demand that will be mutually acceptable to both parties; however, no assurance can be given that the Company will be successful in this endeavor.

     During the quarter ended December 31, 2004, pursuant to its common stock purchase agreement with the Company entered into on September 28, 2004, Fusion Capital purchased 250,000 shares of the Company’s Common Stock at $0.20 per share resulting in aggregate proceeds of $50,000. During the third and fourth quarters of 2004, the Company received advances from certain of its existing shareholders of $601,000 in the aggregate for short-term working capital purposes. During the quarters ended March 31, June 30 and September 30, 2005, the Company received additional advances from those shareholders amounting to $225,000, $130,000 and $400,000, respectively, representing aggregate advances of $755,000 for the first nine months of 2005. Total shareholder advances received through September 30, 2005 aggregated $1,356,000. Of the amount received during the first nine months of 2005, the Company has repaid, as September 2005, $205,000 with interest at 8% per annum amounting to $6,006. The Company has agreed to repay an additional $50,000, also with interest at 8% per annum, during the fourth quarter of 2005, from the proceeds of accounts receivable collections. Definitive terms for repayment of the remaining $1,151,000 have yet to be agreed upon, though it is expected that the Company will repay these advances using the proceeds from future financings and/or cash generated from future operations, if and when such may occur. Further, the Company received an additional advance of $100,000 on October 5, 2005. The Company is not currently paying or accruing any interest related to this remaining balance. Also during the fourth quarter of 2004, the Company raised an additional $50,000 in working capital through the private sale of 250,000 shares of common stock and 125,000 warrants with an exercise price of $0.40 and a term of five years.

     With respect to our trade accounts payable, where permitted under securities laws, we have satisfied and expect to continue to satisfy certain of our unsecured obligations to third parties through restricted stock grants.

     Need for Additional Liquidity. At September 30, 2005, IBSS had a working capital deficit of $2,720,850. As noted in the Company’s Annual Report on Form 10-KSB, as filed with the Commission, the Company’s independent registered public accounting firm’s report for the year ended December 31, 2004 includes an explanatory paragraph to their audit opinion stating that the Company’s 2004 net loss, accumulated deficit and working capital deficiency raise substantial doubt about our ability to continue as a going concern. IBSS incurred an operating cash flow deficit of $1,169,339 for the year ended December 31, 2004 and incurred an additional operating cash flow deficit of $657,056 for the first nine months of 2005. In addition, during 2004 and continuing into 2005, the Company has experienced a decline in services revenues from its largest customer without a sufficient increase in such revenues from other sources. Further, IBSS does not currently have adequate financial resources to fund our operations. There can be no assurance as to if or when revenues from this customer as well as new sources will

increase. Without such increases or an additional capital infusion, or both, the Company will not be able to meet its current and future financial obligations.

     We will seek to raise additional funds from the private placement of additional debt, equity or equity-linked securities. Because of several factors, including the operating, market and industry risks associated with an investment in our common stock; the inclusion of a going concern paragraph in our annual independent registered public accounting firm’s report; the fact that our common stock is traded on the OTCBB; the continued weakness in the capital markets in general and the technology sector in particular; and the other factors described in Exhibit 99.1 of our Annual Report on Form 10-KSB, we may experience difficulty in obtaining additional financing until our operating results or overall market conditions reflect sustained improvement. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences would have a material adverse effect on our business, operating results, financial condition and prospects, which may include the discontinuance of operations.

     Capital Commitments. We currently do not have any commitments or budgeted needs in 2005 for any material capital expenditures, including purchases of furniture, fixtures or equipment. In the absence of any substantial infusion of growth capital or an unexpected increase in our expected gross margin for 2005, we do not expect our capital expenditure plans for 2005 to change.

Critical Accounting Policies and Accounting Estimates

     We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are further described in the footnotes to the financial statements at December 31, 2004, as included in our Annual Report on Form 10-KSB, as filed with the Commission. We consider these accounting policies to be critical accounting policies. Certain accounting policies involve significant judgments and assumptions by us, but do not have a material impact on the carrying value of our assets and liabilities and results of operations.

     The judgments and assumptions we use are based on historical experience and other factors that we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and from estimates which could have an impact on our carrying values of assets and liabilities and our results of operations.

     Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The critical accounting policies and the most sensitive accounting estimates affecting the financial statements were: (i) bad debt reserves to record accounts receivable at their net realizable value; (ii) valuation of net deferred tax assets; (iii) valuation of stock options; and (iv) revenue recognition policies. Each of these policies and estimates are discussed in greater detail below.

     Accounts receivable are customer obligations due under normal trade terms. The Company performs continuing credit evaluations of its clients and generally does not require collateral. Management reviews accounts receivable on a regular basis to determine if any receivables will potentially be uncollectible. Any accounts receivable balances that are determined to be uncollectible are included in the allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available, management believes all accounts receivable are fully collectable and, therefore, has not established a bad debt reserve or allowance as of September 30, 2005. However, actual write-offs may occur on the outstanding accounts receivable balances.

     Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in future periods based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Because of our significant continuing net operating losses and our accumulated deficit, we have fully reserved the net deferred tax asset.

     The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations in accounting for its stock-based compensation plans and applies the disclosure-only provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by FASB Statement No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (“SFAS 148”). We recognize stock-based compensation expense for stock options granted to employees and non-employee directors if the quoted market price of the stock at the date of the grant or award exceeds the price, if any, to be paid by an employee for the exercise of the stock. In December 2004, the FASB issued Statement No. 123 (R), “Share-Based Payment,” (“SFAS 123(R)”) effective for the quarter ending March 31, 2006, which is a revision of SFAS 123. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using APB 25’s intrinsic value method and, as such, only recognizes compensation cost for employee stock options to the extent that options have been issued below the fair market value of the underlying stock on the date of grant. Accordingly, the adoption of SFAS 123’s fair value method will have a significant impact on our result of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income above.

     IBSS recognizes revenues in accordance with the guidance of Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” SAB No. 104, “Revenue Recognition,” Statement of Position 97-2, “Software Revenue Recognition,” and related interpretations. IBSS recognizes revenue for products sold at the time delivery occurs, collection of the resulting receivable is deemed probable, the price is fixed and determinable, and evidence of an arrangement exists. Existing customers may purchase product enhancements and upgrades after such enhancements or upgrades are developed by IBSS based on a standard price list in effect at the time such product enhancements and upgrades are purchased. IBSS generally has no significant performance obligations to customers after the date that products, product enhancements and upgrades are delivered.

     IBSS allocates revenue on arrangements involving multiple elements to each element based on the relative fair value of each element. IBSS’s determination of fair value of each element in multiple-element arrangements is based on vendor-specific objective evidence (“VSOE”). IBSS limits its assessment of VSOE for each element to the price charged when the same element is sold separately. IBSS has analyzed all of the elements included in its multiple-element arrangements and determined that it has sufficient VSOE to allocate revenue to each of the multiple-elements.

     IBSS recognizes service revenues from installation, enhancements, and change order services based on the standard price list in effect when such services are provided to customers. Installation is not essential to the functionality of the products sold and is inconsequential or perfunctory to the sale of the

products. Revenues derived from contractual post-contract support services are recognized ratably over the contract support period.

     IBSS’s revenue recognition policy is significant because its revenue is a key component of IBSS’s results of operations. In addition, the recognition of revenue determines the timing of certain expenses, such as commissions and royalties. Although IBSS follows specific and detailed guidelines in measuring revenue, certain judgments affect the application of its revenue policy. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause IBSS’s operating results to vary significantly from quarter to quarter and could result in future operating losses.

Off-Balance Sheet Arrangements

     The Company does not have any off-balance sheet arrangements.

Item 3. Controls and Procedures

     The Company’s Chief Executive Officer (its principal executive officer) and Chief Financial Officer (its principal financial officer and principal accounting officer), respectively, have concluded, based on their evaluation as of September 30, 2005, that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

     There were no changes in the Company’s internal control over financial reporting in the third quarter of 2005 or in the other factors that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 3. Defaults Upon Senior Securities

     As previously reported, the Company currently is in default on the payment of principal and interest under a senior secured note issued on January 1, 2003 (the “Note”) with a recorded balance of $636,859 as of September 30, 2005. On October 29, 2004 and again on March 15, 2005, the holder of the Note demanded payment of principal and accrued interest in full. According to its terms, the Note became due and payable in full on January 1, 2004. Under the terms of the Note, nonpayment of principal and interest constitutes an Event of Default that entitles the holder thereof to demand payment in full in his discretion. On March 15, 2005, the holder of the Note indicated that, in the absence of immediate resolution of this matter, the holder will explore immediate foreclosure on its secured interest under the Note, which consists of substantially all of the assets of the Company. The Company has not made, and cannot make, any such payment at this time. The Company is investigating the circumstances surrounding the execution and approval of the Note and disputes the amount it may owe under the Note. The Company will continue in its efforts to negotiate settlement to this demand that would be mutually acceptable to both parties; however, no assurance can be given that the Company will be successful in this endeavor.

Item 6. Exhibits

     (a) Exhibits. The following exhibits are filed with this report:

Exhibit No.		Exhibit
31.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 11, 2005		INTEGRATED BUSINESS SYSTEMS AND SERVICES, INC.
				(Registrant)
				By:		/s/ George E. Mendenhall
						George E. Mendenhall
						Chief Executive Officer
						(principal executive officer)
				By:		/s/ Michael P. Bernard
						Michael P. Bernard
						Chief Financial Officer
						(principal financial officer and principal accounting officer)