<PAGE>   1
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                      SECURITIES AND EXCHANGE COMMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K


[ x ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
       ACT OF 1934 for the Fiscal Year Ended June 30, 1998.

                                       or

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934 for the transition period from ___________________
       to _____________________


                       COMMISSION FILE NUMBER: 333-38623


                               MAXXIS GROUP, INC.
             (Exact Name of Registrant as Specified in its Charter)


              GEORGIA                                58-22-78241
    (State or Other Jurisdiction of       (I.R.S. Employer Identification No.)
    Incorporation or Organization)

1901 MONTREAL ROAD, SUITE 108, TUCKER, GEORGIA         30084
  (Address of Principal Executive Offices)           (Zip Code)


Registrant's telephone number, including area code:  (770) 696-6343

Securities registered pursuant to Section 12(b) of the Act:   NONE

Securities registered pursuant to Section 12(g) of the Act:   NONE

Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes  X   No
                                             -----   -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference into Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]

The aggregate market value of the Common Stock held by affiliates of the
Registrant as of September 25, 1998 was $5,429,985. This calculation is based
upon the proposed sales price of $5.50 per share in the Company's current
public offering; however, no shares of Common Stock have yet been sold in the
Company's current public offering. There is no active trading market for the
Common Stock, and the $5.50 per share price is not necessarily indicative of
present value. There were 1,571,187 shares of Common Stock issued and
outstanding as of September 25, 1998.


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<PAGE>   2


                               INDEX TO FORM 10-K

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                                                                                                               PAGE
                                                                                                               ----
PART I

<S>           <C>                                                                                              <C>
Item 1.       Business............................................................................................   1

Item 2.       Properties..........................................................................................  10

Item 3.       Legal Proceedings...................................................................................  11

Item 4.       Submission of Matters to a Vote of Security Holders.................................................  11

PART II

Item 5.       Market for Common Equity and Related Shareholder Matters............................................  11

Item 6.       Selected Consolidated Financial Data................................................................  12

Item 7.       Management's Discussion and Analysis of Financial Condition and Results of Operations...............  13

Item 7A.      Quantitative and Qualitative Disclosures About Market Risks.........................................  18

Item 8.       Financial Statements and Supplementary Data.........................................................  18

Item 9.       Changes in and Disagreements with Accountants in Accounting and Financial Disclosure................  18

PART III

Item 10.      Directors and Executive Officers of the Registrant..................................................  18

Item 11.      Executive Compensation..............................................................................  21

Item 12.      Security Ownership of Certain Beneficial Owners and Management......................................  24

Item 13.      Certain Relationships and Related Transactions......................................................  25

PART IV

Item 14.      Exhibits, Financial Statement Schedules and Reports on Form 8-K.....................................  25

SIGNATURES........................................................................................................  28
</TABLE>
<PAGE>   3

                                     PART I

ITEM 1.       BUSINESS


         This Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended. These statements
appear in a number of places in this Report and include all statements that are
not historical statements of fact regarding the intent, belief or current
expectations of the Company or its directors or officers with respect to, among
other things: (i) the Company's financing plans; (ii) trends affecting the
Company's financial condition or results of operations; (iii) the Company's
growth strategy and operating strategy; and (iv) the Company's anticipated
capital needs. When used in this Report, the words "expects," "intends,"
"believes," "anticipates," "estimates," "may," "could," "should," "would,"
"will," "plans" and similar expressions and variations thereof are intended to
identify forward-looking statements. Investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, many of which are beyond the Company's ability to
control, and that actual results may differ materially from those projected in
the forward-looking statements as a result of various factors discussed herein
and those factors discussed in detail in the Company's filings with the
Securities and Exchange Commission, including the "Risk Factors" section of the
Company's Registration Statement on Form S-1 (Registration Number 333-38623).

         Maxxis Group, Inc., a Georgia corporation ("Maxxis" or the "Company"),
markets communications and Internet services and nutritional and health
enhancement products in the United States through its multi-level network
marketing system of "independent associates," or "IAs." The Company operates
through its subsidiaries: Maxxis 2000, Inc. ("Maxxis 2000"), which conducts
network marketing operations; Maxxis Communications, Inc. (formerly known as
Maxxis Telecom, Inc., "Maxxis Communications"), which provides long distance and
Internet-related services; and Maxxis Nutritionals, Inc. (formerly known as
Maxxis Nutritional, Inc., "Maxxis Nutritionals"), which provides private label
nutritional and health enhancement products. The Company currently markets
1-Plus long distance service and other communications services, such as Internet
access and prepaid phone cards, and nutritional and health enhancement products.
The Company was incorporated in January 1997 and began accepting IAs and
marketing communications services in March 1997. For the period of January 24,
1997 to June 30, 1997 (the "Inception Period") and the fiscal year ended June
30, 1998, the Company generated aggregate revenues of approximately $2,691,000
and $6,991,000, respectively.

         The Company has built a customer base without committing capital or
management resources to construct its own communications network and
transmission facilities. In February 1997, Maxxis Communications contracted
with Colorado River Communications Corp. ("CRC") to obtain switching and
network services and to allow CRC's communications services to be sold by the
Company's IAs. In the future, the Company may contract with other providers of
long distance services and intends to analyze the feasibility of developing its
own long distance network. In November 1997, the Company began marketing
several private label dietary supplements to its customers and IAs. Recently,
the Company began marketing additional nutritional and health enhancement
products. The Company's nutritional and health enhancement products are
manufactured by various suppliers. In September 1998, the Company began
providing Internet access and Web-page development and hosting services.
Internet access is provided through InteReach Internet Services, LLC
("InteReach"), and Web-page development and hosting services are provided by
the Company.

         The Company conducts its marketing activities exclusively through its
network of IAs. The Company believes that IAs are generally attracted to the
Company's multi-level network marketing system because of the potential for
supplemental income and because the IAs are not required to purchase any
inventory, have no monthly sales quotas or account collection issues, have
minimal required paperwork and have a flexible work schedule. The Company
encourages IAs to market services and products to persons with whom the IAs
have an ongoing relationship, such as family members, friends, business
associates and neighbors. The Company also sponsors meetings at which current
IAs are encouraged to bring in others for an introduction to the Company's
marketing system. The Company's multi-level network marketing system and the
Company's reliance upon IAs are intended to reduce marketing costs, customer
acquisition costs and customer attrition. The Company believes that its
multi-level network marketing system will continue to build a base of potential
customers for additional services and products.
<PAGE>   4

STRATEGY

         The Company's goal is to develop a national distribution system
through which large volumes of products and services may be sold. The Company
intends to achieve its goal by:

         -    Growing and Developing its Network of IAs by enhancing the
              sponsoring and training services offered to IAs, continuing to
              support the marketing efforts of IAs and introducing new income
              opportunities for IAs.

         -    Maintaining and Expanding the Number of Customers by offering
              high quality, competitively-priced products and services through
              a highly motivated network of IAs.

         -    Offering Additional Communications Products by entering into
              agreements for the marketing of additional products that meet the
              needs of customers, which may include, among others, paging,
              conference calling, wireless cable, cellular and local phone
              service.

         -    Improving and Expanding its Product and Service Lines by
              continuing to evaluate and offer products and services that are
              attractive to its IAs and customers. The Company recently began
              providing Internet access and Web-page development and hosting
              services. In addition to communications products and services,
              the Company markets a line of private label nutritional and
              health enhancement products to its customers and IAs.

         -    Obtaining Competitive Prices on products and services through
              the purchasing power of the Company's nationwide network.

MARKETING

         The Company markets products and services exclusively through its
network of IAs. Currently, the Company has five IA positions in its marketing
system: associate; senior associate; director; regional director; and executive
director. IAs pay an annual non-refundable fee in order to maintain their
status as IAs. IAs are paid on a commission basis and do not receive any salary
from the Company. To become an associate, individuals (other than individuals
in North Dakota) must complete an application and purchase a distributor kit
for $99. The distributor kit is a package of basic materials which assists an
associate in beginning his or her business. The Company designates a portion of
its gross commissions as "commission value," or "CV," and allocates the CV
among eligible participants in its marketing system. Associates may gather long
distance customers and receive a portion of the CV generated by such customers.
Associates are also entitled to purchase products from the Company at
discounted prices for retail sales. An associate becomes a senior associate
when the associate purchases or sells $100 of bonus-eligible products. Senior
associates continue to receive a percentage of CV with regard to all long
distance customers personally gathered and are also entitled to purchase
products from the Company at discounted prices for retail sales.

         To become a director, a senior associate must sponsor two additional
senior associate positions. A director increases the size of the director's
sales organization by sponsoring additional persons to become senior
associates. These senior associates, and all senior associates that they, in
turn, sponsor, become part of the sales organization of the director who
sponsored them. Senior associates, through the growth of their sales
organizations, may become directors, regional directors or executive directors
and thereby increase the size of the sales organization of the person who was
their original sponsor. The organization that grows below each director through
this process is called a "downline." Directors are eligible to receive the same
commissions as senior associates and, if they directly gather and maintain a
minimum of four active 1-Plus long distance customers, are eligible to receive
a percentage of the CV produced by each IA that is within 15 levels below them
in their downline. In order to encourage the growth of the Company's marketing
system, the Company also pays eligible directors a bonus amount, which is
designated as "bonus value," or "BV," for each sale or purchase of
bonus-eligible products or services. The Company primarily designates retail
priced phone cards, nutritional paks and Web-page development and hosting
services as 



                                       2
<PAGE>   5

bonus-eligible. Directors become regional directors and executive directors
upon the achievement of certain IA sales goals. Regional directors and
executive directors are also eligible to receive the same commissions as
directors. Regional directors and executive directors are also eligible to
serve on the Maxxis 2000 Advisory Board, which advises management on issues
regarding field leadership.

         The maximum aggregate long distance usage commissions the Company may
be required to pay to IAs with respect to a single customer's long distance
usage are approximately 40% of the gross commissions payable to the Company
with respect to such usage, but the Company anticipates that the actual amounts
paid will be less than 40% as the usage increases. The difference between
actual commission payments and the maximum payment is expected to occur because
certain IAs fail to maintain active status necessary to receive commissions
from sales made by persons in their downline.

RELATIONSHIP WITH IAS

         The Company seeks to contractually limit the statements that IAs make
about the Company's business. Each IA also must agree to policies and
procedures to be followed in order to maintain the IA's status in the
organization. IAs are expressly forbidden from making any representation as to
the possible earnings of any IA from the Company or from making any
representation with regard to the Company's public offering of its Common Stock
(the "Securities Offering"). IAs are also prohibited from creating any
marketing literature that has not been pre-approved by the Company. While the
Company has these policies and procedures in place governing the conduct of the
IAs, it is difficult to enforce such policies and procedures. Because the IAs
are classified as independent contractors, the Company is unable to provide
them the same level of direction and oversight as Company employees. Violations
of the Company's policies and procedures may reflect negatively on the Company
and could have a material adverse effect on the Company's business, financial
condition and results of operations.

TRAINING AND MARKETING SUPPORT

         The Company offers its IAs a number of support services. The Company
currently provides to each IA without charge one printed report describing such
IA's downline and provides additional reports for a fee. In addition, the
Company offers training, information and motivational support to the IA network
through its training program and regional meetings.

         The Company provides all IAs with the opportunity to receive training
through the Company's training program. The training program is conducted by
the Company's national training directors and includes a detailed explanation
of the Company's products, the IA compensation plan and the use of the various
marketing tools available to IAs. In addition, the Company encourages senior
associates, directors and regional directors to become managing directors
("MDs"). MDs provide personal training to IAs. To become a MD, a senior
associate, director or regional director must attend a Company approved
training school. The fee to attend the training school is currently $99, and
MDs must attend continuing education training schools each year which also are
subject to a fee. National training directors that are selected by the Company
are paid a fee by the Company for training MDs. The Company does not receive
any fees from IAs for the training provided by MDs.

         The Company's second annual convention was held in September 1998, and
the Company intends to continue to hold additional annual conventions for IAs.
This event provides recognition to the top performers, direct access to senior
management and a chance for IAs to share experiences and develop support
systems. The Company intends to organize additional conventions throughout the
country that current IAs and potential new IAs can attend to learn more about
the Company. The Company also intends to publish a newsletter for the IAs
containing informative and motivational articles and recognizing IA
achievements.



                                       3
<PAGE>   6

PRODUCTS AND SERVICES

         Following is a summary of the various products and services the
Company currently offers to its IAs and customers.

         Communications Services and Products. The Company's IAs market a
variety of long distance and other communications services and products, which
currently include 1-Plus long distance service, prepaid phone cards and
Internet-related services.

         -        1-Plus Long Distance. The Company's 1-Plus long distance
                  service serves as a replacement for a customer's former long
                  distance service (such as the long distance services provided
                  by AT&T Corporation ("AT&T"), MCI WorldCom, Inc. ("MCI
                  WorldCom") and Sprint Corporation ("Sprint")). The 1-Plus
                  services marketed by the Company are billed on a flat rate
                  basis, where the cost of a call does not vary depending upon
                  the distance of a call or the time of day or day of week when
                  the call is originated or terminated. Residential 1-Plus
                  services marketed by the Company are billed based on one
                  minute increments, and business 1-Plus service is billed
                  based on 6-second increments with a 30-second minimum.

         -        Prepaid Phone Cards. The Company offers prepaid phone cards
                  in domestic time increments of 1 hour, 30 minutes and 10
                  minutes. These cards may be used for domestic and
                  international calls. The Company also offers international
                  prepaid phone cards that are denominated in dollar amounts.
                  Charges are deducted from these cards based upon the rates
                  applicable to the calls placed by cardholders.

         -        MAXXCONNECT. In September 1998, the Company began providing 
                  Internet access through InteReach and also began providing 
                  Web-page development and hosting services for IAs.

The Company may add and remove services and products from its communications
services and product lines from time to time.

         Nutritional and Health Enhancement Products. The Company markets a
line of private label nutritional and health enhancement products to its IAs
and customers. Representative products include:

         -        40/30/30 Maxxis Bar is an energy bar intended as a meal
                  replacement which contains approximately 40% carbohydrates,
                  30% protein, 30% dietary fat and various vitamins and
                  minerals.

         -        Maxx-A-Chol is a dietary supplement which is a specialized
                  combination of six herbs.

         -        MAXXIS MSM is a dietary supplement consisting of
                  methylsulfonylmethane, vitamin C, citrus bioflavonoid complex
                  and ginseng.

         -        MAXXIS Multivitamin is a multivitamin nutritional supplement
                  which is delivered by means of a spray.

         -        MAXXIS 02 is a nutritional supplement that contains
                  electrolytes, oxygen, trace elements, enzymes and amino
                  acids.

         -        BetaShield is a nutritional product containing an extract
                  from the cell walls of baker's yeast.

         -        Maxx-Life is a dietary supplement containing amino acids and
                  other ingredients, including lysine, arginine, GABA,
                  glutamine and ornithine.



                                       4
<PAGE>   7

         -        Weight-Ideal is a dietary supplement in capsule and spray
                  forms which contains a blend of nutrients, including chromium
                  picolinate, magnesium acetate and niacin.

         -        Maxxis Skin Care System consists of the following health and
                  beauty products: shampoo; conditioner; body wash; hand and
                  body conditioner; face wash; skin toner; and moisturizer.

Certain nutritional products are sold as a nutritional pak, and the skin care
products are sold as a complete system or individually. The Company anticipates
adding products to and may remove products from its nutritional and health
enhancement product lines from time to time.

         Promotional Materials. The Company also derives revenues from the sale
of various educational and promotional materials designed to aid its IAs in
maintaining and building their businesses. Such materials include various sales
aids, informational videotapes and cassette recordings and product and
marketing brochures.

IA SUPPORT AND INFORMATION SYSTEMS

         The Company operates a call center where advisors answer IA questions
and provide information to IAs. The call center maintains a system that
includes a current database of all IAs, their downlines and their long distance
customers. The Company believes that maintaining sophisticated and reliable
transaction processing systems is essential for multi-level network marketing
companies. The Company uses a commission processing software system that
incorporates the provisions of the Company's marketing program for purposes of
processing detailed and customized IA commission payments, monitoring and
analyzing financial and operating trends and tracking each IA's downline. The
Company also maintains transaction processing systems that facilitate the
shipment of IA training and marketing materials. In addition, the Company's
order processing system tracks the receipt, storage, shipment and sale of the
Company's sales aid products.

SUPPLIERS

         The Company does not own a long distance network. As a result, Maxxis
Communications has entered into an agreement (the "1-Plus Agreement") with CRC
to obtain switching and network services. The Company depends primarily on CRC
for the transmission of subscriber phone calls and the activation of prepaid
phone cards. Long distance customers are customers on CRC's network, and CRC
provides customer support for the Company. Customers have the right to change
their service at any time. The Company's 1-Plus Agreement with CRC, which
expires on February 20, 2000, provides that the Company will have certain
rights with respect to the customer base developed under the agreement upon
achieving certain minimum levels of monthly revenues on CRC's network. The
Company recently reached these minimum levels, and, therefore, the Company has
the right to market other carriers to the customer base. In the event the
Company contracts with such carriers, minimum monthly revenues may be more
difficult to maintain, and the Company could be subject to additional minimum
commitments including, but not limited to, minimum monthly revenues or minimum
monthly minutes of usage, with such new carriers. The accurate and prompt
billing of the Company's customers is also dependent upon CRC. The failure of
CRC to accurately and promptly bill customers could lead to a loss of customers
and could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company would be required to use
another carrier if the 1-Plus Agreement were terminated, the usage or number of
customers originated by the Company's IAs exceeded the capacity of CRC, CRC
failed to provide quality service or became unable to provide service at all or
CRC experienced financial difficulties. If the 1-Plus Agreement is terminated,
there can be no assurance that the Company could enter into new contracts with
other providers on terms favorable to the Company or at all. The termination of
the 1-Plus Agreement could have a material adverse effect on the Company's
business, financial condition and results of operations.

         The Company began marketing a line of private label nutritional
products in November 1997. The Company recently began marketing new health
enhancement products and additional nutritional products, including a weight
management program and skin care system. All of the nutritional and health
enhancement products offered and distributed by the Company are developed and
manufactured by third-party suppliers. Certain of the nutritional 



                                       5
<PAGE>   8

and health enhancement products offered by the Company are proprietary to such
suppliers. The Company does not have any written contracts with or commitments
from any of its suppliers or manufacturers to continue to sell nutritional and
health enhancement products to the Company. The Company believes that its
relationships with suppliers are satisfactory; however, there can be no
assurance that any or all of these suppliers will continue to be reliable
suppliers to the Company. Accordingly, there is a risk that any or all of the
Company's suppliers or manufacturers, including suppliers which provide
proprietary products to the Company, could discontinue selling their
nutritional and health enhancement products to the Company. In the event any of
the third-party manufacturers become unable or unwilling to continue to provide
the nutritional and health enhancement products in required volumes, the
Company would be required to identify and obtain acceptable replacement
sources, and no assurance can be given that any alternative manufacturing
sources would become available to the Company on a timely basis.

         In September 1998, the Company began providing Internet access and
Web-page development and hosting services. The Company provides Internet access
through its agreement with InteReach. InteReach is a third-party reseller of
Internet access. InteReach provides all billing and customer support for the
Company's customers. The failure of InteReach to accurately and promptly bill
customers, to effectively provide customer support or to provide acceptable
service could lead to a loss of subscribers and could have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, if InteReach were to default on its contract with, or
have its contract terminated by, its Internet service provider (an "ISP"), or
if the Company's contract with InteReach is terminated, the Company would be
required to contract with another ISP. There can be no assurance that the
Company could enter into a new contract with another ISP on terms favorable to
the Company or at all.

CUSTOMER SUPPORT

         CRC is responsible for the billing of long distance customers and for
providing customer service. Certain communications services, including 1-Plus
long distance and prepaid phone cards, are provided under CRC's state, national
and international tariffs. The Company has been informed that CRC possesses all
tariffs necessary to offer such services. The Company provides its Internet
access services through InteReach, which is responsible for billing the
Company's Internet access customers and for providing customer support. The
Company provides all of the software necessary to automatically sign up for its
Internet access services through UsefulWare Incorporated.

COMPETITION

         The Company faces competition in the United States for both the
products and services it sells and for the sponsoring and retaining of
independent salespeople.

         Communications Services. The United States long distance
communications industry is intensely competitive, rapidly evolving and subject
to rapid technological change. In addition, the industry is significantly
influenced by the marketing and pricing practices of the major industry
participants. AT&T, MCI WorldCom and Sprint are the dominant competitors in the
domestic long distance communications industry. All of these companies are
significantly larger than the Company and have substantially greater resources.
Many of the Company's current and potential competitors have longer operating
histories, greater name recognition, larger customer bases and substantially
greater financial, personnel, marketing, technical and other resources than the
Company. These competitors employ various means to attract new customers,
including television and other advertising campaigns, telemarketing programs,
network marketing and cash payments and other incentives to new customers.
The Company's ability to compete effectively depends upon, among other factors,
its ability to offer high quality products and services at competitive prices.
There can be no assurance that the Company will be able to compete
successfully.

         The evolving regulatory environment of the United States
communications industry significantly influences the Company's ability to
compete. On February 8, 1996, President Clinton signed into law the
Telecommunications Act of 1996, as amended (the "1996 Telecommunications Act"),
that will allow local exchange carriers ("LECs"), including the Bell operating
companies ("BOCs"), to provide long distance telephone service inter-LATA (a



                                       6
<PAGE>   9

"LATA" is a Local Access and Transport Area), which will likely significantly
increase competition for long distance services. The new legislation also
grants the Federal Communications Commission (the "FCC") the authority to
deregulate other aspects of the communications industry. Such increased
competition could have a material adverse effect on the Company's business,
financial condition and results of operations.

         Telecommunications companies compete for customers based on price,
among other things, with major long distance carriers conducting extensive
advertising campaigns to capture market share. There can be no assurance that a
decrease in the rates charged for communications services by the major long
distance carriers or other competitors, whether caused by general competitive
pressures or the entry of the BOCs and other LECs into the long distance
market, would not have a material adverse effect on the Company's business,
financial condition and results of operations.

         The Company expects that the communications services markets will
continue to attract new competitors and new technologies, possibly including
alternative technologies that are more sophisticated and cost effective than
the technologies included in the products and services offered by the Company.
The Company does not have the contractual right to prevent customers from
changing to a competing service, and the customers may terminate their
service at will.

         Nutritional and Health Enhancement Products. The Company also competes
in the highly competitive market of dietary supplements and health enhancement
products. This market segment includes numerous manufacturers, other network
marketing companies, catalog companies, distributors, marketers, retailers and
physicians that actively compete for the business of consumers. The Company
competes with other providers of such nutritional and health enhancement
products, especially retail outlets, based upon convenience of purchase, price
and immediate availability of the purchased product. For the most part, the
Company's competitors offering comparable products are substantially larger and
have available considerably greater financial resources than the Company. The
market is highly sensitive to the introduction of new products (including
various prescription drugs) that may rapidly capture a significant share of the
market. As a result, the Company's ability to remain competitive depends in
part upon the successful introduction of new products at competitive prices.

         Internet Access and Internet-Related Services. The market for the
provision of Internet access and Internet-related services is extremely
competitive and highly fragmented. There are no substantial barriers to entry,
and the Company expects that competition will continue to intensify. There can
be no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures faced by the
Company will not materially adversely affect its business, financial condition
and results of operations. The Company's current and future competitors
include, without limitation, the following types of Internet access providers:
(i) national commercial ISPs; (ii) numerous regional and local commercial ISPs;
(iii) established on-line commercial information service providers; (iv)
national long distance carriers; (v) regional telephone companies; and (vi)
cable operators.

         IAs. The Company competes for IAs with other direct selling
organizations, some of which have longer operating histories and greater
visibility, name recognition and financial resources. The largest network
marketing companies in the Company's markets are: EXCEL Communications, Inc.;
American Communications Network; BeautiControl Cosmetics, Inc.; HerbalLife
International, Inc.; and Mary Kay, Inc. The Company competes for new IAs on the
basis of the Company's reputation, perceived opportunity for financial success
and quality and range of products offered for sale. Management envisions the
entry of many more direct selling organizations into the marketplace. There can
be no assurance that the Company will be able to successfully meet the
challenges posed by this increased competition. The Company competes for the
time, attention and commitment of its IAs. Given that the pool of individuals
interested in the business opportunities presented by direct selling is limited
in each market, the potential pool of IAs for the Company's products and
services is reduced to the extent other network marketing companies
successfully attract these individuals. There can be no assurance that other
network marketing companies will not convince the Company's existing IAs to
join their organizations. In such event, the Company's business, financial
condition and results of operations could be materially adversely affected.



                                       7
<PAGE>   10

PROPRIETARY RIGHTS

         The Company has applied for a federal registration for the mark
"MAXXIS." In addition, the Company relies upon common law rights to protect
other marks used by the Company and other rights that the Company considers to
be its intellectual property. There can be no assurance that the Company's
measures to protect this intellectual property will prevent or deter the use or
misappropriation of the Company's intellectual property by other parties. The
Company's inability to protect its intellectual property from use or
misappropriation from others could have a material adverse effect upon the
Company's business, financial condition and results of operations. From time to
time, companies may assert other trademark, service mark or intellectual
property rights in marks (including the mark "MAXXIS") or other intellectual
property used by the Company. The Company could incur substantial costs to
defend any legal action taken against the Company. If, in any legal action that
might arise, the Company's asserted trademarks, service marks or other rights
that the Company considers to be its intellectual property should be found to
infringe upon intellectual property rights of other parties, the Company could
be enjoined from further infringement and required to pay damages. In the event
a third party were to sustain a valid claim against the Company, and in the
event any required license were not available on commercially reasonable terms,
the Company's business, financial condition and results of operations could be
materially adversely affected. Litigation, which could result in substantial
cost to and diversion of resources of the Company, may also be necessary to
enforce intellectual property rights of the Company or to defend the Company
against claimed infringement of the rights of others.

REGULATION

         Regulation of Long Distance Telephone Services. Various regulatory
factors may have an impact on the Company's ability to compete and on its
financial performance. The Company's long distance carrier, CRC, is subject to
regulation by the FCC and by various state public service and public utility
commissions. Federal and state regulations and regulatory trends have had, and
may have in the future, both positive and negative effects on the Company and
on the telecommunications service industry as a whole. FCC policy currently
requires interexchange carriers to provide resale of the use of their
transmission facilities. The FCC also requires LECs to provide all
interexchange carriers with equal access to the origination and termination of
calls. If either or both of these requirements were removed, CRC and,
therefore, the Company could be adversely affected. CRC may experience
disruptions in service due to factors outside CRC's and the Company's control,
which may cause CRC to lose the ability to complete its subscribers' long
distance calls. The Company believes that CRC has made all filings with the FCC
necessary to allow CRC to provide interstate and international long distance
service. In order to provide intrastate long distance service, CRC is required
to obtain certification to provide communications services from the public
service or public utility commissions of each state, or to register or be found
exempt from registration by such commissions. While the Company believes that
CRC is in compliance with the applicable state and federal regulations
governing telecommunications service, there can be no assurance that the FCC or
any state regulatory authority in one or more states will not raise material
issues with regard to CRC's compliance with applicable regulations, or that
regulatory activities with respect to CRC will not have a material adverse
effect on the Company's business, financial condition and results of
operations.

         The 1996 Telecommunications Act has increased competition in the long
distance and local telecommunications markets. The 1996 Telecommunications Act
opens competition in the local services market and, at the same time, contains
provisions intended to protect consumers and businesses from unfair competition
by incumbent LECs, including the BOCs. The 1996 Telecommunications Act allows
BOCs to provide long distance service outside of their local service
territories but bars them from immediately offering in-region inter-LATA long
distance services until certain conditions are satisfied. A BOC must apply to
the FCC to provide in-region inter-LATA long distance services and must satisfy
a set of pro-competitive criteria intended to ensure that BOCs open their own
local markets to competition before the FCC will approve such application. The
Company is unable to determine how the FCC will rule on any such application.
The new legislation may result in increased competition to the Company from
others, including the BOCs, and increased transmission costs in the future. If
the federal and state regulations requiring the LECs to provide equal access
for the origination and termination of calls by long distance subscribers
change or if the regulations governing the fees to be charged for such access
services change, 



                                       8
<PAGE>   11

particularly if such regulations are changed to allow variable pricing of such
access fees based upon volume, such changes could have a material adverse
effect upon the Company's business, financial condition and results of
operations. See "Competition -- Communications Services."

         Regulation Affecting Nutritional and Health Enhancement Products. The
formulation, manufacturing, packaging, labeling, advertising, distribution and
sale of the Company's nutritional and health enhancement products are subject
to regulation by a number of governmental agencies, the most active of which is
the Food and Drug Administration ("FDA"), which regulates nutritional products
under the Federal Food, Drug and Cosmetic Act (the "FDCA") and regulations
promulgated thereunder. The Company's products are also subject to regulation
by the Federal Trade Commission (the "FTC"), the Consumer Product Safety
Commission, the United States Department of Agriculture and the Environmental
Protection Agency. The FDCA has been amended several times with respect to
dietary supplements, most recently by the Nutritional Labeling and Education
Act of 1990 and the Dietary Supplement Health and Education Act of 1994. The
Company's nutritional and health enhancement products are generally classified
and regulated as dietary supplements under the FDCA, as amended, and therefore
are not subject to pre-market approval by the FDA. However, these products are
subject to extensive labeling regulation by the FDA and can be removed from the
market if shown to be unsafe. Moreover, if the FDA determines on the basis of
labeling or advertising claims by the Company, that the "intended use" of any
of the Company's nutritional and health enhancement products is for the
diagnosis, cure, mitigation, treatment or prevention of disease, the FDA can
regulate those products as drugs and require pre-market clearance for safety
and effectiveness. In addition, if the FDA determines that claims have been
made regarding the effect of dietary supplements on the "structure or function"
of the body, such claims could result in the regulation of such products as
drugs.

         The FTC and certain states regulate advertising, product claims, and
other consumer matters, including advertising of the Company's nutritional and
health enhancement products. In the past several years the FTC has instituted
enforcement actions against several dietary supplement companies for false and
misleading advertising of certain products. In addition, the FTC has increased
its scrutiny of the use of testimonials, such as those utilized by the Company.
There can be no assurance that the FTC will not question the Company's past or
future advertising or other operations. Moreover, there can be no assurance
that a state will not interpret product claims presumptively valid under
federal law as illegal under that state's regulations. Furthermore, the
Company's IAs and customers of IAs may file actions on their own behalf, as a
class or otherwise, and may file complaints with the FTC or state or local
consumer affairs offices. These agencies may take action on their own
initiative or on a referral from IAs, customers or others, including actions
resulting in entries of consent decrees and the refund of amounts paid by the
complaining IA or customer, refunds to an entire class of IAs or customers, or
other damages, as well as changes in the Company's method of doing business. A
complaint because of a practice of one IA, whether or not that practice was
authorized by the Company, could result in an order affecting some or all IAs
in a particular state, and an order in one state could influence courts or
government agencies in other states. Proceedings resulting from these
complaints may result in significant defense costs, settlement payments or
judgments and could have a material adverse effect on the Company's business,
financial condition or results of operations.

         Although many of the ingredients in the Company's nutritional products
are vitamins, minerals, herbs and other substances for which there is a long
history of human consumption, some of the Company's nutritional products
contain ingredients as to which there is little history of human consumption.
The Company has not tested, and has not engaged any independent third party to
test, any of its nutritional and health enhancement products. Accordingly, no
assurance can be given that the Company's nutritional and health enhancement
products, even when used as directed, will have the effects intended. Although
the Company believes that its nutritional and health enhancement products are
safe when consumed as directed, the Company has not sponsored clinical studies
on the long-term effect of human consumption. If such products are alleged or
proven to be unsafe, the Company could be subject to actions or claims which
could have a material adverse effect on the Company's business, financial
condition or results of operations.

         Regulation of Network Marketing. The Company's multi-level network
marketing system is subject to or affected by extensive government regulation
including, without limitation, federal and state regulations governing the
offer and sale of business franchises, business opportunities and securities.
Various governmental agencies monitor direct selling activities, and the
Company could be required to supply information regarding its marketing plan to



                                       9
<PAGE>   12

such agencies. Although the Company believes that its multi-level network
marketing system is in material compliance with the laws and regulations
relating to direct selling activities, there can be no assurance that
legislation and regulations adopted in particular jurisdictions in the future
will not adversely affect the Company's business, financial condition and
results of operations. The Company also could be found not to be in compliance
with existing statutes or regulations as a result of, among other things,
misconduct by IAs, who are considered independent contractors over whom the
Company has limited control, the ambiguous nature of certain of the regulations
and the considerable interpretive and enforcement discretion given to
regulators. Any assertion or determination that the Company or the IAs are not
in compliance with existing statutes or regulations could have a material
adverse effect on the Company's business, financial condition and results of
operations. An adverse determination by any one state on any regulatory matter
could influence the decisions of regulatory authorities in other jurisdictions.

         The Company has not obtained any no-action letters or advance rulings
from any federal or state securities regulator or other governmental agency
concerning the legality of the Company's operations, and the Company is not
relying on an opinion of counsel to such effect. The Company accordingly is
subject to the risk that its multi-level network marketing system could be
found to be in noncompliance with applicable laws and regulations, which could
have a material adverse effect on the Company's business, financial condition
or results of operations. Such a decision could require the Company to modify
its multi-level network marketing system, result in negative publicity, or have
a negative effect on distributor morale and loyalty. In addition, the Company's
multi-level network marketing system will be subject to regulations in foreign
markets administered by foreign agencies should the Company expand its network
marketing organization into such markets.

         Effect of State Securities Laws. The primary goal of the Company's
current Securities Offering is to increase the motivation of regional and
executive directors by allowing them to purchase an interest in the Company.
Accordingly, because the Company desires the ability to offer its Common Stock
to regional and executive directors in certain states, the Company has
attempted to register or qualify the Securities Offering in such states. Due to
the varying nature of state securities regulations and the considerable
discretion given to state securities regulators, the Company may be unable to
register or qualify the Securities Offering in certain states. The inability of
the Company to offer its Common Stock to residents of certain states may limit
the ability of the Company to attract IAs in such states, or lead to increased
attrition of IAs in such states, and may have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
An adverse determination by any one state regulator on a securities regulatory
matter could influence the decisions of securities regulatory authorities in
other jurisdictions.

FACILITIES

         The Company operates out of offices in Atlanta, Georgia consisting of
approximately 24,600 square feet for general and administrative office space,
warehouse space and training space. The Company may be required to lease or
build additional facilities, including at least one additional call center and
new corporate headquarters, in order to meet adequately its needs in the future.
The Company believes that suitable additional or alternative space will be
available in the future on commercially reasonable terms as needed.

EMPLOYEES

         As of June 30, 1998, the Company employed approximately 30 people. The
Company's IAs are classified by the Company as independent contractors.
The Company's employees are not unionized, and the Company believes its
relationship with its employees is good.


ITEM 2.       PROPERTIES

         See the information provided in Item 1 above entitled "Business --
Facilities" for information with respect to the Company's properties.



                                      10
<PAGE>   13

ITEM 3.       LEGAL PROCEEDINGS

              The Company is not a party to, nor is any of its property subject
to, any material legal proceedings, other than routine litigation incidental to
its business.


ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

              No matter was submitted to a vote of the Company's security
holders during the fourth quarter of the year ended June 30, 1998.


                                    PART II

ITEM 5.       MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

              As of September 25, 1998, the Company had 57 shareholders of
record. In the Securities Offering, the Company intends to offer its Common
Stock at a price of $5.50 per share; however, the $5.50 per share price is not
necessarily indicative of present value. As of the date of this Report, the
Company has not offered or sold any shares of Common Stock pursuant to the
Securities Offering. There is no established trading market for the Common
Stock, and one is not expected to develop in the near future.

              All outstanding shares of Common Stock of the Company are
entitled to share equally in dividends from funds legally available therefor,
when, as and if declared by the Board of Directors. The Company does not plan
to declare any dividends in the immediate future.



                                      11
<PAGE>   14



ITEM 6.       SELECTED CONSOLIDATED FINANCIAL DATA

              The following table sets forth selected consolidated financial
data for the periods presented. The Company was incorporated on January 24,
1997 and began operations in March 1997. The Company's fiscal year ends on June
30. The statement of operations data for the Inception Period and the year
ended June 30, 1998 and the balance sheet data as of June 30, 1997 and 1998 are
derived from the audited Consolidated Financial Statements of the Company. The
Consolidated Financial Statements for the Inception Period and the year ended
June 30, 1998 were audited by Arthur Andersen LLP, independent public
accountants. The selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
related Notes thereto appearing elsewhere in this Report.

<TABLE>
<CAPTION>
                                                                             JANUARY 24, 1997        
                                                                                 INCEPTION            YEAR ENDED
                                                                             TO JUNE 30, 1997       JUNE 30, 1998
                                                                             -----------------     ----------------
<S>                                                                          <C>                   <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
   Communications services...............................................    $        2,322,000    $      5,293,000
   Nutritional products..................................................                   --              526,000
   Marketing services....................................................               369,000           1,172,000
                                                                             ------------------    ----------------
          Total net revenues.............................................             2,691,000           6,991,000
                                                                             ------------------    ----------------
                                                                                     
Cost of services:
   Communications services...............................................               761,000           1,351,000
   Nutritional products..................................................                    --             294,000
                                                                                                                     
   Marketing services....................................................               255,000             431,000
                                                                             ------------------    ----------------
       Total cost of services............................................             1,016,000           2,076,000
                                                                             ------------------    ----------------
Gross margin.............................................................             1,675,000           4,915,000
                                                                             ------------------    ----------------
Operating expenses:
   Selling and marketing.................................................             1,089,000           2,665,000
   General and administrative............................................               660,000           2,344,000
                                                                             ------------------    ----------------
          Total operating expenses.......................................             1,749,000           5,009,000
                                                                             ------------------    ----------------
Interest expense.........................................................                    --               2,000
                                                                             ------------------    ----------------
Loss before income tax benefit...........................................               (74,000)            (96,000)
Income tax benefit.......................................................                    --                  --
                                                                             ------------------    ----------------
Net loss.................................................................    $          (74,000)   $        (96,000)
                                                                             ==================    ================
                                                                                                                       
PER SHARE DATA:
Net loss per share.......................................................    $            (0.05)   $          (0.06)
                                                                             ==================    ================
                                                                             
Weighted average number of shares outstanding............................             1,571,187           1,571,187
                                                                             ==================    ================

<CAPTION>
                                                                                         AS OF JUNE 30,
                                                                             --------------------------------------
                                                                                    1997                 1998
                                                                             -------------------   ----------------
BALANCE SHEET DATA:
Working capital..........................................................    $          (13,000)   $        180,000
Property and equipment, net..............................................                92,000             169,000
Total assets.............................................................               596,000           1,263,000
Long-term obligations....................................................                    --                  --
Shareholders' equity.....................................................               293,000             484,000
</TABLE>



                                      12
<PAGE>   15


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS

         The following discussion and analysis should be read in conjunction
with the "Selected Consolidated Financial Data" and the Consolidated Financial
Statements and Notes thereto included elsewhere in this Report. This Report
contains certain forward-looking statements relating to, without limitation,
future economic performance, plans and objectives of management for future
operations and projections of revenues and other financial items that are based
on the beliefs of the Company's management, as well as assumptions made by, and
information currently available to, the Company's management. When used in this
Report, the words "intends," "believes," "anticipates," "estimates," "may,"
"could," "should," "would," "will," "plans" and similar expressions and
variations thereof are intended to identify forward-looking statements. The
cautionary statements set forth elsewhere in this Report identify important
factors with respect to such forward-looking statements, including certain
risks and uncertainties, that could cause actual results to differ materially
from those in such forward-looking statements.

         Maxxis was incorporated on January 24, 1997 and began accepting IAs
and marketing communications services in March 1997. The Company conducts all
of its business and operations through its wholly-owned subsidiaries: Maxxis
2000; Maxxis Communications; and Maxxis Nutritionals.

         Maxxis 2000 is a network marketing company that currently markets
1-Plus long distance service, travel cards, prepaid phone cards, 800 service
and international telecommunications services, Internet access and Web-page
development and hosting services, and nutritional and health enhancement
products. Maxxis Communications obtains telecommunications services and
purchases time for its prepaid 1 hour, 30 minute and 10 minute phone cards from
CRC. Maxxis Communications also provides Internet access through its agreement
with InteReach. Maxxis Nutritionals purchases private label nutritional and
health enhancement products from various suppliers. The Company believes that
its multi-level network marketing system allows it to obtain customers for its
products in a cost effective manner and to enhance customer retention because
of the relationships between the Company's IAs and customers. The
telecommunications customer base developed by the Company's IAs provides a
potential customer base for the Company's nutritional and health enhancement
products, Internet-related services and for future products.

         The Company derives revenues from communications services, nutritional
products and marketing services. Communications services revenues are comprised
of sales of prepaid phone cards to the Company's IAs and commissions from the
Company's agreement with CRC whereby the Company receives a percentage of the
long distance billings received by CRC from the customers originated by the
Company's IAs, net of allowances for bad debts and billing adjustments. The
Company's aggregate revenues from 1-Plus services were $25,000, or only 0.9% of
total revenues, for the Inception Period, and $1,178,000, or 16.9% of total
revenues, for the year ended June 30, 1998. Because of the administrative
procedures that must be complied with in order to establish 1-Plus customers
and to collect the usage and access fees from the LECs, there is generally a
delay of up to three to four months from the time a prospective customer
indicates a desire to become a 1-Plus customer and the time that the Company
begins to receive commissions from such customer's usage. In the future, the
Company believes that commissions generated on the sales of 1-Plus long
distance services will constitute an increasing percentage of its total
revenues. In September 1998, the Company began providing Internet access and
Web-page development and hosting services. Accordingly, the Company derived no
revenue from such services for the year ended June 30, 1998.

         Nutritional products revenues include sales of private-label
nutritional products to the Company's IAs. Recently, the Company began
marketing new health enhancement products and additional nutritional products,
including a weight management program and skin care system. Marketing services
revenues include application fees from IAs and purchases of sales aids by IAs,
including distributor kits which consist of forms, promotional brochures, audio
and video tapes, marketing materials and presentation materials. Marketing
services revenues also include training fees paid by MDs. To become an
associate, individuals (other than individuals in North Dakota) must complete
an application and purchase a distributor kit for $99. IAs also pay an annual
non-refundable fee in order to maintain their status as an IA, which fee the
Company amortizes over the renewal period. To become a MD, a senior associate,
director or regional director must attend a Company approved training school.
The fee to 



                                      13
<PAGE>   16

attend the training school is currently $99, and MDs must attend continuing
education training schools each year which also are subject to a fee. The
training fees are recognized at the time the training is received. The Company
does not receive any fees from IAs for the training provided by MDs or national
training directors.

         Cost of services consists of communications services costs,
nutritional products costs and marketing services costs. Communications
services cost consists primarily of the cost of purchasing activated prepaid
phone cards. Nutritional products cost consists of the cost of purchasing
private label nutritional products. Marketing services cost includes the costs
of purchasing IA distributor kits, sales aids and promotional materials and
training costs. Operating expenses consist of selling and marketing expenses
and general and administrative expenses. Selling and marketing expenses include
commissions paid to IAs based on (i) usage of long distance services by
customers, (ii) sales of products to new IAs sponsored into the Company and
(iii) sales of additional products and services to customers. General and
administrative expenses include costs for IA support services, information
systems services and administrative personnel to support the Company's
operations and growth.

         The Company has a limited operating history, and its operations are
subject to the risks inherent in the establishment of any new business. The
Company expects that it will incur substantial initial expenses, and there can
be no assurance that the Company will achieve or maintain profitability. If the
Company continues to grow rapidly, the Company will be required to continually
expand and modify its operational and financial systems, add additional IAs and
new customers, and train and manage both current and new employees and IAs.
Such rapid growth would place a significant strain on the Company's operational
resources and systems, and the failure to effectively manage this projected
growth could have a material adverse effect on the Company's business,
financial condition and results of operations.

RESULTS OF OPERATIONS

         The following table sets forth the percentage of total revenues
attributable to each category for the periods shown.

<TABLE>
<CAPTION>
                                                                           JANUARY 24, 1997          
                                                                              (INCEPTION)            YEAR ENDED
                                                                           TO JUNE 30, 1997         JUNE 30, 1998
                                                                          ------------------      -----------------
<S>                                                                       <C>                     <C>              
Net revenues:
   Communications services........................................                 86.3%                  75.7%
   Nutritional products...........................................                  --                     7.5
   Marketing services.............................................                 13.7                   16.8
                                                                              ---------              ---------
     Total net revenues...........................................               100.00%                100.00%
                                                                              =========              =========

Cost of services:
   Communications services........................................                 28.3%                  19.3%
   Nutritional products...........................................                  --                     4.2
   Marketing services.............................................                  9.5                    6.2
                                                                              ---------              ---------
     Total cost of services.......................................                 37.8                   29.7

Operating expenses:
   Selling and marketing..........................................                 40.5                   38.1
   General and administrative.....................................                 24.5                   33.5
                                                                              ---------              ---------
     Total operating expenses.....................................                 65.0%                  71.6%
                                                                              =========              =========
</TABLE>


         The Company was incorporated in January 1997 and commenced operations
in March 1997. No comparisons are presented for the year ended June 30, 1998
compared to the Inception Period because the Company commenced operations in
March 1997 and the Company believes the comparisons would not be meaningful.



                                      14
<PAGE>   17

Similarly, no comparisons are presented for the Inception Period because the
Company was not in existence for the corresponding period in 1996.

YEAR ENDED JUNE 30, 1998

         Net Revenues. Total net revenues are derived from sales of 
communications services, nutritional products and marketing services net of any
returns of prepaid phone cards, distributor kits or other products. Total net
revenues were $6,991,000 for the year ended June 30, 1998. For the year ended
June 30, 1998, communications services revenues were $5,293,000, or 75.7% of
total revenues. Communications services revenues consist of sales of prepaid
phone cards by and to IAs and commissions and fees generated from long distance
customers. For the year ended June 30, 1998, nutritional products revenues were
$526,000, or 7.5% of total net revenues. Nutritional products revenues consist
of sales of private label nutritional products. For the year ended June 30,
1998, marketing services revenues were $1,172,000, or 16.8% of total revenues.
Marketing services revenues consist of application fees paid by IAs, purchases
of sales aids by IAs and training fees paid to become a MD.

         Cost of Services. Cost of services includes communications services
costs, nutritional products costs and marketing services costs. Total cost of
services for the year ended June 30, 1998 was $2,076,000, or 29.7% of total
revenues. For the year ended June 30, 1998, communications services cost was
$1,351,000, or 19.3% of total revenues. Communications services cost consist
primarily of the cost of purchasing activated prepaid phone cards from CRC. The
Company then sells the activated phone cards to its IAs. Communications
services cost also includes, as a minor component, the costs of materials that
are used to package the phone cards. For the year ended June 30, 1998,
nutritional products cost was $294,000, or 4.2% of total revenues. Nutritional
products cost consists of the cost of purchasing private label nutritional
products. Marketing services cost was $431,000, or 6.2% of total revenues, for
the year ended June 30, 1998. Marketing services cost primarily consists of the
costs of purchasing application kits, sales aids and promotional materials and
training costs.

         Operating Expenses. For the year ended June 30, 1998, selling and
marketing expenses were $2,665,000, or 38.1% of total revenues. Selling and
marketing expenses consist of commissions paid to IAs based on (i) usage of
long distance services by customers, (ii) sales of products to new IAs
sponsored into the Company and (iii) sales of additional products and services
to customers. General and administrative expenses were $2,344,000, or 33.5% of
total revenues, for the year ended June 30, 1998. General and administrative
expenses consist of salary expense for the Company's customer service
personnel, office staff and executive personnel and the cost of IA support
services and information systems services.

INCEPTION PERIOD (JANUARY 24, 1997 TO JUNE 30, 1997)

         Net Revenues. For the Inception Period, communications services
revenues were $2,322,000, or 86.3% of total revenues, and marketing services
revenues were $369,000, or 13.7% of total revenues. Communications services
revenues consist of sales of prepaid phone cards by and to the Company's IAs
and commissions and fees generated from long distance usage customers. This
amount was minimal for the Inception Period because no customers were utilizing
long distance services until May 1997. Marketing services revenues include
application kit fees from IAs, purchases of sales aids by IAs and training fees
paid to become a MD.

         Cost of Services. Communications services cost was $761,000, or 28.3%
of total revenues, for the Inception Period. Communications services costs
include the cost of purchasing activated prepaid phone cards. Marketing
services cost, which includes the costs of application kits and promotional
materials, was $255,000, or 9.5% of total revenues, for the Inception Period.

         Operating Expenses. Selling and marketing expenses principally consist
of commissions paid to IAs based on (i) usage of long distance services by
customers, (ii) sales of products and services to new IAs sponsored into the
Company and (iii) sales of additional products and services to customers.
Selling and marketing expenses were $1,089,000, or 40.5% of total revenues, for
the Inception Period. General and administrative expenses were 



                                      15
<PAGE>   18

$660,000, or 24.5% of total revenues, for the Inception Period. General and
administrative expenses consist primarily of salary expense for the Company's
customer service personnel, office staff and executive personnel. Such expenses
also include costs for IA support services and information systems services.

SEASONALITY AND UNAUDITED QUARTERLY FINANCIAL INFORMATION

         The Company has historically experienced, and expects to continue to
experience, significant seasonal fluctuations in the recruitment of its IAs and
the sale of its products and services. The Company's annual summit occurs in
the first quarter of the Company's fiscal year, which has historically caused
an increase in the number of the Company's IAs and sales of the Company's
products and services. Historically, revenues have been lower in the second
quarter than in other quarters of a given year because of the number of new IAs
added and product and service sales have historically declined during the
holiday season. The Company's operating results may vary significantly in the
future, partly due to such seasonal fluctuations. The Company believes that
recruitment of its IAs and sales of its products and services will continue to
follow this seasonal cycle. The Company's quarterly results may fluctuate
significantly as a result of such seasonality. Because of the potential
quarterly fluctuations in the Company's revenue and operating results, results
for any particular quarter may not be indicative of future quarterly or annual
results.

<TABLE>
<CAPTION>
                                                                             
                                                                                     QUARTER ENDED
                                             INCEPTION    ------------------------------------------------------------------
                                               PERIOD     SEPT. 30, 1997     DEC. 31, 1997    MAR. 31, 1998    JUNE 30, 1998
                                             -----------  ---------------    -------------    -------------    -------------
<S>                                          <C>          <C>               <C>               <C>              <C>           
STATEMENT OF OPERATIONS DATA:
Net revenues:
    Communications services...............   $ 2,322,000  $     1,465,000   $    1,122,000    $   1,352,000    $   1,354,000
    Nutritional products..................            --               --          186,000          155,000          185,000
    Marketing services....................       369,000          353,000          318,000          224,000          277,000
                                             -----------  ---------------   --------------    -------------    -------------
        Total net revenues................     2,691,000        1,818,000        1,626,000        1,731,000        1,816,000
                                             -----------  ---------------   --------------    -------------    -------------
Cost of services:
  Communications services.................       761,000          438,000          430,000          213,000          270,000
  Nutritional products....................            --               --           77,000          146,000           71,000
  Marketing services......................       255,000          101,000          127,000          111,000           92,000
                                             -----------  ---------------   --------------    -------------    -------------
        Total cost of services............     1,016,000          539,000          634,000          470,000          433,000
                                             -----------  ---------------   --------------    -------------    -------------
Gross margin..............................     1,675,000        1,279,000          992,000        1,261,000        1,383,000
                                             -----------  ---------------   --------------    -------------    -------------
Operating Expenses:
  Selling and marketing...................     1,089,000          716,000          610,000          668,000          671,000
  General and administrative..............       660,000          597,000          514,000          542,000          691,000
                                             -----------  ---------------   --------------    -------------    -------------
        Total operating expenses..........     1,749,000        1,313,000        1,124,000        1,210,000        1,362,000
                                             -----------  ---------------   --------------    -------------    -------------
Interest income (expense).................            --               --            2,000           (2,000)           2,000   
                                             -----------  ---------------   --------------    -------------    -------------
Income (loss) before income tax benefit...       (74,000)         (34,000)        (134,000)          53,000           19,000
Income tax benefit........................            --               --               --               --               --
                                             -----------  ---------------   --------------    -------------    -------------
Net income (loss).........................   $   (74,000) $       (34,000)  $     (134,000)   $      53,000    $      19,000
                                             ===========  ===============   ==============    =============    =============
PER SHARE DATA:
Net income (loss) per share...............   $     (0.05) $         (0.02)  $        (0.08)   $        0.03    $        0.01
                                             ===========  ===============   ==============    =============    =============
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

         Since inception, the Company has primarily financed all of its
operations through the sale of its securities in private placements. During the
year ended June 30, 1998, cash flows from financing activities totaled
approximately $87,000 related to the sale of Common Stock and $200,000 related
to the sale of preferred stock. In November 1997, the Company entered into a
demand promissory note to fund expenses incurred in connection with the launch
of the Company's nutritional product line. As of March 23, 1998, the Company
had borrowed $200,000 under such promissory note. On March 23, 1998, the
Company converted the outstanding principal amount under the promissory note
into units ("Units") at a price of $5.50 per Unit with each Unit consisting of
one share of convertible preferred stock (the "Preferred Stock") and a warrant
(a "Warrant") to purchase one share of Common Stock at a price of $5.50 per
share. The Preferred Stock is: (i) non-voting; (ii) entitled to an antidilution
adjustment only upon a stock split, recapitalization or similar event; (iii)
entitled to a liquidation preference over the Common Stock; and (iv)
convertible into Common Stock at the option of the holder at any time
commencing 14 months following the date of the issuance of the Preferred Stock
and automatically upon the closing of a public offering that 



                                      16
<PAGE>   19

occurs at least 14 months following the issuance of the Preferred Stock and
that provides gross proceeds to the Company of at least $7,500,000. The
Warrants are entitled to an antidilution adjustment only upon a stock split,
recapitalization or similar event, are not exercisable until 14 months
following their date of issuance and remain exercisable at the option of the
holder until the seventh anniversary of their issuance. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of the Preferred Stock and any additional preferred
stock that may be issued in the future.

         In February 1998, the Company entered into a note with Thomas O. Cordy
(the "Cordy Note") to memorialize a loan in December 1997 of $53,000 from Mr.
Cordy to the Company to fund certain operational expenses. As of June 30, 1998,
the Cordy Note had been repaid in full.

         As of June 30, 1998, the Company had cash of $372,000 and working
capital of $180,000. Cash provided by operating activities for the year ended
June 30, 1998 was $235,000. The Company's investing activities principally
consisted of capital expenditures of $115,000 and software development and
organizational costs of $70,000 for the year ended June 30, 1998.

         The Company anticipates that cash generated from operations, together
with additional borrowings or equity financings, will be sufficient to meet the
Company's capital requirements for the next 12 months. However, if the Company
does not receive sufficient funds from its operations and borrowings and equity
financings to fund its operations, the Company may need to raise additional
capital. In addition, any increases in the Company's growth rate, shortfalls in
anticipated revenues, increases in expenses or significant acquisitions could
have a material adverse effect on the Company's liquidity and capital resources
and could require the Company to raise additional capital. The Company may also
need to raise additional funds in order to take advantage of unanticipated
opportunities, such as acquisitions of complementary businesses or the
development of new products, or otherwise respond to unanticipated competitive
pressures. Sources of additional capital may include venture capital financing,
cash flow from operations, additional lines of credit and private equity and
debt financings. The Company's cash and financing needs for 1998 and beyond
will be dependent on the Company's level of IA and customer growth and the
related capital expenditures, advertising costs and working capital needs
necessary to support such growth. The Company believes that major capital
expenditures may be necessary over the next few years to develop additional
product lines to sell through its IAs and to develop and/or acquire
information, accounting and/or inventory control systems to monitor and analyze
the Company's growing multi-level network marketing system. The Company has not
identified financing sources to fund such cash needs in 1998 and beyond. There
can be no assurance that the Company will be able to raise any such capital on
terms acceptable to the Company or at all.

YEAR 2000 COMPLIANCE

         Many installed computer software and network processing systems
currently accept only two-digit entries in the date code field and may need to
be upgraded or replaced in order to accurately record and process information
and transactions on and after January 1, 2000. The Company's business and
relationships with its customers and IAs depend significantly on a number of
computer software programs, internal operating systems and connections to other
networks, and the failure of these programs, systems or networks to
successfully address the Year 2000 problem could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company is in the preliminary stages of assessing the extent to which its
internal systems and software and the network connections it maintains are
adequately programmed to address the Year 2000 issue. In addition, the
Company's ability to provide services and support to its customers and IAs
depends upon the continued functioning of the software programs, operating
systems and networking used by its vendors and suppliers, and the Company is
also in the preliminary stages of assessing the extent to which its vendors and
suppliers have successfully addressed the Year 2000 problem. It currently is
impossible for the Company to predict the potential expenditures that may be
required or the delay or interruption in service that may result due to the
Year 2000 problem. Any failure by the Company or its vendors or suppliers to
successfully address the Year 2000 problem could significantly interrupt the
business operations of the Company and have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
has not currently established a contingency plan, but the Company intends to
create one as soon as practicable.



                                      17
<PAGE>   20

ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

              Not applicable.


ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

               The Consolidated Financial Statements of the Company, including
the Company's consolidated balance sheets as of June 30, 1998 and 1997 and
consolidated statements of operations, shareholders' equity and cash flows for
the year ended June 30, 1998 and for the period from Inception (January 24,
1997) to June 30, 1997 together with the report thereof of Arthur Andersen LLP,
dated September 4, 1998 are included on pages F-1 through F-15 of this Report.


ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND 
              FINANCIAL DISCLOSURE

              The Company has no disagreements on accounting or financial
disclosure matters with its accountants nor did it change accountants during
the year ended June 30, 1998.


                                    PART III

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS AND DIRECTORS

         The directors and executive officers of the Company are set forth
below. The Company's Board of Directors consists of nine directors divided into
three classes of directors, serving staggered three-year terms. Directors and
executive officers of the Company are elected to serve until they resign or are
removed, or are otherwise disqualified to serve, or until their successors are
elected and qualified. Directors of the Company are elected at the annual
meeting of shareholders. Officers of the Company are appointed at the Board's
first meeting after each annual meeting of shareholders. The ages of the
persons set forth below are as of June 30, 1998. 

<TABLE>
<CAPTION>                                    
                                                                                                          TERM AS
                                                                                                          DIRECTOR
NAME                                  AGE      POSITIONS WITH THE COMPANY                                 EXPIRES
----                                  ---      --------------------------                                 -------
<S>                                   <C>      <C>                                                        <C>           
Ivey J. Stokes.................        39      Chairman of the Board of Directors                           1998
Thomas O. Cordy................        57      Chief Executive Officer, President and Director              1998
Daniel McDonough...............        50      Chief Financial Officer                                        --
James W. Brown.................        62      Executive Vice President, Secretary and Director             1999
Larry W. Gates, II.............        35      Vice President-- Human Resources and Director                1999
Charles P. Bernstein...........        48      Director                                                     2000
Alvin Curry....................        41      Director                                                     1998
Robert J. Glover, Jr...........        37      Director                                                     1999
Terry Harris...................        44      Director                                                     2000
Philip E. Lundquist............        62      Director                                                     2000
</TABLE>



                                      18
<PAGE>   21

         IVEY J. STOKES has served as Chairman of the Board of Directors of the
Company since its inception. Mr. Stokes began his marketing career in 1982 at
A.L. Williams Corporation ("A.L. Williams") where he became one of less than
400 National Sales Directors out of 1.3 million insurance agents. In March
1991, Mr. Stokes left the financial services industry to launch his own
independent marketing firm, Global Marketing Alliance ("Global Alliance"). Over
the next five years, Mr. Stokes became one of the leading money earners in
several national network marketing firms. Mr. Stokes' marketing firm, Global
Alliance, has sponsored and trained over 150,000 distributors since 1991. Mr.
Stokes has a bachelors degree in industrial management from the Georgia
Institute of Technology.

         THOMAS O. CORDY has served as Chief Executive Officer and President
and as a Director of the Company since May 1997. Prior to that time, he served
as President and Chief Executive Officer of CI Cascade Corp. Mr. Cordy
currently serves as Vice Chairman of the Board of Trustees of Clark Atlanta
University, Chairman of the Board of Renaissance Capital Corporation and as a
Director of Cox Enterprises. Mr. Cordy has a bachelors degree from Morehouse
College and a masters degree from Atlanta University. Mr. Cordy has attended
the Stanford Executive Program at the Stanford School of Business and the
University of Oklahoma National Lending School.

         DANIEL MCDONOUGH has served as Chief Financial Officer of the Company
since October 1997. Prior to his employment with the Company, Mr. McDonough
provided financial consulting services to a number of start up companies at
Creative Benefits, Inc. In addition, from 1992 to 1994, Mr. McDonough was the
controller of Jostens Learning Corporation, a $75.0 million technology company
specializing in educational software. Prior to his employment with Jostens, Mr.
McDonough served as assistant controller to Alumax, Inc., a $2.5 billion
integrated aluminum company with over 100 manufacturing operations throughout
the United States. From 1973 to 1980, Mr. McDonough was employed by Price
Waterhouse & Co. Mr. McDonough is a licensed CPA and also holds a masters of
business administration degree from the University of Buffalo.

         JAMES W. BROWN currently serves as Executive Vice President and
Secretary of the Company and has been a Director of the Company since May 1997.
He served as President and Chief Executive Officer of the Company from
inception to April 1997. He has also served as Chief Executive Officer,
President and a Director of Maxxis 2000 since its inception. From 1995 to 1997,
Mr. Brown has served as a manager of NetWorld Communications, L.L.C. Since
1979, Mr. Brown has also served as President and Chief Executive Officer of
Marketing Ideas, Ltd. Mr. Brown has a bachelors degree from the University of
Georgia. He also attended the John Marshall School of Law and the American
Mutual Institute of Management.

         LARRY W. GATES, II has served as Vice President of Human Resources
since the Company's inception and as a Director of the Company since May 1997.
Mr. Gates became a part-time independent insurance agent for A.L. Williams in
1989 while serving in the U.S. Army. In 1993, he left the financial services
industry and became a full-time independent marketer of telecommunications
services through his own independent marketing firm, Classic Enterprises. Mr.
Gates built a downline of over 10,000 distributors between 1993 and 1996. Mr.
Gates has an associates degree from Pierre College.

         CHARLES P. BERNSTEIN has served as a Director of the Company since May
1997. Since 1992, Mr. Bernstein has also served as President of Harvest
Mortgage Co. From 1989 to 1992, Mr. Bernstein was the Vice President of
Nationwide Mortgage Resources, an underwriter and servicer of loans on
residential and commercial real estate. Mr. Bernstein holds an associates
degree from the University of South Carolina.

         ALVIN CURRY has served as a Director of the Company since its
inception. He also serves as Executive Vice President and Chief Operating
Officer of Maxxis 2000. Mr. Curry started his marketing career in 1986 with
A.L. Williams, where he attained the position of Senior Vice President in less
than three years. In March 1991, Mr. Curry left the financial services industry
to join Mr. Stokes in Global Alliance. Mr. Curry attended Northwest Mississippi
Junior College and Tacoma Community College, and he received a degree from the
Knapp College of Business.



                                      19
<PAGE>   22

         ROBERT JAMES GLOVER, JR. has served as a Director of the Company since
its inception. Mr. Glover started his marketing career as an independent
insurance agent with A.L. Williams in 1985, where he attained the sales
position of Senior Vice President. In December 1993, Mr. Glover left the
financial services industry and became an independent marketer of
telecommunications services through his own independent marketing firm, Glover
Enterprises. Mr. Glover's network marketing firm has sponsored and trained over
10,000 distributors. Mr. Glover attended Maryland University.

         TERRY HARRIS has served as a Director of the Company since May 1997.
Since 1982, Mr. Harris has served as Pastor and President of Tacoma Christian
Center Inc. Mr. Harris has a bachelors degree from the University of Puget
Sound and attended Rhema Bible School.

         PHILIP E. LUNDQUIST has served as a Director of the Company since May
1997. He also serves as Chairman of Christopher Partners Inc. Since 1988, Mr.
Lundquist has owned and operated an investment banking consulting company as a
sole proprietorship. From 1985 to 1988, Mr. Lundquist was the Director of
Corporate Finance for Deloitte Haskins & Sells in Atlanta, Georgia. Mr.
Lundquist has a bachelors degree from Williams College and attended the
Institute of Investment Banking at the Wharton School, University of
Pennsylvania.

COMMITTEES OF THE BOARD

         The Executive Committee of the Board of Directors exercises, during
the interval between Board meetings, all of the powers of the Company's Board
of Directors within certain limitations. During the year ended June 30, 1998,
the Executive Committee was composed of Thomas O. Cordy, Alvin Curry and Ivey
J. Stokes and held two meetings.

         The Audit Committee of the Board of Directors reviews, with the
Company's independent public accountants, the annual financial statements of
the Company, reviews the work of such independent public accountants and makes
annual recommendations to the Board of Directors for the appointment of
independent public accountants for the ensuing year. The Audit Committee also
reviews the effectiveness of the financial and accounting functions,
organization, operations and management of the Company. During the year ended
June 30, 1998, the Audit Committee was composed of Charles P. Bernstein, Terry
Harris and Philip E. Lundquist and did not hold any meetings.

         The Compensation Committee reviews and recommends to the Board of
Directors the compensation and benefits of all officers of the Company and
administers the issuance of stock options to the Company's officers, employees,
consultants and advisors. The Compensation Committee also reviews general
policy matters relating toe compensation and benefits of employees of the
Company. During the year ended June 30, 1998, the Compensation Committee was
composed of Charles P. Bernstein, Terry Harris and Philip E. Lundquist and did
not hold any meetings.

         The Company does not have a standing nominating committee. The Board
of Directors or the Executive Committee nominates candidates to stand for
election as directors. The Amended and Restated Bylaws of the Company permit
shareholders to make nominations for directors but only if such nominations are
made pursuant to timely notice in writing to the Secretary of the Company. To
be timely, notice of shareholder nominations for directors must be delivered in
writing to the Secretary of the Company no later than 90 days prior to the
anniversary of the previous year's annual meeting, together with the identity
of the nominator and the number of shares of Common Stock owned, directly or
indirectly, by the nominator.

         During the year ended June 30, 1998, the Board of Directors of the
Company held four meetings. All of the directors of the Company attended 75% or
more of the aggregate of all Board meetings and all meetings of committees of
which they were members.



                                      20
<PAGE>   23

ITEM 11.      EXECUTIVE COMPENSATION

DIRECTOR COMPENSATION

         Members of the Board of Directors are reimbursed for their
out-of-pocket expenses for each meeting attended, but otherwise serve without
compensation.

EXECUTIVE COMPENSATION

         The following Summary Compensation Table sets forth the compensation
earned by the Company's Chief Executive Officer during the year ended June 30,
1998 and the Inception Period. No other executive officers of the Company
received a combined salary and bonus in excess of $100,000 during the year
ended June 30, 1998.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                          ANNUAL COMPENSATION
                                                                                      --------------------------
NAME AND PRINCIPAL POSITION                              PERIOD                          SALARY        BONUS(1)
---------------------------                         -----------------                 -----------    -----------
<S>                                                 <C>                               <C>            <C>
Thomas O. Cordy............................         Fiscal 1998                       $    41,600    $    83,400
Chief Executive Officer and President               Inception Period                        5,250             --
</TABLE>


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

(1)      Represents amounts accrued as bonus compensation for the periods 
         presented.

OPTION GRANTS DURING 1998

         As of June 30, 1998, no options had been granted to the Chief
Executive Officer of the Company, and no executive officer of the Company
received a combined salary and bonus in excess of $100,000 during the year
ended June 30, 1998.

EMPLOYMENT AGREEMENTS

         The Company has entered into employment agreements (collectively, the
"Employment Agreements") with Messrs. Cordy and Brown. The Company intends to
enter into an employment agreement with Mr. McDonough. Generally, the
Employment Agreements provide for a minimum weekly salary. In addition, the
employee may participate in a bonus program and shall be eligible to receive
quarterly or annual payments of a performance bonus based upon the achievement
of targeted levels of performance and such other criteria as the Board of
Directors shall establish from time to time. Each employee may participate in
insurance and other benefit plans of similarly situated employees, including
any stock option plans of the Company.

         Each of the Employment Agreements has a term of one year, and the term
renews daily for an additional year until either party fixes the remaining term
at one year by giving written notice. The Company can terminate each employee
upon death or disability (as defined in the Employment Agreements) or with or
without cause upon delivery to the employee of a notice of termination. If the
employee is terminated because of death, disability or cause, the employee will
receive any accrued compensation through the termination date and any accrued
performance bonus, unless the employee is terminated for cause. If the employee
is terminated without cause, the Company shall pay the employee severance
payments equal to his minimum base salary for each week during the six-month
period following the termination date. If the employee is a director or officer
of the Company or any of its affiliates, the employee shall tender his
resignation to such positions effective as of the termination date.

         Under the Employment Agreements, each employee agrees to maintain the
confidentiality of the Company's trade secrets and confidential business
information. The employee also agrees for a period of one year following the
termination date, if he is terminated or resigns for any reason, not to compete
with or solicit employees or customers



                                      21
<PAGE>   24

of the Company or any of its affiliates within a 30-mile radius of the
Company's corporate offices; provided, that if the employee is terminated
without cause, the non-compete period shall be six months.

SALES REPRESENTATIVE AGREEMENTS

         The Company entered into independent sales representative agreements
(collectively, the "Sales Representative Agreements") with ten independent
sales representatives, including Messrs. Stokes, Gates and Glover. The Sales
Representative Agreements provide for a minimum fee of $800.00 per week. Each
sales representative is also be eligible to receive quarterly payments of a
performance bonus which is a percentage of total revenue from Maxxis 2000. To
be paid a bonus, a sales representative must have 180 new activations in a
quarter. The bonus amount is then determined by the number of open centers in
that quarter. The bonus ranges from 1% of total revenue from Maxxis 2000 if
four centers are opened to 5% of the revenue if 20 centers are opened. Each
sales representative is an independent contractor, and the Company does not
exercise control over the activities of the sales representatives other than as
set forth in the Sales Representative Agreements.

         Each of the Sales Representative Agreements has a term of one year,
and the term renews daily for an additional year until either party fixes the
remaining term at one year by giving written notice. The Company can terminate
each sales representative upon death or disability (as defined in the Sales
Representative Agreements) or with or without cause upon delivery to the sales
representative of a notice of termination. If a sales representative is
terminated, the sales representative will receive any accrued fees through the
termination date and any accrued performance bonus, unless the sales
representative is terminated for cause. If the sales representative is a
director or officer of the Company or any of its affiliates, the sales
representative shall tender his resignation to such positions effective as of
the termination date. Under the Sales Representative Agreements, each sales
representative agrees to maintain the confidentiality of the Company's trade
secrets and confidential business information.

CONSULTING AGREEMENT

         In September 1997, the Company entered into a consulting agreement
with Mr. Robert P. Kelly. The consulting agreement provides for a minimum
weekly salary, and the consultant may participate in a bonus program and is
eligible to receive quarterly or annual payments of a performance bonus based
upon the achievement of targeted levels of performance and such other criteria
as the Board of Directors shall establish from time to time. The consultant is
an independent contractor, and the Company does not exercise control over the
activities of the consultant other than as set forth in the consulting
agreement.

         The consulting agreement has a term of one year, and the term renews
daily for an additional year until either party fixes the remaining term at one
year by giving written notice. The Company can terminate the consultant upon
death or disability (as defined in the consulting agreement) or with or without
cause upon delivery to the consultant of a notice of termination. If the
consultant is terminated because of death, disability or cause, the consultant
will receive any accrued fees through the termination date and any accrued
performance bonus, unless the consultant is terminated for cause. If the
consultant is terminated without cause, the Company shall pay the consultant
severance payments equal to his minimum base salary for each week during the
six-month period following the termination date.

         Under the consulting agreement, the consultant agrees to maintain the
confidentiality of the Company's trade secrets and confidential business
information. The consultant also agrees for a period of one year following the
termination date, if he is terminated or resigns for any reason, not to compete
with or solicit employees or customers of the Company or any of its affiliates
within a 30-mile radius of the Company's corporate offices; provided, that if
the consultant is terminated without cause, the non-compete period shall be six
months.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

         Pursuant to its Amended and Restated Articles of Incorporation, the
Company is obligated to indemnify each of its directors and officers to the
fullest extent permitted by the Georgia Business Corporation Code with



                                      22
<PAGE>   25

respect to all liability and loss suffered and reasonable expenses
incurred by such person in any action, suit or proceeding in which such person
was or is made or threatened to be made a party or is otherwise involved by
reason of the fact that such person is or was a director or officer of the
Company. The Company is obligated to pay the reasonable expenses of the
directors or officers incurred in defending such proceedings if the indemnified
party agrees to repay all amounts advanced by the Company if it is ultimately
determined that such indemnified party is not entitled to indemnification.

STOCK OPTION PLAN

         On September 16, 1998, the Board of Directors adopted (subject to
shareholder approval or ratification) the Maxxis Group, Inc. 1998 Stock Option
Plan (the "Option Plan"), which permits the Company to grant options to
purchase shares of Common Stock to officers, directors, key employees, advisors
and consultants of the Company. The purpose of the Option Plan is to advance
the interests of the Company, its subsidiaries and its shareholders by
affording certain employees and Directors of the Company and its subsidiaries,
as well as key consultants and advisors to the Company or any subsidiary, an
opportunity to acquire or increase their proprietary interests in the Company.
Options granted under the Option Plan are intended to promote the growth and
profitability of the Company and its subsidiaries by providing the optionees
with an additional incentive to achieve the Company's objectives through
participation in its success and growth and by encouraging optionees to
continue their association with or service to the Company.

         Generally, options granted under the Option Plan may be Incentive
Stock Options ("ISOs"), which are intended to meet the requirements of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-qualified options, which are not intended to meet such requirements
("Non-Qualified Options"). ISOs must have terms of ten years or less from the
date of grant and the fair market value of grants of ISOs during any year on
the date of grant may not exceed $100,000. The Option Plan will be administered
by a committee (the "Committee"), having the duties and authorities set forth
in such Option Plan in addition to any other authority granted by the Board.
The Committee will have the full power and authority, in its discretion,
subject to the provisions of the Option Plan, to interpret the Option Plan, to
prescribe, amend, and rescind rules and regulations relating to them, to
determine the details and provisions of each stock option agreement and
restriction agreement, and to make all other determinations necessary or
advisable for the administration of the Option Plan, including, without
limitation, the amending or altering of such Plan and any options or restricted
stock awards granted thereunder, as may be required to comply with or to
conform to any federal, state, or local laws or regulations. The Committee, in
its discretion, will select the recipients of awards and the number of options
granted thereunder and determine other matters such as (i) vesting schedules,
(ii) the exercise price of options (which cannot be less than 100% of the fair
market value of the Common Stock on the date of grant for ISOs) and (iii) the
duration of awards (which cannot exceed ten years from the date of grant or
modification of the option).

         Subject to shareholder approval, the aggregate number of shares of
Common Stock reserved for the issuance of options under the Option Plan will be
300,000 shares, subject to adjustment in accordance with the Option Plan. Any
or all shares of Common Stock subject to the Option Plan may be issued in any
combination of ISOs or Non-Qualified Options, and the amount of Common Stock
subject to the Option Plan may be increased from time to time, subject to
shareholder approval. Shares subject to an option may be either authorized and
unissued shares or shares issued and later reacquired by the Company. The
shares covered by any unexercised portion of an option that has terminated for
any reason may again be optioned or awarded under the Option Plan, and such
shares shall not be considered as having been optioned in computing the number
of shares of Common Stock remaining available for options under the Option
Plan.

         The class of persons eligible to participate in the Option Plan shall
consist of all persons whose participation in the Option Plan the Committee
determines to be in the best interests of the Company which shall include, but
not be limited to, all employees and directors of the Company or any
subsidiary, as well as key consultants and advisors to the Company or any
subsidiary. The Committee will have the power to specify, with respect to the
Options granted to a particular Optionee, the effect of the termination of such
Optionee's employment or service under various circumstances on such Optionee's
right to exercise an Option, which effect



                                      23
<PAGE>   26

may include immediate or deferred termination of such Optionee's rights under
an Option, or acceleration of the date at which an Option may be exercised in
full. As of September 25, 1998, no options to purchase shares of Common Stock
were outstanding.


ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of September 25, 1998 by: (i) each
person known by the Company beneficially to own more than 5% of the outstanding
shares of the Common Stock; (ii) each director of the Company; and (iii) all
directors and executive officers of the Company as a group. Except as otherwise
indicated, all persons listed have sole voting and investment power with
respect to their shares.

<TABLE>
<CAPTION>
                                                                             AMOUNT OF          PERCENTAGE OF
                                                                             BENEFICIAL          COMMON STOCK
NAME AND ADDRESS(A) OF BENEFICIAL OWNER                                     OWNERSHIP(B)         OUTSTANDING
---------------------------------------                                    ----------------    --------------

<S>                                                                        <C>                 <C>               
Alvin Curry(c)...........................................................        636,363             40.5%
King David Trust(d)......................................................        454,545             28.9
Cynthia Glover, trustee(e)...............................................        181,818             11.6
The Anchora Company(f)...................................................         72,727              4.6
Charles P. Bernstein.....................................................             --               --
James W. Brown...........................................................         47,272              3.0
Thomas O. Cordy(g).......................................................             --               --
Larry W. Gates, II.......................................................         45,454              2.9
Robert J. Glover(h)......................................................             --               --
Terry Harris.............................................................          3,636               *
Philip E. Lundquist......................................................             --               --
Ivey J. Stokes(i)........................................................             --               --
All directors and executive officers as a group                                  987,270             62.8
   (10 persons) (c) - (i)................................................
</TABLE>

---------------------
*        Less than one percent
(a)       The address of the King David Trust and Alvin Curry is c/o Maxxis 
Group, Inc., 1901 Montreal Drive, Suite 108, Tucker, Georgia 30084. The address
of Cynthia Glover, trustee, U/A Louise Glover dated January 10, 1997 is 7839
Taylor Circle, Riverdale, Georgia 30274. The address of The Anchora Company is
c/o Salem Management Company, Ltd., Design House, Leeward Highway, P.O. Box
150, Providenciales Turks & Caicos Island, B.W.I.
(b)       In accordance with Rule 13d-3 under the Securities Exchange Act of 
1934, as amended, a person is deemed to be the beneficial owner, for purposes
of this table, of any shares of Common Stock if such person has or shares
voting power or investment power with respect to such security, or has the
right to acquire beneficial ownership at any time within 60 days from September
25, 1998. As used herein, "voting power" is the power to vote or direct the
voting of shares and "investment power" is the power to dispose or direct the
disposition of shares.
(c)       Includes 454,545 shares owned by the King David Trust of which Mr. 
Curry, a director of the Company, is the trustee. Mr. Curry disclaims
beneficial ownership of such shares.
(d)       All such shares are owned by the King David Trust of which Mr.
Curry is the trustee and Mr. Stokes' minor children are the beneficiaries. Mr.
Stokes, the Chairman of the Board, disclaims beneficial ownership of such
shares. 
(e)       All such shares are owned by Cynthia Glover, trustee, U/A Louise
Glover dated January 10, 1997. Ms. Glover is the wife of Robert J. Glover, a
director of the Company. Mr. Glover is the sole beneficiary and disclaims
beneficial ownership of such shares. In addition, Ms. Glover disclaims
beneficial ownership of such shares. 
(f)       All such shares are owned by The Anchora Company of which Mr. Cordy, 
Chief Executive Officer and President of the Company, is the protector. Mr.
Cordy disclaims beneficial ownership of such shares.
(g)       Excludes 72,727 shares owned by The Anchora Company, of which Mr.
Cordy is the protector. Mr. Cordy disclaims beneficial ownership of such
shares. 
(h)       Excludes 181,818 shares owned by Cynthia Glover, trustee, U/A Louise 
Glover dated January 10, 1997 of which Mr. Glover is the sole beneficiary. Mr.
Glover disclaims beneficial ownership of such shares.
(i)       Excludes 454,545 shares owned by the King David Trust of which Mr. 
Stokes' minor children are the beneficiaries. Mr. Stokes disclaims beneficial
ownership of such shares.



                                      24
<PAGE>   27


ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         On February 16, 1997, Glover Enterprises, Inc., an affiliate of Robert
J. Glover, a director of the Company, loaned the Company $50,000 to fund
initial start-up costs of the Company. The Company has repaid this loan.

         During the Inception Period, the Company paid a fee of $184,000 to IS
14, Inc. ("IS 14"), a former Delaware corporation which was controlled by
certain of the directors and officers of the Company. The IS 14 fee was
comprised of compensation for managerial, marketing and administrative services
performed by certain of the Company's officers and sales representatives prior
to the establishment of the Company's payroll. IS 14 has been dissolved, and
the Company will not make any additional payments to IS 14.

         Pursuant to Mr. Cordy's employment agreement, The Anchora Company, an
affiliate of Mr. Cordy, purchased 800,000 shares of Common Stock, at a price of
$0.15 per share. In exchange, The Anchora Company gave the Company a $120,000
full recourse promissory note which bears interest at an annual rate of 8.75%.
Mr. Cordy guaranteed the promissory note. The principal and interest on the
promissory note are due and payable on the earlier of May 1, 2002 or the
closing of an underwritten public offering where the Company receives aggregate
net proceeds of at least $5,000,000.

         In December 1997, the Company borrowed approximately $53,000 from Mr.
Cordy to fund certain operating expenses. In February 1998, the Company entered
into the Cordy Note to memorialize such borrowing. As of June 30, 1998, the
Cordy Note was repaid in full.

         Certain of the transactions described above may be on terms more
favorable to officers, directors and principal shareholders than they could
obtain in a transaction with an unaffiliated third party. The Company has
adopted a policy requiring that all material transactions between the Company
and its officers, directors or other affiliates must: (i) be approved by a
majority of the disinterested members of the Board of Directors of the Company;
and (ii) be on terms no less favorable to the Company than could be obtained
from unaffiliated third parties.


                                    PART IV

ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A)(1)        FINANCIAL STATEMENTS

              The following Consolidated Financial Statements of the Company
              are filed as a part of this Report and are attached hereto as
              pages F-1 through F-15:

                  Consolidated Balance Sheets as of June 30, 1998 and 1997
                  Consolidated Statements of Operations for the Year Ended June
                      30, 1998 and for the Period from Inception (January 24,
                      1997) to June 30, 1997
                  Consolidated Statements of Changes in Shareholders' Equity
                      for the Year Ended June 30, 1998 and for the Period from
                      Inception (January 24, 1997) to June 30, 1997
                  Consolidated Statements of Cash Flows for the Year Ended June
                      30, 1998 and for the Period from Inception (January 24,
                      1997) to June 30, 1997
                  Notes to Consolidated Financial Statements



                                      25
<PAGE>   28


(A)(2)        FINANCIAL STATEMENT SCHEDULES

              Reference is made to Note 2 of the Notes to the Consolidated   
              Financial Statements on page F-9. All schedules have been 
              omitted as they were not required or not applicable or because
              the information required to be presented is included in the 
              Consolidated Financial Statements and the related Notes thereto.

(A)(3)        EXHIBITS

<TABLE>
<CAPTION>
Exhibit     
Number      Exhibit Description
------      -------------------
<S>         <C>
2.1*        Plan of Reorganization of the Company effective as of February 17, 1998.
3.1*        Amended and Restated Articles of Incorporation of the Company, as amended to date.
3.2*        Amended and Restated Bylaws of the Company, as amended to date.
4.1*        See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Articles of Incorporation  
            and Amended and Restated Bylaws defining the rights of holders of Common Stock of the Company.
4.2*        Specimen Common Stock certificate.
4.3*        Shareholders Agreement, dated as of September 1, 1997 among the Company and the holders of 
            Class A Common Stock.
4.4*        Amended and Restated Shareholders Agreement, dated as of February 18, 1998 among the 
            Company and certain holders of its Common Stock.
10.1*       Form of Employment Agreement by and between the Company and certain of its officers.
10.2*       Employment Agreement by and between the Company and Thomas O. Cordy dated May 1, 1997.
10.3*       Promissory Note by The Anchora Company in favor of the Company dated as of May 1, 1997 in 
            the original principal amount of $120,000.
10.4*       Guarantee by Thomas O. Cordy in favor of the Company dated May 1, 1997.
10.5*       Form of Independent Sales Representative Agreement by and between the Company and certain of 
            its sales representatives.
10.6*       Consulting Agreement by and between the Company and Robert P. Kelly dated as of September 
            1, 1997.
10.7*       Software License Agreement between Summit V. Inc., a subsidiary of Jenkon International, Inc. 
            and the Company dated February 2, 1997.
10.8*       Software Service Agreement between Summit V. Inc., a subsidiary of Jenkon International, Inc. 
            and the Company dated February 2, 1997.
10.9R*      Equipment Purchase Agreement between Summit V. Inc., a subsidiary of Jenkon International, Inc.
            and the Company dated February 2, 1997.
10.10*      Agreement for 1-Plus Services between Colorado River Communications Corporation and the 
            Company dated February 20, 1997.+
10.11R*     Sublease Agreement between DowElanco and the Company dated February 14, 1997. 
10.12*      Warehouse lease between Malon D. Mimms and the Company dated March 17, 1997. 
10.13*      Warehouse lease between Malon D. Mimms and the Company dated June 23, 1997. 
10.14*      Demand Secured Promissory Note dated November 26, 1997 by the Company in favor of the 
            lenders named on Schedule I thereto.
10.15R*     Sub-Sublease Agreement between the Company and Simons Engineering, Inc. dated September 1, 
            1997.
10.16*      Demand Promissory Note dated February 28, 1998 by the Company in favor of Thomas O. 
            Cordy.
10.17*      Form of Stock Purchase Warrant.
10.18       Maxxis Group, Inc. 1998 Stock Option Plan.
10.19       Lease Amendment Agreement dated June 5, 1998 among Malon D. Mimms, the Company and 
            Richard Bowers & Co.
10.20       Lease Amendment Agreement dated August 14, 1998 among Malon D. Mimms, the Company and 
</TABLE>



                                      26
<PAGE>   29

<TABLE>
<S>              <C>
                 Richard Bowers & Co.
21.1*            Subsidiaries of the Company.
23.1             Consent of Arthur Andersen LLP.
24.1             Power of Attorney (included on signature pages hereof).
27.1             Financial Data Schedule.
</TABLE>

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

*             Incorporated by reference to the Company's Registration 
              Statement on Form S-1 (Registration No. 333-38623).
+             Confidential treatment has been granted for certain confidential
              portions of this Exhibit pursuant to Rule 406 under the
              Securities Act of 1933. In accordance with Rule 406, these
              confidential portions have been omitted from this Exhibit and
              filed separately with the Commission.

(B)           REPORTS ON FORM 8-K

              None.



                                      27
<PAGE>   30


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized.

                                     MAXXIS GROUP, INC.



September 28, 1998                  By: /s/ THOMAS O. CORDY
                                        --------------------------------------
                                        Thomas O. Cordy
                                        Chief Executive Officer


                               POWER OF ATTORNEY

         KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints jointly and severally, IVEY J.
STOKES and THOMAS O. CORDY, and each one of them, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign any
and all amendments to this Annual Report (Form 10-K) and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorney-in-fact, or his substitute or substitutes, may do or cause
to be done by virtue hereof.

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report on Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.

<TABLE>
<S>                                <C>
September 28, 1998                 /s/ IVEY J. STOKES
                                   --------------------------------------------------------
                                   Ivey J. Stokes
                                   Chairman of the Board


September 28, 1998                 /s/ THOMAS O. CORDY
                                   --------------------------------------------------------
                                   Thomas O. Cordy
                                   Chief Executive Officer, President and Director
                                   (Principal executive officer)


September 28, 1998                 /s/ DANIEL McDONOUGH
                                   --------------------------------------------------------
                                   Daniel McDonough
                                   Chief Financial Officer
                                   (Principal financial and accounting officer)


September 28, 1998                 /s/ JAMES W. BROWN
                                   --------------------------------------------------------
                                   James W. Brown
                                   Executive Vice President, Secretary and Director
</TABLE>



                                      28
<PAGE>   31

<TABLE>
<S>                                <C>
September 28, 1998                 /s/ LARRY W. GATES, II
                                   ---------------------------------------------------------
                                   Larry W. Gates, II
                                   Vice President, Human Resources and Director


September 28, 1998                 /s/ CHARLES P. BERNSTEIN
                                   ---------------------------------------------------------
                                   Charles P. Bernstein
                                   Director


September 28, 1998                 /s/ ALVIN CURRY
                                   ---------------------------------------------------------
                                   Alvin Curry
                                   Director


September 28, 1998                 /s/ ROBERT J. GLOVER, JR.
                                   ---------------------------------------------------------
                                   Robert J. Glover, Jr.
                                   Director


September 28, 1998                 /s/ TERRY HARRIS
                                   ---------------------------------------------------------
                                   Terry Harris
                                   Director


September 28, 1998                 /s/ PHILIP E. LUNDQUIST
                                   ---------------------------------------------------------
                                   Philip E. Lundquist
                                   Director
</TABLE>



                                      29
<PAGE>   32


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                                                                              Page
                                                                                                              ----

<S>                                                                                                           <C>
Report of Independent Public Accountants................................................................       F-2

Consolidated Balance Sheets as of June 30, 1998 and 1997................................................       F-3

Consolidated Statements of Operations for the Year Ended June 30, 1998 and                                     F-4
     for the Period from Inception (January 24, 1997) to June 30, 1997..................................

Consolidated Statements of Changes in Shareholders' Equity for the Year Ended                                  F-5
     June 30, 1998 and for the Period from Inception (January 24, 1997) to June 30, 1997................

Consolidated Statements of Cash Flows for the Year Ended June 30, 1998 and                                     F-6
     for the Period from Inception (January 24, 1997) to June 30, 1997..................................

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



                                      F-1
<PAGE>   33

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS







To Maxxis Group, Inc. and Subsidiaries:


We have audited the accompanying consolidated balance sheets of MAXXIS GROUP,
INC. (a Georgia corporation) AND SUBSIDIARIES as of June 30, 1998 and 1997 and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the year ended June 30, 1998 and for the period from inception
(January 24, 1997) to June 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Maxxis Group, Inc. and
subsidiaries as of June 30, 1998 and 1997 and the results of their operations
and their cash flows for the year ended June 30, 1998 and for the period from
inception (January 24, 1997) to June 30, 1997 in conformity with generally
accepted accounting principles.




/S/ ARTHUR ANDERSEN LLP


Atlanta, Georgia
September 4, 1998

                                      F-2
<PAGE>   34


                       MAXXIS GROUP, INC. AND SUBSIDIARIES


                           CONSOLIDATED BALANCE SHEETS

                             JUNE 30, 1998 AND 1997



<TABLE>
<CAPTION>

                                     ASSETS

                                                                                           1998           1997
                                                                                       -----------    -----------
<S>                                                                                    <C>            <C>        
CURRENT ASSETS:
   Cash                                                                                $   372,000    $    35,000
   Short-term investment                                                                    10,000         10,000
   Communications receivables, net of allowance for doubtful accounts of $40,000 and
      $0, respectively                                                                     316,000         25,000
   Inventories, net                                                                        218,000        185,000
   Prepaid expenses                                                                         43,000         12,000
   Other current assets                                                                          0         23,000
                                                                                       -----------    -----------
                                                                                           959,000        290,000

PROPERTY AND EQUIPMENT, NET                                                                169,000         92,000

ORGANIZATIONAL COSTS, NET                                                                        0         76,000

CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET                                                126,000        118,000

OTHER ASSETS                                                                                 9,000         20,000
                                                                                       -----------    -----------
                                                                                       $ 1,263,000    $   596,000
                                                                                       ===========    ===========

                                       LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                                                    $   211,000    $   158,000
   Commissions payable                                                                     101,000         42,000
   Accrued compensation                                                                    154,000              0
   Provision for sales returns                                                              45,000              0
   Sales taxes payable                                                                     130,000              0
   Accrued expenses                                                                         83,000        103,000
   Deferred revenue                                                                         55,000              0
                                                                                       -----------    -----------
                                                                                           779,000        303,000
                                                                                       -----------    -----------
COMMITMENTS AND CONTINGENCIES (NOTE 7)

SHAREHOLDERS' EQUITY:
   Stock subscription deposits                                                                   0        360,000
   Preferred stock, no par value; 10,000,000 shares authorized; 100,000 shares
      designated as Series A; 36,359 and 0 Series A shares issued and outstanding,
      respectively                                                                         200,000              0
   Common stock, no par value; 20,000,000 shares authorized, 1,571,187 and 1,299,992
      shares issued and outstanding, respectively                                          574,000        127,000
   Shareholder note receivable                                                            (120,000)      (120,000)
   Accumulated deficit                                                                    (170,000)       (74,000)
                                                                                       -----------    -----------
            Total shareholders' equity                                                     484,000        293,000
                                                                                       -----------    -----------
                                                                                       $ 1,263,000    $   596,000
                                                                                       ===========    ===========
</TABLE>

   The accompanying notes are an integral part of these consolidated balance
                                    sheets.

                                      F-3
<PAGE>   35



                       MAXXIS GROUP, INC. AND SUBSIDIARIES


                      CONSOLIDATED STATEMENTS OF OPERATIONS

                      FOR THE YEAR ENDED JUNE 30, 1998 AND

        FOR THE PERIOD FROM INCEPTION (JANUARY 24, 1997) TO JUNE 30, 1997



<TABLE>
<CAPTION>


                                             1998           1997
                                         -----------    ----------- 
<S>                                      <C>            <C>        
NET REVENUES:
    Communications services              $ 5,293,000    $ 2,322,000
    Nutritional products                     526,000              0
    Marketing services                     1,172,000        369,000
                                         -----------    ----------- 
              Total net revenues           6,991,000      2,691,000
                                         -----------    ----------- 
COST OF SERVICES:
    Communications services                1,351,000        761,000
    Nutritional products                     294,000              0
    Marketing services                       431,000        255,000
                                         -----------    ----------- 
              Total cost of services       2,076,000      1,016,000
                                         -----------    ----------- 
GROSS MARGIN                               4,915,000      1,675,000
                                         -----------    ----------- 
OPERATING EXPENSES:
    Selling and marketing                  2,665,000      1,089,000
    General and administrative             2,344,000        660,000
                                         -----------    ----------- 
              Total operating expenses     5,009,000      1,749,000
                                         -----------    ----------- 
INTEREST EXPENSE                               2,000              0
                                         -----------    ----------- 
LOSS BEFORE INCOME TAX BENEFIT               (96,000)       (74,000)

INCOME TAX BENEFIT                                 0              0
                                         -----------    ----------- 
NET LOSS                                 $   (96,000)   $   (74,000)
                                         ===========    =========== 
BASIC AND DILUTED LOSS PER SHARE         $     (0.06)   $     (0.05)
                                         ===========    =========== 

WEIGHTED AVERAGE NUMBER OF SHARES AND
 SHARE EQUIVALENTS OUTSTANDING             1,571,187      1,571,187
                                         ===========    =========== 
</TABLE>




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

                                      F-4
<PAGE>   36



                       MAXXIS GROUP, INC. AND SUBSIDIARIES


                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                    FOR THE YEAR ENDED JUNE 30, 1998 AND FOR

          THE PERIOD FROM INCEPTION (JANUARY 24, 1997) TO JUNE 30, 1997


<TABLE>
<CAPTION>

                                         PREFERRED STOCK       COMMON STOCK          STOCK    SHAREHOLDER
                                      ------------------   --------------------- SUBSCRIPTION     NOTE     ACCUMULATED
                                      SHARES      AMOUNT      SHARES      AMOUNT    DEPOSITS   RECEIVABLE     DEFICIT      TOTAL
                                      ------   ---------   ---------   ---------   ---------   ----------  -----------  ---------
<S>                                   <C>      <C>         <C>         <C>       <C>          <C>          <C>          <C>
BALANCE, JANUARY 24, 1997 (INCEPTION)      0   $       0   $       0   $       0    $      0     $      0   $        0  $       0

    Issuance of common stock               0           0   1,299,992     127,000           0     (120,000)           0      7,000
    Stock subscription deposits            0           0           0           0     360,000            0            0    360,000
    Net loss                               0           0           0           0           0            0      (74,000)   (74,000)
                                      ------   ---------   ---------   ---------   ---------    ---------    ---------  ---------
BALANCE, JUNE 30, 1997                     0           0   1,299,992     127,000     360,000     (120,000)     (74,000)   293,000

    Issuance of preferred stock       36,359     200,000           0           0           0            0            0    200,000
    Issuance of common stock               0           0     271,195     447,000           0            0            0    447,000
    Stock subscription deposits            0           0           0           0    (360,000)           0            0   (360,000)
    Net loss                               0           0           0           0           0            0      (96,000)   (96,000)
                                      ------   ---------   ---------   ---------   ---------    ---------    ---------  ---------
BALANCE, JUNE 30, 1998                36,359   $ 200,000   1,571,187   $ 574,000   $       0    $(120,000)   $(170,000) $ 484,000
                                      ======   =========   =========   =========   =========    =========    =========  =========
</TABLE>



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

                                      F-5

<PAGE>   37



                       MAXXIS GROUP, INC. AND SUBSIDIARIES


                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                    FOR THE YEAR ENDED JUNE 30, 1998 AND FOR

          THE PERIOD FROM INCEPTION (JANUARY 24, 1997) TO JUNE 30, 1997


<TABLE>
<CAPTION>

                                                                            1998         1997
                                                                         =========    =========
<S>                                                                      <C>          <C>       
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                              $ (96,000)   $ (74,000)
                                                                         ---------    ---------
   Adjustments to reconcile net loss to net cash provided by operating
      activities:
      Depreciation and amortization                                        176,000       54,000
      Changes in assets and liabilities:
      Communications receivables                                          (291,000)     (25,000)
      Inventories                                                          (33,000)    (185,000)
      Prepaid expenses                                                     (31,000)     (12,000)
      Other assets                                                          34,000      (43,000)
      Commissions payable                                                   59,000       42,000
      Accounts payable                                                      53,000      158,000
      Accrued compensation                                                 154,000            0
      Provision for sales returns                                           45,000            0
      Sales taxes payable                                                  130,000            0
      Accrued expenses                                                     (20,000)     103,000
      Deferred revenue                                                      55,000            0
                                                                         ---------    ---------
            Total adjustments                                              331,000       92,000
                                                                         ---------    ---------
            Net cash provided by operating activities                      235,000       18,000
                                                                         ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures                                                   (115,000)     (99,000)
   Purchase of short-term investment                                             0      (10,000)
   Software development and organizational costs                           (70,000)    (241,000)
                                                                         ---------    ---------
            Net cash used in investing activities                         (185,000)    (350,000)
                                                                         ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from stock subscriptions                                             0      360,000
   Proceeds from issuance of common stock                                   87,000        7,000
   Proceeds from issuance of preferred stock                               200,000            0
                                                                         ---------    ---------
            Net cash provided by financing activities                      287,000      367,000
                                                                         ---------    ---------
NET INCREASE IN CASH                                                       337,000       35,000

CASH, BEGINNING OF YEAR                                                     35,000            0
                                                                         ---------    ---------
CASH, END OF YEAR                                                        $ 372,000    $  35,000
                                                                         =========    =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:

   Cash paid for interest                                                $   2,000    $       0
                                                                         =========    =========
   Cash paid for income taxes                                            $       0    $       0
                                                                         =========    =========
   Stock issued for note receivable                                      $       0    $ 120,000
                                                                         =========    =========
</TABLE>



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

                                      F-6
<PAGE>   38



                       MAXXIS GROUP, INC. AND SUBSIDIARIES


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 1998 AND 1997



1.    ORGANIZATION AND PRESENTATION

      DESCRIPTION OF BUSINESS AND OPERATIONS

      Maxxis Group, Inc., a Georgia corporation, was incorporated on January 24,
      1997 ("Inception") and is headquartered in Tucker, Georgia. Maxxis Group,
      Inc.'s principal business operations are carried out through its wholly
      owned subsidiaries, Maxxis 2000, Inc. and Maxxis Telecom, Inc., which
      began operations in March 1997, and Maxxis Nutritional, Inc., which began
      operations in December 1997. Maxxis Group, Inc., together with its wholly
      owned subsidiaries (collectively referred to as the "Company"), was
      founded for the purpose of providing long-distance services, private label
      nutritional products, and other consumable products and services through a
      multilevel marketing system of independent associates ("IAs") to
      subscribers throughout the United States. The Company currently markets
      both long-distance services and value-added communications services, such
      as travel cards, prepaid phone cards, 800 service, and international
      telecommunications service, as well as private label nutritional products.

      The Company has a limited operating history, and its operations are
      subject to the risks inherent in the establishment of any new business.
      Since the Company has only recently made the transition to an operating
      company, the Company's ability to manage its growth and expansion will
      require it to implement and continually expand its operational and
      financial systems, recruit additional employees, and train and manage both
      current and new employees. Growth may place a significant strain on the
      Company's operational resources and systems, and failure to effectively
      manage this projected growth would have a material adverse effect on the
      Company's business.


2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      PRINCIPLES OF CONSOLIDATION

      All significant intercompany balances and transactions have been
      eliminated in consolidation.

      REVENUE RECOGNITION

      Communications services revenues consist of prepaid phone card sales to
      IAs. The Company purchases prepaid phone cards from an independent
      tariffed long-distance reseller (the "Reseller"). IAs purchase these
      prepaid phone cards from the Company. Revenues from the sale of these
      prepaid phone cards are recognized when the cards are sold to IAs, net of
      an estimate of sales returns for defective or unused cards. Active IAs
      have the right of return for defective or unused cards for up to 30 days
      after the date of purchase. IAs that terminate their relationship with the
      Company also have up to one year from the date of purchase to return cards
      that are unused and sealed in the original packaging, net of a restocking
      fee, for a refund.
   
                                   F-7
<PAGE>   39

      Communications services also consist of revenues generated from the
      Company's agreement with the Reseller that provides for the Company to
      receive a percentage of the gross long-distance revenues generated by the
      Company's customers, less billing adjustments. The Company recognizes
      long-distance revenues when services are provided by the Reseller, net of
      an estimate for billing adjustments. The Reseller assumes the risk of all
      bad debts. Amounts due to the Company related to this agreement are
      included in communications receivables in the accompanying consolidated
      balance sheets.

      Nutritional services revenues consist of sales of private label
      nutritional products manufactured by various suppliers and are recorded as
      products are shipped.

      Marketing services revenues primarily consist of receipts from IAs for
      application fees and purchases of distributor kits and sales aids, which
      include starter kits of forms, promotional brochures, marketing materials,
      and presentation materials.

      DEFERRED REVENUE

      Deferred revenue relates to an annual nonrefundable renewal fee assessed
      to IAs after their first year with the Company that provides IAs with the
      right to sell the Company's products and services. The Company recognizes
      this revenue on a straight-line basis over the IAs' renewal period.

      COST OF SERVICES

      Communications services costs primarily include the costs of purchasing
      prepaid phone cards from the Reseller.

      Nutritional services costs include the costs of purchasing nutritional
      products from third-party suppliers.

      Marketing services costs include the costs for printing and designing of
      associate applications, starter kits, and other sales aids.

      SELLING AND MARKETING EXPENSES

      Selling and marketing expenses primarily consist of commissions paid to
      IAs based on the sponsoring of new IAs and the sale of communication 
      services and nutritional products.

      GENERAL AND ADMINISTRATIVE EXPENSES

      General and administrative expenses primarily consist of salary expense
      for the Company's customer service personnel, office staff, and executive
      personnel in addition to the cost of IAs support services and information
      systems services.

      CONCENTRATIONS OF CREDIT RISK

      The Company's customers are primarily residential and are not concentrated
      in any specific geographic region of the United States. The Company 
      purchases its prepaid phone card services from the Reseller. Failure of 
      the Reseller to provide quality services and customer support could have a
      material adverse effect on the Company's results of operations. The 
      Company has an additional agreement with the Reseller to provide long-
      distance services, which if terminated or canceled may significantly 
      impact the results of operations of the Company. While the Company 

                                      F-8
<PAGE>   40

      believes it could contract with another long-distance reseller, the loss
      of revenues or potential disruption of services to customers may have a
      material effect on the Company's results of operations.

      The Company's success will depend heavily on its ability to attract,
      maintain, and motivate a large base of IAs who, in turn, sponsor customers
      and other IAs. The Company anticipates a significant turnover among IAs,
      which the Company believes is typical of direct selling. The Company has
      begun establishing its network of IAs; however, there can be no assurance
      that the Company will be successful in establishing a viable network of
      IAs.

      USE OF ESTIMATES

      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 and
      disclosure of contingent assets and liabilities in the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. Actual results could differ from those estimates.

      COMMUNICATIONS RECEIVABLES

      A summary of changes in the allowance for doubtful accounts for the year
      ended June 30, 1998 and the period from Inception to June 30, 1997 is as
      follows:

<TABLE>
<CAPTION>

                                                 1998      1997
                                               -------   -------

                <S>                            <C>       <C>    
                Balance, beginning of period   $     0   $     0
                    Provisions                  40,000         0
                    Recoveries                       0         0
                    Write-offs                       0         0
                                               -------   -------
                Balance, end of period         $40,000   $     0
                                               =======   =======
</TABLE>



      INVENTORIES

      Inventories consist of the following as of June 30, 1998 and 1997:
<TABLE>
<CAPTION>

                                          1998         1997
                                       ---------    ---------
                <S>                    <C>          <C>      
                Prepaid phone cards    $  10,000    $  25,000
                Sales aids               158,000      160,000
                Nutritional products      76,000            0
                                       ---------    ---------
                                         244,000      185,000
                Less reserve             (26,000)           0
                                       ---------    ---------
                Inventory, net         $ 218,000    $ 185,000
                                       =========    =========
</TABLE>


      Inventories are valued at the lower of purchased cost (determined on a
      first-in, first-out basis) or market.

                                      F-9
<PAGE>   41

      PROPERTY AND EQUIPMENT

      Property and equipment consist primarily of furniture and fixtures, office
      equipment, computer equipment, and leasehold improvements which are stated
      at cost and are depreciated using the straight-line method over the
      estimated useful lives of three to five years.

      INCOME TAXES

      The Company accounts for income taxes in accordance with Statement of
      Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
      Taxes," which requires that deferred income taxes be provided based on
      estimated future tax effects of differences between the carrying amounts
      of assets and liabilities for financial reporting purposes and the amounts
      used for income tax purposes calculated based on provisions of enacted tax
      laws (Note 4).

      ORGANIZATIONAL COSTS

      The Company capitalized certain organizational costs related to start-up
      activities and the legal formation of the Company. These costs were
      amortized over one year, and amortization expenses were $76,000 and
      $25,000 for the year ended June 30, 1998 and the period from Inception to
      June 30, 1997, respectively.

      CAPITALIZED SOFTWARE DEVELOPMENT COSTS

      Certain software development costs pertaining to a software application
      which is used internally for processing applications and customer service
      have been capitalized as incurred. Capitalization of software development
      costs begins upon the establishment of technological feasibility. The
      establishment of technological feasibility and the ongoing assessment of
      recoverability of capitalized software development costs require
      considerable judgement by management with respect to certain external
      factors, including but not limited to, anticipated future revenues,
      estimated economic life, and changes in software and hardware
      technologies. These software development costs are amortized over an
      estimated useful life of three years, and amortization expenses were
      $62,000 and $21,000 for the year ended June 30, 1998 and the period from
      Inception to June 30, 1997, respectively.

      OTHER ASSETS

      Other assets include security deposits for lease obligations.

      SHORT-TERM INVESTMENT

      The short-term investment is a certificate of deposit recorded at cost,
      which approximates the estimated fair value and matures in May 1999.

      LOSS PER SHARE

      In March 1997, the Financial Accounting Standards Board ("FASB") issued
      SFAS No. 128, "Earnings Per Share," which specifies the computation,
      presentation, and disclosure requirements for earnings per share ("EPS")
      which the Company adopted for the year ended June 30, 1998. Basic net EPS
      is computed by dividing reported earnings available to common shareholders
      by weighted average shares outstanding as computed under the requirements
      of Staff Accounting 


                                      F-10
<PAGE>   42


      Bulletin 83. As a result, all shares issued prior to the Company's
      completion of its registration statement have been included as outstanding
      since Inception (Note 6). No dilution for any potentially dilutive
      securities is included in basic EPS. Diluted EPS is computed by dividing
      reported earnings available to common shareholders by weighted average
      shares and common equivalent shares outstanding.

      All prior period EPS amounts have been restated to conform to the
      provisions of SFAS No. 128.

      FAIR VALUE OF FINANCIAL INSTRUMENTS

      The Company's financial instruments consist primarily of cash, accounts
      receivable, and accounts payable. The carrying amounts of cash, accounts
      receivable, and accounts payable approximate their fair values because of
      the short-term maturity of such instruments.


3.    PROPERTY AND EQUIPMENT

      Property and equipment consisted of the following at June 30, 1998 and
      1997:
<TABLE>
<CAPTION>

                                                   1998         1997
                                                ---------    ---------
                <S>                             <C>          <C>      
                Computer equipment              $ 154,000    $  67,000
                Furniture and fixtures             42,000       28,000
                Leasehold improvements             13,000            0
                Office equipment                    5,000        4,000
                                                ---------    ---------
                                                  214,000       99,000
                Less accumulated depreciation     (45,000)      (7,000)
                                                ---------    ---------
                Property and equipment, net     $ 169,000    $  92,000
                                                =========    =========
</TABLE>



4.    INCOME TAXES

      Significant components of the Company's deferred tax assets and
      liabilities are as follows at June 30, 1998 and 1997:

<TABLE>
<CAPTION>

                                            1998        1997
                                          --------    --------

                <S>                       <C>         <C>     
                Property and equipment    $  2,000    $      0
                Organizational costs        23,000           0
                Net operating losses        35,000      27,000
                Valuation allowance        (60,000)    (27,000)
                                          --------    --------
                Net deferred tax assets   $      0    $      0
                                          ========    ========
</TABLE>

      Based on uncertainties associated with the future realization of deferred
      tax assets, the Company established a valuation allowance of $60,000 and
      $27,000 at June 30, 1998 and 1997, respectively. At June 30, 1998 and
      1997, the Company had net operating loss carryforwards of approximately
      $90,000 and $70,000, respectively, which will begin expiring in the year
      2012 unless previously utilized.

                                      F-11
<PAGE>   43


      A reconciliation of the benefit for income taxes at the statutory federal
      income tax rate to the Company's tax benefit as reported in the
      accompanying statements of operations is stated below:

<TABLE>
<CAPTION>

                                                           1998        1997
                                                         --------    --------
                <S>                                      <C>         <C>      
                Tax benefit computed at statutory rate   $(33,000)   $(25,000)
                State income taxes                         (4,000)     (3,000)
                Nondeductible expenses                      4,000       1,000
                Change in valuation allowance              33,000      27,000
                                                         --------    --------
                Income tax benefit                       $      0    $      0
                                                         ========    ========
</TABLE>




5.    TRANSACTIONS WITH AFFILIATES

      The Company had significant transactions with IS 14, Inc. ("IS 14"), which
      was affiliated through common ownership during 1997. IS 14 provided
      funding for certain expenses incurred by the Company, and all amounts have
      been repaid as of June 30, 1997. In addition, the Company paid to IS 14,
      in consideration for marketing support, a fee equivalent to a percentage
      of revenues totaling $184,000 for the period from Inception to June 30,
      1997 which is included in selling and marketing expense in the
      accompanying consolidated statements of operations. Amounts due to IS 14
      related to this fee and included in commissions payable in the
      accompanying consolidated balance sheets totaled $9,000 at June 30, 1997.


6.    SHAREHOLDERS' EQUITY

      Effective February 17, 1998, the Company declared a 1 for 11 reverse stock
      split for all classes of common stock. The Company also effected a plan of
      reorganization pursuant to which each outstanding share of Class A common
      stock and Class B common stock was converted into one share of common
      stock ("Common Stock"). All share, per share, and weighted average share
      information in the financial statements has been restated for this stock
      split and reorganization.

      In February 1997, the Company sold 1,227,265 shares of Common Stock to the
      founders of the Company at $.006 per share. In May 1997, the Company sold
      72,727 shares of Common Stock to an executive officer for $1.65 per share
      and accepted as payment a $120,000 note receivable from an affiliate of
      that individual due on the earlier of (i) May 1, 2002 or (ii) the closing
      of an underwritten initial public offering with aggregate net proceeds of
      at least $5 million. The note is guaranteed by the executive officer,
      bears interest at 8.75% per year, compounded annually, and is classified
      as a shareholder note receivable in the shareholders' equity section of
      the consolidated balance sheets.

      The Company and certain of its shareholders have entered into a
      shareholders' agreement whereby the shareholders agreed to certain
      restrictions on the transfer or other disposition of the shares of Common
      Stock held by each holder. In the event a shareholder intends to transfer
      his or her Common Stock to a nonpermitted transferee, the Company and the
      remaining shareholders have a right of first refusal to purchase the
      transferring shareholder's Common Stock at fair market value. In addition,
      if the Company terminates a shareholder's employment or engagement as a
      sales representative or consultant for cause, the Company shall have the
      right to repurchase, at fair market value, an amount of the shareholder's
      Common Stock which starts at 100% and declines 20% per year for each
      completed year of service with the Company. If the right of first refusal
      or

                                      F-12
<PAGE>   44

      the Company's right to purchase is exercised, these provisions could have
      the effect of further concentrating the stock ownership and voting power
      of the Company.

      Additionally, in August 1997, the Company completed a private placement
      offering for shares of Common Stock at a price of $1.65 per share.
      Potential investors were required to complete subscription agreements for
      the Common Stock and submit cash at the date of subscription. The Company
      reserved the right to reject a subscription and refund amounts to a
      subscriber at any time prior to the acceptance of the subscription. At
      June 30, 1997, the Company had received paid subscriptions for 218,181
      shares of Common Stock. However, since these subscriptions had not yet
      been accepted by the Company and no shares had been issued as of June 30,
      1997, amounts received from subscribers are included in stock subscription
      deposits in the accompanying balance sheet at June 30, 1997. Subsequent to
      June 30, 1997, the Company accepted these subscriptions and additional
      subscriptions for 53,014 shares of the Common Stock.

      On November 26, 1997, the Company entered into a promissory note (the
      "Note") agreement with various lenders for an aggregate principal amount
      up to $200,000, which was secured primarily by the assets of the Company.
      The Note accrued interest at 10%, payable monthly beginning on January 1,
      1998, and the principal was due on demand. On March 23, 1998, the Note was
      exchanged for 36,359 shares of the Company's Series A nonvoting
      convertible preferred stock ("Series A Preferred Stock" or "Series A") and
      warrants (the "Warrants") to purchase 36,359 shares of the Company's
      Common Stock. The Warrants are exercisable 14 months after the issuance
      date and provide the right to purchase Common Stock at $5.50 per share.
      The Warrants expire seven years after the date of issuance.

      In February 1998, the Company amended and restated its articles of
      incorporation such that the Company is authorized to issue 20,000,000 and
      10,000,000 shares of no par value Common Stock and nonvoting preferred
      stock (the "Preferred Stock"), respectively. 100,000 shares of the
      Company's Preferred Stock have been designated as Series A. The Series A
      Preferred Stock has a liquidation preference of $5.50 per share (as
      adjusted for any combinations, consolidations, stock distributions, or
      stock dividends with respect to such shares) plus all declared or
      accumulated but unpaid dividends. The Series A shareholders have the right
      to convert each share into shares of Common Stock, pursuant to the
      articles of incorporation, at any time beginning 14 months after the date
      of issuance. As of June 30, 1998, all outstanding shares of the Preferred
      Stock were Series A.


7.    COMMITMENTS AND CONTINGENCIES

      OPERATING LEASES

      The Company leases certain office equipment and office space under
      operating leases. Total rental expenses for the year ended June 30, 1998
      and the period from Inception to June 30, 1997 were approximately $84,000
      and $45,000, respectively.

                                      F-13
<PAGE>   45

      Minimum lease payments under noncancelable leases for the years subsequent
      to June 30, 1998 are as follows:

<TABLE>
<CAPTION>

                         <S>                                                            <C>     
                         1999                                                           $123,000
                         2000                                                            101,000
                         2001                                                            111,000
                         2002                                                                  0
                         2003 and thereafter                                                   0
                                                                                        --------
                                                                                        $335,000
                                                                                        ========
</TABLE>


      LITIGATION

      The Company is subject to various claims and legal actions which arise in
      the ordinary course of business. In the opinion of management, the
      ultimate resolution of such matters will not have a material adverse
      effect on the Company's financial position, liquidity, or results of
      operations.

      EMPLOYMENT AGREEMENTS

      The Company has entered into employment agreements with certain executive
      officers (the "Employment Agreements"). Generally, the Employment
      Agreements provide for a minimum weekly salary. In addition, the employee
      may participate in a bonus program and shall be eligible to receive
      quarterly or annual payments of a performance bonus based on the
      achievement of targeted levels of performance and such other criteria as
      the board of directors shall establish from time to time. The chief
      executive officer's Employment Agreement provided for an additional bonus
      payment on July 1, 1998. All unpaid bonuses are included in accrued
      compensation in the accompanying consolidated balance sheets.

      Each of the Employment Agreements has a term of one year, and the term
      renews daily until either party fixes the remaining term at one year by
      giving written notice. The Company can terminate each employee upon death
      or disability (as defined in the Employee Agreements) or with or without
      cause upon delivery of a notice of termination. If the employee is
      terminated because of death, disability, or cause, the employee will
      receive any accrued compensation through the termination date and any
      accrued performance bonus, unless the employee is terminated for cause. If
      the employee is terminated without cause, the Company shall pay the
      employee severance payments equal to his/her minimum base salary for each
      week during the six-month period following the termination date. If the
      employee is a director or officer of the Company or any of its affiliates,
      the employee shall tender his/her resignation to such positions effective
      as of the termination date.

      Under the Employment Agreements, each employee agrees to maintain the
      confidentiality of the Company's trade secrets and confidential business
      information. The employee also agrees for a period of one year following
      the termination date if he/she is terminated or resigns for any reason not
      to compete with or solicit employees or customers of the Company or any of
      its affiliates within a 30-mile radius of the Company's corporate offices,
      provided that if the employee is terminated without cause, the noncompete
      period shall be six months.

      RELATIONSHIP WITH IAS

      Because IAs are classified as independent contractors and not as employees
      of the Company, the Company is unable to provide them with the same level
      of direction and oversight as company employees. While the Company has
      policies and rules in place governing the business conduct of


                                      F-14
<PAGE>   46


      IAs and intends to review periodically the sales tactics of the IAs, it
      may be difficult to enforce such policies and rules. Violation of these
      policies and rules might reflect negatively on the Company and may lead to
      complaints to or by various federal and state regulatory authorities.
      Violation of the Company's policies and rules could subject the Company
      and its long-distance provider to complaints regarding the unauthorized
      switching of subscribers' long-distance carriers (also known in the
      industry as "slamming"). Such complaints could have a material adverse
      effect on the Company's business, financial condition, and results of
      operations.

      REGULATION OF NETWORK MARKETING; EFFECT OF STATE LAWS

      The Company's network marketing system is subject to or affected by
      extensive government regulation, including, without limitation, federal
      and state regulations governing the offer and sale of business franchises,
      business opportunities, and securities. Various governmental agencies
      monitor direct selling activities, and the Company could be required to
      supply information regarding its marketing plan to such agencies. Although
      the Company believes that its network marketing system is in material
      compliance with the laws and regulations relating to direct selling
      activities, there can be no assurance that legislation and regulations
      adopted in particular jurisdictions in the future will not adversely
      affect the Company's business, financial condition, and results of
      operations. The Company could also be found to be in noncompliance with
      existing statutes or regulations as a result of, among other things,
      misconduct by IAs, who are considered independent contractors over whom
      the Company has limited control; the ambiguous nature of certain of the
      regulations; and the considerable interpretive and enforcement discretion
      given to regulators. Any assertion or determination that the Company or
      the IAs are not in compliance with existing statutes or regulations could
      have a material adverse effect on the Company's business, financial
      condition, and results of operations. An adverse determination by any one
      state on any regulatory matter could influence the decisions of regulatory
      authorities in other jurisdictions.


8.    SALES REPRESENTATIVE AGREEMENTS

      The Company has entered into sales representative agreements
      (collectively, the "Sales Representative Agreements") with ten independent
      sales representatives. The Sales Representative Agreements provide for a
      minimum weekly salary, and each sales representative shall be eligible to
      receive quarterly payments of a performance bonus based on the achievement
      of targeted levels of performance. Unpaid bonuses are included in accrued
      compensation in the accompanying consolidated balance sheets. Each sales
      representative is an independent contractor, and the Company does not
      exercise control over the activities of the sales representatives other
      than as set forth in the Sales Representative Agreements.

      Each of the Sales Representative Agreements has a term of one year, and
      the term renews daily until either party fixes the remaining term at one
      year by giving written notice. The Company can terminate each sales
      representative upon death or disability (as defined in the Sales
      Representative Agreements) or with or without cause upon delivery to the
      sales representative of a notice of termination. If a sales representative
      is terminated, the sales representative will receive any accrued fees
      through the termination date and any accrued performance bonus, unless the
      sales representative is terminated for cause. If the sales representative
      is a director or officer of the Company or any of its affiliates, the
      sales representative shall tender his resignation to such positions
      effective as of the termination date. Under the Sales Representative
      Agreements, each sales representative agrees to maintain the
      confidentiality of the Company's trade secrets and confidential business
      information.


                                      F-15