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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

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|[X] |  | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934

For the fiscal year ended March 31, 2001.

Commission file number: 33-89384-LA

PROLOGIC MANAGEMENT SYSTEMS, INC.
(Name of small business issuer in its charter)

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|Arizona
(State or other jurisdiction of incorporation or organization)                  |  | 86-0498857
(I.R.S. Employer Identification No.)
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|3708 E. Columbia Street, #110, Tucson, Arizona
(Address of principal executive offices) |  | 85714
(Zip Code)                               

Issuers telephone number (520) 747-4100.

Securities registered under Section 12(g) of the Exchange Act:

Common Stock and Warrants to Purchase Common Stock

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 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 [   ].

Check if disclosure of delinquent filers pursuant to Item 405 of Regulations
S-B is not contained in this form, and no disclosure will be contained, to the
best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [   ]

Issuers revenue for its most recent fiscal year: $37,756,351.

As of June 15, 2001, the aggregate market
value of 5,055,699 shares of voting stock held by
non-affiliates of the issuer (calculated using the reported closing sale price
of the common stock on the OTC Bulletin Board) was $1,769,495. This calculation does not reflect a
determination that certain persons are affiliates of the registrant for any
other purposes.

Number of shares of common stock outstanding on March 31, 2001 was 6,858,058.

Transitional Small Business Disclosure Format: Yes [   ]; No [X].

DOCUMENTS INCORPORATED BY REFERENCE:
None





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TABLE OF CONTENTS



|                                                   |                                                                                                                         |  |  |  |  |  |  | 
|-------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                            
|                                                   | ITEM 1. BUSINESS                                                                                                       
|                                                   | ITEM 2. PROPERTIES                                                                                                     
|                                                   | ITEM 3. LEGAL PROCEEDINGS                                                                                              
|                                                   | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SHAREHOLDERS                                                            
|PART II                                           
|                                                   | ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                                       
|PART III                                          
|                                                   | ITEM 6. MANAGEMENTS DISCUSSION & ANALYSIS                                                                             
|PART IV.                                          
|                                                   | ITEM 7. FINANCIAL STATEMENTS                                                                                           
|                                                   | ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES                          
|PART V.                                           
|                                                   | ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
|                                                   | ITEM 10. EXECUTIVE COMPENSATION                                                                                        
|                                                   | ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                                                
|                                                   | ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                
|                                                   | ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K                                                                              
|REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
|CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                   | CONSOLIDATED BALANCE SHEETS                                                                                            
|                                                   | CONSOLIDATED STATEMENTS OF OPERATIONS                                                                                  
|                                                   | CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)                                                   
|                                                   | CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                  
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|                                                   | NOTE 1THE COMPANY AND ITS OPERATIONS                                                                                  
|                                                   | NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                                                      
|                                                   | NOTE 3PROPERTY AND EQUIPMENT                                                                                          
|                                                   | NOTE 4LINE OF CREDIT                                                                                                  
|                                                   | NOTE 5CONVERTIBLE SUBORDINATED NOTES                                                                                  
|                                                   | NOTE 6LONG-TERM DEBT AND NOTES PAYABLE                                                                                
|                                                   | NOTE 7INCOME TAXES                                                                                                    
|                                                   | NOTE 8CAPITAL STOCK                                                                                                   
|                                                   | NOTE 9STOCK OPTION PLAN                                                                                               
|                                                   | NOTE 10SIGNIFICANT CUSTOMERS                                                                                          
|                                                   | NOTE 11401(k) PLAN                                                                                                    
|                                                   | NOTE 12RELATED PARTY TRANSACTIONS                                                                                     
|                                                   | NOTE 13COMMITMENTS AND CONTINGENCIES                                                                                  
|                                                   | NOTE 14SUBSEQUENT EVENTS                                                                                              
|EXHIBIT INDEX                                     
|EX-10.29                                          
|EX-10.29.1                                        
|EX-10.29.2                                        



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PART I

RECENT DEVELOPMENTS

Settlement Agreement with Sunburst Acquisitions IV, Inc.

On February 16, 2001, the Company signed a settlement agreement with
Sunburst Acquisitions IV, Inc., which resulted in 1,959,972 of our shares being
cancelled, and $100,000 in settlement expense cost reimbursement to Sunburst.
On July 8, 1999, the Company had entered into a Stock Purchase and Merger
Agreement (SPMA) with Sunburst Acquisitions IV, Inc., a Colorado corporation
(Sunburst). Under the terms of the SPMA, Sunburst was obligated to purchase
6,171,235 shares of common stock for $5,000,000. At December 31, 1999, Sunburst
had not performed any contractual obligation beyond the initial Tranche 1 stock
purchase payment of $1,000,000, and, as a result of Sunbursts defaults, the
SPMA was, thereafter, effectively abandoned.

Financing Agreement with KBK Financial, Inc.

Subsequent to March 31, 2001, the Company signed a $3,000,000 financing
agreement with KBK Financial, Inc. for a line of credit to finance its accounts
receivable. This credit facility replaced a $5,000,000 credit facility with
Coast Business Credit, which matured at March 31, 2001. This new facility is
designed to provide working capital to support the Companys systems
integration operations. Among other things, the financing agreement with KBK
Financial, Inc. requires that the Companys BASIS, Inc. subsidiary maintain a
net worth of at least $400,000. (See Part III, Item 6, Managements Discussion
& Analysis, Liquidity and Capital Resources.)

OTC Bulletin Board

Subsequent to March 31, 2001, the National Association of Securities
Dealers approved the application of GunnAllen Financial, Inc., a Tampa, FL
based full-service brokerage and investment firm, to make a market in the
Companys securities on the OTC Bulletin Board. The Companys common stock was
previously traded in the non-NASDAQ over-the-counter market, after it delisted
from the NASDAQ Small Cap Market in August 1998. (See Part III, Item 6,
Managements Discussion & Analysis, Introduction.)

Expansion

During Fiscal 2001 the Companys BASIS subsidiary achieved Sun
Microsystems, Inc. iForce (sm) National System Provider (NSP) status, which
made BASIS eligible to sell and service Sun products nationwide without being
constrained by the time and personnel restrictions that Sun Microsystems
otherwise requires of its channel partners to set up new offices. Subsequent to March 31,
2001, the Company expanded BASIS systems integration business into the Phoenix
and Tucson metro areas.

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ITEM 1. BUSINESS

GENERAL

Prologic Management Systems, Inc. is an Arizona corporation founded in
1984. The Company is a commercial systems integration, professional services
and software development firm, specializing in high-availability, fully
integrated systems. The Companys BASIS, Inc. subsidiary, headquartered in
Emeryville, California, provides systems integration services, networking
services, security and database software for the commercial market. The
Companys Tucson office, which also serves as its corporate headquarters,
provides professional services, including process improvement consulting
services, software development services, and support services for its clients
in the manufacturing industry.

The Company offers clients a wide range of professional services from
consulting to implementing custom business solutions, including the integration
of web storefronts with back-end e-commerce systems, developing complete
e-business strategies, web design and security. The Company specializes in open
systems integration and related services, primarily utilizing UNIX operating
systems to deploy powerful computing solutions. Professional services include
enterprise and workgroup client/server design and optimization, relational
database integration, LAN/WAN and workgroup solutions, and offers consulting
and software development expertise in manufacturing, distribution and resource
tracking for commercial clients.

The Companys principal executive offices are located at 3708 E. Columbia
Street, Suite 110, Tucson, Arizona 85714 and its telephone number is (520)
747-4100. The Companys World Wide Web Site can be accessed at
www.prologic.com.

SERVICES AND PRODUCTS

The Company provides systems integration services and other professional
services, including e-commerce, consulting, and software development, as well
as support services for its customers in the manufacturing sector that utilize
its proprietary software products. The Companys software development expertise
provides an internal resource for development needs in integration and custom
projects.

The Company provides national and regional product support, as well as
Internet and Intranet application and framework and design, security,
encryption and relational database deployment. The Company provides
full-service planning, design, management, custom programming, systems
integration, technical and consulting services. This includes design and
architecture, consulting, technical support, training and the installation and
sale of third-party computer hardware and software products.

The Company provides consulting services to its clients, particularly in
the areas of hardware and software selection, logical and physical system
design, programming implementation, process improvement, education and
training. As a systems integrator, the Company assumes overall project
management responsibility. The Company generally bills for project work on a
time and materials basis. The Companys ability to undertake and successfully
implement major systems integration and other projects requires a wide range of
technical skills, such as logical and physical design, implementation and
training support and technical expertise in computer hardware and peripheral
equipment, databases, programming, productivity tools, communications, and
system design and maintenance. The Companys experience has been that a

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highly trained and skilled workforce possessing
the necessary technical expertise is available in each of the markets in which
the Company currently has offices.

In an effort to increase its software sales, the Company focused a limited
amount of development resources to address supply chain management for its
clients adopting an e-commerce strategy in business-to-business (B2B)
operations and to enhance and improve its traditional application software
products, which use an open architecture with the capability of accessing data
from multiple industry-standard database architectures.

The Companys proprietary products include manufacturing and distribution
software for commercial clients, as well as e-commerce supply chain offerings.
The Companys principal software products are described below.

Prologic Manufacturing.Prologic Manufacturing is a comprehensive
21-module software application suite that includes management tools, which help
manage the day-to-day operations of a manufacturing environment. The
Manufacturing modules range from general accounting to the tracking and
movement of products through the plant, to increased visibility of labor
efficiencies. Prologic Manufacturing integrates all aspects of the
manufacturing process. Prologic Manufacturing can be used in conjunction with
Prologic Electronic Data Interchange software as well as Prologic Data
Collection software.

Prologic Distribution.The Prologic Distribution application software
suite includes software tools to help management of product distribution,
businesses forecast and plan for product fulfillment and distribution. Prologic
Distribution was designed to help customers reduce inventory carrying costs and
improve customer service. Inventory forecasts provide management with complete
reporting tools including seasonality and multi-warehouse considerations for
reducing warehousing and distribution costs. In addition, a full history by
location is maintained on-line to enable management to track product demand by
location and to further facilitate customer service. Prologic Distribution can
be used in conjunction with Prologic Electronic Data Interchange software and
Prologic Data Collection software.

To date, the vast majority of the Companys operating revenues in each
fiscal year have been generated from the sale of systems integration hardware
products and sales of related software products, integration services and other
professional services. The Companys other activities, including sales of
e-commerce solutions and sales of its proprietary software products and related
services, contribute substantially less to overall operating revenues. Since
1996, the Company has continued to increase sales of its systems integration
services, which have a higher margin than sales of computer hardware.

Sales of the Companys professional services have represented an
increasingly important percentage of gross margins. During the Companys fiscal
year ended March 31, 2001, approximately 40% of the Companys total gross
margin was generated by professional services. During the same fiscal year,
approximately 60% of the Companys gross margin was generated by hardware sales
and related third-party software, which have materially lower margins than
sales of professional services, systems integration services or proprietary
software.

Development of higher revenues from the Companys other activities has
been hampered by the capital requirements of the Companys systems integration
business and the Companys lack of additional capital resources that are
necessary to aggressively market the Companys higher margin proprietary
software products and services.

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MARKETING AND DISTRIBUTION

The Companys strategic marketing efforts are directed by its corporate
office in Tucson. However, the Companys BASIS, Inc. subsidiary provides
internal sales and marketing management with additional support, when required,
from the Tucson office. The Companys primary goal is to lead with its
commercial systems integration expertise and promote the sale of professional
services to increase the Companys overall margins and competitive advantage.
To achieve this goal, the Company intends to address its existing customer
base, develop new corporate accounts in targeted geographical areas and expand
and develop strategic relationships with various companies that sell products
within the systems integration market. The Company has joint marketing
relationships with leading hardware vendors and will continue to offer its
systems integration expertise. The Company currently resells products from or
has marketing agreements with 3Com Corporation, Accenture, Foundry Networks,
Inc., GE Access, Check Point Software Technologies Ltd., Cisco Systems, Inc.,
Computer Associates International, Inc., Legato Systems, Inc., Oracle
Corporation, Protegrity, Sun Microsystems, Inc., and Veritas Software
Corporation.

During fiscal 2001, the Companys BASIS subsidiary initiated a marketing
campaign designed to enhance its presence in the Silicon Valley, through the
use of cooperative marketing funds provided by multiple vendors.

The Company has established sales and/or integration offices in Tucson,
Arizona (Prologic), Emeryville, California (BASIS), and Portland, Oregon
(BASIS) to offer proximity to its customer and vendor base. The Company
believes that there are sufficient numbers of qualified potential employees in
all areas where the Company has offices to support the expansion of the
Companys services and its customer base in accordance with the Companys
long-range business plan.

GROWTH STRATEGY

The Companys strategy is to grow its revenue both by increasing its
systems integration services within its customer base at existing Company
locations, and by expanding its sales force on a regional basis into new
customer relationships that can be served initially by the technical resources
located at existing locations.

As the new customers are integrated into the overall operations, the
Companys focus will turn to securing higher gross margins. This will be
accomplished primarily through the sale of systems integration and professional
consulting services. Management believes that higher margins, if achieved, will
enable the Company to internally fund the growth of the operations to take
advantage of the significant growth opportunities that exist in the market.

The Company believes that an internal growth strategy is the most
cost-effective avenue of growth for the Company. However, due to limited
working capital, growth of the Companys operations will, for the foreseeable
future, depend principally upon the Companys ability to generate growth
internally while expanding, or at least maintaining, its operating margins.

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COMPETITION

The systems integration and computer software industries are highly
competitive, include participants from a variety of market segments, are
subject to rapid change and have low barriers to entry. The competition in
systems integration services includes mid-level and regional systems
integrators, international, national and regional accounting firms, the service
groups of computer equipment companies, contract programming companies,
facilities management companies and general management consulting firms. Among
the more recognizable participants in the market are Accenture, Cambridge
Technology Partners, Computer Sciences Corporation, PricewaterhouseCoopers,
Electronic Data Systems Corporation, IBM-Innovative Information Systems, and
Technology Solutions Corporation. The Company believes it competes favorably
with these systems integrators in the areas and level of responsiveness,
regional and national vendor contacts, and its dedication to maintaining
up-to-date certification standards to provide its clients with a higher
standard of customer service.

Many participants in the software development and systems integration
businesses have significantly greater financial, technical, and marketing
resources than does the Company. The Company expects that competition in the
services industry could increase in the future, partly due to low barriers of
entry. Increased competition could result in price reductions, reduced margins,
or loss of market share for the Company and greater competition for qualified
technical personnel. There can be no assurance that the Company will be able to
compete successfully against current and future competitors. If the Company is
unable to compete effectively, or if competition among information technology
services companies results in a deterioration of market conditions for
information technology services companies, there could be a material adverse
effect on the Company.

DEPENDENCE UPON LIMITED SUPPLY OF SALES, MANAGEMENT AND TECHNICAL PERSONNEL

The Company believes that its ability to compete successfully depends in
part on a number of factors outside of its control, including the ability of
its competitors to hire, retain and motivate a large number of sales personnel,
technicians and managers, and the development by others of competitive services
and software. The Companys Management believes that its principal long-term
challenge is to identify and hire effective sales and project managers and
skilled technical personnel to focus efforts on the marketing and sales of
professional services and proprietary software products, both through the
Companys systems integration subsidiary and through direct sales. Many
participants in the professional services, systems integration and software
development businesses have significantly greater financial, technical, and
marketing resources than does the Company.

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SOURCES OF PRODUCTS AND UNDERLYING TECHNOLOGY

The principal products used in the Companys systems integration projects
include third-party computer hardware and software. As of June 2001, the
Company has not experienced any material difficulties or delays in meeting
customer shipments. While alternate independent suppliers for such products are
available, the Company is reliant upon licensing and marketing agreements with
the product manufacturers.

The Companys primary supplier, GE Access, is a master distributor for Sun
Microsystems and numerous other hardware and software manufacturers. GE
Access-distributed products accounted for approximately 87.7% of the Companys
fiscal 2001 product purchases and 89.8% of product purchases in fiscal 2000. In
fiscal 2000, the Company extended its distribution agreement with GE Access an
additional three (3) years. GE Access currently allows the Company to purchase
goods on open credit and under a program that allows customers, such as the
Company, to assign proceeds from sales of products directly to GE Access. At
March 31, 2001, the Company had $2,106,083 in assignment of proceeds and
$1,566,603 in open credit with this supplier. The credit with this supplier is
based on the credit worthiness of our clients under the assignment of proceeds
program.

In December 2000, the Company signed a $5 million note, converting
approximately $5 million in accounts payable to GE Access into installment
debt. The note requires bi-weekly payments of $20,000 commencing on January 1,
2001, and requires that the Company direct 50% of any future sums received by,
committed to, or invested in the Company as an additional equity capital
infusion, towards repayment of the unpaid balance of the note. The interest
rate on the note is 10%, with a due date of April 2, 2002.

The Company has numerous underlying agreements with third-party hardware
and software companies concerning the distribution and support of their
products. There are a limited number of companies that have comparable
products. Furthermore, the loss of any license agreement with a significant
supplier or manufacturer could interrupt the sales of the Companys products
and services and have a material adverse impact on the Company.

DEPENDENCE UPON LIMITED NUMBER OF CUSTOMERS

The Companys five largest clients in the fiscal year ended March 31, 2001
accounted in the aggregate for 53.15% of total revenues (and individually
accounted for 17.41%, 12.90%, 11.24%, 6.07% and 5.54% of total revenues,
respectively) and in fiscal 2000, the five largest clients accounted in the
aggregate for 39.01% of total revenues (and individually accounted for 12.58%,
8.97%, 8.64%, 5.74% and 3.08% of total revenues, respectively). Based upon the
significant capital expenditure usually associated with the initial purchase of
the systems which the Company integrates for its customers, and because these
systems purchases generally are not recurring expenses by the same customer, it
is unlikely that the revenue from any individual customer that has accounted
for significant revenues in past periods will continue to represent a
significant portion of future period revenues. As a result, the Companys
business, operating results and financial condition could be materially
adversely affected by the failure of anticipated orders to materialize and by
deferrals or cancellations of systems integration orders received.

From time to time, the Company, in the ordinary course of its systems
integration business, enters into agreements to provide professional services
to customers in connection with the development of certain product features and
enhancements. Such agreements provide for payment of specified fees as services
are provided, and payments as development milestones are attained. Other than
with respect to such

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agreements, none of the Companys customers are contractually
obligated to license or purchase additional products or services from the
Company.

Furthermore, the Companys customers are generally concentrated in
specific geographic areas, particularly the Western States. The Companys
future success depends upon the capital spending patterns of its customers and
the continued demand by such customers for the Companys products and services.
The Companys operating results may in the future be subject to substantial
period-to-period fluctuations as a consequence of customer concentration and
factors affecting capital spending in the areas in which the Company conducts
its business.

PRODUCT DEVELOPMENT

The market for computer products and related services is characterized by
rapid technological developments and changes in customer requirements. As a
result, the Companys success will depend in part on its ability to continue to
evaluate third party products and to introduce in a timely manner new products
that keep pace with technological advances and respond to rapidly changing
customer requirements. The life cycle of a product is dependent in part on
timely updates to keep pace with technological advances and the needs of its
customers. The Company seeks to evaluate all of the products it markets,
typically on an annual basis, but there can be no assurance that any
enhancements or new products will adequately address the changing needs or gain
the acceptance of the marketplace.

EMPLOYEES

As of March 31, 2001, the Company had approximately 59 full-time
employees, including 23 in technical services, 19 in sales and marketing and 17
in finance and administration. The Companys Tucson office employed 20
full-time employees, and the Companys BASIS, Inc. subsidiary had 39 full-time
employees. The Companys employees are not represented by any collective
bargaining organization, and the Company has never experienced a work stoppage.
The Company believes that its relations with its employees are satisfactory.




ITEM 2. PROPERTIES

The Companys headquarters are located in Tucson, Arizona in a leased
office consisting of approximately 12,178 square feet. The lease expires
September 2004.

BASIS leases 10,700 square feet of office space in Emeryville, California,
under a month-to-month lease. BASIS Portland, Oregon site leases 2,672 square
feet of office space under an extended lease that expires March 2002.

If the Company were to require additional or alternate space within the
next twelve months, the Company believes that space sufficient to meet its
requirements will be available on commercially reasonable terms.

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ITEM 3. LEGAL PROCEEDINGS

As previously reported, on August 1, 2000, certain holders of the
Companys Series B Convertible Preferred Stock filed an action in the Arizona
Superior Court, Pima County (Pace Investment Co., Inc., et al. v. Prologic
Management Systems, Inc., CV 20003999). In the complaint, Plaintiffs allege
that certain conditions affecting the Series B Preferred Stock conversion rate
were not timely met, or not met at all, resulting in rights to convert Series B
Preferred shares into a substantially greater number of shares of the Companys
common stock than originally specified. Although the exact number of shares of
common stock is unspecified, the Company believes that judgment in favor of the
Plaintiffs might result in conversion rights involving up to 5,837,049 shares
of common stock. The Plaintiffs also request a judgment declaring whether the
Companys Series C Convertible Preferred Stock (which has conversion rights and
conversion rates identical to those of the Series B Preferred Stock) was
validly issued. The Company maintains, as previously reported, that the
conditions were met by December 31, 1999, and has filed a counterclaim against
the Plaintiffs, petitioning the court to, amongst other things, affirm the
Companys position and deny the Plaintiffs claims.

On February 21, 2001, these Series B Convertible Preferred Stockholders
requested that Prologic convert their shares of Series B Convertible Preferred
Stock into common stock. The Company converted the preferred stock to common
stock at a conversion rate of $2.25 per share for a total of 277,782 shares of
common stock. The Plaintiffs contend that the conversion should have resulted
in the issuance of approximately 4.6 million shares and both the original
complaint and counterclaim remain pending.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SHAREHOLDERS

The Company held its 2000 Annual Meeting on March 29, 2001. February 21, 2001
was the record date for the Annual Meeting. On the record date, 6,821,752
shares of common stock were outstanding and eligible to vote, and 6,293,479
shares of common stock were present in person or by proxy at the Annual
Meeting. The table below briefly describes the proposals and results from the
2000 Annual Meeting.

|                                                                                                                                                                                                                   |                  |     |           |                     |  |             |                        |        |  |  |        |   | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------- | --- | --------- | ------------------- |  | ----------- | ---------------------- | ------ |  |  | ------ | - | 
|                                                                                                                                                                                                                   |                  |     |           |                     |  |             | Number of Shares Voted
|Proposal                                                                                                                                                                                                           |                  | For |           | Against or Withheld |  | Abstentions
|                                                                                                                                                                                                                   |                  |     |           |                     |  |            
|To elect seven directors to serve until the next
annual meeting                                                                                                                                                   
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                   | James M. Heim    |     |           | 6,291,534           |  |             |                        | 1,945  |  |  |        | 0 | 
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                   | Richard E. Metz  |     |           | 6,236,094           |  |             |                        | 57,385 |  |  |        | 0 | 
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                   | Mark S. Biestman |     |           | 6,291,534           |  |             |                        | 1,945  |  |  |        | 0 | 
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                   | Bruce Carlsmith  |     |           | 6,291,534           |  |             |                        | 1,945  |  |  |        | 0 | 
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                   | Herbert F. Day   |     |           | 6,291,534           |  |             |                        | 1,945  |  |  |        | 0 | 
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                   | Edwin G. Hubert  |     |           | 6,291,534           |  |             |                        | 1,945  |  |  |        | 0 | 
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                   | John W. Olynick  |     |           | 6,274,869           |  |             |                        | 18,610 |  |  |        | 0 | 
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|To amend and restate Prologics 1994 Stock Option Plan
to increase the number of common stock reserved for
issuance under the plan from 500,000 to 3,500,000,
and to extend the term of the plan to March 29, 2011 |                  |     | 6,090,481 |                     |  |             | 202,853                |        |  |  | 145    |  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|To amend the Articles of Incorporation to increase
the authorized shares of common stock from 10,000,000
to 50,000,000 and the preferred stock from 1,000,000
to 5,000,000                                         |                  |     | 6,126,781 |                     |  |             | 77,553                 |        |  |  | 89,145 |  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|To amend the Articles of Incorporation to limit the
liability of directors to the fullest extent allowed
by Arizona law                                                                                            |                  |     | 5,903,545 |                     |  |             | 365,932                |        |  |  | 24,002 |  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                  
|To ratify the appointment of BDO Seidman LLP as the
independent auditors for the fiscal year ending March
31, 2001                                                                                                 |                  |     | 6,291,534 |                     |  |             | 0                      |        |  |  | 1,945  |  

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PART II




ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company completed its initial public offering on March 15, 1996 at a
price of $5.00 per share of Common Stock and $0.125 per Warrant (each warrant
entitling the holder to purchase one share of common stock at an exercise price
of $6.00). The Companys common stock warrants expired unexercised in the
fiscal year ended March 31, 1999. The Companys securities were delisted from
trading on the NASDAQ Small Cap Market and the Boston Stock Exchange in August
1998, following which trading of the Companys common stock has continued to be
conducted on the non-NASDAQ over-the-counter (OTC) market, under the symbol
PRLO. Trading of the Companys common stock in the OTC market has been sporadic
and generally at very low reported daily volumes. Until recently when the
Companys stock began trading on the OTC Bulletin Board, there had been no
active market for the Companys common stock since it was delisted from the
NASDAQ Small Cap Market in August 1998.

The table below represents the high and low bid prices for the Companys
common stock, as reported by the National Quotation Bureau, from June 30, 1999
through March 31, 2001. The National Quotation Bureau did not
quote high and low bid prices for the common stock during the quarter
ended June 30, 1999. The quotations shown represent inter-dealer prices
without adjustment for retail mark-ups, mark downs or commissions, and may not
necessarily reflect actual transactions.

|                   |  |              |        |     |  |   |        | 
|------------------ |  | ------------ | ------ | --- |  | - | ------ | 
|                   |  | Common Stock
|                   |  |             
|Quarter Ended      |  | High         |        | Low
|                   |  |              |        |    
|June 30, 1999      |  |              | N/A    |     |  |   | N/A    | 
|                  
|                  
|                  
|                  
|September 30, 1999 |  | $            | 0.3750 |     |  | $ | 0.2500 | 
|                  
|                  
|                  
|                  
|December 31, 1999  |  | $            | 0.3750 |     |  | $ | 0.1250 | 
|                  
|                  
|                  
|                  
|March 31, 2000     |  | $            | 1.1875 |     |  | $ | 0.3125 | 
|                  
|                  
|                  
|                  
|June 30, 2000      |  | $            | 0.8000 |     |  | $ | 0.3000 | 
|                  
|                  
|                  
|                  
|September 30, 2000 |  | $            | 0.5100 |     |  | $ | 0.3100 | 
|                  
|                  
|                  
|                  
|December 31, 2000  |  | $            | 0.4500 |     |  | $ | 0.1200 | 
|                  
|                  
|                  
|                  
|March 31, 2001     |  | $            | 0.4000 |     |  | $ | 0.1300 | 

As of June 15, 2001, there were 196 shareholders of record of the
Companys common stock. The Company has neither declared or paid cash dividends
on its common stock in the past, and currently intends to retain any earnings
for use in the business and does not anticipate paying any cash dividends on
its common stock in the foreseeable future. During the fiscal year, dividends
totaling 100,671 shares of common stock valued, in the aggregate, at $100,113
were paid to holders of the Companys Series B Preferred Stock and Series C
Preferred Stock.

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RECENT SALES OF UNREGISTERED SECURITIES

Fiscal Year Ended March 31, 2001



|1. |  | During the fiscal year ended March 31, 2001, the Company issued dividends
totaling 100,671 shares of common stock to holders of the Companys Series
B and Series C Preferred Stock in a transaction exempt from registration.
The dividends were valued, in the aggregate, at $100,113.                                                                                                                           
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | During the fiscal year ended March 31, 2001, the Company issued 277,782
shares of common stock to certain holders of shares of the Companys
Series B Preferred Stock pursuant to the conversion of 62,500 shares of
Series B Preferred stock in a transaction exempt from registration under
Section 4(2) of the Securities Act of 1933.                                                                          
|  
|3. |  | During the fiscal year ended March 31, 2001, the Company issued a warrant
to purchase an aggregate of 66,666 shares of common stock as consideration
for financial advisory services rendered by an investment banking firm in
a transaction exempt from registration under Section 4(2) of the
Securities Act of 1933. The exercise price is $0.75 per share of common
stock, and the warrant expires in May 2005.

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PART III




ITEM 6. MANAGEMENTS DISCUSSION & ANALYSIS

INTRODUCTION

The Company provides systems integration services, software development,
technology products and related services. The majority of the Companys
revenues are generated from systems integration and related product sales. The
Companys services include systems integration, and national and regional
support in Internet and intranet application and framework design, enterprise
and workgroup client/server design and optimization, relational database
development, LAN/WAN and workgroup solutions, network design and connectivity,
and security and encryption design and deployment. The Companys software
development expertise provides an internal resource for development needs in
integration and custom projects. The Companys proprietary products include
manufacturing, distribution, and resource tracking software for commercial
clients, as well as its e-commerce solutions. The Companys products are not
directed to the retail consumer market. For additional information on the
combined operating results of the Company and its subsidiaries, see the
Consolidated Financial Statements of the Company and Notes thereto. The
discussion should be read in conjunction with and is qualified in its entirety
by the Consolidated Financial Statements of the Company and Notes thereto.

The Companys securities were delisted from both the NASDAQ Stock Market
and the Boston Stock Exchange in August 1998. Delisting resulted from the
Companys failure to maintain the minimum net tangible asset requirement of the
NASDAQ Stock Market. Trading of the Companys securities may continue to be
conducted on the OTC Electronic Bulletin Board or in the non-NASDAQ
over-the-counter market. As a result, a holder of the Companys securities may
find it more difficult to dispose of, or to obtain accurate quotations as to
the market value of, the Companys securities. In addition, purchases and sales
of the Companys securities may be subject to Rule 15g-9 (the Rule)
promulgated by the Securities and Exchange Commission (the SEC). The Rule
imposes various sales practice requirements on broker-dealers who sell
securities governed by the Rule to persons other than established customers and
accredited investors (generally institutions with assets in excess of $5
million or individuals with a net worth in excess of $1 million or annual
income exceeding $200,000 or $300,000 jointly with their spouse). For
transactions covered by the Rule, the broker-dealer must make a special
suitability determination for the purchaser and have received the purchasers
written consent to the transaction prior to sale. Consequently, the Rule may
have an adverse effect on the ability of broker-dealers to sell the Companys
securities and may affect the salability of the Companys securities in the
secondary market.

The SEC has also adopted rules that regulate broker-dealer practices in
connection with transactions in penny stocks. Penny stocks generally are
equity securities with a price less than $5.00 per share, other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
system. With the Companys securities delisted from the NASDAQ Small Cap
Market, they may come within the definition of penny stocks because the trading
price of the Companys common stock in currently below the $5.00 per share
threshold. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not exempt from the rules, to deliver a
standardized document prepared by the SEC that provides information about penny
stocks and the nature and level of risks in the penny stock market. The
broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customers account. The bid and
offer quotations, and the broker-dealer and salesperson compensation
information must be given to the customer prior to

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effecting the transaction.
These disclosure
requirements may have the effect of reducing the level of trading activity
in the secondary market for a stock that becomes subject to the penny stock
rules.

RESULTS OF OPERATIONS

COMPARISON OF FISCAL 2001 TO FISCAL 2000

Revenues.Total revenue increased by 7.22% for the fiscal year ended
March 31, 2001 to $37,756,351 from $35,214,426 for the previous fiscal year.
Sales of third party hardware increased by 5.32% to $24,842,295 from
$23,586,367 for the year ended March 31, 2000; sales of third party and
software licenses increased by 27.04% to $8,581,053 from $6,754,679 for the
year ended March 31, 2000; and sales of professional services decreased by
11.1% to $4,333,003 from $4,873,380 for the prior fiscal year. The increase in
the sales of third party hardware and software is attributable to the
replacement and restructuring of the sales and marketing department at BASIS.
During the fiscal year, the Company added additional sales and technical
personnel in that business unit. Sales of third party software increased due to
focused efforts within our BASIS subsidiary on our relationship with Oracle.
While the professional services revenue decreased, the overall gross margin
contribution from professional services increased.

Historically, the Companys revenues vary significantly from period to
period. This is due to the high revenues associated with the initial stages of
a typical system implementation in contrast to the relatively lower revenues
associated with services and products which may be furnished by the Company to
the customer after completion of the initial installation. Accordingly, the
Companys revenues may vary significantly from period to period for a variety
of reasons, including but not limited to the timing of customer orders for
products and services, deferrals and cancellations of orders, and capital
spending patterns of customers and prospective customers in the specific
industries and areas in which the Companys customers have historically been
concentrated.

Cost of Sales.Cost of sales increased 4.8% to $30,939,608, or 81.9% of
total revenue, for the fiscal year ended March 31, 2001, from $29,525,218, or
83.8% of total revenue, for the same period of the prior fiscal year. The
decrease as a percentage of total revenue was due to the change in sales mix to
a higher amount of software sales, which carry a higher margin than hardware
sales, and an increase in the gross margin rate on sales of professional
services. The cost of third party hardware sales as a percentage of hardware
sales decreased to 88.8%, or $22,060,121, from 90.5%, or $21,352,928, for the
fiscal year ended March 31, 2000. The cost of professional services, and
software and third party licenses also increased from $8,172,290 in the fiscal
year ended March 31, 2000 to $8,879,487 for the same period ended in 2001. The
overall increase in gross margin from services was due to increased procurement
fees received from vendors for the design, architecture, and sales efforts
related to client installations. The Company expects professional services as a
percentage of third party product sales to increase as the new clients that
were secured in fiscal 2001 increase their usage of our service offerings.
Professional services costs were 37.1% of service revenue in fiscal 2001 as
compared to 62.1% of service revenues in fiscal 2000. The cost of sales for
software licenses increased to 84.7% of license revenue in fiscal 2001 from
76.2% in fiscal 2000.

The increase in the cost of software was the result of competition as the
Companys BASIS subsidiary rapidly expanded its client base; initial sales
contain a lower component of services and are therefore more susceptible to
pricing pressures in the database software market. The Company expects this
general industry trend to continue. However, as the Company increases sales of
professional services to these newer clients following the initial installation
phase, the impact of competitive pressures associated

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with computer hardware and software sales should diminish. The
Company anticipates that its overall margin will improve as sales of
professional services become a larger percentage of total revenue.

Gross Profits.Gross profit increased by 19.9% to $6,816,743 for the
fiscal year ended March 31, 2001, as compared to $5,689,208 for the fiscal year
ended in 2000. Gross margin increased to 18.1% in the fiscal year ended March
31, 2001 from 16.2% for the same period in 2000, due principally to the
increased sales of software licenses and improved margins on professional
services. The overall increase in gross margin from services was due to
increased procurement fees received from vendors for the design, architecture,
and sales efforts related to client installations. The Company expects
professional services as a percentage of third party product sales to increase
as the new clients that were secured in fiscal 2001 increase their usage of our
service offerings.

General and Administrative.General and administrative expenses were
$5,375,680, or 14.2% of total revenue, for the fiscal year ended March 31,
2001, as compared to $4,273,033, or 12.1% of total revenue, for the same period
of the prior fiscal year. The increase in general and administrative expense
was due in part to the increase in expansion at our BASIS, Inc. subsidiary,
including efforts to achieve Sun Microsystems, Inc. iForce (sm) National System
Provider status in the current fiscal year. The Company expects to continue to
reduce general administrative expenses as a percentage of sales as revenue
increases.

Selling and Marketing.Primarily as a result of increasing the sales
and marketing staff during the fiscal year ended March 31, 2001, selling and
marketing expenses increased 25.5% from $2,004,194 to $2,514,968. As a percent
of total revenue, selling and marketing expense increased from 5.7% of total
revenue for the previous fiscal year to 6.7% of total revenue for the fiscal
year ended March 31, 2001. The Company expects overall selling and marketing
expense to increase during Fiscal 2002, as additional sales and marketing staff
is hired to support continued growth.

Research and Development.For the fiscal year 2001, the Company
incurred approximately $194,797 of research and development expense, compared
$360,799 for the prior fiscal year. Research and development expense in fiscal
year 2001 included development expenses related to enhancing the Companys
application software products and providing clients with e-commerce
capabilities in business-to-business operations.

Operating Loss.The Companys loss from operations was $1,268,702, or a
loss of 3.4% of total revenue, for the fiscal year ended March 31, 2001, as
compared to a loss of $948,818, or a loss of 2.7% of total revenue, for the
same period of the prior fiscal year. The increase in the loss was due to an
increase in operating expenses as a percentage of total revenue. The operating
loss is primarily attributable to the Companys significant investment in sales
and marketing and development of our technical departments in conjunction with
efforts to achieve Sun Microsystems, Inc. iForce (sm) National System Provider
status.

The Company believes that it will continue to see gross profit erode in
the systems integration market for hardware sales. Accordingly, the Companys
strategy is to continue to increase the sales of professional services and
software products and associated services. If the Company is successful in
increasing sales of professional services and software increase in relation to
the sales of hardware, the Company expects to see continued favorable changes
in its results of operations in future periods.

The Company expects that operating results will fluctuate as a result of a
number of factors, including but not limited to: the availability to the
Company of capital adequate to support its current and anticipated levels of
sales; the ability to attract and retain highly skilled technical, managerial
and
sales and marketing personnel; the timing of new product and service
introductions by the Company, by vendors

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whose products the Company resells to
its customers, as well as by its competitors; changes in the Companys level of
operating expenses, including the Companys marketing and promotional programs;
the size and timing of customer orders for its products or services,
development, production or quality problems on the part of the Company or its
suppliers; the payment of support and maintenance fees; competition in the
computer software market; and the general state of the global and national
economies. The market demand for the Companys products and services can be
significantly affected by uncertain economic cycles. Many of the factors that
may affect the Companys operating results and demand for products and services
based on its technologies cannot be predicted, may not exhibit a consistent
trend, or are substantially beyond the Companys control. Fluctuations in
operating results can also be expected to result in volatility in the price of
the Companys common stock.

Interest Expense.The Company incurred $652,625 in interest expense
during the fiscal year ended March 31, 2001 as compared to $888,385 for the
same period of the prior fiscal year. Interest expense is on both long-term and
short-term debt.

Income Taxes.The Company had no income tax expense for the years ended
March 31, 2001 and 2000. As of March 31, 2001, the Company had federal net
operating loss carryforwards of approximately $13,000,000 (see Note 7 of the
Consolidated Financial Statements for a further discussion of the loss
carryforwards). The utilization of net operating loss carryforwards may be
significantly limited as determined pursuant to applicable provisions of the
Internal Revenue Code and U.S. Treasury regulations thereunder.

Net Loss for Continuing Operations.The Company had a net loss of
$1,897,901, or $0.25 per share, for the fiscal year ended March 31, 2001, as
compared to a loss of $1,814,878, or $0.30 per share, for the same period of
the prior fiscal year.

Net Loss from Discontinued Operations.During fiscal 2000, the Company
discontinued operations of Great River Systems. The loss for the fiscal year
ended March 31, 2001 related to the discontinuance of the subsidiary, was
$15,070, as compared to a loss of $1,443,949 in fiscal 2000, which included
one-time charges related to the discontinuance of the subsidiary.

Net Loss including Discontinued Operations.Including charges related
to the discontinuance of the Great River Systems subsidiary, the Company had a
net loss of $1,912,971, or $0.25 per share, for the fiscal year ended March 31,
2001, as compared to a net loss of $3,258,827, or $0.52 per share, for the same
period of the prior fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2001, the Company had a working capital deficit of
approximately $1,876,000 versus a deficit of approximately $4,658,000 at March
31, 2000. The improvement resulted primarily from the conversion of
approximately $5 million in trade payables to a long-term note. The cash
balance at March 31, 2001 was approximately $610,000, of which $300,000 was
restricted as security for the Companys operating line of credit. As a result
of the working capital deficit, and recurring losses, the Companys independent
certified public accountants have expressed substantial doubt about the
Companys ability to continue as a going concern.

Cash provided by operations during the fiscal year ended March 31, 2001
was approximately $4,309,000 compared to cash used in operations of $4,861,000
in fiscal 2000. The increase was due

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primarily to improved operating results, reductions in outstanding
accounts receivable balances, and increased accounts payable balances. Cash
used in investing activities was approximately $76,000 at March 31, 2001 versus
approximately $207,000 at March 31, 2000. The decrease was due to low capital
expenditures during the fiscal year. Cash used in financing activities in
fiscal 2001 totaled approximately $4,370,000 compared to cash provided by
financing activities of $5,465,000 in fiscal 2000. The decrease resulted
primarily from a reduction in the Companys line of credit.

Historically the Company has been unable to generate sufficient internal
cash flows to support operations, and has been dependent upon capital reserves
and outside capital sources to supplement cash flow. New equity investments,
lines of credit and other borrowings, and credit granted by its suppliers have
enabled the Company to sustain operations over the past several years. In
August 1998, the Company had failed to meet the continued listing criteria
established by NASDAQ and the Companys securities were delisted from the
NASDAQ Small Cap Market. The subsequent lack of liquidity in the Companys
securities has materially adversely affected the Companys ability to attract
equity capital. Additionally, the lack of capital resources has precluded the
Company from effectively executing its strategic business plan. The ability to
raise capital and maintain credit sources is critical to the continued
viability of the Company.

During fiscal year 2000, the Company authorized a class of securities
designated Series C 10% Cumulative Convertible Preferred Stock, consisting of
100,000 shares with a Stated Value of $10.00 per share, a dividend rate of 10%
and an Applicable Conversion Value of $2.25. On December 30, 1999, the Company
authorized the sale of 75,000 shares of the Series C Preferred, including
37,500 shares to a related party and 37,500 shares to an entity in which
officers of the Company have a minority interest, for an aggregate of $750,000,
pursuant to two subscription agreements. Of the $750,000 in proceeds, $220,780
represented conversion of current debt from a related party, and $529,220 was
subscribed to in cash. Including the conversion of debt, and $337,720 in cash
payments, the Company has received $558,500, representing 55,850 shares of the
Series C Preferred stock, and has extended the due date for the remaining
$191,500.

In fiscal 1998, the Company signed a financing agreement with Coast
Business Credit for a line of credit in an amount of the lower of $5,000,000 or
the sum of 85% of eligible accounts receivable, restricted cash (see Note 4 of
the Consolidated Financial Statements) and equipment loans (maximum of
$250,000). This credit facility was designed to provide working capital to
support the Companys systems integration operations. Among other things the
agreement required that the Company maintain a combined net worth at its
subsidiaries of at least $750,000. The credit facility matured at March 31,
2001, and was subsequently purchased by and replaced with a $3,000,000
financing agreement with KBK Financial, Inc. (See Part I, Recent Developments,
Financing Agreement with KBK Financial, Inc.)

During fiscal 2000, the Company and one of its primary vendors agreed to
convert $1,212,000 of the Companys trade payables to the vendor into a
promissory note. The promissory note included interest at 11% in monthly
installments of $37,500 through September 2000, and $50,000 through November
2000. The remaining principal balance of approximately $575,000 was due in full
on December 31, 2000. At March 31, 2001, the principal balance was
approximately $723,000. As of March 31, 2001, this note had not been extended
and the Company is currently negotiating new terms on this outstanding balance.

As part of the Sunburst settlement described in Part I, Recent
Developments, Settlement Agreement with Sunburst Acquisitions IV, Inc.,the
Company paid $100,000 to Sunburst, of which, $25,000 was paid in cash and the
Company executed a short-term promissory note for the remaining

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$75,000. The
note is payable in three quarterly principal payments of $25,000 commencing in
April 2001, plus interest at 10%.

In December 2000, the Company signed a $5 million note, converting
approximately $5 million of its accounts payable. The note requires bi-weekly
payments of $20,000 commencing on January 1, 2001, and requires that the
Company direct 50% of any future sums received by, committed to, or invested in
the Company as an additional equity capital infusion, towards repayment of the
unpaid balance of the note. The interest rate on the note is 10%, with a due
date of April 2, 2002.

In fiscal 1997, the Company borrowed $100,000 with an interest rate of 8%
and a scheduled maturity date of June 30, 1997. Subsequently, the maturity date
was extended with a revised interest rate of 2% per month plus 10,000 shares
per month of restricted common stock. During fiscal 2000, the Company issued
120,000 shares of common stock as interest towards the note. In March 2000, the
Company renegotiated the terms of the note and eliminated the common stock
interest component. The replacement note is unsecured, in the amount of
$164,500, which includes interest and expenses previously accrued, and bears
interest at 2% per month. The note, including principal and interest, was paid
in full during fiscal 2001.

During fiscal 1998 and 1997, the Company borrowed $365,000 in short-term
notes collateralized by its computer equipment and office furnishings.
Subsequently, $170,000 of these notes was exchanged for 288,000 shares of
common stock and $65,000 in principle was repaid. The interest rate on the
notes is 2% per month. As of March 31, 2001, the remaining principle balance on
these notes, which are currently due, was $110,000.

At March 31, 2001, the Company had current debt obligations, or debt that
will become due within twelve months, of $1,453,377, excluding $999,150 of
borrowings under its line of credit, the term of which expired on March 31,
2001. It is unlikely that the Company will be able to service this debt from
funds generated by operations alone. As a result, the Company will require
additional equity or debt financing to maintain current operations, service
current debt, and assure its ability to achieve its plans for current and
future expansion. The Company continues to review its strategic alternatives,
including raising capital through debt or equity financing.

During fiscal 2001, the Company purchased approximately $76,000 in capital
equipment and software.

Recently Adopted Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities, which
is effective for financial statements issued for all fiscal quarters of fiscal
years beginning after June 15, 1999. This Statement requires companies to
recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged asset
or liability that are attributable to the hedged risk or (ii) the earnings
effect of the hedged forecasted transaction. For a derivative not designated as
a hedging instrument, the gain or loss is recognized in income in the period of
change. Historically, the Company has not entered into derivative contracts to
hedge existing risks or for speculative purposes.

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Accordingly, the Company does
not expect adoption of the new standard on January 1, 2000 to have any effect
on its financial statements.

In December 1999, the SEC staff released Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements (SAB 101). SAB 101
provides interpretive guidance on the recognition, presentation and disclosure
of revenue in the financial statements. SAB 101 must be applied to the
financial statements no later than the fourth quarter of fiscal years ending
after December 15, 2000. The Company adopted SAB 101 during the year ended
December 31, 2000, and it had no impact on the Companys financial position or
results of operations and cash flows.

In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 (FIN 44) Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of APB No. 25 for (a) the definition of employee for purposes
of applying APB No. 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 2, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998, or
January 12, 2000. During the year ended December 31, 2000, the Company adopted
FIN 44 in accounting for stock options.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

Managements discussion and analysis should be read in conjunction with
the audited Consolidated Financial Statements contained elsewhere in this
annual report on Form 10-KSB for the fiscal year ended March 31, 2001. Except
for the historical information contained herein, the matters discussed in this
report on Form 10-KSB are forward-looking statements that involve a number of
risks and uncertainties. There are numerous important factors and risks,
including the rapid change in hardware and software technology, market
conditions, the anticipation of growth of certain market segments and the
positioning of the Companys products and services in those segments,
seasonality in the buying cycles of certain of the Companys customers, the
timing of product announcements, the release of new or enhanced products, the
introduction of competitive products and services by existing or new
competitors and the significant risks associated with the acquisition of new
products, product rights, technologies, businesses, the management of growth,
the Companys ability to attract and retain highly skilled technical,
managerial and sales and marketing personnel, and the other risks detailed
from time to time in the Companys SEC reports, including reports on Form
10-KSB and Form 10-QSB, that could cause results to differ materially from
those anticipated by the forward-looking statements made herein. Therefore,
historical results and percentage relationships will not necessarily be
indicative of the operating results of any future period.

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PART IV.




ITEM 7. FINANCIAL STATEMENTS

The financial statements attached to this Report on Form 10-KSB as pages F-1 to
F-22 are incorporated herein by reference.




ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

Not applicable.

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PART V.




ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Information concerning the names, ages, terms and positions with the
members of the Companys Board of Directors and its executive officers and
their respective business experience is set forth below. Each director has
served continuously with the Company since his election as indicated below.

|                      |  |     |    |          |  |                                                                                |  |  |      | 
|--------------------- |  | --- | -- | -------- |  | ------------------------------------------------------------------------------ |  |  | ---- | 
|Name                  |  | Age |    | Position |  | Director Since                                                                
|                      |  |     |    |          |  |                                                                               
|James M. Heim(1)      |  |     | 50 |          |  | Chief Executive Officer and Director                                           |  |  | 1984 | 
|                     
|                     
|                     
|                     
|John W. Olynick       |  |     | 53 |          |  | President                                                                      |  |  | 2001 | 
|                     
|                     
|                     
|                     
|Richard E. Metz(2)    |  |     | 54 |          |  | Executive Vice President, Chief
Administrative Officer, Secretary and
Director |  |  | 1984 | 
|                     
|                     
|                     
|                     
|Mark S. Biestman      |  |     | 44 |          |  | Director                                                                       |  |  | 1997 | 
|                     
|                     
|                     
|                     
|Herbert F. Day(1)(2)  |  |     | 62 |          |  | Director                                                                       |  |  | 2001 | 
|                     
|                     
|                     
|                     
|Edwin G. Hubert(1)(2) |  |     | 59 |          |  | Director                                                                       |  |  | 2001 | 
|                     
|                     
|                     
|                     
|Bruce Carlsmith       |  |     | 45 |          |  | Director                                                                       |  |  | 2001 | 



---

|(1) |  | Member of Audit Committee       
|--- |  | --------------------------------
|   
|   
|   
|   
|(2) |  | Member of Compensation Committee

JAMES M. HEIM, Chief Executive Officer, Principal Financial and Accounting
Officer and Director. Mr. Heim is a co-founder of Prologic and has served as a
Director since its inception in 1984. In addition, Mr. Heim served as
Prologics President from 1984 to 1999 and as its Chief Financial Officer from
1984 to 1995. Mr. Heim has over 20 years of business management experience and
is responsible for capital raising, acquisitions, and other corporate
activities. Mr. Heim holds both a Juris Doctor degree from the College of Law
and a B.S. in Business Administration from the University of Arizona.

JOHN W. JOHN W. OLYNICK, President, Director. Mr. Olynick, 53, is Prologics
President and has served as a Director since 2001. Mr. Olynick, who joined
Prologic in September 1999 and also serves as President of Prologics BASIS,
Inc. subsidiary, is responsible for strategic business development. Mr.
Olynick has had over 25 years of national sales, business development and
management experience in the technology industry. During his 20 years at
Digital Equipment Corporation (DEC), Mr. Olynick was responsible for
successfully restructuring and increasing sales, and developing business and
sales growth strategies. Mr. Olynick had served as DECs North American Sales
Manager of its OEM Storage Group, which was acquired by Quantum Corporation in
1994, at which time Mr. Olynick became Quantums Corporate Distribution Sales
Manager. Mr. Olynick attended the New York University School of Engineering
and Harvard Business School Professional Development Program.

RICHARD E. METZ, Executive Vice President, Chief Administrative Officer,
Secretary and Director. Mr. Metz is a co-founder of Prologic and has served as
a Director since its inception in 1984. He has served as Prologics President
since December 1999, and Executive Vice President since 1995. Mr. Metz has
over 30 years of business management and investment experience, including 10
years in the computer hardware and software industry prior to his affiliation
with Prologic. Since 1982, Mr. Metz has owned and managed The Metz Group, a
business consulting and investment firm. Mr. Metz is a member of the American
Arbitration Association and is an Associate member of the American Bar
Association, Dispute Resolution and Intellectual Property Law Sections.

21



---



##### Table of Contents



MARK S. MARK S. BIESTMAN, Director. Mr. Biestman, who has served as a Director
since 1997, has worked in the information technology field for over 20 years in
both sales and marketing management. Mr. Biestman is currently Senior Vice
President of Worldwide Sales at CommerceOne, Inc., a public company based in
Pleasanton, California, co-founded by former CEO of Sybase, Mark Hoffman.
CommerceOne develops, licenses and markets the Commerce Chain Solution, the
industrys only real-time, electronic procurement and supplier management
solution for inter-business transactions. From May 1997 to November 1997, Mr.
Biestman served as Vice President of Commercial Applications & Business
Development at Actra Business Systems, a strategic venture between Netscape
Communications Corporation and General Electric Information Services focused on
Internet-based cross-commerce solutions. Mr. Biestman served as Netscape
Communications Vice President of Sales, Western Region from June 1995 to May
1997, Vice President of Telecommunications Sales at Oracle Corporation from
1994 to 1995, and Vice President of Sales and Industry Marketing at Metaphor
from 1993 to 1994. In addition, Mr. Biestman has held various sales and
management positions at Tandem Computers and IBM Corporation. Mr. Biestman
holds a B.A. in Economics from the University of California at Berkeley and has
attended the Stanford Business School Executive program.

BRUCE CARLSMITH, Director.Mr. Carlsmith, 45, who has served as a
Director since 2001, has worked in the information technology field for over 20
years in various capacities, including as an industry consultant, an analyst,
and as executive management. Mr. Carlsmith is currently Chief Operating
Officer at MagNetPoint, a private company based in Novato, California, where he
oversees sales, business development, strategic partnerships and business
operations. A former MagNetPoint board member, Mr. Carlsmith brings a strong
technical background and years of management experience over a broad range of
disciplines. Before joining MagNetPoint, Mr. Carlsmith was CEO and a member of
the board of directors for Registry Magic where he reshaped and redirected the
NASDAQ-listed supplier of voice-recognition auto-attendant products. Prior to
that he was a telecommunications analyst with Montgomery Securities, and prior
to that he was with Pacific Telesis and the Boston Consulting Group. Mr.
Carlsmith has a B.S. in Mechanical Engineering from Stanford and an MBA from
Harvard.

HERBERT F. HERBERT F. DAY, Director. Mr. Day, 61, who has served as a Director since
2001, previously served as Director of the Company from 1995 to 1998, at which
time he resigned for personal reasons. Mr. Day has over thirty years of
experience in the computer industry with IBM Corporation. He has held
professional and management positions in sales, marketing, product management
and product and business planning. Mr. Day received his B.S. in Electrical
Engineering from the University of Maryland.

EDWIN G. EDWIN G. HUBERT,Director.Mr. Hubert, 59, who has served as a Director
since 2001, has over 30 years financial management and business development
experience. Mr. Hubert is both a licensed CPA and a practicing attorney
serving corporate clients. He is also active in real estate development and,
since 1993, has served as Managing Partner of H30 Partners. Mr. Hubert has over
10 years experience with IBM, and has held positions with companies such as
Coopers & Lybrand and Touche Ross & Co. (which subsequently merged
internationally to form Deloitte Touche Tohmatsu International). Mr. Hubert is
also responsible for negotiating sales of companies to McDonnell Douglas Data
Services and Bank One. Mr. Hubert holds a Juris Doctor degree from the
University of Arizona, as well as Bachelor and Masters degrees from the
University of Michigan.

22



---



##### Table of Contents






ITEM 10. EXECUTIVE COMPENSATION

Information below sets forth certain information regarding business
experience and compensation paid or awarded by the Company during the fiscal
year ended March 31, 2001 to the following Executive Officers: Mr. James M.
Heim, the Companys Chief Executive Officer, Mr. John W. Olynick, the Companys
President, and Mr. Richard E. Metz, the Companys Executive Vice President and
Chief Administrative Officer. No other officer made more than $100,000 in
Fiscal 2001.

Summary Compensation Table

|                             |  |                     |      |                        |  |       |         |                       |  |              |        |  |  |  |         |     |  |           |        |    
|---------------------------- |  | ------------------- | ---- | ---------------------- |  | ----- | ------- | --------------------- |  | ------------ | ------ |  |  |  | ------- | --- |  | --------- | ------ | ---
|                             |  | Annual Compensation |      | Long-Term Compensation
|                             |  |                     |      |                       
|Name and Other               |  |                     |      |                        |  |       |         |                       |  |              |        |  |  |  |         |     |  | All Other
|Principal Position           |  | Year                |      | Salary                 |  | Bonus |         | Stock Options/SARs(#) |  | Compensation
|                             |  |                     |      |                        |  |       |         |                       |  |             
|James M. Heim,               |  |                     | 2001 |                        |  | $     | 120,000 |                       |  |              | 0      |  |  |  | 0       |     |  |           | 0      |    
|Chief Executive Officer      |  |                     | 2000 |                        |  | $     | 153,666 |                       |  | $            | 68,694 |  |  |  | 250,000 | (1) |  |           | 0      |    
|                             |  |                     | 1999 |                        |  | $     | 72,000  |                       |  |              | 0      |  |  |  | 0       |     |  |           | 0      |    
|                            
|                            
|                            
|                            
|John W. Olynick,             |  |                     | 2001 |                        |  | $     | 200,000 |                       |  | $            | 27,189 |  |  |  | 0       |     |  | $         | 49,011 | (2)
|President                    |  |                     | 2000 |                        |  | $     | 165,000 |                       |  | $            | 94,926 |  |  |  | 250,000 | (3) |  | $         | 4,200  | (4)
|                            
|                            
|                            
|                            
|Richard E. Metz,             |  |                     | 2001 |                        |  | $     | 104,000 |                       |  |              | 0      |  |  |  | 0       |     |  |           | 0      |    
|Executive Vice President,    |  |                     | 2000 |                        |  | $     | 104,000 |                       |  | $            | 59,471 |  |  |  | 32,500  | (5) |  |           | 0      |    
|Chief Administrative Officer |  |                     | 1999 |                        |  | $     | 5,000   |                       |  | $            | 0      |  |  |  | 0       |     |  |           | 0      |    



---

|(1) |  | During the fiscal year ended March 31, 2000, a total of 250,000
nonqualified stock options were granted to Mr. Heim pursuant to his Employment
Agreement with the Company as its President. In December 1999, all 250,000
stock options were cancelled in connection with the termination of Mr. Heims
Employment Agreement.                                                                                          
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | During the fiscal year ended March 31, 2001, Mr. Olynick received an $8,400
car allowance and a $40,611 housing allowance.                                                                                                                                                                                                                                                                                             
|   
|   
|   
|   
|(3) |  | During the fiscal year ended March 31, 2000, a total of 250,000 stock
options were granted to Mr. Olynick pursuant to his Employment Agreement with
the Company. These options are exercisable at $0.50 per share. 83,334 options
vested in the second quarter of fiscal 2000, 83,333 optioned shares vested in
the second quarter of fiscal 2001, and 83,333 optioned shares are scheduled to
vest at August 31, 2001.
|   
|   
|   
|   
|(4) |  | During the fiscal year ended March 31, 2000, Mr. Olynick received a $4,200
car allowance.                                                                                                                                                                                                                                                                                                                              
|   
|   
|   
|   
|(5) |  | During the fiscal year ended March 31, 2000, 32,500 non-qualified stock
options were granted as payment for past services.                                                                                                                                                                                                                                                                                             

Option Grants

During the fiscal year ended March 31, 2001, none of the executive officers
named in the Summary Compensation Table received grants of stock options.

23



---



##### Table of Contents



Option Exercises

During the fiscal year, none of the executive officers identified in the
Summary Compensation Table exercised any stock options, and, as of March 31,
2001, none held any in-the-money options.

Board Compensation

The Company compensates its outside directors for attendance at board meetings
at the rate of $500 per meeting and $150 per hour for committee participation.
Additionally, directors receive 10,000 options to purchase common stock at a
price not less than 100% of the current market price per share at the time of
grant, exercisable upon completion of their elected term. In fiscal 2001, the
Company granted a total of 25,000 options to purchase common stock to Director,
Mark S. Biestman, as compensation for service from 1998 to 2000. The options
are exercisable at the price determined by the board at the time of grant and
expire 5 years from the date of issuance. Directors who are also employees of
the Company receive no additional compensation for serving as a director. The
Company reimburses its directors for travel and out-of-pocket expenses in
connection with their attendance at meetings of the board of directors.




ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

PRINCIPAL SHAREHOLDERS AND SHAREHOLDINGS OF MANAGEMENT

The following table sets forth information, as of March 31, 2001,
concerning the Common Stock beneficially owned by (i) each director of the
Company (ii) the Companys Chief Executive Officer and its other executive
officers, (iii) each person known to the Company to own beneficially more than
5% of the outstanding Common Stock, and (iv) all of the Companys directors and
executive officers as a group.

Except as otherwise noted, the named individual beneficial owner has sole
investment and voting power.

|                                                              |  |                |        |              |  |          |           |  |  |  |       |  
|------------------------------------------------------------- |  | -------------- | ------ | ------------ |  | -------- | --------- |  |  |  | ----- | -
|                                                              |  |                |        |              |  | Shares  
|                                                              |  | Title of Class |        | Beneficially |  | Percent 
|Name of Beneficial Owner                                      |  | of Stock       |        | Owned(1)     |  | of Class
|                                                              |  |                |        |              |  |         
|James M. Heim & Marlene Heim(2)                               |  |                | Common |              |  |          | 1,316,172 |  |  |  | 19.19 | %
|                                                             
|                                                             
|                                                             
|                                                             
|Richard E. Metz(3)                                            |  |                | Common |              |  |          | 220,520   |  |  |  | 3.22  | %
|                                                             
|                                                             
|                                                             
|                                                             
|Mark S. Biestman(4)                                           |  |                | Common |              |  |          | 35,000    |  |  |  | *     |  
|                                                             
|                                                             
|                                                             
|                                                             
|Bruce Carlsmith                                               |  |                | Common |              |  |          | 0         |  |  |  | *     |  
|                                                             
|                                                             
|                                                             
|                                                             
|Herbert F. Day(5)                                             |  |                | Common |              |  |          | 20,000    |  |  |  | *     |  
|                                                             
|                                                             
|                                                             
|                                                             
|Edwin G. Hubert                                               |  |                | Common |              |  |          | 0         |  |  |  | *     |  
|                                                             
|                                                             
|                                                             
|                                                             
|John W. Olynick(6)                                            |  |                | Common |              |  |          | 210,667   |  |  |  | 3.07  | %
|                                                             
|                                                             
|                                                             
|                                                             
|Sunburst Acquisitions IV, Inc.(7)                             |  |                | Common |              |  |          | 600,000   |  |  |  | 8.75  | %
|                                                             
|                                                             
|                                                             
|                                                             
|HFG Properties Ltd.(8)                                        |  |                | Common |              |  |          | 727,452   |  |  |  | 10.61 | %
|                                                             
|                                                             
|                                                             
|                                                             
|All directors and executive
Officers as a group(7 persons)(9) |  |                | Common |              |  |          | 1,802,359 |  |  |  | 26.28 | %



---

|* |  | Less than 1%
|- |  | ------------

24



---



##### Table of Contents



|(1) |  | The inclusion herein of any shares of common stock does not constitute an
admission of beneficial ownership of such shares, but are included in
accordance with rules of the Securities and Exchange Commission (SEC).
The shareholdings include, pursuant to rules of the SEC, shares of common
stock subject to options or warrants which are presently exercisable or
which may become exercisable within 60 days following March 31, 2001
(exercisable options).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Includes 727,452 shares owned by HFG Properties Ltd., an Arizona limited
partnership of which Mr. Heim is a general partner, and 5,280 shares owned
by Sonoita Resources, an Arizona limited liability company of which Mr.
Heim is a member. James M. Heim and Marlene Heim directly own an
aggregate of 583,440 shares of common stock.                                                                                                                               
|   
|   
|   
|   
|(3) |  | Comprised of 184,500 shares, 3,520 shares owned by Sonoita Resources, an
Arizona limited liability company of which Mr. Metz is a member, and
32,500 shares subject to exercisable options.                                                                                                                                                                                                                                                                             
|   
|   
|   
|   
|(4) |  | Comprised of 35,000 shares subject to exercisable options.                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|   
|   
|   
|(5) |  | Comprised of 20,000 shares subject to exercisable options.                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|   
|   
|   
|(6) |  | Comprised of 44,000 shares and 166,667 shares subject to exercisable
options.                                                                                                                                                                                                                                                                                                                                                                                           
|   
|   
|   
|   
|(7) |  | The address of Sunburst Acquisitions IV, Inc. is 6363 Sunset Boulevard,
Hollywood, California 90028.                                                                                                                                                                                                                                                                                                                                                                    
|   
|   
|   
|   
|(8) |  | HFG Properties Ltd. is an Arizona limited partnership of which Mr. James
M. Heim is a general partner.                                                                                                                                                                                                                                                                                                                                                                  
|   
|   
|   
|   
|(9) |  | Comprised of 1,548,192 shares and 254,167 shares subject to exercisable
options.                                                                                                                                                                                                                                                                                                                                                                                        




ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In June 1996, Prologic executed an agreement with HFG Properties, Ltd., an
Arizona limited partnership partly owned by Prologics Chief Executive Officer,
Mr. Heim. The agreement was for the lease of office facilities occupied by
Prologic, located at 2030 East Speedway Boulevard, Tucson, Arizona. The terms
of the lease were from July 1996 through June 2001, with a monthly rent of 95%
of the market rate, as determined by an independent appraisal. During the
fiscal year ended March 31, 2000, the Company terminated this lease without
penalty. Prologic incurred obligations of $52,138 to HFG Properties, Ltd.
under the lease during the fiscal year ended March 31, 2000.

Prologic secured a new office space at 3708 East Columbia Street, Suite
110, Tucson, Arizona, and completed the move of its offices and facilities in
October 1999. The management company that leased this new property to Prologic
has no relationship with Mr. Heim or any other Company director.

The board of directors has adopted a policy that all transactions and/or
loans between Prologic and its officers, directors and/or 5% shareholders will
be on terms no less favorable than could be obtained from independent third
parties, and will be approved by a majority of the independent disinterested
directors.

25



---



##### Table of Contents



On December 30, 1999, the Company authorized the sale of 75,000 shares of
the Series C Preferred Stock, including 37,500 shares to HFG Properties, Ltd.,
an Arizona limited partnership of which Mr. Heim is a general partner, and
37,500 shares to Sonoita Resources, an Arizona limited liability company of
which Mr. Heim and Mr. Metz are members, for an aggregate of $750,000, pursuant
to two subscription agreements.

SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE

Section 16(a) of the
Securities Exchange Act of 1934, requires the Companys officers and
directors, and persons who beneficially own more than ten percent of
a registered class of the Companys equity securities, to file
reports of ownership and change in ownership with the Securities and
Exchange Commission. Such reports are filed on Form 3, Form 4, and
Form 5 under the Exchange Act. Officers, directors and greater than
ten-percent shareholders are required by Exchange Act regulations to
furnish the Company with copies of all Section 16(a) forms they file.

Based solely on its
review of the copies of such forms received by it, or written
representations from certain reporting persons that no Forms 3, 4, or
5 were required for those persons, the Company believes that all
officers, directors, and greater than ten-percent beneficial owners
complied with the applicable Section 16(a) filing requirements.

26



---



##### Table of Contents






ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K



|A. |  | Documents filed as part of this report:
|-- |  | ---------------------------------------



| | 1. |  | Financial Statements. The following financial statements filed as part
of this report are listed on pages F-2 to F-22 and herein by reference:
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

|                                                                     |  |      |     | 
|-------------------------------------------------------------------- |  | ---- | --- | 
|Financial Statement                                                  |  | Page
|                                                                     |  |     
|Report of Independent Public Accountants                             |  |      | F-3 | 
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Consolidated Balance Sheets                                          |  |      | F-4 | 
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Consolidated Statements of Operations                                |  |      | F-5 | 
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Consolidated Statements of Changes in Stockholders Equity (Deficit) |  |      | F-6 | 
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Consolidated Statements of Cash Flows                                |  |      | F-7 | 
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Notes to Consolidated Financial Statements                           |  |      | F-8 | 



| | 2. |  | Exhibit:
| | -- |  | --------

|               |  |                                                                                                                    |  |      |  | 
|-------------- |  | ------------------------------------------------------------------------------------------------------------------ |  | ---- |  | 
|Exhibit Number |  | Document                                                                                                           |  | Page
|               |  |                                                                                                                    |  |     
|3.1            |  | Articles of Incorporation by the Company*                                                                         
|              
|              
|              
|              
|3.1.1          |  | Specimen of Series A 8% Cumulative Convertible
Preferred Stock******                                              
|              
|              
|              
|              
|3.1.2          |  | Specimen of Series B 10% Cumulative Convertible
Preferred Stock*******                                            
|              
|              
|              
|              
|3.1.3          |  | Specimen of Series C 10% Cumulative Convertible
Preferred Stock*****                                              
|              
|              
|              
|              
|3.2            |  | Bylaws of the Company*                                                                                            
|              
|              
|              
|              
|4.2            |  | Specimen of Common Stock Certificate*                                                                             
|              
|              
|              
|              
|4.4            |  | [Form of] Representatives Warrant*                                                                               
|              
|              
|              
|              
|10.15          |  | 1994 Stock Option Plan, Form of Incentive Agreement*                                                              
|              
|              
|              
|              
|10.17          |  | Employment Agreement of John W. Olynick********                                                                   
|              
|              
|              
|              
|10.19          |  | Form of Lock-Up Agreement of Shareholders*                                                                        
|              
|              
|              
|              
|10.20          |  | Form of Stock Purchase Agreement, Promissory
Note and Escrow Agreement for July 31, 1994
Issuance of Common Stock*
|              
|              
|              
|              
|10.29          |  | Account Transfer & Purchase Agreement with KBK
Financial, Inc.                                                    
|              
|              
|              
|              
|10.29.1        |  | First Amendment To Account Transfer & Purchase
Agreement with KBK Financial, Inc.                                 
|              
|              
|              
|              
|10.29.2        |  | Specific Guarantee with KBK Financial, Inc.                                                                       
|              
|              
|              
|              
|21             |  | Subsidiaries***                                                                                                   



---

|*    |  | Incorporated by reference to the corresponding exhibit number in the
Companys Registration Statement on Form SB-2 (Commission file no.
33-89384-LA).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|**   |  | Incorporated by reference to the corresponding exhibit number in the
Companys Form 8-K filed on August 23, 1996.                                    
|    
|    
|    
|    
|***  |  | Incorporated by reference to the corresponding exhibit number in the
Companys Form 10-KSB filed on July 14, 1999.                                   
|    
|    
|    
|    
|**** |  | Incorporated by reference to the corresponding exhibit number in the
Companys Form 8-K filed on August 19, 1999.                                    

27



---



##### Table of Contents



|*****    |  | Incorporated by reference to exhibit number 3.1 in the Companys Form
10-QSB filed on February 22, 2000.          
|-------- |  | ------------------------------------------------------------------------------------------------------------------
|        
|        
|        
|        
|******   |  | Incorporated by reference to exhibit number 3.1(a) in the Companys Form
10-KSB filed on July 14, 2000.           
|        
|        
|        
|        
|*******  |  | Incorporated by reference to exhibit number 3.1(b) in the Companys
Form 10-KSB filed on July 14, 2000.           
|        
|        
|        
|        
|******** |  | Incorporated by reference to the corresponding exhibit number on the
Companys Form 10-KSB filed on July 14, 2000.



|B. |  | Report on Form 8-K.
|-- |  | -------------------

No reports on Form 8-K were filed during the fourth quarter ended March
31, 2001.

28



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##### Table of Contents



In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

|                     |  |                                                            
|-------------------- |  | -----------------------------------------------------------
|                     |  | PROLOGIC MANAGEMENT SYSTEMS, INC.                          
|                    
|DATED: June 29, 2001 |  | By: /s/ James M. Heim
James M. Heim
Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James M. Heim and Richard E. Metz, or either of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this annual report on
Form 10-KSB and any documents related to this report and filed pursuant to the
Securities and Exchange Act of 1934, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, full
power and authority to do and perform each and every act and thing requisite
and necessary to be done in connection therewith as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

|                     |  |                                                                                                             |  |              
|-------------------- |  | ----------------------------------------------------------------------------------------------------------- |  | -------------
|Signature            |  | Capacity                                                                                                    |  | Date         
|                     |  |                                                                                                             |  |              
|/s/ James M. Heim    |  | James M. Heim,
Chief Executive Officer
(Principal Executive, Financial and Accounting
Officer) and Director |  | June 29, 2001
|                    
|/s/ John W. Olynick  |  | John W. Olynick
President, and Director                                                                     |  | June 29, 2001
|                    
|/s/ Richard E. Metz  |  | Richard E. Metz,
Executive Vice PresidentSecretary and Director                                             |  | June 29, 2001
|                    
|/s/ Mark S. Biestman |  | Mark S. Biestman,
Director                                                                                  |  | June 29, 2001
|                    
|/s/ Herbert F. Day   |  | Herbert F. Day,
Director                                                                                    |  | June 29, 2001
|                    
|/s/ Edwin G. Hubert  |  | Edwin G. Hubert,
Director                                                                                   |  | June 29, 2001
|                    
|/s/ Bruce Carlsmith  |  | Bruce Carlsmith
Director                                                                                    |  | June 29, 2001

29



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##### Table of Contents



PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED MARCH 31, 2001 AND 2000





---



##### Table of Contents



PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONTENTS

|                                                   |                                                                      |  |     |     | 
|-------------------------------------------------- | -------------------------------------------------------------------- |  | --- | --- | 
|Report of Independent Certified Public Accountants |                                                                      |  | F-3 |    
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|Consolidated Financial Statements                  |                                                                      |  |     |    
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Consolidated Balance Sheets                                          |  |     | F-4 | 
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Consolidated Statements of Operations                                |  |     | F-5 | 
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Consolidated Statements of Changes in Stockholders Equity (Deficit) |  |     | F-6 | 
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Consolidated Statements of Cash Flows                                |  |     | F-7 | 
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|Notes to Consolidated Financial Statements         |                                                                      |  | F-8 |    

F-2



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##### Table of Contents






REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
Prologic Management Systems, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Prologic
Management Systems, Inc. and subsidiaries (the Company) as of March 31, 2001
and 2000, and the related consolidated statements of operations, changes in
stockholders deficit, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. These 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Prologic Management
Systems, Inc. and subsidiaries as of March 31, 2001 and 2000, and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has suffered recurring
losses from operations and has negative working capital and a stockholders
deficit. These factors raise substantial doubt about the Companys ability to
continue as a going concern. Managements plans in regard to these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

|                                      |  |                    
|------------------------------------- |  | -------------------
|                                      |  | (s)BDO SEIDMAN, LLP
|                                     
|                                     
|                                     
|                                     
|Los Angeles, California
June 15, 2001

F-3



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##### Table of Contents









PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                                             |                                                                                                                                                                                                                                |   |            |             |      |   |            |             |  
|------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | ---------- | ----------- | ---- | - | ---------- | ----------- | -
|                                                             |                                                                                                                                                                                                                                |   | March 31, 
|                                                             |                                                                                                                                                                                                                                |   |           
|                                                             |                                                                                                                                                                                                                                |   | 2001       |             | 2000
|                                                             |                                                                                                                                                                                                                                |   |            |             |     
|ASSETS(Note 4)                                              
|                                                            
|                                                            
|                                                            
|                                                            
|Current assets:                                             
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Cash                                                                                                                                                                                                                           |   | $          | 310,305     |      |   | $          | 447,910     |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Restricted cash (Notes 2 and 4)                                                                                                                                                                                                |   |            | 300,000     |      |   |            | 300,000     |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Accounts receivable, less allowance for
doubtful accounts of $426,156 and $335,863. Receivables include $2,106,083 and $0 of
accounts under an assignment of proceeds
agreement (Notes 1 and 4)                                |   |            | 3,375,590   |      |   |            | 7,573,226   |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Inventory                                                                                                                                                                                                                      |   |            | 369,241     |      |   |            | 203,463     |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Prepaid expenses                                                                                                                                                                                                               |   |            | 72,543      |      |   |            | 23,465      |  
|                                                             |                                                                                                                                                                                                                                |   |            |             |      |   |            |            
|Total current assets                                         |                                                                                                                                                                                                                                |   | 4,427,679  |             |      |   | 8,548,064  |            
|                                                            
|                                                            
|                                                            
|                                                            
|Property and equipment, net (Note 3)                         |                                                                                                                                                                                                                                |   | 343,214    |             |      |   | 403,435    |            
|                                                            
|                                                            
|                                                            
|                                                            
|Goodwill, net                                                |                                                                                                                                                                                                                                |   | 408,942    |             |      |   | 619,245    |            
|                                                            
|                                                            
|                                                            
|                                                            
|Other assets                                                 |                                                                                                                                                                                                                                |   | 201,631    |             |      |   | 322,342    |            
|                                                             |                                                                                                                                                                                                                                |   |            |             |      |   |            |            
|                                                             |                                                                                                                                                                                                                                | $ | 5,381,466  |             |      | $ | 9,893,086  |            
|                                                             |                                                                                                                                                                                                                                |   |            |             |      |   |            |             |  
|LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS DEFICIT      
|                                                            
|                                                            
|                                                            
|                                                            
|Current liabilities:                                        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Line of credit (Note 4)                                                                                                                                                                                                        |   | $          | 699,150     |      |   | $          | 4,647,306   |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Current portion of long-term debt and notes payable (Note 6)                                                                                                                                                                   |   |            | 1,753,377   |      |   |            | 1,646,060   |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Notes payable  related parties (Note 12)                                                                                                                                                                                      |   |            |            |      |   |            | 14,400      |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Accounts payable (Note 1)                                                                                                                                                                                                      |   |            | 2,800,003   |      |   |            | 5,674,105   |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Accrued expenses                                                                                                                                                                                                               |   |            | 910,086     |      |   |            | 706,904     |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Deferred maintenance revenue                                                                                                                                                                                                   |   |            | 141,516     |      |   |            | 502,936     |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Net liabilities of discontinued operations (Note 2)                                                                                                                                                                            |   |            |            |      |   |            | 14,061      |  
|                                                             |                                                                                                                                                                                                                                |   |            |             |      |   |            |            
|Total current liabilities                                    |                                                                                                                                                                                                                                |   | 6,304,132  |             |      |   | 13,205,772 |            
|                                                            
|                                                            
|                                                            
|                                                            
|Long-term debt, less current portion (Note 6)                |                                                                                                                                                                                                                                |   | 4,506,855  |             |      |   | 66,573     |            
|                                                             |                                                                                                                                                                                                                                |   |            |             |      |   |            |            
|Total liabilities                                            |                                                                                                                                                                                                                                |   | 10,810,987 |             |      |   | 13,272,345 |            
|                                                             |                                                                                                                                                                                                                                |   |            |             |      |   |            |            
|Commitments and contingencies (Notes 1, 4, 8, 9, 11 and 13) 
|                                                            
|                                                            
|                                                            
|                                                            
|Preferred stock (Note 8):                                   
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Series A cumulative convertible preferred stock, no par
value, 16,667 shares authorized, 16,667 shares issued and
outstanding, liquidation value of $6.00 per share plus
accrued dividends                                     |   |            | 100,000     |      |   |            | 100,000     |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Series B cumulative convertible preferred stock, no par
value, 100,000 shares authorized, 9,500 and 72,000 shares
issued and outstanding at March 31, 2001 and 2000,
liquidation value of $10 per share plus accrued dividends |   |            | 68,588      |      |   |            | 519,883     |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Series C cumulative convertible preferred stock, no par,
100,000 shares authorized, 75,000 shares issued and
outstanding, liquidation value of $10 per share plus
accrued dividends                                            |   |            | 750,000     |      |   |            | 750,000     |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Stock subscription receivable                                                                                                                                                                                                  |   |            | (191,500    | )    |   |            | (191,500    | )
|                                                             |                                                                                                                                                                                                                                |   |            |             |      |   |            |            
|                                                             |                                                                                                                                                                                                                                |   | 727,088    |             |      |   | 1,178,383  |            
|                                                             |                                                                                                                                                                                                                                |   |            |             |      |   |            |            
|                                                             | Stockholders deficit (Notes 5, 6, 8, and 9):                                                                                                                                                                                 
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Common stock, no par value, 50,000,000 shares authorized,
6,858,058 and 8,429,577 shares issued and outstanding at
March 31, 2001 and 2000 (Note 14)                                                                           |   |            | 10,077,220  |      |   |            | 9,620,812   |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Warrants                                                                                                                                                                                                                       |   |            | 741,366     |      |   |            | 728,770     |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Accumulated deficit                                                                                                                                                                                                            |   |            | (16,975,195 | )    |   |            | (14,907,224 | )
|                                                             |                                                                                                                                                                                                                                |   |            |             |      |   |            |            
|Total stockholders deficit                                  |                                                                                                                                                                                                                                |   | (6,156,609 | )           |      |   | (4,557,642 | )          
|                                                             |                                                                                                                                                                                                                                |   |            |             |      |   |            |            
|Total liabilities, preferred stock and stockholders deficit |                                                                                                                                                                                                                                | $ | 5,381,466  |             |      | $ | 9,893,086  |            
|                                                             |                                                                                                                                                                                                                                |   |            |             |      |   |            |             |  

See accompanying notes to consolidated financial statements.

F-4



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##### Table of Contents






PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                    |                                                |   |                       |            |      |   |            |            |  
|--------------------------------------------------- | ---------------------------------------------- | - | --------------------- | ---------- | ---- | - | ---------- | ---------- | -
|                                                    |                                                |   | Years ended March 31,
|                                                    |                                                |   |                      
|                                                    |                                                |   | 2001                  |            | 2000
|                                                    |                                                |   |                       |            |     
|Revenue (Note 10):                                 
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Hardware                                       |   | $                     | 24,842,295 |      |   | $          | 23,586,367 |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Professional services                          |   |                       | 4,333,003  |      |   |            | 4,873,380  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Software license                               |   |                       | 8,581,053  |      |   |            | 6,754,679  |  
|                                                    |                                                |   |                       |            |      |   |            |           
|Total revenue                                       |                                                |   | 37,756,351            |            |      |   | 35,214,426 |           
|                                                    |                                                |   |                       |            |      |   |            |           
|Cost of revenue:                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Hardware                                       |   |                       | 22,060,121 |      |   |            | 21,352,928 |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Professional services                          |   |                       | 1,607,608  |      |   |            | 3,024,476  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Software license                               |   |                       | 7,271,879  |      |   |            | 5,147,814  |  
|                                                    |                                                |   |                       |            |      |   |            |           
|Total cost of revenue                               |                                                |   | 30,939,608            |            |      |   | 29,525,218 |           
|                                                    |                                                |   |                       |            |      |   |            |           
|Gross profit                                        |                                                |   | 6,816,743             |            |      |   | 5,689,208  |           
|                                                    |                                                |   |                       |            |      |   |            |           
|Operating expenses:                                
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | General and administrative                     |   |                       | 5,375,680  |      |   |            | 4,273,033  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Selling and marketing                          |   |                       | 2,514,968  |      |   |            | 2,004,194  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Research and development                       |   |                       | 194,797    |      |   |            | 360,799    |  
|                                                    |                                                |   |                       |            |      |   |            |           
|Total operating expenses                            |                                                |   | 8,085,445             |            |      |   | 6,638,026  |           
|                                                    |                                                |   |                       |            |      |   |            |           
|Operating loss                                      |                                                |   | (1,268,702            | )          |      |   | (948,818   | )         
|                                                    |                                                |   |                       |            |      |   |            |           
|Other (income) expense:                            
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Interest expense                               |   |                       | 652,625    |      |   |            | 888,385    |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Other (income)                                 |   |                       | (23,426    | )    |   |            | (22,325    | )
|                                                    |                                                |   |                       |            |      |   |            |           
|Total other expense                                 |                                                |   | 629,199               |            |      |   | 866,060    |           
|                                                    |                                                |   |                       |            |      |   |            |           
|Loss from continuing operations                     |                                                |   | (1,897,901            | )          |      |   | (1,814,878 | )         
|                                                   
|                                                   
|                                                   
|                                                   
|Income (loss) from discontinued operations (Note 2) |                                                |   | (15,070               | )          |      |   | (1,443,949 | )         
|                                                    |                                                |   |                       |            |      |   |            |           
|Net (loss)                                          |                                                |   | (1,912,971            | )          |      |   | (3,258,827 | )         
|                                                   
|                                                   
|                                                   
|                                                   
|Preferred stock dividend                            |                                                |   | (155,000              | )          |      |   | (178,750   | )         
|                                                    |                                                |   |                       |            |      |   |            |           
|Net loss applicable to common stockholders          |                                                | $ | (2,067,971            | )          |      | $ | (3,437,577 | )         
|                                                    |                                                |   |                       |            |      |   |            |            |  
|Weighted average number of common shares:          
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Basic and diluted                              |   |                       | 8,261,151  |      |   |            | 6,590,070  |  
|                                                    |                                                |   |                       |            |      |   |            |            |  
|Loss per common share:                             
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Basic and diluted from continuing operations   |   | $                     | (.25       | )    |   | $          | (.30       | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Basic and diluted from discontinued operations |   |                       |           |      |   |            | (.22       | )
|                                                    |                                                |   |                       |            |      |   |            |           
|                                                    | Basic and diluted net loss                     |   | $                     | (.25       | )    |   | $          | (.52       | )
|                                                    |                                                |   |                       |            |      |   |            |            |  

See accompanying notes to consolidated financial statements.

F-5



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##### Table of Contents






PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 2001 AND 2000

|                       |                                                           |  |              |            |        |   |            |           |             |   |           |        |               |   |             |            |   |   |            |            |  
|---------------------- | --------------------------------------------------------- |  | ------------ | ---------- | ------ | - | ---------- | --------- | ----------- | - | --------- | ------ | ------------- | - | ----------- | ---------- | - | - | ---------- | ---------- | -
|                       |                                                           |  |              |            |        |   |            |           |             |   |           |        |               |   |             |            |   |   | Total     
|                       |                                                           |  | Common Stock |            |        |   |            |           |             |   |           |        | Stockholders'
|                       |                                                           |  |              |            |        |   |            |           | Accumulated |   | Equity   
|                       |                                                           |  | Shares       |            | Amount |   | Warrants   |           | Deficit     |   | (Deficit)
|                       |                                                           |  |              |            |        |   |            |           |             |   |          
|Balance,March 31, 1999 |                                                           |  | 4,711,349    |            |        | $ | 8,692,637  |           |             | $ | 694,230   |        |               | $ | (11,469,647 | )          |   | $ | (2,082,780 | )         
|                      
|                      
|                      
|                      
|                       | Common stock issued for interest                          |  |              | 120,000    |        |   |            | 53,170    |             |   |           |       |               |   |             |           |   |   |            | 53,170     |  
|                      
|                      
|                      
|                      
|                       | Common stock issued                                       |  |              | 3,459,972  |        |   |            | 1,000,000 |             |   |           |       |               |   |             |           |   |   |            | 1,000,000  |  
|                      
|                      
|                      
|                      
|                       | Expenses associated with issuance of common stock         |  |              |           |        |   |            | (252,645  | )           |   |           |       |               |   |             |           |   |   |            | (252,645   | )
|                      
|                      
|                      
|                      
|                       | Issuance of stock dividend on preferred series B stock    |  |              | 134,956    |        |   |            | 126,000   |             |   |           |       |               |   |             |           |   |   |            | 126,000    |  
|                      
|                      
|                      
|                      
|                       | Issuance of common stock through exercise of stock option |  |              | 3,300      |        |   |            | 1,650     |             |   |           |       |               |   |             |           |   |   |            | 1,650      |  
|                      
|                      
|                      
|                      
|                       | Issuance of warrant in connection with services performed |  |              |           |        |   |            |          |             |   |           | 34,540 |               |   |             |           |   |   |            | 34,540     |  
|                      
|                      
|                      
|                      
|                       | Dividends                                                 |  |              |           |        |   |            |          |             |   |           |       |               |   |             | (178,750   | ) |   |            | (178,750   | )
|                      
|                      
|                      
|                      
|                       | Net loss                                                  |  |              |           |        |   |            |          |             |   |           |       |               |   |             | (3,258,827 | ) |   |            | (3,258,827 | )
|                       |                                                           |  |              |            |        |   |            |           |             |   |           |        |               |   |             |            |   |   |            |           
|Balance,March 31, 2000 |                                                           |  | 8,429,577    |            |        |   | 9,620,812  |           |             |   | 728,770   |        |               |   | (14,907,224 | )          |   |   | (4,557,642 | )         
|                      
|                      
|                      
|                      
|                       | Conversion of preferred stock to common stock             |  |              | 277,782    |        |   |            | 451,295   |             |   |           |       |               |   |             |           |   |   |            | 451,295    |  
|                      
|                      
|                      
|                      
|                       | Common stock cancelled                                    |  |              | (1,959,972 | )      |   |            | (100,000  | )           |   |           |       |               |   |             |           |   |   |            | (100,000   | )
|                      
|                      
|                      
|                      
|                       | Issuance of stock dividend                                |  |              | 100,671    |        |   |            | 100,113   |             |   |           |       |               |   |             |           |   |   |            | 100,113    |  
|                      
|                      
|                      
|                      
|                       | Issuance of common stock through exercise of stock option |  |              | 10,000     |        |   |            | 5,000     |             |   |           |       |               |   |             |           |   |   |            | 5,000      |  
|                      
|                      
|                      
|                      
|                       | Issuance of warrant in connection with services performed |  |              |           |        |   |            |          |             |   |           | 12,596 |               |   |             |           |   |   |            | 12,596     |  
|                      
|                      
|                      
|                      
|                       | Dividends                                                 |  |              |           |        |   |            |          |             |   |           |        |               |   |             | (155,000   | ) |   |            | (155,000   | )
|                      
|                      
|                      
|                      
|                       | Net loss                                                  |  |              |           |        |   |            |          |             |   |           |       |               |   |             | (1,912,971 | ) |   |            | (1,912,971 | )
|                       |                                                           |  |              |            |        |   |            |           |             |   |           |        |               |   |             |            |   |   |            |           
|Balance,March 31, 2001 |                                                           |  | 6,858,058    |            |        | $ | 10,077,220 |           |             | $ | 741,366   |        |               | $ | (16,975,195 | )          |   | $ | (6,156,609 | )         
|                       |                                                           |  |              |            |        |   |            |           |             |   |           |        |               |   |             |            |   |   |            |           

See accompanying notes to consolidated financial statements.

F-6



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##### Table of Contents






PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                               |                                                                                           |                                                         |                              |            |         |           |            |            |         |            |  
|-------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------------- | ---------------------------- | ---------- | ------- | --------- | ---------- | ---------- | ------- | ---------- | -
|Increase (Decrease) in Cash                                    |                                                                                           | Years ended March 31,                                  
|                                                               |                                                                                           |                                                        
|                                                               |                                                                                           |                                                         |                              |            | 2001    |           | 2000      
|                                                               |                                                                                           |                                                         |                              |            |         |           |           
|Cash flows from operating activities:                         
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Net loss                                                                                  |                                                         | $                            | (1,912,971 | )       |           | $          | (3,258,827 | )      
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                                                                                           | Depreciation and amortization                           |                              |            | 346,710 |           |            |            | 633,206 |           
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                                                                                           | Issuance of common stock for interest incurred          |                              |            |        |           |            |            | 53,170  |           
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                                                                                           | Issuance of warrants for services and interest incurred |                              |            | 12,596  |           |            |            | 34,540  |           
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                                                                                           | Loss on disposal of fixed assets                        |                              |            |        |           |            |            | 5,118   |           
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                                                                                           | Change in assets and liabilities:                      
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                                                                                           |                                                         | Accounts receivable          |            |         | 4,197,636 |            |            |         | (5,256,062 | )
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                                                                                           |                                                         | Inventory                    |            |         | (165,778  | )          |            |         | 313,474    |  
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                                                                                           |                                                         | Prepaid expenses             |            |         | (49,078   | )          |            |         | (19,200    | )
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                                                                                           |                                                         | Other assets                 |            |         | 120,711   |            |            |         | (238,922   | )
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                                                                                           |                                                         | Accounts payable             |            |         | 1,985,898 |            |            |         | 2,837,261  |  
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                                                                                           |                                                         | Accrued expenses             |            |         | 148,294   |            |            |         | 100,885    |  
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                                                                                           |                                                         | Deferred maintenance revenue |            |         | (361,420  | )          |            |         | 382,045    |  
|                                                               |                                                                                           |                                                         |                              |            |         |           |            |           
|                                                               | Total adjustments                                                                         |                                                         |                              | 6,235,569  |         |           |            | (1,154,485 | )      
|                                                               |                                                                                           |                                                         |                              |            |         |           |            |           
|Net cash provided by (used in) continuing operating activities |                                                                                           |                                                         | 4,322,598                    |            |         |           | (4,413,312 | )         
|                                                              
|                                                              
|                                                              
|                                                              
|Net cash used in discontinued operations (Note 2)              |                                                                                           |                                                         | (14,061                      | )          |         |           | (447,237   | )         
|                                                               |                                                                                           |                                                         |                              |            |         |           |            |           
|Net cash provided by (used in) operating activities            |                                                                                           |                                                         | 4,308,537                    |            |         |           | (4,860,549 | )         
|                                                              
|                                                              
|                                                              
|                                                              
|Cash flows from investing activities:                         
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Purchase of equipment                                                                     |                                                         |                              | (76,185    | )       |           |            | (207,190   | )      
|                                                               |                                                                                           |                                                         |                              |            |         |           |            |           
|Net cash used in investing activities                          |                                                                                           |                                                         | (76,185                      | )          |         |           | (207,190   | )         
|                                                               |                                                                                           |                                                         |                              |            |         |           |            |           
|Cash flows from financing activities:                         
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Net change in line of credit                                                              |                                                         |                              | (3,948,156 | )       |           |            | 3,413,050  |        
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Issuance of long-term debt and notes payable                                              |                                                         |                              |           |         |           |            | 744,280    |        
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Issuance of Series C cumulative convertible preferred stock                               |                                                         |                              |           |         |           |            | 558,500    |        
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Issuance of common stock                                                                  |                                                         |                              | 5,000      |         |           |            | 749,005    |        
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Repayment of debt                                                                         |                                                         |                              | (401,801   | )       |           |            |           |        
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Stock cancellation expenses                                                               |                                                         |                              | (25,000    | )       |           |            |           |        
|                                                               |                                                                                           |                                                         |                              |            |         |           |            |           
|Net cash (used in) provided by financing activities            |                                                                                           |                                                         | (4,369,957                   | )          |         |           | 5,464,835  |           
|                                                               |                                                                                           |                                                         |                              |            |         |           |            |           
|Net increase (decrease) in cash                                |                                                                                           |                                                         | (137,605                     | )          |         |           | 397,096    |           
|                                                              
|                                                              
|                                                              
|                                                              
|Cash, beginning of year                                        |                                                                                           |                                                         | 447,910                      |            |         |           | 50,814     |           
|                                                               |                                                                                           |                                                         |                              |            |         |           |            |           
|Cash, end of year                                              |                                                                                           | $                                                       | 310,305                      |            |         | $         | 447,910    |           
|                                                               |                                                                                           |                                                         |                              |            |         |           |            |            |        
|Supplemental statement of cash flow information:              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Cash paid during the year for interest                                                    |                                                         | $                            | 486,628    |         |           | $          | 812,403    |        
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Cash paid during the year for taxes                                                       |                                                         |                              |           |         |           |            |           |        
|                                                               |                                                                                           |                                                         |                              |            |         |           |            |            |        
|Non-cash financing and investing activities:                  
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Conversion of debt and interest to Series C preferred stock                               |                                                         |                              |           |         |           |            | 220,780    |        
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Subscription receivable                                                                   |                                                         |                              |           |         |           |            | 191,500    |        
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Conversion of Series B Preferred Stock                                                    |                                                         |                              | (451,294   | )       |           |            |           |        
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Conversion of accounts payable to long-term note                                          |                                                         |                              | 5,000,000  |         |           |            |           |        
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Preferred stock dividends paid in common stock                                            |                                                         |                              | 100,113    |         |           |            |           |        
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Note issued for stock cancellation expenses                                               |                                                         |                              | 75,000     |         |           |            |           |        
|                                                               |                                                                                           |                                                         |                              |            |         |           |            |            |        

See accompanying notes to consolidated financial statements.

F-7



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##### Table of Contents






PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE 1THE COMPANY AND ITS OPERATIONS

Nature of Business and Summary Operations

Prologic Management Systems, Inc., an Arizona corporation, and its wholly-owned
subsidiaries, BASIS, Inc. (BASIS) and Great River Systems, Inc. (GRSI),
(collectively, the Company) is a commercial systems integration, professional
services and software development firm, specializing in high-availability,
fully integrated systems. The Companys BASIS, Inc. subsidiary, headquartered
in Emeryville, California, provides systems integration services, networking
services, security and database software for the commercial market. The
Companys Tucson office, which also serves as its corporate headquarters,
provides professional services, including process improvement consulting
services, software development services, and support services for its clients
in the manufacturing industry.

The Companys GRSI subsidiary was dissolved in Fiscal 2000.

The Company generates the majority of its sales revenue from the resale of
hardware and software products produced by third parties, primarily Sun
Microsystems, Inc. (Sun). BASISs reseller agreement with Sun can be canceled
by either party upon 30 days notice. The Company anticipates that the reseller
agreement will continue indefinitely. The Company is contractually required to
purchase all Sun products from a designated distributor (supplier) of Sun
products. The Companys supplier offers credit terms and financing
arrangements whereby accounts receivable from the sales of certain Sun products
are assigned to the supplier and has, to whom customers are directed to send
payment. At March 31, 2001 and 2000, the Company owed approximately $7,367,035
and $5,118,101 to its supplier and has assigned $2,106,083 and $0 of accounts
receivable to its supplier.

As of March 31, 1998, the Companys common stock and warrants were listed on
the Nasdaq SmallCap Market. On June 8, 1998, the Company was informed by
Nasdaq that it failed to meet the minimum net tangible assets requirement and
the minimum bid price criteria for continued listing on the Nasdaq SmallCap
Market and therefore, its securities would be delisted. On August 7, 1998, the
Company notified Nasdaq that it would not pursue its right to appeal the
decision by Nasdaq to delist the Companys securities. The Companys
securities were delisted from the Nasdaq stock market effective with the close
of business on August 7, 1998, and trading of the Companys common stock has
continued to be conducted on the non-NASDAQ over-the-counter (OTC) market,
under the symbol PRLO. Until recently when the Companys stock began trading on
the OTC Bulletin Board, there had been no active market for the Companys
common stock since it was delisted from the NASDAQ Small Cap Market in August
1998. The delisting of the Companys securities could significantly impair the
Companys ability to obtain additional financing.

Basis of Presentation

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.
The Company has suffered recurring operating losses and has negative cash flow
from operations and a stockholders deficit. These factors raise substantial
doubt about the Companys ability to continue as a going concern. The
Companys plans with regard to these matters are described below. In addition,
the Companys ability to obtain additional financing may be impaired due
to the delisting of its securities from the Nasdaq SmallCap Market. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

F-8



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##### Table of Contents



PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1THE COMPANY AND ITS OPERATIONS (Continued)

Management Plans

The Company intends to manage its short-term liquidity through extending
payments to vendors, engaging additional investors and creditors, and
negotiating an increased credit limit with its primary supplier. The Company
believes its investment to build the infrastructure to expand the delivery of
professional services and a recently implemented sales and marketing effort
directed at selling these services to its customers will significantly improve
its operating results. The Company believes that a shift in revenue mix will
result in a more favorable gross profit margin, reduce borrowing requirements,
and produce a higher net margin, as professional services become a larger
percentage of total revenue. There can be no assurance, however, that the
Company will be able to successfully complete a shift in revenue mix or that
the transition will result in higher gross or net margins.

In addition, the Company is continuing its efforts to secure working capital
for operations and to expand its sales force on a regional basis, utilizing its
technical resources as its existing locations. However, there can be no
assurance that the Company will be able to secure additional capital, or that
if such capital is available, that the terms or conditions would be acceptable
to the Company.




NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of Prologic and its
subsidiaries GRSI and BASIS. All significant intercompany accounts and
transactions have been eliminated in consolidation.

Discontinued Operations

Great River Systems, Inc. has been accounted for as a discontinued operations
pursuant to Managements formal adoption on March 31, 2000 of a plan to
dissolve the business unit. GRSI was dissolved in 2000. Net liabilities to be
disposed of, at their expected realizable values, have been separately
classified in the accompanying balance sheet at March 31, 2001 and 2000.

Net assets of discontinued operations at March 31, 2001 and 2000 consist of:

|                                           |  |           |   |      |  |   |        | 
|------------------------------------------ |  | --------- | - | ---- |  | - | ------ | 
|                                           |  | March 31,
|                                           |  |          
|                                           |  | 2001      |   | 2000
|                                           |  |           |   |     
|Cash                                       |  | $         |  |      |  | $ | 688    | 
|                                          
|                                          
|                                          
|                                          
|Accounts receivable                        |  |           |  |      |  |   | 13,862 | 
|                                           |  |           |   |      |  |   |        | 
|Total assets                               |  |           |  |      |  |   | 14,550 | 
|                                           |  |           |   |      |  |   |        | 
|Accounts payable                           |  |           |  |      |  |   | 28,611 | 
|                                           |  |           |   |      |  |   |        | 
|Net liabilities of discontinued operations |  | $         |  |      |  | $ | 14,061 | 
|                                           |  |           |   |      |  |   |        | 

F-9



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##### Table of Contents



PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Operating results of this discontinued operation for the year ended March 31,
2001 and 2000 are shown separately in the accompanying statement of operations.
The operating results of this discontinued operation for the years ended March
31, 2001 and 2000 consist of:

|                     |  |           |         |      |  |   |            |  
|-------------------- |  | --------- | ------- | ---- |  | - | ---------- | -
|                     |  | March 31,
|                     |  |          
|                     |  | 2001      |         | 2000
|                     |  |           |         |     
|Net sales            |  | $         |        |      |  | $ | 9,218      |  
|                    
|                    
|                    
|                    
|Loss from operations |  | $         | (15,070 | )    |  | $ | (1,443,949 | )

Use of Estimates

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

Fair Value of Financial Instruments

The estimated fair value of financial instruments has been determined by the
Company using available market information and valuation methodologies.
Considerable judgement is required in estimating fair values. Accordingly, the
estimates may not be indicative of the amounts the Company could realize in a
current market exchange.

The carrying amount of accounts receivable, accounts payable and accrued
expenses approximate fair value due to the short maturity of these instruments.
The terms of notes payable and other long-term obligations approximate the
terms in the marketplace at which they could be replaced. Therefore, the fair
value approximates the carrying value of these financial instruments.

Revenue Recognition

The Company recognizes revenue from the sale of third-party hardware and
software products upon shipment from the vendor to the end user, or when
shipped from the Company, whichever is appropriate. Revenue is recognized on
sales of third-party maintenance agreements upon receipt of the billing invoice
from the vendor at which time the Company retains no further obligation to the
customer or vendor. Revenue from professional services is recognized upon
completion of the work and notification from the customer of their acceptance.
Revenue from software licensing is recognized in accordance with Statement of
Position 97-2, Software Revenue Recognition. Revenue from software licensing
is recognized when delivery of the software has occurred, a signed
non-cancelable license agreement has been received from the customer and any
remaining obligations under the license agreement are insignificant. Revenue
associated with agreements to provide product support services is recognized as
related services are provided. Revenue from annual or other renewals of
maintenance contracts is deferred and recognized on a straight-line basis over
the term of the contracts.

F-10



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##### Table of Contents



PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Restricted Cash

Restricted cash consists of a certificate of deposit that secures the Companys
revolving line of credit, which earns interest at prime minus 3.0%.

Inventory

Inventory consists primarily of third-party computer hardware and third-party
software products, which are typically awaiting transfer to a customer, and is
stated at the lower of cost (first-in, first-out) or market.

Property and Equipment

Property and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets,
which is generally five years.

Product Development

Under Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,
capitalization of software development costs begins upon the establishment of
technological feasibility of the product. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
require considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenues, estimated economic product lives and changes in software and hardware
technology. In addition, the Company has and plans to continue to purchase
software from third parties. Purchased software is also accounted for in
accordance with SFAS No. 86. Amounts that could have been capitalized under
this statement after consideration of the above factors were immaterial, and
therefore no software development costs were capitalized by the Company in 2001
or fiscal 2000.

Impairment of Long-Lived Assets

SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of any asset may not
be recoverable.

The Company assesses the recoverability of long-lived assets by determining
whether the amortization of the balances over their remaining lives can be
recovered through undiscounted future operating cash flows. The amount of
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Companys average cost of
funds. The assessment of the recoverability of long-lived assets will be
impacted if estimated future operating cash flows are not achieved.

Goodwill

Cost in excess of net assets acquired (goodwill) is being amortized on a
straight-line basis over seven years. Amortization expense totaled $210,303
for 2001 and $244,500 for 2000. During 2000, management wrote off the
remainder of the goodwill associated with the discontinuance of Great River
Systems, Inc.

F-11



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##### Table of Contents



PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Concentrations of Credit Risk

Financial instruments, which potentially expose the Company to concentrations
of credit risk, as defined by SFAS No. 105, consist primarily of accounts
receivable. The Company does not require collateral upon delivery of its
products or services.

Income Taxes

The Company accounts for income taxes utilizing the asset and liability
approach, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
basis of assets and liabilities for financial reporting purposes and tax
purposes. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
provided when management cannot determine whether or not it is more likely that
the net deferred tax asset will be realized.

Research and Development Expenses

The Company expenses research and development costs as incurred in accordance
with Statement of Financial Accounting Standards (SFAS) No. 2, Accounting
for Research and Development Costs. Research and development expenses are
costs associated with products or processes for which technological feasibility
has not been proven and future benefits are uncertain.

Stock-Based Compensation

The Company accounts for employee stock options or similar equity instruments
in accordance with Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123). SFAS No. 123 defines
a fair-value-based method of accounting for employee stock options or similar
equity instruments. This statement gives entities a choice to recognize
related compensation expense by adopting the new fair-value method or to
measure compensation using the intrinsic value method under Accounting
Principles Board (APB) Opinion No. 25 Accounting for Stock Issued to
Employees, the former standard. If the former standard for measurement is
elected, SFAS No. 123 requires supplemental disclosure to show the effect of
using the new measurement criteria.

The Company currently uses the disclosure standards of SFAS 123 but accounts
for stock based compensation using APB 25.

Earnings Per Share

FASB Statement of Financial Accounting Standard No. 128, Earnings Per Share
(SFAS 128) provides for the calculation of Basic and Diluted earnings per
share. Basic earnings per share includes no dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution of securities that could share in the earnings
of the entity. At March 31, 2001 and 2000, potential common stock, consisting
of stock options, warrants and convertible preferred stock totaling 2,470,512
and 2,750,463, respectively, are excluded from the computation of diluted
earnings per share because they are anti-dilutive.

F-12



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##### Table of Contents



PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

New Accounting Pronouncements

In April 2000, the Company adopted Financial Accounting Standards Board SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards requiring every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires changes in
the derivatives fair value to be recognized in earnings unless specific hedge
accounting criteria are met. The adoption of SFAS 133 did not have a material
impact on the consolidated financial statements.

In December 1999, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue in the financial statements filed with the SEC.
Subsequently, the SEC released SAB 101B, which delayed the implementation date
of SAB 101 for registrants with fiscal years that begin between December 16,
1999 and March 15, 2000. The Company was required to be in conformity with the
provisions of SAB 101, as amended by SAB 101B, no later than January 1, 2001.
The Company believes the adoption of SAB 101, as amended by SAB 101B, has not
had a material effect on the financial position, results of operations or cash
flows.

In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, the Interpretation of APB Opinion
No. 25 (FIN44). The Interpretation is intended to clarify certain problems
that have arisen in practice since the issuance of APB No. 25, Accounting for
Stock Issued to Employees. The effective date of the Interpretation was July
1, 2000. The provisions of the Interpretation apply prospectively, but they
will also cover certain events occurring after December 14, 1998 and after
January 12, 2000. The adoption of FIN 44 did not have a material adverse
affect on the current and historical consolidated financial statements.




NOTE 3PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

|                                     |  |                       |           |      |  |   |           | 
|------------------------------------ |  | --------------------- | --------- | ---- |  | - | --------- | 
|                                     |  | Years ended March 31,
|                                     |  |                      
|                                     |  | 2001                  |           | 2000
|                                     |  |                       |           |     
|Furniture and leasehold improvements |  | $                     | 253,481   |      |  | $ | 365,084   | 
|                                    
|                                    
|                                    
|                                    
|Equipment and software               |  |                       | 910,864   |      |  |   | 818,129   | 
|                                     |  |                       |           |      |  |   |           | 
|                                     |  |                       | 1,164,345 |      |  |   | 1,183,213 | 
|                                    
|                                    
|                                    
|                                    
|Less accumulated depreciation        |  |                       | 821,131   |      |  |   | 779,778   | 
|                                     |  |                       |           |      |  |   |           | 
|Net property and equipment           |  | $                     | 343,214   |      |  | $ | 403,435   | 
|                                     |  |                       |           |      |  |   |           | 

F-13



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##### Table of Contents



PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE 4LINE OF CREDIT

In March 1998, BASIS and GRSI obtained a line of credit in an amount that is
the lower of $5,000,000 or the sum of 85% of eligible accounts receivable,
restricted cash (see Note 2) and equipment loans in the first year (maximum
equipment loan is $250,000). This line of credit is secured by substantially
all of BASIS and GRSIs assets. As of March 31, 2001 and 2000, borrowings
under this line of credit were $699,150 and $4,647,306, respectively.

The line of credit bears monthly interest at the highest prime rate in effect
during each month plus 1.75% per annum for the portion of the loan related to
accounts receivable and prime plus 2.25% per annum for the portion related to
equipment purchases subject to a minimum charge in any month of not less than
9% per annum. Interest is based on a minimum daily loan balance of $1,000,000.
The line matured on March 31, 2001, and was fully paid on April 6, 2001.

On April 6, 2001, the Company entered into a $3,000,000 financing agreement
with KBK Financial, Inc. for a line of credit to finance its accounts
receivables. This credit facility replaced the $5,000,000 credit facility
described above. The KBK line of credit calls for an interest rate of 8%. The
agreement has no stated maturity date but can be terminated by either party
with 30 days written notice.




NOTE 5CONVERTIBLE SUBORDINATED NOTES

In November 1996, the Company borrowed $820,000 in a private offering of 10%
convertible subordinated notes. On September 29, 1997, the Company
renegotiated the conversion terms with the holders of $720,000 of the notes.
The revised terms assign a fixed conversion price of $3.75 per share, which was
$2.63 in excess of the market price of the Companys common stock on the date
of the revision. In addition, the noteholders were granted warrants to
purchase a total of 252,000 shares of the Companys common stock at a price of
$2.00 per share. The warrants were valued at approximately $257,000 ($1.02 per
share) and have been recorded in the accompanying financial statements as
additional debt issuance costs (other assets) and are amortized over the
remaining term of the notes. The warrants expire on December 31, 2001.

During December 1997, $100,000 of notes were converted into 160,000 shares of
the Companys common stock based on the fair market value of the stock on the
date of the conversion. During the year ended March 31, 1999, the remaining
noteholders converted $720,000 of notes into 72,000 shares of Series B
convertible preferred stock and warrants to purchase a total of 72,000 shares
of the Companys common stock which are exercisable at $1.00 per share, which
was the fair market value of the stock at the date of their issuance. The
warrants expired unexercised on March 31, 2001.

F-14



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##### Table of Contents



PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE 6LONG-TERM DEBT AND NOTES PAYABLE

Long-term debt and notes payable are as follows:

|                                                                                                                                                                                                                                                                                                                                                                                                               |  |           |           |      |  |   |           | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | --------- | ---- |  | - | --------- | 
|                                                                                                                                                                                                                                                                                                                                                                                                               |  | March 31,
|                                                                                                                                                                                                                                                                                                                                                                                                               |  |          
|                                                                                                                                                                                                                                                                                                                                                                                                               |  | 2001      |           | 2000
|                                                                                                                                                                                                                                                                                                                                                                                                               |  |           |           |     
|Notes payable, interest at 2% per month, secured by
various equipment, originally due on March 31, 1998, since
extended on a month-to-month basis collateralized by
common stock                                                                                                                                                                                                                               |  | $         | 110,000   |      |  | $ | 150,000   | 
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|Software purchase agreement for minimum royalties of
$250,000, with imputed interest at 10%, minimum payments
due in monthly installments of $8,890, including interest,
through December 31, 2001; secured by purchased software                                                                                                                                                                              |  |           | 76,859    |      |  |   | 150,000   | 
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|Note payable, interest at 8.5%, unsecured, principal and
interest of $2,100 due monthly through March 31, 2004                                                                                                                                                                                                                                                                                                 |  |           | 66,572    |      |  |   | 84,688    | 
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|Original note payable, interest at 2% per month plus
10,000 shares per month of restricted common stock,
unsecured. In March 2000, the Company renegotiated the
terms of the note and eliminated the common stock interest
component. The replacement note is unsecured, in the
amount of $164,500, which includes interest and expenses
previously accrued, and bears interest at 2% per month
Repaid in 2001 |  |           |          |      |  |   | 164,500   | 
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|Note payable, interest at 11% per annum on the outstanding
principal, quarterly payments of $25,000 through October
12, 2001                                                                                                                                                                                                                                                                                   |  |           | 75,000    |      |  |   |          | 
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|Note payable, interest at prime less 3.0%, due on the
earlier of the termination of the line of credit or March
28, 2001, secured by restricted cash (Note 4)                                                                                                                                                                                                                                                  |  |           | 300,000   |      |  |   | 300,000   | 
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|Note payable, interest at 11% per annum on the outstanding
principal, monthly payments of $50,000 through June 30,
2000 with a balloon payment of the remaining balance
Note is in default and is included in current portion                                                                                                                                                                                  |  |           | 722,910   |      |  |   | 813,938   | 
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|Note payable and asset agreement, interest at 10%
principle of $20,000 plus interest due bi-weekly through
April 2, 2002                                                                                                                                                                                                                                                                                       |  |           | 4,860,000 |      |  |   |          | 
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|Other                                                                                                                                                                                                                                                                                                                                                                                                          |  |           | 48,891    |      |  |   | 49,507    | 
|                                                                                                                                                                                                                                                                                                                                                                                                               |  |           |           |      |  |   |           | 
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|Total short-term debt and long-term debt                                                                                                                                                                                                                                                                                                                                                                       |  |           | 6,260,232 |      |  |   | 1,712,633 | 
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|Less current portion of long-term debt and notes payable                                                                                                                                                                                                                                                                                                                                                       |  |           | 1,753,377 |      |  |   | 1,646,060 | 
|                                                                                                                                                                                                                                                                                                                                                                                                               |  |           |           |      |  |   |           | 
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                              
|Long-term debt and notes payable, excluding current portion                                                                                                                                                                                                                                                                                                                                                    |  | $         | 4,506,855 |      |  | $ | 66,573    | 
|                                                                                                                                                                                                                                                                                                                                                                                                               |  |           |           |      |  |   |           | 

F-15



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##### Table of Contents



PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6SHORT-TERM DEBT AND NOTES PAYABLE (Continued)

A summary of long-term debt and notes payable installments after March 31, 2001
is as follows:

| |      |  |        |          
| | ---- |  | ------ | ---------
| |      |  | Amount
| |      |  |       
| | 2002 |  | $      | 1,753,377
|
|
|
|
| | 2003 |  |        | 4,475,618
|
|
|
|
| | 2004 |  |        | 15,618   
|
|
|
|
| | 2005 |  |        | 15,619   
| |      |  |        |          
| |      |  | $      | 6,260,232
| |      |  |        |          




NOTE 7INCOME TAXES

The Company has a net operating loss carryforward approximating $13 million for
federal income tax purposes, which expires in varying amounts from 2002 through
2021. Utilization of the net operating loss carryforward may be significantly
limited or eliminated as a result of change in ownership as defined in Section
382 of the internal revenue code.

A reconciliation of the difference between the provision for income taxes and
the amount that would be computed using statutory federal income tax rates is
as follows:

|                                                 |  |                       |          |      |  |   |            |  
|------------------------------------------------ |  | --------------------- | -------- | ---- |  | - | ---------- | -
|                                                 |  | Years ended March 31,
|                                                 |  |                      
|                                                 |  | 2001                  |          | 2000
|                                                 |  |                       |          |     
|Benefit computed at federal rate of 34%          |  | $                     | (650,000 | )    |  | $ | (1,108,000 | )
|                                                
|                                                
|                                                
|                                                
|State income tax benefit, net of federal benefit |  |                       | (76,000  | )    |  |   | (144,000   | )
|                                                
|                                                
|                                                
|                                                
|Increase in valuation allowance                  |  |                       | 606,000  |      |  |   | 1,098,000  |  
|                                                
|                                                
|                                                
|                                                
|Expiration of unused net operating losses        |  |                       | 120,000  |      |  |   | 154,000    |  
|                                                 |  |                       |          |      |  |   |            |  
|Benefit for income taxes                         |  | $                     |         |      |  | $ |           |  
|                                                 |  |                       |          |      |  |   |            |  

A detail of the net deferred tax asset is as follows:

|                          |                                 |   |                       |           |      |   |            |           | 
|------------------------- | ------------------------------- | - | --------------------- | --------- | ---- | - | ---------- | --------- | 
|                          |                                 |   | Years ended March 31,
|                          |                                 |   |                      
|                          |                                 |   | 2001                  |           | 2000
|                          |                                 |   |                       |           |     
|Deferred tax assets:     
|                         
|                         
|                         
|                         
|                          | Net operating loss carryforward |   | $                     | 6,007,000 |      |   | $          | 5,293,000 | 
|                         
|                         
|                         
|                         
|                          | Allowance for doubtful accounts |   |                       | 170,000   |      |   |            | 134,000   | 
|                         
|                         
|                         
|                         
|                          | Deferred maintenance revenue    |   |                       | 57,000    |      |   |            | 201,000   | 
|                         
|                         
|                         
|                         
|                          | Goodwill                        |   |                       | 40,000    |      |   |            | 40,000    | 
|                         
|                         
|                         
|                         
|                          | Other accruals                  |   |                       | 5,000     |      |   |            | 5,000     | 
|                          |                                 |   |                       |           |      |   |            |          
|Total deferred tax assets |                                 |   | 6,279,000             |           |      |   | 5,673,000  |          
|                         
|                         
|                         
|                         
|Less valuation allowance  |                                 |   | (6,279,000            | )         |      |   | (5,673,000 | )        
|                          |                                 |   |                       |           |      |   |            |          
|Net deferred tax assets   |                                 | $ |                      |           |      | $ |           |          
|                          |                                 |   |                       |           |      |   |            |           | 

F-16



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##### Table of Contents



PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7INCOME TAXES (Continued)

Net deferred tax assets of approximately $6,279,000 have been offset by a
valuation allowance since management cannot determine whether it is more likely
than not such assets will be realized.




NOTE 8CAPITAL STOCK

Common Stock

In fiscal 2000, the Company issued 120,000 shares of common stock in connection
with month-to-month extensions on a $100,000 bridge note payable. The terms of
the bridge note extension require the Company to issue 10,000 additional shares
of common stock to the lender for each month the note is extended. The fair
value of these shares was charged to interest expense. The note was fully paid
in 2001.

During fiscal year ending March 31, 2000, the Company entered into a Stock
Purchase and Merger Agreement (SPMA) with Sunburst Acquisitions IV, Inc., a
Colorado corporation (Sunburst). The terms of the SPMA required Sunburst to
purchase up to 6,171,235 shares of the Companys common stock for $5,000,000.
The investment by Sunburst was to be staged in two parts. The first stage
(Tranche 1) was a purchase of 3,459,972 shares at $.289 per share, for a
total of $1,000,000. The second stage (Tranche 2) was to be a purchase of up
to 1,820,791 shares at $1.0984 per share, for a total of $2,000,000 was to take
place by December 31, 1999. At December 31, 1999, Sunburst had not performed
any contractual obligation beyond the initial in August of 1999 and as a result
of Sunbursts default the SPMA was, thereafter, effectively abandoned. The
Company incurred costs of $252,645 in expenses associated with this agreement.
On February 16, 2001, the Company signed a settlement agreement with Sunburst
resulting in the Company canceling 1,959,972 shares of common stock originally
issued to Sunburst. Also, in connection with this settlement the
Company assigned to certain employees of the Company the right to
purchase 900,000 shares of the Companys common stock
from Sunburst and such employees purchased such shares for $300,000. The Company incurred $100,000 in expenses
associated with this transaction.

In fiscal 2000, the Company declared a Series B preferred stock dividend. The
dividend was paid by issuing 134,956 shares of common stock. The fair value of
these shares was $126,000 on the date of grant.

In fiscal 2001, the Company declared a Series B and Series C preferred stock
dividend. The dividends were paid by issuing 100,671 shares of common stock.
The fair value of these shares was $100,113 on the date of grant.

The Company issued 10,000 and 3,300 shares of common stock in connection with
employee stock options exercised during 2001 and 2000, respectively.

Common Stock Warrants

In fiscal 2000, the Company issued warrants for the purchase of 40,000 shares
of common stock at $1.00 per share in connection with consulting services that
were rendered during the year. The fair value of $34,540 of these warrants was
recorded as consulting expense in the accompanying financial statements.

In fiscal 2001, the Company issued warrants for the purchase of 66,666 shares
of common stock at $0.75 per share in connection with consulting services that
were rendered during the years. The fair value of these warrants resulted in
the Company recording a $12,596 consulting expense in the accompanying
financial statements.

F-17



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##### Table of Contents



PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8CAPITAL STOCK (Continued)

Series A Cumulative Convertible Preferred Stock

The Series A preferred stock agreement provides for dividends at the rate of
8%, payable quarterly in cash or shares of common stock at a stated price of
$2.00 per share, at the discretion of the Companys Board of Directors.
Cumulative unpaid dividends totaled approximately $24,000 and $16,000 at March
31, 2001 and 2000, respectively. Holders of Series A preferred stock have
liquidation preference over holders of common stock and receive $6.00 per share
plus accrued dividends, in the event of liquidation. The agreement defines a
more than 50% change in voting power as a liquidation.

Holders of Series A preferred stock may convert each share of Series A
preferred stock into shares of common stock with a minimum stated value of
$2.00 per share beginning after June 1998, at a conversion rate of $6.00 per
preferred stock share (each share of Series A preferred is convertible into
three shares of common stock), subject to adjustment. In addition, for each
share of common stock received through conversion, holders were entitled to
receive one warrant to purchase one share of common stock at the conversion
price ($2.00 per share). Warrants issued under this agreement expired in
December 2000.

Series A preferred stock is subject to conversion 12 months after the issuance
at the option of the Company, contingent upon an increase in the price of
common stock equal to at least 150% of the conversion price ($3.00 per share,
subject to adjustment).

On August 30, 1999, the Companys Board of Directors amended its articles of
incorporation to reduce the number of authorized shares from 750,000 to 16,667.

Series B Cumulative Convertible Preferred Stock

In March 1998, the Company authorized 100,000 shares of 10% Series B Cumulative
Convertible preferred stock (Series B preferred). The Series B preferred stock
agreement provides for the dividends at a rate of 10% of the issued and
outstanding balance payable semi-annually beginning October 31, 1998, payable
in cash or shares of common stock, subject to provisions in the agreement.
Cumulative unpaid dividends totaled approximately $30,000 and $18,000 at March
31, 2001 and 2000, respectively.

Series B Preferred may be converted to common stock at the option of the
shareholder. The conversion rate (4.44 common shares to be received per one
preferred share) is calculated by dividing the stated value ($10 at March 31,
2001 and 2000) by the effective conversion price ($2.25 at March 31, 2001 and
2000).

During February 2001, certain holders of Series B preferred stock converted
62,500 shares of preferred stock into 277,782 shares of common stock at a
conversion rate of 4.44 common shares to one preferred share. Currently the
Company is in litigation regarding the conversion rate. See Note 13 for
further details.

The Company may redeem Series B preferred at the stated value plus accrued
dividends with at least 20 days notice to the shareholders and may not reissue
any shares repurchased.

Holders of Series B preferred stock have liquidation preference over holders of
common stock. In the event of liquidation, Series B preferred shareholders
will receive $10 per share plus accrued dividends. The agreement defines a
more than 50% change in voting power as a liquidation.

F-18



---



##### Table of Contents



PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8CAPITAL STOCK (Continued)

Series C Cumulative Preferred Stock

In December 1999, the Company authorized 100,000 shares of 10% Series C
Cumulative Convertible preferred stock. The Series C preferred stock provides
for dividends at the rate of 10% payable semi-annually beginning April 30,
2000, to be paid in cash or shares of common stock, subject to provision in the
agreement. Cumulative unpaid dividends totaled approximately $53,638 and
$18,750 at March 31, 2001 and 2000, respectively.

Series C preferred stock may be converted into common stock at the option of
the shareholder. The conversion rate (4.44 common shares to be received per
one preferred share) is calculated by dividing the stated value ($10 at March
31, 2000) by the effective conversion price ($2.25 at March 31, 2000), subject
to adjustment.

The Company may redeem the Series C preferred stock at the stated value plus
accrued dividends with at least 20 days notice to the shareholders and may not
reissue any shares repurchased.

Holders of Series C preferred stock have liquidation preference over holders of
common stock and receive $10 per share plus accrued dividends, in the event of
liquidation. The agreement defines a more than 50% change in voting power as a
liquidation.

In fiscal 2000, the Company issued 75,000 shares of Series C preferred stock to
two entities in which officers of the Company hold interests. Of the 75,000
shares issued, the Company received $337,720 in cash and $220,780 represented
conversion of debt from a related party. The due date of the remaining
$191,500 has been extended pending settlement of the Series B litigation.




NOTE 9STOCK OPTION PLAN

During 1995, the Companys Board of Directors approved the 1994 Stock Option
Plan (the Plan). The maximum number of shares that may be purchased pursuant
to the Plan is 500,000. During 2001, The Board of Directors and Shareholders
approved an amendment to the Plan to increase the number of shares of common
stock allocated to the Plan to 3,500,000 and also extended the term of the Plan
to March 29, 2011. Options granted under the Plan include incentive and
nonqualified stock options, with vesting determined on the grant date, not to
exceed ten years, and are exercisable over a ten-year maximum period at a price
to approximate the fair market value of the common stock at the date of grant.

The following table summarizes the activity under the Companys stock option
plan:

|                                               |                  |  |                       |         |                 |   |                  |     |                 |  |           |           |  |   |      |     | 
|---------------------------------------------- | ---------------- |  | --------------------- | ------- | --------------- | - | ---------------- | --- | --------------- |  | --------- | --------- |  | - | ---- | --- | 
|                                               |                  |  | Years ended March 31,
|                                               |                  |  |                      
|                                               |                  |  | 2001                  |         | 2000           
|                                               |                  |  |                       |         |                
|                                               |                  |  | Number of Shares      |         | Price Per Share |   | Number of Shares |     | Price Per Share
|                                               |                  |  |                       |         |                 |   |                  |     |                
|Options outstanding, beginning of year         |                  |  | 1,136,081             |         |                 | $ | .73              |     |                 |  | 351,250   |           |  | $ | 1.81 |    
|                                              
|                                              
|                                              
|                                              
|                                               | Granted          |  |                       | 457,000 |                 |   |                  | .55 |                 |  |           | 1,217,500 |  |   |      | .50 | 
|                                              
|                                              
|                                              
|                                              
|                                               | Canceled/expired |  |                       | 58,081  |                 |   |                  | .50 |                 |  |           | 429,369   |  |   |      | .50 | 
|                                              
|                                              
|                                              
|                                              
|                                               | Exercised        |  |                       | 10,000  |                 |   |                  | .50 |                 |  |           | 3,300     |  |   |      | .50 | 
|                                               |                  |  |                       |         |                 |   |                  |     |                 |  |           |           |  |   |      |    
|Options outstanding, end of year               |                  |  | 1,525,000             |         |                 | $ | .69              |     |                 |  | 1,136,081 |           |  | $ | .73  |    
|                                               |                  |  |                       |         |                 |   |                  |     |                 |  |           |           |  |   |      |    
|Options exercisable, end of year               |                  |  | 834,667               |         |                 | $ | .65              |     |                 |  | 488,982   |           |  | $ | 1.02 |    
|                                               |                  |  |                       |         |                 |   |                  |     |                 |  |           |           |  |   |      |    
|Weighted average fair value of options granted |                  |  |                       |         |                 | $ | .22              |     |                 |  |           |           |  | $ | .19  |    
|                                               |                  |  |                       |         |                 |   |                  |     |                 |  |           |           |  |   |      |    

F-19



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##### Table of Contents



PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9STOCK OPTION PLAN (Continued)

Options outstanding and exercisable by price range as of March 31, 2001 are as
follows:

|                         |  |             |           |             |  |           |      |             |  |          |      |  |  |          |         |  |  |   |      | 
|------------------------ |  | ----------- | --------- | ----------- |  | --------- | ---- | ----------- |  | -------- | ---- |  |  | -------- | ------- |  |  | - | ---- | 
|                         |  |             |           |             |  | Weighted 
|                         |  |             |           |             |  | Average   |      | Weighted    |  |          |      |  |  | Weighted
|                         |  |             |           |             |  | Remaining |      | Average     |  |          |      |  |  | Average 
|                         |  | Options     |           | Contractual |  | Exercise  |      | Options     |  | Exercise
|Range of Exercise Prices |  | Outstanding |           | Life        |  | Price     |      | Exercisable |  | Price   
|                         |  |             |           |             |  |           |      |             |  |         
|$.50                     |  |             | 1,325,000 |             |  |           | 3.25 |             |  | $        | .50  |  |  |          | 634,667 |  |  | $ | .50  | 
|                        
|                        
|                        
|                        
|$1.00  $1.38            |  |             | 200,000   |             |  |           | 3.63 |             |  | $        | 1.14 |  |  |          | 200,000 |  |  | $ | 1.14 | 
|                        
|                        
|                        
|                        
|$.50  $1.375            |  |             | 1,525,000 |             |  |           | 3.25 |             |  | $        | .58  |  |  |          | 834,667 |  |  | $ | .65  | 
|                         |  |             |           |             |  |           |      |             |  |          |      |  |  |          |         |  |  |   |      | 

The Company has elected to account for its stock-based compensation plans under
APB No. 25 and has therefore recognized no compensation expense in the
accompanying consolidated financial statements for stock-based employee awards
granted as the option price for all employees options grants exceeded the fair
value of the Companys common stock on the date of grant. Additionally, the
Company has computed for pro forma disclosure purposes the value of all options
granted during 2001 and 2000, using the Black-Scholes option pricing model with
the following weighted average assumptions:

|                        |  |         |         |         |  |  |         |  
|----------------------- |  | ------- | ------- | ------- |  |  | ------- | -
|                        |  | 2001    |         | 2000   
|                        |  | Options |         | Options
|                        |  |         |         |        
|Risk free interest rate |  |         | 5.01    | %       |  |  | 5.84    | %
|                       
|                       
|                       
|                       
|Expected dividend yield |  |         |        |         |  |  |        |  
|                       
|                       
|                       
|                       
|Expected lives          |  |         | 5 years |         |  |  | 5 years |  
|                       
|                       
|                       
|                       
|Expected volatility     |  |         | 34      | %       |  |  | 280-560 | %

If the Company had accounted for its stock-based compensation plans using a
fair value based method of accounting, the Companys net loss and loss per
common and common share equivalent would have been as follows:

|                                           |             |  |                       |            |      |  |   |            |  
|------------------------------------------ | ----------- |  | --------------------- | ---------- | ---- |  | - | ---------- | -
|                                           |             |  | Years ended March 31,
|                                           |             |  |                      
|                                           |             |  | 2001                  |            | 2000
|                                           |             |  |                       |            |     
|Net loss:                                 
|                                          
|                                          
|                                          
|                                          
|                                           | As reported |  | $                     | (1,912,971 | )    |  | $ | (3,258,827 | )
|                                          
|                                          
|                                          
|                                          
|                                           | Pro forma   |  |                       | (2,067,971 | )    |  |   | (3,487,395 | )
|                                          
|                                          
|                                          
|                                          
|Loss per common share  basic and diluted:
|                                          
|                                          
|                                          
|                                          
|                                           | As reported |  |                       | (.25       | )    |  |   | (.52       | )
|                                          
|                                          
|                                          
|                                          
|                                           | Pro forma   |  |                       | (.25       | )    |  |   | (.53       | )

The effects of applying SFAS No. 123 for providing pro forma disclosures for
2001 and 2000 are not likely to be representative of the effects on reported
net loss and loss per common and common share equivalent for future years,
because options vest over several years and additional awards generally are
made each year.

F-20



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##### Table of Contents



PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE 10SIGNIFICANT CUSTOMERS

The Company derives a significant portion of its total revenue from relatively
few customers. The Companys five largest customers accounted for $20,072,463
and 53.15% and 39.01% of total revenue for the year ended March 31, 2001 and
2000, respectively. Revenue from three customers was 17.41%, 12.90% and 11.24%
of total revenue in the year ending March 31, 2001. Revenue from one customer
was 12% in the year ending March 31, 2000.

At March 31, 2001 and 2000, receivables from two customers accounted for 24%
and 14%, and 21% and 12%, respectively, of total accounts receivable.

The Company anticipates that customers that represent more than 10% of total
revenue will vary from period to period depending on the placement of orders by
a particular customer or customers in any given period.




NOTE 11401(k) PLAN

The Company has a 401(k) plan for the benefit of its employees. The Company
may also make discretionary contributions to the plan in amounts determined by
management. Participants immediately vest in both their personal contributions
and in the Companys contributions. The Company contributed immaterial amounts
to the plan for the years ended March 31, 2001 and 2000.




NOTE 12RELATED PARTY TRANSACTIONS

The Company leased its Tucson facility through October 2000 from an
organization, which is partially owned by the Chief Executive Officer. Rent
expense under this lease in 2000 was $52,138.

In 2000, $86,000 in related party principal and accrued interest was converted
to Series C Preferred Stock (see Note 8).




NOTE 13COMMITMENTS AND CONTINGENCIES

The Company leases office, manufacturing and storage space, and equipment under
noncancelable operating lease agreements expiring through September 2004.
These leases contain renewal options, and the Company is responsible for
certain executory costs, including insurance and utilities. Rent expense for
2001 and 2000 was $228,476 and $208,676, respectively. Future minimum lease
payments under operating leases that have remaining noncancelable lease terms
in excess of one year at March 31, 2001 are as follows:

|                       |  |        |         | 
|---------------------- |  | ------ | ------- | 
|Years ending March 31, |  | Amount
|                       |  |       
|2002                   |  | $      | 104,866 | 
|                      
|                      
|                      
|                      
|2003                   |  |        | 83,292  | 
|                      
|                      
|                      
|                      
|2004                   |  |        | 83,292  | 
|                      
|                      
|                      
|                      
|2005                   |  |        | 43,103  | 
|                       |  |        |         | 
|                       |  | $      | 314,553 | 
|                       |  |        |         | 

F-21



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##### Table of Contents



PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13COMMITMENTS AND CONTINGENCIES

On August 1, 2000, certain holders of the Companys Series B Convertible
Preferred Stock filed an action in the Arizona Superior Court alleging that
certain conditions affecting the conversion rate were not timely met, or not
met at all, resulting in rights to convert Series B Preferred shares into a
substantially greater number of shares of the Companys common stock than
originally specified.

The terms of the Companys Series B Cumulative Convertible Preferred Stock
agreement required that if by December 31, 1999 the Series B Cumulative
Convertible Preferred Stock had not been redeemed or that the Company had not
raised at least $1.5 million from the sale of equity securities excluding the
Series B Cumulative Convertible Preferred Stock, the conversion rate would
become fifty percent of the average price of the Companys common stock during
the month of December 1999. Additionally, the Series C Cumulative Convertible
Preferred Stock agreement calls for the conversion price to be adjusted
downwards to match revised conversion prices of other preferred stock series.
Management believes the Company raised the required amount of funding to
maintain the existing conversion rate according to the terms of the Series B
Cumulative Convertible Preferred Stock agreement. If the Company had not raised
the proceeds specified in the Series B Cumulative Convertible Preferred Stock
agreement, then the Company would have recorded a deemed dividend of
approximately $400,000. On February 21, 2001, certain of the Series B Preferred
Stockholders, referred to above, requested that the Company convert their
shares of Series B Preferred Stock to common stock. The Company converted the
preferred stock of those holders at a conversion rate of $2.25 per share for a total of 227,782
shares of common stock. These Series B Preferred Stockholders
contend that the
conversion should have resulted in the issuance of approximately 4.6 million
shares and both the original complaint and counter claim remain pending. The
case is inactive while the parties determine if settlement is possible.




NOTE 14SUBSEQUENT EVENTS

In conjunction with the proposals approved by its shareholders at the Companys
2000 Annual Meeting, which was held during fiscal 2001, on April 6, 2001, the
Company filed articles of amendment to increase the authorized shares of common
stock to 50,000,000 and increase the authorized shares of preferred stock to
5,000,000.

F-22



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##### Table of Contents






EXHIBIT INDEX

|               |  |                                                                                                                    |  |      |  | 
|-------------- |  | ------------------------------------------------------------------------------------------------------------------ |  | ---- |  | 
|Exhibit Number |  | Document                                                                                                           |  | Page
|               |  |                                                                                                                    |  |     
|3.1            |  | Articles of Incorporation by the Company*                                                                         
|              
|              
|              
|              
|3.1.1          |  | Specimen of Series A 8% Cumulative Convertible
Preferred Stock******                                              
|              
|              
|              
|              
|3.1.2          |  | Specimen of Series B 10% Cumulative Convertible
Preferred Stock*******                                            
|              
|              
|              
|              
|3.1.3          |  | Specimen of Series C 10% Cumulative Convertible
Preferred Stock*****                                              
|              
|              
|              
|              
|3.2            |  | Bylaws of the Company*                                                                                            
|              
|              
|              
|              
|4.2            |  | Specimen of Common Stock Certificate*                                                                             
|              
|              
|              
|              
|4.4            |  | [Form of] Representatives Warrant*                                                                               
|              
|              
|              
|              
|10.15          |  | 1994 Stock Option Plan, Form of Incentive Agreement*                                                              
|              
|              
|              
|              
|10.17          |  | Employment Agreement of John W. Olynick********                                                                   
|              
|              
|              
|              
|10.19          |  | Form of Lock-Up Agreement of Shareholders*                                                                        
|              
|              
|              
|              
|10.20          |  | Form of Stock Purchase Agreement, Promissory
Note and Escrow Agreement for July 31, 1994
Issuance of Common Stock*
|              
|              
|              
|              
|10.29          |  | Account Transfer & Purchase Agreement with KBK
Financial, Inc.                                                    
|              
|              
|              
|              
|10.29.1        |  | First Amendment To Account Transfer & Purchase
Agreement with KBK Financial, Inc.                                 
|              
|              
|              
|              
|10.29.2        |  | Specific Guarantee with KBK Financial, Inc.                                                                       
|              
|              
|              
|              
|21             |  | Subsidiaries***                                                                                                   



---

|*        |  | Incorporated by reference to the corresponding exhibit number in the
Companys Registration Statement on Form SB-2 (Commission file no.
33-89384-LA).
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|        
|        
|        
|        
|**       |  | Incorporated by reference to the corresponding exhibit number in the
Companys Form 8-K filed on August 23, 1996.                                    
|        
|        
|        
|        
|***      |  | Incorporated by reference to the corresponding exhibit number in the
Companys Form 10-KSB filed on July 14, 1999.                                   
|        
|        
|        
|        
|****     |  | Incorporated by reference to the corresponding exhibit number in the
Companys Form 8-K filed on August 19, 1999.                                    
|        
|        
|        
|        
|*****    |  | Incorporated by reference to exhibit number 3.1 in the Companys Form
10-QSB filed on February 22, 2000.                                             
|        
|        
|        
|        
|******   |  | Incorporated by reference to exhibit number 3.1(a) in the Companys
Form 10-KSB filed on July 14, 2000.                                              
|        
|        
|        
|        
|*******  |  | Incorporated by reference to exhibit number 3.1(b) in the Companys
Form 10-KSB filed on July 14, 2000.                                              
|        
|        
|        
|        
|******** |  | Incorporated by reference to the corresponding exhibit number on the
Companys Form 10-KSB filed on July 14, 2000.