<PAGE>   1
                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended March 31, 2000.

Commission file number: 33-89384-LA

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

               Arizona                                   86-0498857
    (State or other jurisdiction of         (I.R.S. Employer Identification No.)
    incorporation or organization)

  3708 E. Columbia Street, #110, Tucson, Arizona                  85714
    (Address of principal executive offices)                    (Zip Code)

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

         (Former address: 2030 East Speedway Blvd., Tucson Arizona 85719
                     Former telephone number: 520-320-1000)

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: $35,844,426.

As of March 31, 2000, the aggregate market value of voting stock held by
non-affiliates of the issuer: $7,586,619.30 based on Common Stock outstanding of
8,429,577 shares. 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, 2000 was 8,429,577.

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

                      DOCUMENTS INCORPORATED BY REFERENCE:
                                      None
<PAGE>   2
                                     PART I

RECENT DEVELOPMENTS


Stock Purchase and Merger Agreement with Sunburst Acquisitions IV, Inc.

         As previously reported, on July 8, 1999, 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 require that
Sunburst purchase up to 5,280,763 shares of common stock of the Company for
$3,000,000 pursuant to a Regulation D Exemption under the United States
Securities Act of 1933, as amended. The investment by Sunburst was to be staged
in two parts. The first stage ("Tranche 1") purchased 3,459,972 shares at
$0.2890 per share, for a total of $1,000,000. The Company received the initial
$1 million during August 1999. The second stage ("Tranche 2") purchased up to
1,820,791 shares at $1.0984 per share, for a total of $2,000,000. The Company
used the proceeds from Tranche 1 primarily as working capital. The proceeds from
Tranche 2 were intended to be used by the Company to facilitate the acquisition
of another (unaffiliated) company (the "Tranche 2 Acquisition"), and funded
essentially simultaneously with the closing of the Tranche 2 Acquisition.
Subject to shareholder approval, upon closing of the Tranche 2 Acquisition it
was intended that the Company initiate the process to be merged with and into
Sunburst or a subsidiary of Sunburst organized for that purpose. As a condition
to closing of the merger, Sunburst was obligated to have a binding commitment
from other investors, satisfactory to the Company in form and substance, to
purchase from Sunburst or the surviving entity 890,287 shares of common stock at
$2.246 per share, for a total of $2,000,000 ("Tranche 3"). If, by December 15,
1999, either the Tranche 2 Acquisition had not been closed or the Company had
not been merged with Sunburst, then Sunburst was to purchase 455,208 shares of
the Company's common stock (at a price of $1.098 per share) for a total purchase
price of $500,000. Such purchase was to be credited against Sunburst's
contractual obligation to complete the Tranche 2 purchase. In summary, 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 purchase, and, as a result of Sunburst's
defaults, the SPMA was, thereafter, effectively abandoned. Prior to breaching
the SPMA, Sunburst had received 3,459,972 shares of the Company's common stock,
a number disproportionate to its performance under the SPMA. The Company
contends that Sunburst, having never fully paid for the shares, is unjustly
holding Prologic common stock to which it is not entitled. The Company is
continuing to hold discussions with the principals of Sunburst in an effort to
reach a resolution of the immediate situation. As of the date of this report, no
definitive settlement has been reached. As a result of Sunburst's defaults under
the SPMA, the Company will require additional equity or debt financing, from
other sources, to maintain current operations, service current debt, and assure
its ability to achieve its plans for current and future expansion. No assurance
can be given of the Company's ability to obtain such financing on favorable
terms, if at all. In June 2000, the Company engaged the investment banking firm
of Carmichael and Company to assist and advise the Company in connection with
the review of the Company's strategic alternatives. In addition to raising
capital, possible alternatives include the sale of certain assets, including
BASIS, Inc., the Company's remaining operating subsidiary.
<PAGE>   3
Closure and Dissolution of Great River Systems, Inc. Subsidiary

         As reported in the Company's Report on Form 10-QSB for the quarter
ended December 31, 1999, the Company's Great River Systems, Inc. ("GRSI")
subsidiary had not materially contributed to operations for the nine months then
ended. Revenues for GRSI were less than 1% of the Company's total net sales,
while its operations accounted for approximately 60% of the Company's net loss
for the nine-month period. The Company explored various strategic alternatives
for GRSI, but found none to be cost effective. Accordingly, the Company's Board
of Directors authorized the closure of Great River Systems, Inc. at March 31,
2000, and its subsequent dissolution. As a result, the Company recognized a
one-time restructuring charge, and a nonrecurring asset impairment charge to
goodwill, at March 31, 2000. These nonrecurring charges, together with the net
loss from operations for Great River Systems, totaled $1,443,949, and are
presented as "Net Loss from Discontinued Operations".


ITEM 1. BUSINESS

GENERAL

         Prologic Management Systems, Inc. is an Arizona corporation founded in
1984. The Company is a commercial systems integration 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, and applications software for
the commercial market.

         The Company offers clients a wide range of 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, utilizing UNIX and LINUX operating systems to deploy powerful
computing solutions, enterprise and workgroup client/server design and
optimization, relational database integration, LAN/WAN and workgroup solutions,
and offers 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.


PRODUCTS AND SERVICES

         The Company provides systems integration services, e-commerce services,
software development, proprietary software products and related services;
however, the majority of the Company's revenues are generated from systems
integration and sales of related products and services. The Company specializes
in open systems integration, utilizing UNIX and LINUX operating systems to
deploy powerful computing solutions, enterprise and workgroup client/server
design and optimization, relational database integration, LAN/WAN and workgroup
solutions, thin client computing, and offers software development expertise in
manufacturing, distribution and resource tracking for commercial clients. 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 and distribution software for
<PAGE>   4
commercial clients, as well as its intranet-based sales tracking and reporting
system and intranet-based document management, warehousing and retrieval system.

         The Company's revenues arise principally from the sale of systems
integration-related hardware products and services, the sale and integration of
third-party software, and the sale of its proprietary software. Since 1996, the
Company has continued to increase sales of its systems integration services,
which have a higher margin than sales of computer hardware and related services.
Over the long term, the Company believes that the sale of professional services
and proprietary software offers the greatest opportunity to increase the
Company's overall margins, and the Company focuses its development expenditures
principally on software and service development activities. To date, sales of
the Company's professional services and proprietary software have represented an
increasingly important percentage of gross margins. During the Company's fiscal
year ended March 31, 2000, approximately 34% of the Company's total gross margin
was generated by professional services. During the same fiscal year,
approximately 66% 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.

         The Company provides national and regional product support, as well as
Internet and Intranet application and framework and design, workgroup solutions
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, 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 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 principal
software products are described below.

         Prologic Manufacturing. Prologic Manufacturing is a comprehensive
20-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.
<PAGE>   5
         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.

         Prologic Electronic Data Interchange. The Prologic Electronic Data
Interchange is a management tool that automatically creates and electronically
sends outgoing invoices and incoming orders for inter-company communications.

         Prologic Data Collection. The Prologic Data Collection software
provides a comprehensive and sophisticated data collection applications suite
designed to meet extensive information management needs. Prologic Data
Collection is a chart-server, open file system that offers full compatibility
with other applications as well as operating systems and hardware platforms. The
Data Collection applications include Bar Code Warehouse Management, Time and
Attendance, Shop Flow and Material Reporting and Custom Applications.

         SYMRP - Supply Chain Management. The Company is currently utilizing its
SYMRP advanced scheduling software to develop a business-to-business ("B2B")
software solution for use within the supply chains of small to mid-market
enterprises ("SME"). The Company acquired SYMRP in 1996 from Symmetrix, Inc., a
Massachusetts based consulting firm. The patented Resource Planning technology
provides for the scheduling of resources, including materials, labor and
production equipment for multiple plant locations on a simultaneous basis. The
resource planning technology was designed for use in environments that require
the ability to continuously monitor and modify production, labor and material
schedules, thus providing management with the ability to utilize finite
resources at, or near, optimum capacity at all times, at multiple manufacturing
facilities around the world. The final product will extend real-time e-commerce
capabilities to all partners within a supply chain, regardless of their IT
platform.

         To date, the vast majority of the Company's operating revenues in each
fiscal year have been generated from systems integration and sales of related
products and services, and 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.
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 other products and services.


MARKETING AND DISTRIBUTION

         The Company's overall marketing and distribution effort is directed by
its corporate office in Tucson. However, the Company's BASIS, Inc. subsidiary
provides local 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, leveraging its reputation and client
base, and in the long term promote the sale of professional services and
proprietary software products to increase the Company's overall margins and
competitive advantage. To achieve this goal, the Company will address its
existing customer base, develop new corporate accounts in targeted geographical
areas and expand and develop
<PAGE>   6
strategic relationships with various companies that sell products within this
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 GE
Access Graphics, Cisco Systems, Inc., Informix Corporation, Netscape
Communications Corporation, Oracle Corporation, Progressive Networks, Inc.,
Remedy Corporation, Sun Microsystems, Inc., SunSoft, Inc., Sybase, Inc., Symbol
Technologies, Inc., and Veritas Software Corporation.

         During fiscal 2000, 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) Portland, Maine (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 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 services, and, in
the long term, the sale of proprietary software products and related 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 acquisition strategy is the most
cost-effective avenue of growth for the Company. However, delisting of the
Company's securities from trading on the NASDAQ Small Cap Market, the Company's
lack of capital resources, and the failure of Sunburst Acquisitions, IV to
fulfill its obligations under the SPMA (See PART I, RECENT DEVELOPMENTS, "Stock
Purchase and Merger Agreement with Sunburst Acquisitions IV, Inc.") have caused
the Company to suspend indefinitely its acquisition activity. As a result,
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.


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 Andersen Consulting, Cambridge
Technology Partners, Computer Sciences Corporation, PricewaterhouseCoopers,
Electronic Data Systems
<PAGE>   7
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.

         The Company's software products are intended for sale to clients with
annual revenues of approximately $10,000,000 to $100,000,000. Although the
Company is not a significant competitor in the manufacturing and distribution
software markets, it competes generally on the basis of product features and
functions, product architecture, the ability to run on a variety of industry
standard platforms, technical support and other related services. Ease of
product integration with third-party applications software and price/performance
are also factors. Products in this market are principally sold through
value-added resellers and systems integrators. The Company distributes its
software products through a national network of dealers and a field salesperson
on the East Coast. With the emerging browser technology, the impact of which
changed industry standards and expectations, several competitors have announced
that they are in the process of developing versions of their existing products
which will operate in a browser-based environment, but the Company believes that
most of their production is currently host or windows-based. The Company is
currently working towards incorporating browsers into its proprietary software
and plans to complete this development prior to introducing sales of its
proprietary software into the small to middle size enterprise market, focusing
on the application service provider model as the primary method of providing its
software products to future clients.

         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 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.
<PAGE>   8
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 July 2000,
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 66% of the Company's
fiscal 2000 revenues. 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,
2000, the Company had no assignment of proceeds and $5,118,101 in open credit
with this supplier. The current stated credit limit with this supplier, which
has been unchanged for the last three years, is $600,000. Recently the Company
extended its agreement with GE Access an additional three (3) years.
Historically, the supplier has allowed the Company to exceed its credit limits.
However, there is no assurance that this supplier will continue to do so.
Although this supplier is not the sole source of these products, the Company has
a long relationship with this supplier and would like to continue the
relationship. Although this relationship and the stated credit limit have not
caused delays in meeting customer shipments, management believes that, because
of the trends in the Company's operating results and the current low credit
limit, the Company's ability to meet customer demands would be adversely
affected if GE Access enforced the stated credit limit.

         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 fiscal year ended March 31, 2000
accounted in the aggregate for 39.01% of total revenues at 12.58%, 8.97%, 8.64%,
5.74% and 3.08% of total revenues, respectively; and in fiscal 1999, the five
largest clients accounted in the aggregate for 30.62% at 13.45%, 6.80%, 4.07%,
3.22% and 3.08% of total revenues, respectively.

         From time to time, the Company, in the ordinary course of 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 agreements, none of the Company's customers are contractually obligated to
license or purchase additional products or services from the Company. Based upon
the significant capital expenditure usually associated with the initial purchase
of the Company's products and services, 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 orders received.
<PAGE>   9
         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 application and development software, as well as
computer software in general, 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 enhance products and
to develop and 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
enhance its products, typically on an annual basis, but there can be no
assurance that the Company will be successful in developing and marketing
enhancements of the Company's existing products or new products on a timely
basis, or at all. In addition, there can be no assurance that any enhancements
or new products will adequately address the changing needs or gain the
acceptance of the marketplace. The Company employed 3 full-time programmers in
product support and development at March 31, 2000.

         Product development employees' time is expensed to research and
development. Due to current restraints in working capital, the Company has
significantly reduced corporate-funded development. In the future the Company
may be required to expend substantial funds for continuing product development,
including expenses associated with research and development activities and
additional engineering and other technical personnel. There can be no assurance
that such funds will be available to the Company given its current financial
condition and results of operations. Any failure by the Company to anticipate or
respond adequately to technological developments, customer requirements, or new
design and production techniques, or any significant delays in product
development or introduction, could have a material adverse effect on the
operating results of the Company.


EMPLOYEES

         As of March 31, 2000, the Company had approximately 49 full-time
employees, including 25 in technical services, 12 in sales and marketing and 12
in finance and administration. The Company's Tucson office employed 19 full-time
employees, and the Company's BASIS, Inc. subsidiary had 29 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. The Company's previous lease of a facility owned by a
partnership that is controlled by the family of Mr. James M. Heim, the Company's
Chief Executive Officer and Chairman of the Board, was terminated during the
fiscal year.
<PAGE>   10
         BASIS leases 10,700 square feet of office space in Emeryville,
California, under a month-to-month lease, pending renewal. BASIS' Portland,
Oregon site leases 2,672 square feet of office space under a lease that expires
March 2001. Great River Systems, Inc. leased 5,382 square feet of office space
in Eagan, Minnesota, which has been subleased (see Part I - Recent
Developments). The sublease and prime lease agreements expire December 2003.

         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.


ITEM 3. LEGAL PROCEEDINGS

         As of the date of this filing, neither the Company nor its subsidiaries
are a party to any legal proceedings, the adverse outcome of which, in
management's opinion, would have a material adverse effect on the Company's
operations or financial condition.


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

         No matters were submitted to a vote of security holders during the
quarter ended March 31, 2000.
<PAGE>   11
                                     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 has been sporadic and
generally at very low reported daily volumes. There has 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, 1998 through March 31, 2000. The quotations shown
         represent inter-dealer prices without adjustment for retail mark-ups,
         mark downs or commissions, and may not necessarily reflect actual
         transactions.

<TABLE>
<CAPTION>
                                                               Common Stock
         Quarter Ended                                         High      Low
         -------------                                         ----      ---

<S>                                                           <C>      <C>
         June 30, 1998                                        $1.50    $0.625
         September 30, 1998                                   $0.625   $0.0625
         December 31, 1998                                    $0.375   $0.0200
         March 31, 1999                                       $0.250   $0.0312
         June 30, 1999                                        $0.500   $0.0010
         September 30, 1999                                   $1.25    $0.1250
         December 31, 1999                                    $0.625   $0.1250
         March 31, 2000                                       $1.375   $0.2813
</TABLE>

As of June 2, 2000, there were 161 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
134,956 shares of common stock valued at $126,000 were paid to the Series B
stockholders.


RECENT SALES OF UNREGISTERED SECURITIES

Fiscal Year Ended March 31, 1998

1.   During the fiscal year ended March 31, 1998, the Company issued warrants to
     purchase an aggregate of 134,288 shares of common stock in consideration
     for financial advisory services rendered by financial advisors in
     transactions exempt from registration under Section 4(2) of the Securities
     Act of 1933. The exercise prices range from $0.75 to $2.00 per share of
     common stock. The expiration dates range from February 2000 to November
     2002. At March 31, 2000, warrants to purchase 13,000 shares of common
     stock, exercisable at $2.00 per share, had expired.
<PAGE>   12
2.   During the fiscal year ended March 31, 1998, the Company sold 41,667 shares
     of Series A, 8% Cumulative Convertible Preferred Stock at a purchase price
     of $6.00 per share to two non-U.S. buyers under a Regulation S private
     placement transaction exempt from registration under Section 4(2) of the
     Securities Act of 1933. The Series A stock has a dividend rate of 8%,
     payable in cash or shares of common stock. Each share of Series A stock is
     convertible into three (3) shares of common stock, or the equivalent of
     $2.00 per share. For each share of common stock received through
     conversion, the holder is entitled to receive a warrant (which shall expire
     on December 31, 2000) to purchase one share of common stock at an exercise
     price of $2.00 per share.

3.   During the fiscal year ended March 31, 1998, the Company issued warrants to
     purchase an aggregate of 252,000 shares of common stock to a group of
     private investors holding $720,000 of convertible subordinated promissory
     notes in a transaction exempt from registration under Section 4(2) of the
     Securities Act of 1933. The warrants have an exercise price of $2.00 per
     share of common stock and expire in December 2001.

4.   During the fiscal year ended March 31, 1998, the Company sold $125,000 of
     short-term equipment notes in a private offering exempt from registration
     under Section 4(2) of the Securities Act of 1933. In the prior fiscal year,
     the Company had sold $240,000 of the short-term equipment notes. During the
     fiscal year ended March 31, 1998, the Company issued 256,000 shares of
     common stock to a group of the note holders, in exchange for the
     cancellation of $160,000 of such short-term equipment notes, in a
     transaction exempt from registration under Section 4(2) of the Securities
     Act of 1933.

5.   During the fiscal year ended March 31, 1998, the Company issued 241,330
     shares of common stock at $1.00 per share to three affiliates of the
     Company for cash and the assumption of debt in a transaction exempt from
     registration under Section 4(2) of the Securities Act of 1933. The $1.00
     per share price was in excess of the market price of the Company's common
     stock on the dates of purchase.

6.   During the fiscal year ended March 31, 1998, the Company issued an
     aggregate of 96,000 shares of common stock, as a partial payment of
     interest, to the holder of a $100,000 note in a transaction exempt from
     registration under Section 4(2) of the Securities Act of 1933.

Fiscal Year Ended March 31, 1999

1.   During the fiscal year ended March 31, 1999, the Company issued 75,000
     shares of common stock and a warrant to purchase up to an additional 75,000
     shares of common stock to Series A Preferred stockholders pursuant to the
     conversion of 25,000 shares of Series A Preferred stock in a transaction
     exempt from registration under Section 4(2) of the Securities Act of 1933.

2.   During the fiscal year ended March 31, 1999, the Company issued 72,000
     shares of Series B 10% Cumulative Convertible Preferred Stock and issued
     warrants to purchase an aggregate of 72,000 shares of common stock in
     exchange for an aggregate of $720,000 of convertible subordinated
     promissory notes, held by a group of private investors, in a private
     offering exempt from registration under Section 4(2) of the Securities Act
     of 1933. The Series B stock has a stated value of $10.00 per share and a
     dividend rate of 10% per annum. Each share of Series B stock is convertible
     into a share of common stock at a rate of $2.25 per share, reduced from
     $3.75 per share. The warrants have an exercise price of $1.00 per share of
     common stock, with an expiration in March 2001.

3.   During the fiscal year ended March 31, 1999, the Company issued warrants to
     purchase an aggregate of 66,000 shares of common stock in consideration for
     financial advisory services rendered by financial
<PAGE>   13
     advisors in transactions exempt from registration under Section 4(2) of the
     Securities Act of 1933. The exercise price is $2.00 per share of common
     stock, with expiration dates ranging from February 2000 to May 2003. At
     March 31, 2000, warrants to purchase 26,000 shares of common stock had
     expired.

4.   During the fiscal year ended March 31, 1999, the Company issued 32,000
     shares of common stock to a note holder in exchange for the cancellation of
     a $20,000 of short-term equipment note, in a transaction exempt from
     registration under Section 4(2) of the Securities Act of 1933.

5.   During the fiscal year ended March 31, 1999, the Company issued an
     aggregate of 120,000 shares of common stock, as a partial payment of
     interest, to the holder of a $100,000 note in a transaction exempt from
     registration under Section 4(2) of the Securities Act of 1933.

Fiscal Year Ended March 31, 2000

1.   During the fiscal year ended March 31, 2000, the Company issued a warrant
     to purchase an aggregate of 40,000 shares of common stock as consideration
     for financial advisory services rendered by a financial services advisor in
     a transaction exempt from registration under Section 4(2) of the Securities
     Act of 1933. The exercise price is $1.00 per share of common stock, and the
     warrant expires in December 2003.

2.   During the fiscal year ended March 31, 2000, the Company issued dividends
     totaling 134,956 shares of common stock to Series B 10% Cumulative
     Convertible Preferred stockholders in a transaction exempt from
     registration. The dividends were valued at $126,000.

3.   During the fiscal year ended March 31, 2000, the Company issued an
     unsecured $164,500 note, which includes interest and expenses previously
     accrued and bears interest at 2% per month, in exchange for the
     cancellation of a $100,000 note (issued in a prior period) by the holder of
     such note in a transaction exempt from registration under Section 4(2) of
     the Securities Act of 1933.

4.   During the fiscal year ended March 31, 2000, the Company entered into an
     agreement to sell 6,171,235 shares of common stock for an aggregate of
     $5,000,000 to Sunburst Acquisitions IV, Inc. Prior to the agreement being
     abandoned, the Company had received $1,000,000 and had issued 3,459,972
     shares of common stock in a transaction exempt from registration under
     Section 4(2) of the Securities Act of 1933.

5.   During the fiscal year ended March 31, 2000, the Company sold 75,000 shares
     of Series C 10% Cumulative Convertible Preferred stock for an aggregate of
     $750,000, 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, in a
     transaction exempt from registration under Section 4(2) of the Securities
     Act of 1933. The Series C Preferred stock has a stated value of $10.00 per
     share and a dividend rate of 10% per annum. Each share of Series C
     Preferred stock is convertible into one share of common stock at a rate of
     $2.25 per share.

6.   During the fiscal year ended March 31, 2000, the Company issued an
     aggregate of 120,000 shares of common stock, as a partial payment of
     interest, to the holder of a $100,000 note in a transaction exempt from
     registration under Section 4(2) of the Securities Act of 1933.
<PAGE>   14
                                    PART III

ITEM 6. MANAGEMENT'S DISCUSSION & ANALYSIS

INTRODUCTION

         The Company provides systems integration services, software
development, proprietary software 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, Internet/intranet design
and connectivity, and graphic design services for the World Wide Web. 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 intranet-based sales tracking and reporting
system and intranet-based document management, warehousing and retrieval system.
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
<PAGE>   15
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 2000 TO FISCAL 1999

         Revenues. Total revenue increased by 163.3% for the year ended March
31, 2000 to $35,215,426 from $13,374,038 for the previous fiscal year. Sales of
third party hardware increased by 165.6% to $23,586,367 from $8,879,045 for the
year ended March 31, 1999; sales of third party and proprietary software
licenses increased by 303.7% to $6,754,679 from $1,673,393 for the year ended
March 31, 1999; and sales of professional services increased by 72.7% to
$4,873,380 from $2,821,600 for the prior fiscal year. The increase in the sales
of third party hardware and third party 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.

         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 to $29,525,218, or 83.8% of
total revenue, for the fiscal year ended March 31, 2000, from $10,368,968, or
77.5% of total revenue, for the same period of the prior fiscal year. The
overall increase as a percentage of total revenue was due to the change in sales
mix to a higher amount of hardware sales, which carry a lower margin than
professional services. The cost of third party hardware sales as a percentage of
hardware sales increased from 88.8%, or $7,882,768, to 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 $2,486,200 in the fiscal
year ended March 31, 1999 to $8,172,290 for the same period ended in 2000.
Professional services costs increased to 62.1% in fiscal 2000 from 44.2% of
service revenues in fiscal 1999. The cost of sales for software licenses
increased to 76.2% of license revenue in fiscal 2000 from 74.0% in fiscal 1999.

         The increase in the cost of third party hardware 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 computer hardware 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
computer hardware installation phase, the impact of competitive pressures
associated with computer hardware sales should diminish. The Company anticipates
that its overall margin will improve as sales of professional services become a
larger percentage of total revenue.
<PAGE>   16
         The increase in the rate of professional service cost to service sales
is the result of increased amounts of hardware installation activity, as
professional services associated with such installation carries a lower profit
margin than software development and system design and architecture services.

         The cost of software licenses increased as a percentage of total
revenue due to the increased sales of lower margin third party software in
relation to sales of the Company's higher margin propriety software. The cost of
the proprietary software is low due to the Company's complete write-off over the
last several fiscal years of all of its unamortized software development cost.

         Gross Profits. Gross profit increased by 89.3% to $5,689,208 for the
fiscal year ended March 31, 2000, as compared to $3,005,070 for the fiscal year
ended in 1999. Gross margin decreased to 16.2% in the fiscal year ended March
31, 2000 from 22.5% for the same period in 1999, due principally to the
increased sales of lower margin third party hardware products in relationship to
higher margin professional services. The Company expects professional services
as a percentage of third party product sales to increase as the new clients that
were secured in fiscal 2000 increase their usage of our service offerings.

         General and Administrative. General and administrative expenses were
$4,273,033, or 12.1% of total revenue, for the fiscal year ended March 31, 2000,
as compared to $4,281,656, or 32.0% of total revenue, for the same period of the
prior fiscal year. The decrease in general and administrative expense was due in
part to the overall restructuring within the company offset by an increase in
acquisition-related activities in the current fiscal year. The Company does not
expect to actively pursue acquisitions in the fiscal year ending March 31, 2001.
The Company expects to continue to reduce general administrative expenses as a
percentage of sales as revenue increases and corporate restructuring efforts are
eliminated.

         Selling and Marketing. Primarily as a result of increasing the sales
and marketing staff during the fiscal year ended March 31, 2000, selling and
marketing expenses increased 98.8% from $1,008,381 to $2,004,194. However, as a
percent of total revenue, selling and marketing expense decreased from 7.5% of
total revenue for the previous fiscal year to 5.7% of total revenue for the
fiscal year ended March 31, 2000. The Company expects overall selling and
marketing expense to increase during Fiscal 2001, as additional sales and
marketing staff is hired to support continued sales growth.

         Research and Development. For fiscal year 2000, the Company incurred
approximately $360,799 of research and development expense, compared $51,750 for
the prior fiscal year. At March 31, 2000, the Company elected to write off
certain costs associated with technology licenses and product feasibility
analysis incurred in previous periods.

         Operating Loss. The Company's loss from operations decreased by
$1,387,899 to $948,818, or 2.7% of total revenue, for the fiscal year ended
March 31, 2000, as compared to $2,336,717, or 17.5% of total revenue, for the
same period of the prior fiscal year. The reduction in the loss was due to
higher revenue and the decreased operating expenses as a percentage of sales.
The operating loss is primarily attributable to the Company's significant
investment in sales and marketing, acquisition efforts and operational
restructuring costs related to the discontinuance of the Company's Midwest
operating subsidiary, Great River Systems.

         The Company believes that it will continue to see gross profit erode in
the systems integration market for both hardware and software sales.
Accordingly, the Company's strategy is to continue to increase the sales of
professional services and sales of its proprietary software products and
associated services. If the Company is successful in increasing sales of
professional services and proprietary software
<PAGE>   17
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 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 expenditures for its Product
Development Group 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 licensees; 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 $888,385 in interest expense
during the fiscal year ended March 31, 2000 as compared to $412,332 for the same
period of the prior fiscal year. The increase is attributable to increased
borrowing to support the Company's increased sales and receivables. 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, 2000 and 1999. As of March 31, 2000, the Company had federal net
operating loss carryforwards of approximately $14,000,000 (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
$1,814,878, or $0.30 per share, for the fiscal year ended March 31, 2000, as
compared to a loss of $2,723,009, or $0.61 per share, for the same period of the
prior fiscal year.

         Net Loss from Discontinued Operations. During the fiscal year, the
Company discontinued operations of Great River Systems. The loss for the fiscal
year ended March 31, 2000 related to the discontinuance of the subsidiary,
including one-time charges, was $1,443,949 as compared to income of $494,822 for
the same period of the prior fiscal year.

         Net Loss including Discontinued Operations. Including charges related
to the discontinuance of the Great River Systems subsidiary, the Company had a
net loss of $3,437,577, or $0.52 per share, for the fiscal year ended March 31,
2000, as compared to a net loss of $2,311,220, or $0.50 per share, for the same
period of the prior fiscal year.


LIQUIDITY AND CAPITAL RESOURCES

         At March 31, 2000, the Company had a working capital deficit of
approximately $4,605,000 versus a deficit of approximately $1,233,000 at March
31, 1999. The increase resulted primarily from the
<PAGE>   18
total outstanding balance of the Company's revolving line of credit, which
matures on March 31, 2001, being re-categorized from a long-term to a current
liability. The cash balance at March 31, 2000 was approximately $747,910, 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 used in operations during the fiscal year ended March 31, 2000 was
approximately $4,860,547 compared to cash provided by operations of $52,198 in
fiscal 1999. The increase was due primarily to increased accounts receivable
resulting from significant sales growth. Cash used in investing activities was
approximately $207,190 at March 31, 2000 versus approximately $142,451 at March
31, 1999. The increase was due to additional capital equipment purchases. Cash
provided by financing activities in fiscal 2000 totaled approximately $5,464,835
compared to $36,211 in fiscal 1999. The increase resulted primarily from
additional advances against the Company's line of credit and the issuance of
equity securities.

         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, until
December 31, 2000.

         During July 1999, the Company entered into a Stock Purchase and Merger
Agreement ("SPMA") with Sunburst Acquisitions IV, Inc., a Colorado corporation
("Sunburst"). Pursuant to the SPMA, the Company received $1 million during
August 1999 in connection with the sale of shares of its common stock. The
Company used the funds primarily as working capital. Sunburst has not performed
any contractual obligations under the SPMA beyond the initial purchase of
shares, and, as a result of Sunburst's defaults, the SPMA was effectively
abandoned. (See PART I, RECENT DEVELOPMENTS, "Stock Purchase and Merger
Agreement with Sunburst Acquisitions IV, Inc.")

         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 5 of
the Consolidated Financial Statements) and equipment loans (maximum of
$250,000).
<PAGE>   19
This credit facility is designed to provide working capital to support the
Company's systems integration operations. Among other things the agreement
requires that the Company maintain a combined net worth at its subsidiaries of
at least $750,000. At March 31, 2000, the Company was in compliance with this
requirement. The credit facility matures at March 31, 2001, and, to support
operations, the Company will require that the line of credit be renewed or
replaced. The total amount of the line of credit outstanding at March 31, 2000
was approximately $4,647,306, and the total amount of the line of credit
outstanding at June 20, 2000 was approximately $3,592,000.

         During fiscal 2000, the Company and one of its primary vendors agreed
to convert a $1,212,000 trade payable into a promissory note. At March 31, 2000,
the principal balance was approximately $814,000. At June 30, 2000, the
principal balance was approximately $753,000, payable with interest at 12% in
monthly installments of $37,500 through September 2000, and $50,000 through
November 2000. The remaining principal balance of approximately $575,000 is due
in full on December 31, 2000.

         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. After an initial payment of $15,693, the note is
payable in twelve equal monthly installments of $15,555, including principal and
interest, through March 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 $45,000 in principle was repaid. The interest rate on
the notes is 2% per month. As of March 31, 2000, the remaining principle balance
on these notes, which are currently due, was $150,000.

         At March 31, 2000, the Company had current debt obligations, or debt
that will become due within twelve months, of approximately $1,660,000. 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. No assurance
can be given of the Company's ability to obtain such financing on favorable
terms, if at all. In June 2000, the Company engaged the investment banking firm
of Carmichael and Company to assist and advise the Company in connection with
the review of the Company's strategic alternatives. In addition to raising
capital, possible alternatives include the sale of certain assets, including
BASIS, Inc., the Company's remaining operating subsidiary.

         The terms and conditions of the Company's Series B Cumulative
Convertible Preferred Stock require that if, by December 31, 1999, the Series B
Cumulative Convertible Preferred Stock had not been redeemed and the redemption
price paid in full, or the Company had not raised at least $1.5 million from the
sale of its equity securities excluding the Series B Preferred Stock, the
conversion rate would have become fifty percent (50%) of the average of the
closing "bid" and "asked" price of the Common Stock on the NASDAQ Stock Market
during the month of December 1999 (or, if the Common Stock was not then quoted
on the NASDAQ Stock Market, the closing prices on such other market on which the
Common Stock was then quoted). At December 31, 1999, the Company had raised in
excess of $1.5 million and, therefore, the foregoing condition is no longer
effective. If the Company had not raised the proceeds specified in the Series B
Cumulative Convertible Preferred Stock Agreement, then the Company would record
a deemed dividend of approximately $400,000.
<PAGE>   20
         During the first nine months of fiscal 2000, the Company purchased
approximately $207,190 in capital equipment and software.

         Year 2000 Issue. The Company's proprietary manufacturing software
product line was Year 2000 compliant in July 1998 and was released during the
quarter ending September 30, 1998. The Company's internal development tools are
Year 2000 compliant. The proprietary wholesale distribution software product
line was Year 2000 compliant as of April 1999 and was released in May 1999.
Internally, the Company uses its distribution software accounting package. The
Company is not currently aware of, and to date has not experienced, any
significant Year 2000 compliance problems relating to the Company's proprietary
software systems that would have a material and adverse effect on the Company's
business, results of operations or financial condition. Furthermore, the Company
does not believe that clients utilizing its Year 2000 compliant software
products will have any problems with their vendors or customers because of the
Year 2000 issue due to the use of the Company's software products. However,
there can be no assurance that the Company will not discover Year 2000
compliance problems in its proprietary software or other third-party software or
hardware that will require a substantial investment to correct. The Company's
inability to fix such software on a timely basis could result in lost revenues,
increased operating costs and other business interruptions, any of which could
have a material and adverse effect on the Company's business, results of
operations and financial condition. Additionally, there can be no assurance that
utility companies, Internet network companies, Internet access companies,
third-party service providers and others outside the Company's control will be
Year 2000 compliant. Costs relating to the development of the Year 2000 issue
were included in the research and development expenses during the fiscal year
ended March 31, 1999, and the Company has not incurred any material costs or
expenses relating to Year 2000 issues during fiscal year ended March 31, 2000.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

         In February 1998, the Financial Accounting Standards Board issued
Statement No. 132, "Employers' Disclosures about Pension and Other
Postretirement Benefits" (SFAS No. 132), which is effective for financial
statements issued for fiscal years beginning after December 15, 1997. SFAS No.
132 revises employers' disclosures about pension and other postretirement
benefit plans. SFAS No. 132 requires comparative information for earlier years
to be restated. The Company adopted SFAS No. 132 for its fiscal year beginning
April 1, 1998. Adoption of SFAS No. 132 did not have an effect on the Company's
financial statement presentation and disclosures.

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

"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, 2000. 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.
<PAGE>   21
                                    PART IV.

ITEM 7. FINANCIAL STATEMENTS

The financial statements attached to this Report on Form 10-KSB as pages F-1 to
F-23 are incorporated herein by reference.


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

         Not applicable.
<PAGE>   22
                                     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.

<TABLE>
<CAPTION>
         Name                      Age   Position                               Director Since
         ----                      ---   --------                               --------------
<S>                                <C>   <C>                                    <C>
         James M. Heim (1)(2)      49    Chief Executive Officer and Director   1984
         Richard E. Metz (1)(2)    53    President and Director                 1984
         Mark S. Biestman (1)(2)   43    Director                               1997
         John W. Olynick           52    Vice President of Sales & Strategic
                                         Business Development
</TABLE>

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

         Directors are elected to serve until the next Annual Meeting of
Shareholders. Prior to March 5, 1999, the Board of Directors consisted of five
members. On March 5, 1999, two of the independent directors resigned, citing
conflicts with other obligations. The Board of Directors concluded that, in view
of the then-recent delisting of the Company's common stock and the Company's
disappointing financial performance, its ability to identify and appoint
qualified, unaffiliated individuals to fill the vacancies was unlikely. The
Board of Directors, by the authority contained in the Bylaws of the Corporation,
approved a resolution that until the next meeting of shareholders, the number of
Directors of the Corporation shall be three. For the remainder of their terms,
the following Directors were appointed to serve as both the Audit Committee and
the Compensation Committee: Mark S. Biestman, Chairman, James M. Heim and
Richard E. Metz.

         JAMES M. HEIM, Chief Executive Officer, Chairman of the Board and
Director. Mr. Heim is a co-founder of the Company and has served as Chief
Executive Officer and as a Director of the Company since its inception in 1984.
In addition, Mr. Heim served as the Chief Financial Officer of the Company from
1984 through 1994 and its President from 1984 until December 1999. Mr. Heim has
over twenty years of business management experience and is responsible for
capital raising, acquisition, and other corporate activities. Mr. Heim holds
both a Juris Doctorate from the College of Law and a Bachelor of Science in
Business Administration from the University of Arizona.

         RICHARD E. METZ, President, Chief Administrative Officer, Secretary and
Director. Mr. Metz is a co-founder of the Company and has served as a director
since its inception in 1984. He has served as the Company's President since
December 1999. Mr. Metz has thirty years of business management and investment
experience, including ten years as a computer hardware and software VAR prior to
his affiliation with the Company. Since 1982, Mr. Metz has owned and managed The
Metz Group, a business and management 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.

         MARK S. BIESTMAN, Director. Mr. Biestman, who became a Director in
1997, has worked in the information technology field for over 19 years in both
sales and marketing management. Mr. Biestman is
<PAGE>   23
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. Mr. Biestman has
also served as Netscape Communications' Vice President of Sales, Western Region,
as Vice President of Telecommunications Sales at Oracle Corporation, and as Vice
President of Sales and Industry Marketing at Metaphor. 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.

         JOHN W. OLYNICK, Corporate Vice President of Sales & Strategic Business
Development, and President of the Company's subsidiary, BASIS, Inc. Mr. Olynick,
who joined Prologic in September 1999 as its Corporate Vice President of Sales &
Strategic Business Development, is responsible for the management and
coordination of sales and marketing resources, as well as strategic business
development. Mr. Olynick also serves as President of the Company's BASIS, Inc.
subsidiary. 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.
<PAGE>   24
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, 2000 to the following Executive Officers: Mr. James M.
Heim, the Company's Chief Executive Officer, Mr. Richard E. Metz, the Company's
President, and Mr. John W. Olynick, the Company's Vice President, Sales &
Strategic Business Development, and President of the Company's BASIS, Inc.
subsidiary.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                               Annual Compensation               Long-Term Compensation
                               -------------------               ----------------------
Name and Other                                                                     All Other
Principal Position         Year     Salary      Bonus     Stock Options/SARs(#)    Compensation
------------------         ----     ------      -----     ---------------------    ------------

<S>                        <C>     <C>         <C>        <C>                      <C>
James M. Heim,             2000    $153,666    $68,694         250,000(1)                  0
Chief Executive Officer    1999    $ 72,000          0               0                     0
                           1998    $ 62,000          0               0                     0

Richard E. Metz,           2000    $104,000    $59,471          32,500(2)                  0
President                  1999    $  5,000          0               0
                                                                                           0
                           1998    $ 27,500          0               0                     0

John W. Olynick,           2000    $165,000    $94,926         250,000(3)            $ 4,200(4)
Vice President
</TABLE>

(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, 2000, 32,500 non-qualified stock
options were granted as payment for past services.

(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, and 83,333 optioned shares are
scheduled to vest at August 31, 2000 and 2001.

(4) During the fiscal year ended March 31, 2000, Mr. Olynick received a $4,200
car allowance.

Mr. Olynick joined the Company in September 1999, as its Vice President, Sales &
Strategic Business Development. Pursuant to the Employment Agreement, which
expires August 31, 2002, Mr. Olynick's annual salary is $150,000, with other
compensation including (1) a first year bonus plan of up to $50,000, (2) a bonus
of up to $50,000 per year, based on 1% of the total consolidated adjusted gross
revenue of the Company, and (3) participation in the Company's Executive Bonus
Plan. If, on or before September 1, 2000, Mr. Olynick is terminated by the
Company without cause or if he terminates his employment for good reason, Mr.
Olynick is entitled to 18 months severance compensation. If however such
termination occurs after September 1, 2000, Mr. Olynick is entitled to 12 months
severance compensation.
<PAGE>   25
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, 2000,
concerning the Common Stock beneficially owned by (i) each director of the
Company (ii) the Company's Chief Executive Officer and its other executive
officer, (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.

<TABLE>
<CAPTION>
                                                                       Shares
                                                                       Beneficially     Percent
Title of Class of Stock    Name(1)                                     Owned            of Class
-----------------------    -------                                     ---------        --------
<S>                        <C>                                         <C>              <C>
Common                     HFG Properties Ltd.                           697,320         8.05%
Common                     James M. Heim & Marlene Heim                1,089,060(2)     12.91%
Common                     Richard E. Metz                               201,700(3)      2.39%
Common                     Mark S. Biestman                               35,000(4)      0.41%
Common                     John W. Olynick                                83,334(5)      0.98%

Common                     All directors, nominees and executive
                           officers as a group (4 persons)             1,409,094(6)     16.69%
</TABLE>


(1) Except as otherwise noted below, the persons named in the table have sole
voting and investment power with respect to all shares of the common stock shown
as beneficially owned by the person named, subject to applicable community
property law. The shareholdings include, pursuant to rules of the Securities and
Exchange Commission, shares of Common Stock which a person has a right to
acquire as of March 31, 2000 or within 60 days thereafter. Except as otherwise
noted, the addresses for the persons named in the table is 3708 E. Columbia
Street, Suite 110, Tucson, Arizona 85714.

(2) Includes 697,320 shares owned by HFG Properties Ltd., an Arizona limited
partnership of which Mr. Heim is the sole general partner. James M. Heim and
Marlene Heim directly own an aggregate of 391,740 shares of Common Stock.

(3) Comprised of 169,200 shares of common stock and 32,500 shares subject to
stock options that were exercisable at March 31, 2000 or within 60 days
thereafter.

(4) Comprised of 35,000 shares subject to stock options that were exercisable at
March 31, 2000 or within 60 days thereafter.

(5) Comprised of 83,334 shares subject to stock options that were exercisable at
March 31, 2000 or within 60 days thereafter.

(6) Comprised of 1,258,260 shares of common stock and 150,834 shares subject to
stock options that were exercisable at March 31, 2000 or within 60 days
thereafter.
<PAGE>   26
OPTIONS GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                                                 Potential Realizable Value at
                                                                                    Assumed Annual Rate of
                  Number of         % of Total                                     Stock Price Appreciation
                  Shares            Options Granted   Exercise or                       For Option Term
                  Underlying        To Employees in   Base Price    Expiration     -------------------------
Name              Options Granted   Fiscal Year       ($/Sh)        Date           5%            10%
----              ---------------   ---------------   -----------   ----------     -----------   -----------

<S>               <C>               <C>               <C>           <C>            <C>           <C>
James M. Heim     250,000           100%              $0.50         Cancelled              N/A           N/A

Richard E. Metz   32,500            100%              $0.50         06/15/04       $ 20,739.58   $ 26,170.79

John W. Olynick   250,000           100%              $0.50         12/30/04       $159,535.20   $201,313.75
</TABLE>

No Director or executive officer exercised any options during the fiscal year
ended March 31, 2000.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         During the fiscal year ended March 31, 2000, the Company terminated its
         lease of office space owned by a partnership that is controlled by the
         family of Mr. James M. Heim, the Company's Chief Executive Officer and
         Chairman of the Board. The Company had leased the property since July
         1996 for a reduced monthly rent based which was 5% below an independent
         appraised market rate, which increased annually in a percentage amount
         equal to one-half of the percentage increase in the Consumer Price
         Index for the previous year. During the fiscal year ended March 31,
         2000, the Company incurred obligations of $52,138 to such partnership
         under the lease.
<PAGE>   27
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-23 and herein by reference:

<TABLE>
<CAPTION>
         Financial Statement                                                Page
         -------------------                                                ----
<S>                                                                         <C>
         Report of Independent Public Accountants                            F-3
         Consolidated Balance Sheets                                         F-4
         Consolidated Statements of Operations                               F-5
         Consolidated Statements of Changes in Shareholders' Equity          F-6
         Consolidated Statements of Cash Flows                               F-7
         Notes to Consolidated Financial Statements                          F-8
</TABLE>

         2.   Exhibit:

<TABLE>
<CAPTION>
         Exhibit Number    Document                                                  Page
         --------------    --------                                                  ----
<S>                        <C>                                                       <C>
         3.1               Articles of Incorporation by the Company*
         3.1(a)            Specimen of Series A 8% Cumulative Convertible
                           Preferred Stock                                            31
         3.1(b)            Specimen of Series B 10% Cumulative Convertible
                           Preferred Stock                                            37
         3.1(c)            Specimen of Series C 10% Cumulative Convertible
                           Preferred Stock*****
         3.2               Bylaws of the Company*
         3.3               Articles of Incorporation of Great River Systems, Inc.*
         3.4               Bylaws of GRSI*
         4.2               Specimen of Common Stock Certificate*
         4.4               [Form of] Representative's Warrant*
         10.1              Stock Purchase and Merger Agreement (Sunburst)****
         10.15             1994 Stock Option Plan, Form of Incentive
                           Agreement*
         10.17             Employment Agreement of John W. Olynick                    43
         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             Coast Business Credit Loan and Security Agreement ***
         10.30             SYMRP Purchase Agreement*
         10.31             Agreement and Plan of Reorganization dated as of
                           June 1, 1996 among Prologic Management Systems,
                           Inc., BASIS, Inc., BASIS Acquisition Corp. and
                           certain Principal Shareholders of BASIS, Inc.**
         11.1              Earnings per Share Calculation                             53
         21                Subsidiaries
         27                Financial Data Schedule                                    54
</TABLE>
<PAGE>   28
* 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.


B.       Report on Form 8-K.

         During the fourth quarter of fiscal 2000, the Company filed a Report on
Form 8-K dated December 30, 1999, reporting under Item 5. Other Events: (1) the
failure of Sunburst Acquisitions IV, Inc. ("Sunburst") to meet its Tranche 2
Purchase obligations under the July 8, 1999 Stock Purchase and Merger Agreement
(the "SPMA") between the Company and Sunburst, and the Company's expectation
that neither the additional stock purchases required of Sunburst under the SPMA
nor the merger of the Company into Sunburst as contemplated therein, will occur
as originally reported; (2) the expiration of the Company's September 15, 1999
definitive agreement to acquire Solid Systems, Inc. by the scheduled closing
date of December 15, 1999; (3) the designations and sale of 75,000 shares of the
Company's Series C Convertible Preferred Stock for an aggregate of $750,000; and
(4) the Company's Board of Directors' termination of the employment contract
with James M. Heim, under which Mr. Heim served as President of the Company, and
Mr. Heim's acceptance of the Board's request to retain his services, on an "at
will" basis, as the Company's Chairman of the Board and Chief Executive Officer
at a salary adjusted accordingly.
<PAGE>   29
               PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES


                        CONSOLIDATED FINANCIAL STATEMENTS


                       YEARS ENDED MARCH 31, 2000 AND 1999


<PAGE>   30

               PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
                                    CONTENTS



<TABLE>
<S>                                                                             <C>
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
</TABLE>

                                      F-2

<PAGE>   31

               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, 2000
and 1999, 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 generally accepted auditing
standards. 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, 2000 and 1999, and the results of
their operations and cash flows for the years then ended in conformity with
generally accepted accounting principles.

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 cash flows from its operating activities. 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 5, 2000

                                      F-3

<PAGE>   32

               PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                               March 31,
                                                                                               ---------
                                                                                         2000             1999
                                                                                         ----             ----
<S>                                                                                  <C>                <C>
ASSETS (Note 4)

Current assets:
   Cash                                                                              $    447,910       $     50,814
   Restricted cash (Notes 2 and 4)                                                        300,000            300,000
   Accounts receivable, less allowance for doubtful accounts of $335,863 and
     $264,214 Receivables include $0 and $236,007 of accounts under an
     assignment of proceeds agreement (Notes 1 and 4)                                   7,573,226          2,317,164
   Inventory                                                                              203,463            516,937
   Prepaid expenses                                                                        23,465              4,265
                                                                                     ------------       ------------

Total current assets                                                                    8,548,064          3,189,180

Property and equipment, net (Note 3)                                                      403,435            425,652
Goodwill, net                                                                             619,245          1,028,162
Other assets                                                                              322,342             83,420
                                                                                     ------------       ------------
                                                                                     $  9,893,086       $  4,726,414
                                                                                     ============       ============


LIABILITIES AND STOCKHOLDERS' DEFICIT

 Current liabilities:
   Short-term debt and notes payable (Note 6)                                        $  1,646,060       $    349,136
   Notes payable - related parties (Note 12)                                               14,400            100,400
   Accounts payable (Note 1)                                                            5,674,105          2,836,844
   Accrued expenses                                                                       654,154            553,269
   Deferred maintenance revenue                                                           502,936            120,891
   Short-term portion of line of credit (Note 4)                                        4,647,306                 --
   Net liabilities of discontinued operations (Note 2)                                     14,061            461,298
                                                                                     ------------       ------------

Total current liabilities                                                              13,153,022          4,421,838

Long-term portion of line of credit (Note 4)                                                   --          1,234,256

Long-term debt and notes payable, excluding current portion (Note 6)                       66,573            533,217
                                                                                     ------------       ------------

Total liabilities                                                                      13,219,595          6,189,311
                                                                                     ------------       ------------

Commitments and contingencies (Notes 1, 4, 8, 9, 11 and 13)

Stockholders' deficit (Notes 5, 6, 8, and 9):
   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, 72,000 shares issued and outstanding, liquidation value
     of $10 per share plus accrued dividends                                              519,883            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                 --
   Common stock, no par value, 10,000,000 shares authorized, 8,429,577 and
     4,711,349 shares issued and outstanding                                            9,620,812          8,692,637
   Stock subscription receivable                                                         (191,500)                --
   Warrants                                                                               728,770            694,230
   Accumulated deficit                                                                (14,854,474)       (11,469,647)
                                                                                     ------------       ------------

Total stockholders' deficit                                                            (3,326,509)        (1,462,897)
                                                                                     ------------       ------------

Total liabilities and stockholders' deficit                                          $  9,893,086       $  4,726,414
                                                                                     ============       ============
</TABLE>


          See accompanying notes to consolidated financial statements.

                                      F-4

<PAGE>   33

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


<TABLE>
<CAPTION>
                                                              Years ended March 31,
                                                              ---------------------
                                                             2000               1999
                                                             ----               ----
<S>                                                      <C>                <C>
Revenue (Note 10):
   Hardware                                              $ 23,586,367       $  8,879,045
   Professional services                                    4,873,380          2,821,600
   Software license                                         6,754,679          1,673,393
                                                         ------------       ------------

Total revenue                                              35,214,426         13,374,038
                                                         ------------       ------------

Cost of sales:
   Hardware                                                21,352,928          7,882,768
   Professional services                                    3,024,476          1,247,336
   Software license                                         5,147,814          1,238,864
                                                         ------------       ------------

Total cost of sales                                        29,525,218         10,368,968
                                                         ------------       ------------

Gross profit                                                5,689,208          3,005,070
                                                         ------------       ------------

Operating expenses:
   General and administrative                               4,273,033          4,281,656
   Selling and marketing                                    2,004,194          1,008,381
   Research and development                                   360,799             51,750
                                                         ------------       ------------

Total operating expenses                                    6,638,026          5,341,787
                                                         ------------       ------------

Operating loss                                               (948,818)        (2,336,717)
                                                         ------------       ------------

Other (income) expense:
   Interest expense                                           888,385            412,332
   Other (income)                                             (22,325)           (26,040)
                                                         ------------       ------------

Total other expense                                           866,060            386,292
                                                         ------------       ------------

Loss from continuing operations                            (1,814,878)        (2,723,009)
Income (loss) from discontinued operations (Note 2)        (1,443,949)           494,822
                                                         ------------       ------------

Net (loss)                                                 (3,258,827)        (2,228,187)
                                                         ------------       ------------

Preferred stock dividend                                     (126,000)                --

Cumulative preferred stock dividend                           (52,750)           (83,033)
                                                         ------------       ------------

Net loss applicable to common stockholders               $ (3,437,577)      $ (2,311,220)
                                                         ============       ============

Weighted average number of common shares:
   Basic and diluted                                        6,590,070          4,615,329
                                                         ============       ============

Loss per common share:
   Basic and diluted for continuing operations           $       (.30)      $       (.61)
   Basic and diluted for discontinued operations                 (.22)               .11
   Basic net (loss) per common share                     $       (.52)      $       (.50)
                                                         ============       ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-5

<PAGE>   34

               PROLOGIC MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                       YEARS ENDED MARCH 31, 2000 AND 1999


<TABLE>
<CAPTION>
                                Series A                Series B                 Series C
                               Cumulative              Cumulative               Cumulative
                               Convertible             Convertible              Convertible
                             Preferred Stock         Preferred Stock          Preferred Stock           Common Stock
                          ----------------------  ----------------------  -------------------------  --------------------
                             Shares      Amount     Shares      Amount      Shares       Amount       Shares     Amount    Warrants
                             ------      ------     ------      ------      ------       ------       ------     ------    --------
<S>                       <C>          <C>        <C>         <C>         <C>           <C>         <C>        <C>        <C>
BALANCE, March 31, 1998      41,667    $250,000           -    $      -                             4,478,724  $8,493,270  $582,053
   Issuance of
     preferred stock
     in connection
     with conversion
     of a note                    -           -      72,000     519,883            -             -          -           -         -
   Common stock issued
     for interest                 -           -           -           -            -             -    120,000      36,198         -
   Issuance of warrant
     in connection
     with services to
     raise capital                -           -           -           -            -             -          -           -   112,177
   Conversion of
     preferred stock
     to common stock        (25,000)   (150,000)          -           -            -             -     75,000     150,000         -
   Issuance of common
     stock in
     connection with
     conversion of a
     note                         -           -           -           -            -             -     32,000      11,200         -
   Issuance of common
     stock in
     connection with
     conversion of a
     note                         -           -           -           -            -             -      5,625       1,969         -
   Net loss                       -           -           -           -            -             -          -           -         -
                          ----------   ---------  ----------  ----------  -----------   -----------  ---------  ---------  ---------

BALANCE, March 31, 1999      16,667     100,000      72,000     519,883            -             -  4,711,349   8,692,637   694,230

   Common stock issued
     for interest                 -           -           -           -            -             -    120,000      53,170         -
   Common stock issued            -           -           -           -            -             -  3,459,972   1,000,000         -
   Expenses associated
     with issuance of
     common stock                 -           -           -           -            -             -          -    (252,645)        -
   Issuance of
     Preferred stock              -           -           -           -       75,000       750,000          -           -         -
   Issuance of stock
     dividend on
     Preferred Series
     B stock                      -           -           -           -            -             -    134,956     126,000         -
   Issuance of common
     stock through
     exercise of stock
     option                       -           -           -           -            -             -      3,300       1,650         -
   Issuance of warrant
     in connection
     with services
     performed                    -           -           -           -            -             -          -           -    34,540

   Net loss                       -           -           -           -            -             -          -           -         -
                          ----------   ---------  ----------  ----------  -----------   -----------  ---------  ---------  ---------

BALANCE, March 31, 2000      16,667    $100,000      72,000    $519,883       75,000      $750,000   8,429,577 $9,620,812  $728,770
                          ==========   =========  ==========  ==========  ===========   ===========  =========  =========  =========

</TABLE>

<TABLE>

                            Stock         Stockholders'       Total
                           Subscription    Accumulated        Equity
                           Receivable       Deficit         (Deficit)
                           ----------       -------         ---------
<S>                       <C>            <C>              <C>
BALANCE, March 31, 1998    $              $(9,241,460)         $83,863
   Issuance of
     preferred stock
     in connection
     with conversion
     of a note                    -                 -          519,883
   Common stock issued
     for interest                 -                 -           36,198
   Issuance of warrant
     in connection
     with services to
     raise capital                -                 -          112,177
   Conversion of
     preferred stock
     to common stock              -                 -                -
   Issuance of common
     stock in
     connection with
     conversion of a
     note                         -                 -           11,200
   Issuance of common
     stock in
     connection with
     conversion of a
     note                         -                 -            1,969
   Net loss                       -        (2,228,187)      (2,228,187)
                           ---------      ------------     ------------

BALANCE, March 31, 1999           -       (11,469,647)      (1,462,897)

   Common stock issued
     for interest                 -                 -           53,170
   Common stock issued            -                 -        1,000,000
   Expenses associated
     with issuance of
     common stock                 -                 -         (252,645)
   Issuance of
     Preferred stock       (191,500)                -          558,500
   Issuance of stock
     dividend on
     Preferred Series
     B stock                      -          (126,000)               -
   Issuance of common
     stock through
     exercise of stock
     option                       -                 -            1,650
   Issuance of warrant
     in connection
     with services
     performed                    -                 -           34,540

   Net loss                       -        (3,258,827)      (3,258,827)
                           ---------      ------------     ------------

BALANCE, March 31, 2000   $(191,500)     $(14,854,474)    $(3,326,509)
                           =========      ============     ============
</TABLE>
          See accompanying notes to consolidated financial statements.

                                      F-6

<PAGE>   35

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

<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH                                                                    Years ended March 31,
                                                                                           -------------------------------
                                                                                               2000              1999
                                                                                           -------------     -------------
<S>                                                                                         <C>               <C>
Cash flows from operating activities:
   Net loss                                                                                 $(3,258,827)      $(2,228,187)
   Adjustments to reconcile net loss to net cash provided by (used in)
     operating activities:
     Depreciation and amortization                                                              633,206           398,933
     Issuance of common stock for interest incurred                                              53,170            38,167
     Issuance of warrants for services and interest incurred                                     34,540           112,177
     Loss on disposal of fixed assets                                                             5,118                 -
     Change in assets and liabilities:
       Accounts receivable                                                                   (5,256,062)         (483,565)
       Inventory                                                                                313,474          (339,404)
       Prepaid expenses                                                                         (19,200)           57,812
       Other assets                                                                            (238,922)          149,719
       Accounts payable                                                                       2,837,261         1,330,362
       Accrued expenses                                                                         100,885            82,012
       Deferred maintenance revenue                                                             382,045          (113,565)
                                                                                           -------------     -------------

   Total adjustments                                                                         (1,154,485)        1,232,648
                                                                                           -------------     -------------

Net cash used in continuing operating activities                                             (4,413,312)         (995,539)

Net cash (used in) provided by discontinued operations (Note 2)                                (447,237)        1,047,737
                                                                                           -------------     -------------

Net cash (used in) provided by operating activities                                          (4,860,549)           52,198

Cash flows from investing activities:
   Purchase of equipment                                                                       (207,190)         (144,451)
   Investing activities of discontinued operations (Note 2)                                           -             2,000
                                                                                           -------------     -------------

Net cash (used in) provided by investing activities                                            (207,190)         (142,451)
                                                                                           -------------     -------------

Cash flows from financing activities:
   Net change in line of credit                                                               3,413,050            36,211
   Issuance of long-term debt and notes payable                                                 744,280                 -
   Issuance of Series C cumulative convertible preferred stock                                  558,500                 -
   Issuance of common stock                                                                     749,005                 -
   Financing activities of discontinued operations (Note 2)                                           -                 -
                                                                                           -------------     -------------

Net cash provided by financing activities                                                     5,464,835            36,211
                                                                                           -------------     -------------

Net increase (decrease) in cash                                                                 397,096           (54,042)

Cash, beginning of year                                                                          50,814           104,856
                                                                                           -------------     -------------

Cash, end of year                                                                           $   447,910       $    50,814
                                                                                           =============     =============

Supplemental statement of cash flow information:
   Cash paid during the year for interest                                                   $   812,403       $   152,731
   Cash paid during the year for taxes                                                                -                 -
                                                                                           =============     =============

Non-cash financing and investing activities:
   Conversion of preferred Series A stock to common stock                                   $         -       $   150,000
   Conversion of convertible subordinated notes to Series B cumulative convertible
     preferred stock                                                                                  -           519,883
   Reclassification of costs associated with Series B preferred stock                                 -           200,116
   Conversion of debt and interest to common stock                                                    -            11,200
   Conversion of debt and interest to Series C preferred stock                                  220,780                 -
   Subscription receivable                                                                      191,500                 -
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-7

<PAGE>   36

               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. ("Prologic"), an Arizona corporation, with its
wholly-owned subsidiaries, Great River Systems, Inc. ("GRSI") and BASIS, Inc.
("BASIS") (collectively, the "Company") provides a full range of hardware and
commercial software solutions, with a focus on UNIX-based products, as well as
NT and legacy interoperability. The Company also provides systems integration
services, networking services and applications software for the commercial
market together with related support services. In addition, Prologic has
developed proprietary application software which is licensed to manufacturers
and companies in the wholesale distribution industry.

The Company has historically generated the majority of its revenue from the
resale of hardware and software products produced by third parties, primarily
Sun Microsystems, Inc. (Sun). Sales of Sun products accounted for approximately
66% and 68%, of total revenue for the years ended March 31, 2000 and 1999, and
represented approximately 90% of hardware revenue for the same periods. 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, to whom customers
are directed to send payment. At March 31, 2000 and 1999, the Company owed
approximately $5,118,101 and $1,848,477 to its supplier, of which $0 and
$236,007 represented accounts receivable assigned to its supplier. Subsequent to
March 31, 2000 and March 31, 1999, the Company exceeded its credit limit with
its supplier. Management is currently pursuing options available for increasing
the credit limit and financing purchases with other sources. Although this
relationship and the stated credit limit have not caused delays in meeting
customer shipments, management believes that because of the trends in the
Company's operating results and the current low credit limit, its ability to
meet customer demands could be effected.

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 will 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. The delisting of the Company's securities could significantly
impair the Company's ability to obtain additional financing.

                                      F-8

<PAGE>   37

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

NOTE 1 -- THE COMPANY AND ITS OPERATIONS (CONTINUED)

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.

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.

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. The Company
received the initial funding in August of 1999. However, the second stage
("Tranche 2") has not occurred as of the date of this report.

In addition, the Company is continuing its efforts to secure working capital for
operations, expansion and possible acquisitions, mergers, joint ventures, and/or
other business combinations. 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.

                                      F-9

<PAGE>   38

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

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. Net assets to be disposed of, at their expected realizable
values, have been separately classified in the accompanying balance sheet at
March 31, 2000 and 1999, and the March 31, 1999 balance sheet has been restated
to conform with current year's presentation.

Net assets of discontinued operations at March 31, 2000 and 1999 consist of:

<TABLE>
<CAPTION>
                                                              March 31,
                                                   --------------------------------
                                                       2000               1999
                                                   --------------     -------------
<S>                                                <C>                <C>
 Cash                                                       $688           $77,348
 Accounts receivable                                      13,862           311,013
 Property and equipment, net                                   -            66,349
                                                   --------------     -------------

 Total assets                                             14,550           454,710
                                                   --------------     -------------

 Accounts payable                                         28,611           735,326
 Accrued expenses                                              -           180,682
                                                   --------------     -------------

                                                          28,611           916,008
                                                   --------------     -------------

 Net liabilities of discontinued operations              $14,061          $461,298
                                                   ==============     =============
</TABLE>

Operating results of this discontinued operation for the year ended March 31,
2000 are shown separately in the accompanying income statement. The income
statements for the year ended March 31, 1999 have been restated to conform to
the current year's presentation. The operating results of this discontinued
operation for the years ended March 31, 2000 and 1999 consist of:

<TABLE>
<CAPTION>
                                                March 31,
                                     --------------------------------
                                         2000               1999
                                     --------------     -------------
<S>                                    <C>                <C>
 Net sales                             $     9,218        $3,704,639
 Gross profit (loss)                   $   (52,004)       $1,066,800
 Income (loss) from operations         $(1,136,579)       $  488,858
 Net income (loss)                     $(1,443,949)       $  494,822
</TABLE>

                                      F-10

<PAGE>   39

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

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

RECLASSIFICATIONS

Certain amounts in 1999 were reclassified to conform with 2000 financial
statement presentation.

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 substantial
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.

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%.

                                      F-11

<PAGE>   40

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

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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
fiscal 2000 or fiscal 1999.

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 for Great River System, Inc. and BASIS.
Amortization expense for the years ended March 31, 2000 and 1999 totaled
$244,500 for both years. In the current year, management wrote off the remainder
of the goodwill associated with the discontinuance of Great Rivers Systems, Inc.

                                      F-12
<PAGE>   41

               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.

                                      F-13
<PAGE>   42

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

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

EARNINGS PER SHARE

On March 3, 1997, the FASB issued Statement of Financial Accounting Standard No.
128, "Earnings Per Share" (SFAS 128). 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.

A reconciliation of the numerators and denominators of the basic and diluted
loss per share calculations for the years ended March 31, 2000 and 1999, is as
follows:

<TABLE>
<CAPTION>
                                                          Years ended March 31,
                                                       -----------------------------
                                                          2000             1999
                                                       ------------     ------------
<S>                                                    <C>              <C>
 Loss per share - Basic and diluted:
   Net loss applicable to common shareholders          $(3,437,547)     $(2,311,220)
                                                       ============     ============

   Weighted average number of common shares              6,590,070        4,615,329
                                                       ============     ============

 Loss per common share - Basic and diluted             $      (.52)     $      (.50)
                                                       ============     ============
</TABLE>

NOTE 3 -- PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                          Years ended March 31,
                                                       -----------------------------
                                                          2000             1999
                                                       ------------     ------------
                                                                        (restated)
<S>                                                       <C>          <C>
 Furniture and leasehold improvements                     $365,084         $299,141
 Equipment and software                                    818,129        1,061,248
                                                       ------------     ------------

 Less accumulated depreciation                             779,778          934,737
                                                       ------------     ------------

 Net property and equipment                               $403,435         $425,652
                                                       ============     ============
</TABLE>

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, 2000 and 1999, borrowings under this
line of credit were $4,647,306 and $1,234,256, respectively, with additional
availability of approximately $352,694 at March 31, 2000.

                                      F-14

<PAGE>   43

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


NOTE 4 -- LINE OF CREDIT (CONTINUED)

The line of credit bears monthly interest at the highest prime rate in effect
during each month (8.83% during March 31, 2000) plus 1.75% per annum for the
portion of the loan related to accounts receivable and prime plus (8.83% at
March 31, 2000) 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 matures on
March 31, 2001.

The Company is required to pay a monthly minimum fee of $1,500. Also, the
Company paid an initial loan fee of $50,000 in March 1998 with an additional
loan fee based on .25% of the maximum dollar amount ($5,000,000) due annually
thereafter. In years four and beyond, the Company must pay a renewal fee of .5%
of the maximum dollar amount.

If the Company terminates this agreement prior to the maturity date, it must pay
a penalty equal to the greater of all interest due during the prior six months
or the minimum monthly interest multiplied by the number of partial or full
months from the effective termination to the maturity date.

The line of credit agreement requires that BASIS and GRSI maintain a combined
minimum net worth of $750,000. At March 31, 2000, BASIS and GRSI were in
compliance with this covenant.

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 fair value
of $61,920 related to these warrants was charged to interest expense during
fiscal 1999. The remaining debt issue costs have been netted against the Series
B cumulative preferred stock. The warrants expire on March 31, 2001.

                                      F-15

<PAGE>   44

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

NOTE 6 -- SHORT-TERM DEBT AND NOTES PAYABLE

Short-term debt and notes payable are as follows:

<TABLE>
<CAPTION>
                                                                                             March 31,
                                                                                    -----------------------------
                                                                                       2000             1999
                                                                                    ------------     ------------
<S>                                                                                 <C>             <C>
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
  with an option to exchange for common stock.                                      $  150,000      $  150,000

Software purchase agreement with minimum royalties of $250,000, minimum
  payments due in annual installments of $25,000 through June 30, 2000
  and the remaining principal and interest due March 31, 2001; secured
  by purchased software.                                                               150,000         194,156

Note payable, interest at 8.5%, unsecured, principal and interest due monthly
  through March 31, 2004.                                                               84,688         126,499

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.  After an initial payment of $15,693, the note is payable
  in twelve equal monthly installments of $15,555, including principal and
  interest, through March 2001.                                                        164,500         100,000

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 2).                                                                       300,000         300,000

Note payable, interest at 11% per annum on the outstanding principal, monthly
  payments of $50,000 through May 30, 2000 with a balloon payment of the
  remaining balance.                                                                   813,938              --

Other                                                                                   49,507          11,698
                                                                                    ----------      ----------

Total short-term debt and long-term debt                                             1,712,633         882,353

Less current portion of long-term debt and  notes payable                            1,646,060         349,136
                                                                                    ----------      ----------

Long-term debt and notes payable, excluding current portion                         $   66,573      $  533,217
                                                                                    ==========      ==========
</TABLE>

During fiscal 1999, notes totaling $10,000 in principal and $1,200 in accrued
interest were exchanged for common stock.

A summary of long-term debt and notes payable installments after March 31, 2000
is as follows:

<TABLE>
<CAPTION>
                                Amount
                              ------------

<S>                           <C>
      2001                     $1,646,060
      2002                         66,573
                              ------------
                               $1,712,633
                              ============
</TABLE>

                                      F-16

<PAGE>   45

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

NOTE 7 -- INCOME TAXES

The Company has a net operating loss carryforward approximating $14.0 million
for federal income tax purposes which expires in varying amounts from 2001
through 2020. 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:

<TABLE>
<CAPTION>
                                                          Years ended March 31,
                                                          ---------------------
                                                          2000              1999
                                                          ----              ----
<S>                                                   <C>               <C>
Benefit computed at federal rate of 34%               $(1,108,000)      $  (747,000)
State income tax benefit, net of federal benefit         (144,000)         (176,000)
Increase in valuation allowance                         1,098,000           923,000
Expiration of unused net operating losses                 154,000                --
                                                      -----------       -----------
Benefit for income taxes                              $         -       $         -
                                                      ===========       ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                            Years ended March 31,
                                            ---------------------
                                           2000               1999
                                           ----               ----
<S>                                    <C>               <C>
Deferred tax assets:
  Net operating loss carryforward      $ 5,293,000       $ 4,384,000
  Allowance for doubtful accounts          134,000            98,000
  Deferred maintenance revenue             201,000            48,000
  Goodwill                                  40,000            40,000
  Other accruals                             5,000             5,000
                                       -----------       -----------

Total deferred tax assets                5,673,000         4,575,000

Less valuation allowance                (5,673,000)       (4,575,000)
                                       -----------       -----------

Net deferred tax assets                $         -       $         -
                                       ===========       ===========
</TABLE>

Net deferred tax assets of approximately $5,673,000 have been offset by a
valuation allowance since management cannot determine whether it is more likely
than not such assets will be realized.

                                      F-17

<PAGE>   46

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

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 (see Note 7).
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.

In fiscal 2000, the Company issued 3,459,972 shares of common stock in
accordance with the Sunburst agreement (described in Note 1) for $1,000,000. The
Company incurred costs of $252,645 in expenses associated with this agreement.

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 2000, the Company issued 3,300 shares of common stock in connection
with an employee stock option exercise.

In fiscal 1999, holders of notes totaling $10,000 in principal and $1,200 in
interest converted these notes to 32,000 shares of common stock at $.35 per
share, as provided for in the conversion agreement (see Note 7).

In fiscal 1999, holders of Series A preferred stock converted 25,000 shares of
stock, totaling $150,000, into 75,000 shares of common stock, and warrants to
purchase an additional 75,000 shares of common stock at $2.00 per share as
provided in the offering agreement.

In fiscal 1999, the Company issued 5,625 shares of common stock, totaling
$1,969, to certain individuals as compensation in accordance to terms of their
agreements.

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.

During fiscal 1999, the Company issued warrants for the purchase of 141,000
shares of common stock to financial advisory companies at varying exercise
prices ranging from $1.00 to $3.00 per share, expiring from February 2000 to
November 2002. The agreements provide for the issuance of warrants for the
purchase of up to an additional 50,000 shares of the Company's common stock,
dependent upon the continuation of the agreements, which are cancelable by
either party without penalty. The warrants were valued at $50,256, based on the
fair value on the date of issuance, and have been recorded as general and
administrative expense in the accompanying financial statements.

In fiscal 1999, the Company issued 72,000 warrants in connection with the
conversion of the $720,000 note (see Note 5). The fair value of the warrants at
$61,920 was recorded as interest expense and a reduction of the principal note
balance of the note, based on the fair market value. The remaining debt issue
costs were reclassed against the preferred Series B stock.

In fiscal 1999 the Company issued 75,000 warrants in connection with the
conversion of the Series A preferred stock, as discussed below in Note 8. The
warrants were valued at $23,250, based on the fair value on the date of
issuance.

                                      F-18

<PAGE>   47
               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 payable 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 $16,000 and $8,000 at March
31, 2000 and 1999, 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.

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 are 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 expire 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.

In July 1998, holders of 25,000 shares of Series A preferred totaling $150,000
converted their shares into 75,000 shares of common stock and warrants to
purchase 75,000 shares of common stock as provided in the preferred stock
agreement.

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 $18,000 and $72,000 at March
31, 2000 and 1999, 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 shares) is calculated by dividing the stated value ($10 at March 31,
2000) by the effective conversion price ($2.25 at March 31, 2000).

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 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.

In June 1998, holders of $720,000 of convertible notes converted their notes
into 72,000 shares of Series B preferred and warrants to purchase 72,000 shares
of common stock (see Note 6). The warrants are exercisable at $1 per share and
expire March 31, 2001, which was the fair market value of the warrants at the
date of their issuance. The fair value of $61,920 of these warrants was charged
to interest expense.

                                      F-19
<PAGE>   48
               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 $18,750 at March
31, 2000.

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 shares) 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.

In fiscal 2000, the Company issued 75,000 shares of Series C preferred stock
(including 37,500 to a related party and 37,500 to an entity in which officers
of the Company hold a minority interest). Of the 75,000 shares issued, the
Company received $337,720 in cash, $220,780 represented conversion of debt from
a related party, with the remaining $191,500 balance to be collected within the
next year.

NOTE 9 -- STOCK OPTION PLAN

During 1995, the Company's Board of Directors approved a stock option plan. The
maximum number of shares that may be purchased pursuant to the plan is 500,000.
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:

<TABLE>
<CAPTION>
                                                                           Years ended March 31,
                                                        ----------------------------------------------------------
                                                                  2000                            1999
                                                        --------------------------     ---------------------------
                                                        Number of       Price           Number of       Price
                                                          Shares        Per Share        Shares         Per Share
                                                        -----------     ----------     ------------     ----------
<S>                                                     <C>             <C>            <C>              <C>
 Options outstanding, beginning of year                    351,250          $1.81          460,363          $1.68
   Granted                                               1,217,500            .50           54,500            .50
   Canceled/expired                                        429,369            .50          163,613           1.00
   Exercised                                                 3,300            .50                -              -
                                                        -----------     ----------     ------------     ----------

 Options outstanding, end of year                        1,136,081            .73          351,250          $1.81
                                                        ===========     ==========     ============     ==========

 Options exercisable, end of year                          488,982           1.02          252,292           1.02
                                                        ===========     ==========     ============     ==========

 Weighted average fair value of options granted                              $.19                            $.08
                                                                        ==========                      ==========
</TABLE>

                                      F-20

<PAGE>   49

               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, 2000 are as
follows:

<TABLE>
<CAPTION>
                                                         Weighted
                                                          Average        Weighted                     Weighted
                                                         Remaining       Average                      Average
                                         Options        Contractual      Exercise       Options       Exercise
Range of Exercise Prices               Outstanding         Life           Price       Exercisable      Price
                                       -------------    ------------    -----------   ------------   -----------
<S>                                    <C>              <C>             <C>           <C>            <C>
$.50 - $1.81                              1,136,081            3.62           $.91        488,982         $1.02
                                       =============    ============    ===========   ============   ===========
</TABLE>

In June 1998, the Board authorized the repricing of 100,000 stock options with
exercise prices in excess of $3.88 to $1.00 per share. The effect of these
repricings are reflected in the summary tables above.

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 2000 and 1999, using the Black-Scholes option pricing model with
the following weighted average assumptions:

<TABLE>
<CAPTION>
                                                                                    2000
                                                                                   Options         1999 Options
                                                                                 ------------      -------------
<S>                                                                              <C>               <C>
 Risk free interest rate                                                                5.84 %      5.14 - 5.46 %
 Expected dividend yield                                                                   -                  -
 Expected lives                                                                      5 years            5 years
 Expected volatility                                                                 280-560 %              532 %
</TABLE>

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:

<TABLE>
<CAPTION>
                                                                                      Years ended March 31,
                                                                                  -------------------------------
                                                                                      2000              1999
                                                                                  -------------     -------------
<S>                                                                                <C>               <C>
 Net loss:

   As reported                                                                     $(3,437,577)      $(2,311,220)
   Pro forma                                                                        (3,666,145)       (2,491,734)

 Loss per common share - basic and diluted:
   As reported                                                                            (.52)             (.50)
   Pro forma                                                                              (.55)             (.56)
</TABLE>

The effects of applying SFAS No. 123 for providing pro forma disclosures for
2000 and 1999 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-21

<PAGE>   50

               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 39.01% and
31.0% of total revenue for the years ended March 31, 2000 and 1999. Revenue from
one customer was 12.6% and 13% of total revenue in the years ending March 31,
2000 and March 31, 1999, respectively.

At March 31, 2000 receivables from two customer accounted for 21% and 12% 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, 2000 and 1999.

NOTE 12 -- RELATED PARTY TRANSACTIONS

The Company leased its Tucson facility for the fiscal year 1999 and part of
fiscal 2000 from an organization which is partially owned by the Chief Executive
Officer.

The Company had notes payable to related parties of approximately $100,400 at
March 31, 1999. The effective interest rates on these notes were approximately
6.0%. In fiscal year 2000, $86,000 in 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 March 2002. These
leases contain renewal options, and the Company is responsible for certain
executory costs, including insurance and utilities. Future minimum lease
payments under operating leases that have remaining noncancelable lease terms in
excess of one year at March 31, 2000 are as follows:

<TABLE>
<CAPTION>
 Years ending March 31,                         Amount
 ----------------------------              ------------
<S>                                       <C>
          2001                            $    301,423
          2002                                 167,115
          2003                                 119,520
                                           ------------
                                          $    588,058
                                           ============
</TABLE>

                                      F-22

<PAGE>   51

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

NOTE 13 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)

The terms of the Company's Series B Cumulative Convertible Preferred Stock
agreement require 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 had raised the required amount of funding to be
in compliance with the Series B Cumulative Convertible Preferred Stock
agreement. If a Company had not raised the proceeds specified in the Series B
Cumulative Convertible Preferred Stock agreement, then the Company would record
a deemed dividend of approximately $400,000.

NOTE 14 -- SUBSEQUENT EVENTS

On May 25, 2000, the Company entered into an agreement with an investment
banking firm for financial advisory services and fundraising assistance. In
connection with the agreement, the Company issued 66,666 warrants with an
exercise price of $0.75 per share. The fair value of these warrants was
approximately $57,000 on the date of grant.


                                      F-23
<PAGE>   52
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 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: July 12, 2000                    By: /s/  James M. Heim
       -------------                        ------------------------------------
                                                 James M. Heim
                                                 Chief Executive Officer

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.


<TABLE>
<CAPTION>
Signature                  Capacity                                           Date
---------                  --------                                           ----
<S>                        <C>                                                <C>
/s/  James M. Heim         James M. Heim,                                     July 12, 2000
----------------------     Chief Executive Officer
                           (Principal Executive, Financial and Accounting
                           Officer), Secretary and Director

/s/  Richard E. Metz       Richard E. Metz,                                   July 12, 2000
----------------------     President, (Principal Executive Officer),
                           Chief Administrative Officer and Director

/s/  Mark S. Biestman      Mark S. Biestman,                                  July 12, 2000
----------------------     Director
</TABLE>
<PAGE>   53
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number              Description of Exhibit
-------             ----------------------
<S>                 <C>
 3.1(a)             Specimen of Series A 8% Cumulative Convertible Preferred Stock

 3.1(b)             Specimen of Series B 10% Cumulative Convertible Preferred Stock

10.17               Employment Agreement of John W. Olynick

27                  Financial Data Schedule
</TABLE>