<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, 1997.

Commission file number: 33-89384-LA

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

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

            2030 East Speedway Boulevard, Tucson, Arizona      85719
               (Address of principal executive offices)     (Zip Code)

                    Issuer's 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:   $13,864,000.

As of March 31, 1997, the aggregate market value of voting stock held by
non-affiliates of the issuer: $2,719,277 based on Common Stock of 2,417,135.
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, 1997 was 3,675,395.

Transitional Small Business Disclosure Format:

                                Yes      ; No X .

                      DOCUMENTS INCORPORATED BY REFERENCE:

None.
<PAGE>   2
                                     PART I

ITEM 1. BUSINESS

GENERAL

      Prologic Management Systems, Inc. ("Prologic") is an Arizona corporation
founded in April, 1984. Prologic, together with its subsidiaries (the "Company")
is a commercial systems integration and software development firm. Prologic's
subsidiaries, BASIS, Inc., based in Emeryville, California ("BASIS"), and Great
River Systems, Inc. based in St. Paul, Minnesota ("GRSI"), offer national and
regional systems integration expertise. The Company's system integration
services include 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. Prologic's Tucson office has development expertise in
manufacturing, distribution, resource planning and resource tracking for
manufacturing and commercial clients. Prologic provides a full range of hardware
and commercial software solutions, with a focus on UNIX-based products, as well
as Microsoft NT and legacy interoperability. The Company's principal executive
offices are located at 2030 East Speedway Boulevard, Tucson, Arizona 85719 and
its telephone number is (520) 320-1000. The Company's worldwide web site can be
accessed at www.prologic.com.

Acquisition of Great River Systems, Inc.

      In September 1995, the Company completed the acquisition of GRSI, a
regional systems integration firm based in St. Paul, Minnesota. The acquisition
was financed with a combination of cash and stock. Founded in 1984, GRSI is a
computer systems integrator specializing in enterprise networking, internet
servers and services, systems administration, consulting and training. Internet
and intranet products and services include server installation and
configuration, website design and administration, database integration, internet
publishing, training, and planning and consulting. A key consideration in the
acquisition of GRSI was the synergy that exists between the systems integration
capabilities of GRSI and the software and integration services of Prologic.
Effective systems integration is a requirement for the successful implementation
of software products and services. GRSI's worldwide web site can be accessed at
www.grs.com.


Acquisition of BASIS, Inc.

      In August 1996, Prologic completed its acquisition of BASIS, a commercial
systems integration company located in the San Francisco Bay Area with
additional offices in Portland, Oregon. The acquisition was financed with a
combination of cash and stock. BASIS specializes in providing open systems
integration and a broad range of product support services to commercial,
governmental, and research clients. BASIS support services range from basic
installation, orientation, and troubleshooting to comprehensive long-term
maintenance programs. Further, as a vendor-independent reseller of a broad range
of computer hardware and software, with a focus on Unix-based products, BASIS is
strategically aligned with Prologic. BASIS' worldwide web site can be accessed
at www.BASISinc.com.


PRODUCTS AND SERVICES

      The Company provides systems integration expertise, software development,
proprietary software products and related services. The Company's services
include systems integration expertise, 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 products include manufacturing, distribution, and
resource planning and tracking software for manufacturing and commercial
clients.


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<PAGE>   3
      The Company's revenues arise principally from the sale of systems
integration-related products and services, the sale and re-engineering of
third-party software, and the sale of its proprietary software. The Company
believes that, over the long term, the sale of Prologic's proprietary software
offers the greatest opportunity to increase the Company's overall margins, and
the Company focuses its research and development expenditures principally on
software development activities, utilizing Java and browser technologies. During
the Company's fiscal year ended March 31, 1997 ("fiscal 1997"), approximately
68.6% of the Company's revenues were generated by hardware sales and related
services, which have materially lower margins than sales of proprietary
software. During the same fiscal year, approximately 14.2% and .6% of the
Company's total revenues were generated by systems integration services (net of
related hardware and third-party software sales) and by sales of Prologic
proprietary software, respectively.

      The Company provides national and regional product support, as well as
internet and intranet application and framework and design, workgroup solutions
and relational database development. The Company provides full-service planning,
design, management, custom programming, systems integration, technical and
consulting services. This includes consulting, maintenance and support, training
and the installation and sale of third party computer hardware on which to
implement the Company's 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 has developed a
series of 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.

      Sales Tracking and Reporting System ("STARS"). STARS, the Company's Sales
Tracking and Reporting System, is an intranet-based application that consists of
an integrated set of modules for sales tracking, order processing and management
analysis. STARS was designed to transform complex, incompatible application
environments into a simple, user-friendly application. The STARS interface
system is based on Netscape Navigator. STARS is built around industry-standard
Internet and World Wide Web technologies, including HTML/HTTP protocols and
relevant language tools, such as Java applets, CGI scripts and embedded SQL/C
programs. The STARS application has drill-down menus, graphical displays and
presentations.

      Document Retrieval and Distribution System ("DRD"). The Company's Document
Retrieval and Distribution System is an intranet application providing
centralized information warehouse capabilities is based on the Netscape
Publishing System. DRD consolidates multiple types of data, from text documents
to Microsoft PowerPoint presentations to video clips with sound, providing a
single source of information to organizations. SunSoft, the software arm of Sun
Microsystems, uses DRD to manage volumes of documents and publications relating
to their products, programs and services. From within the SunSoft system,
information from over 80 independent internal systems is accessible. The power
and ease-of-use of the DRD system provides authorized users with data on product
information, White Papers, promotions, channel program information and
resources. DRD is equipped with keyword and attribute search capabilities,
uniform content presentation, along with native distribution of information. It


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includes database management (using Oracle products), client server network
applications and collaborative project management.

      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.

      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 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 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 which 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.

      Resource Planning (SYMRP). In January of 1996, the Company completed the
purchase of SYMRP Scheduler software 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 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. This
technology was developed for a division of a Fortune 100 chemicals company and
was awarded US Patent No. 5,233,533 granted August 3, 1993. An important factor
in the Company's acquisition of the Resource Planning and Scheduling System is
the system's design for integration with customer's existing manufacturing
application software. This allows the product to co-exist with systems that are
already in use, without displacing all of the training, procedures, time and
effort that typically go into implementing a manufacturing system. The Company
believes this is complimentary to its strategy of providing its customers
immediate benefits without replacing the existing system. To date, the Company
has not released the product. However, the Company expects to begin actively
marketing and selling the product during fiscal 1998.


MARKETING & DISTRIBUTION

      The Company's overall marketing and distribution effort is directed by its
corporate office in Tucson ("Prologic Corporate"). However, each subsidiary
provides local sales and marketing management with additional support, when
required, from the Tucson office. The Company's primary goal is to lead


                                                                               4
<PAGE>   5
with its commercial systems integration expertise, leveraging its reputation and
client base, and in the long term promote the sale of Prologic's 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 strategic relationships with various companies that sell products
within this market.

      The Company intends to develop new corporate accounts in targeted
geographical markets by expanding its multi-channel sales organization, which
currently consists of direct corporate sales, resellers, agents and other
systems integration firms. The Company has joint marketing relationships with
leading hardware vendors and will continue to offer its systems integration
expertise. The Company currently has marketing agreements with Adobe, Banyan,
Cisco, Informix, IBM, Netscape Communications Corporation, Oracle, Progressive
Networks, Sun Microsystems, SunSoft, Sybase and Symbol Technologies to resell
their products.

      The Company will also target expanding and developing strategic
relationships with various companies that sell products within this market. For
example, the Company intends to expand its current relationship with Sun
Microsystems, the largest provider of internet servers, Oracle and Netscape
Communications Corporation. As part of its marketing program, the Company also
exhibits its products at various U.S. trade shows. Existing strategic partners
of the Company include Adobe, Banyan, Cisco, Informix, IBM, Netscape
Communications Corporation, Oracle, Progressive Networks, Sun Microsystems,
SunSoft, Sybase and Symbol Technologies. Over the past thirteen years, Prologic
has established relationships with resellers through which to distribute its
software and services. Prologic will continue to maintain, seek out and work
with third party integrators who wish to OEM or private label our products both
in the United States and in foreign markets.

      The Company has established a sales office in Portland, Maine, as well as
regional sales and integration centers in St. Paul, Minnesota (GRSI),
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 the Tucson area,
as well as in the Company's targeted expansion areas, to support the
geographic expansion of the Company which supports the Company's long-range
business plan.

      Prologic has identified and qualified a number of potential acquisition
candidates in key geographical locations. These candidates include companies
that have considerable resources in terms of technical personnel and/or software
products that would be complementary to our business plan. Once acquired,
Prologic Corporate will act as the administrative arm for new subsidiary
companies, providing management, accounting, finance and marketing support. Once
fully integrated, senior management, accounting functions, finance and marketing
activity for the acquisitions will be consolidated and centralized.

      As acquisitions are integrated into the overall operations, the 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 Prologic's proprietary software products and related services. The higher
margins will enable the Company to internally fund the growth of the operations
to take advantage of the significant opportunities that exist in the market.

      The Company believes that its acquisition strategy is the most cost-
effective avenue of growth for the Company. However, the recent market price of 
the Company's stock and the need to raise additional capital has caused the 
Company to temporarily suspend its acquisition activity until these conditions 
and operating results have improved.


COMPETITION


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      The systems integration and computer software industries are both highly
competitive and include participants from a variety of market segments. The
competition in systems integration services includes mid-level and regional
systems integrators, "Big Six" 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, an affiliate of Arthur
Andersen LLP; Cambridge Technology Partners; Computer Sciences Corporation;
Coopers & Lybrand LLP; Electronic Data Systems Corporation; IBM-Innovative
Information Systems; and Technology Solutions Corporation. The Company believes
it competes favorably with these systems integrators in the areas and level of
responsiveness, regional and national vendor contacts and dedication to
achieving certification standards to provide its clients with a higher quality
of customer service.

      The Company's software products are intended for sale to clients with
annual revenues in excess of $10,000,000. The Company 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. In the
mid-sized commercial market for manufacturing systems, the Company's principal
competitors are Effective Management Systems, Fourth Shift Corporation and
Symix. 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 its subsidiaries' sales mix. Further, the Company believes that
none of these competitors have patented resource planning technology designed to
interface to their products as well as third party systems.

      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 project managers, and
the development by others of software that is competitive with Prologic's
applications and services, and the price at which others offer comparable
applications software. Management of the Company believes that the Company's
principal challenge, in the long-term, is to identify and hire effective sales
and marketing managers to focus efforts on the marketing and sales of Prologic's
proprietary software products, both through the Company's systems integration
subsidiaries and through direct sales.

      Many participants in the software development and systems integration
businesses have significantly greater financial, technical, and marketing
resources than does the Company.


SOURCES OF RAW MATERIAL AND UNDERLYING TECHNOLOGY

      The principal materials and components used in the Company's commercial
applications software products include computer media and user manuals. For each
product, the Company prepares master software disks, user manuals and packaging.
Substantially all of the Company's documentation production is performed by
third-party vendors. Outside sources provide all packaging and related materials
to the Company's specifications. The completed packages are assembled
internally. As of June 1997, the Company has not experienced any material
difficulties or delays in the manufacture and assembly of its products, or
material returns due to product defects. Alternate independent sources for such
components are readily available in sufficient supply. In addition, all of the
Company's sales offices sell hardware, generally through third party reseller
programs.


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<PAGE>   7
      The Company has numerous underlying license agreements with third party
companies concerning the use of software and programming languages which the
Company has incorporated into its products. For certain programming languages,
there are a limited number of third party companies which supply such products.
Thus, there may not be suitable alternate sources from which the Company can
procure such programming languages, should one of the third-party companies
licensing such programming language cease to conduct business.

      Furthermore, these license agreements typically require the payment of
royalties. The nonpayment of royalties under these licenses could result in a
loss of the licenses, which could interrupt the sales of the Company's products,
particularly for those items for which there are only a limited number of
suppliers. Loss of any such license through either cessation of business or
non-payment of royalties would have a seriously adverse impact on the Company.


DEPENDENCE UPON LIMITED NUMBER OF CUSTOMERS

      The Company's five largest clients in fiscal year ended March 31, 1997
accounted for 32.2% of total sales at 8.12%, 7.60%, 7.03%, 4.83% and 4.63% of
total revenues, respectively; and in fiscal 1996, the five largest clients
accounted for 60.8% at 26.6%, 11.7%, 8.2%, 7.6% and 6.7% 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 milestone
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 of this customer concentration, 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.
Furthermore, such customers are concentrated in the discrete manufacturing and
wholesale distribution industries. Accordingly, the Company's future success
depends upon the capital spending patterns of such 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 such customer concentration and factors
affecting capital spending in the manufacturing and distribution industries.


PRODUCT DEVELOPMENT

      The market for application, management 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 is dependent upon 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 12 full-time programmers in
research and development at March 31, 1997. Research and development employees'
time is normally expensed to research and development, but could be capitalized
if the time is directly related to the development of


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products. Due to current restraints in working capital, the Company has
significantly reduced corporate-funded development.


EMPLOYEES

      As of March 31, 1997, the Company had approximately 65 full-time and 2
part-time employees, including 30 in technical services, 19 in sales and
marketing and 16 in finance and administration. The Tucson office employed 17
full-time and 2 part-time employees, GRSI had 11 full-time employees, and BASIS
had 37 full-time employees. 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.

      The Company expects to experience a period of growth in the number of its
employees. These hiring goals are substantially more aggressive than those for
previous periods. There can be no assurance that the Company will be able to
obtain the services of additional or qualified personnel necessary to facilitate
this growth. This growth may place a substantial strain on the Company's
management, operational, financial and accounting resources. The Company's need
to manage its changing business effectively will also require it to continue to
implement and improve its operational, financial and management information
systems and to train, motivate and manage its employees. The Company's inability
to manage change effectively would have a materially adverse effect on the
Company and its ability to execute on its business strategy.


ITEM 2. PROPERTIES

      Prologic's headquarters are located in Tucson, Arizona in a leased office
consisting of approximately 10,000 square feet. The facility is owned by a
partnership which is controlled by the family of Mr. James M. Heim, the
Company's President, Chief Executive Officer and Chairman of the Board. The
lease term which expires in June 2001, with rentals based on a rate not to
exceed 95% of the market rate as determined by an independent market analysis of
other office space located in the general area. The rent shall be increased
annually in a percentage amount equal to one-half of the percentage increase in
the Consumer Price Index for the previous year.

      GRSI leases 3,400 square feet of office space in St. Paul, Minnesota.
The GRSI lease expires in November 1998.

      BASIS leases 10,700 square feet of office space in Emeryville, California.
The lease expires under a five-year non-cancelable operating lease that expires
in March 1998. BASIS' Portland, Oregon site leases 2672 square feet of office
space under a lease that expires in December 1999.

      The Company may require additional space within the next twelve months;
however, the Company believes that the additional 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 position.

On June 11,1997 the Company was served with a complaint by an alleged 
stockholder, Lampedusa LLC, against the Company, alleging damages of $50 million
in connection with the Company's previously


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announced joint venture with Compagnie des Signaux (CDS). The Company believes
that the claim is without merit. On July 17, 1997 a United States Magistrate
Judge recommended that the lawsuit be dismissed without prejudice against the
Company. The parties have ten days to object to the recommendation. No
objections were raised by either party during the period and the Company
believes the lawsuit will be dismissed.


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, 1997.


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                                     PART II


ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      The Company completed its initial public offering on March 15, 1996 at a
price of $5.00 per share of Common Stock and $0.125 per Warrant (each warrant
entitles the holder to purchase one share of common stock at an exercise price
of $6.00). The common stock and common stock warrants of the Company are traded
on the Nasdaq Stock Market under the symbols PRLO and PRLOW, respectively, as
well as on the Boston Stock Exchange under the symbols PRC and PRCW,
respectively.

The table below represents the high and low for the Company's common stock and
warrants, as reported on the Nasdaq Stock Market from the initial trading on
March 31, 1996 through March 31, 1997.


<TABLE>
<CAPTION>
                                    Common Stock            Warrants
                                    ------------            --------
Quarter Ended                       High  Low               High  Low
---------------------------------------------------------------------
<S>                                 <C>                     <C>
March 31, 1996                      $6.00 $3.63             $1.63   $0.570

June 30, 1996                       $4.63 $3.25             $1.25   $0.625

September 30, 1996                  $4.25 $3.00             $0.9375 $0.625

December 31, 1996                   $4.13 $1.88             $0.9375 $0.500

March 31, 1997                      $3.25 $1.00             $0.75   $0.250
</TABLE>


As of July 22, 1997 there were 407 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 in the
foreseeable future.


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                                    PART III


ITEM 6. MANAGEMENT'S DISCUSSION & ANALYSIS

      The following discussion should be read in conjunction with the audited
Consolidated Financial Statements included elsewhere herein. Except for the
historical information contained herein, the matters discussed in this Annual
Report are forward-looking statements that involve a number of risks and
uncertainties. There are certain 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
statements made herein. Therefore, historical results and percentage
relationships will not necessarily be indicative of the operating results of any
future period.


Introduction

      The Company provides systems integration services, networking services and
applications software for the commercial market. The systems integration
services include consulting, maintenance, training and the installation of
hardware on which to implement the Company's as well as third party software
products The Prologic proprietary applications software is licensed for use to
manufacturers and for use in the wholesale distribution industry. The Company's
products are not directed to the retail consumer market. The financial
information for the fiscal year ended March 31, 1996 includes six months of
operating activity from GRSI, a wholly owned subsidiary which was acquired on
September 30, 1995. The financial information for the  fiscal year ended
March 31, 1997 includes eight months of operating activity from BASIS, a
wholly owned subsidiary which was acquired during August 1996. 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 Acquisition of Great River Systems, Inc.

      In September 1995, the Company completed the acquisition of GRSI, a
regional systems integration firm based in St. Paul, Minnesota. Founded in
1984, GRSI is a computer systems integrator specializing in enterprise
networking, internet servers and services, systems administration, consulting
and training. All of the outstanding common stock of GRSI was acquired
for 100,000 shares of common stock of the Company, $100,000 in cash and
issuance of a promissory note in the amount of $150,000. The acquisition was
accounted for as a purchase. Accordingly, the purchase price was allocated to
the assets acquired and liabilities assumed based on their estimated fair values
at the date of acquisition determined by management estimates. Goodwill in the
amount of $259,746 was recorded in connection with the acquisition.


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The Acquisition of BASIS, Inc.

      In August 1996, Prologic completed its acquisition of BASIS, a
commercial systems integration company located in the San Francisco
Bay Area with additional offices in Portland, Oregon. The acquisition was
financed with a combination of $500,000 in cash and 337,349 shares of the
Company's common stock. BASIS specializes in providing open systems integration
and a broad range of product support services to commercial, governmental, and
research clients. BASIS support services range from basic installation,
orientation, and troubleshooting to comprehensive long-term maintenance
programs. Further, as a vendor-independent reseller of a broad range of computer
hardware and software, with a focus on Unix-based products, BASIS is
strategically aligned with Prologic.


RESULTS OF OPERATIONS
COMPARISON OF FISCAL 1997 TO FISCAL 1996

      Revenues. Revenues were approximately $13,864,000 and $2,624,000 in fiscal
years 1997 and 1996, respectively. The increase was due to the implementation of
the Company's strategy of acquiring systems integration businesses which
included the addition of GRSI during fiscal 1996 and BASIS in fiscal 1997. In
fiscal 1996 GRSI generated $1,816,000 for a six month period from the
acquisition date and in fiscal 1997 provided $4,851,000 for the entire twelve
month period. BASIS provided revenue of approximately $8,610,000 for the eight
month period following the acquisition date in August 1996. Revenue attributable
to sales of computer hardware for fiscal years 1997 and 1996 were approximately
$9,513,000 and $1,350,000, respectively, or approximately 68.6% and 51.5%,
respectively, of total revenues for the periods. Sales of approximately
$2,269,000 in services in fiscal 1997 increased from $547,000 in fiscal 1996.
Third party software license and upgrade revenue increased 187% to approximately
$2,083,000 in fiscal 1997 from approximately $727,000 in fiscal 1996. Overall,
the increase in sales was attributable to the acquisition of the subsidiaries
GRSI and BASIS. The acquisitions have also significantly changed the Company's
product mix from principally proprietary software and related support sales to
that of third party hardware and software as traditionally sold by GRSI and
BASIS. The Company's progress to integrate the sale of its manufacturing and
distribution software into the GRSI and BASIS sales mix during fiscal 1997 has
not been as successful as the Company had planned. No product or service other
than computer hardware accounted for more than 10% of total revenues during
fiscal year 1997 or 1996.

      Historically, the Company's revenues in any particular period have been
concentrated among a relatively small number of customers, particularly due to
the revenues associated with the Company's development of product features and
enhancements during the initial stages of a customer contract as contrasted 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
customer contract. 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 manufacturing and wholesale distribution industries, in which the
Company's customers have historically been concentrated.

      Cost of Sales. Cost of sales was approximately $11,418,000 and $1,744,000
in fiscal years 1997 and 1996, respectively, and as a percentage of total
revenues was approximately 82.4% and 66.5% in the comparable periods. The
increase in cost of sales as a percentage of total revenues was directly related
to the change in product mix resulting from the acquisitions of GRSI and BASIS,
whose sales were predominately hardware and third party software which carries a
much higher ratio of cost to revenue than the sales mix in fiscal 1996. The
Company's strategic plan is to increase higher margin systems integration
services and to utilize the distribution channels provided by GRSI and BASIS,
and other acquisitions, to increase sales of its software and related services
which, when integrated into the subsidiaries product mix, is expected to
generate a more favorable ratio of cost of sales to revenue.


                                                                              12
<PAGE>   13
      Gross Profits. Gross profit increased to approximately $2,447,000, or
17.6% of net sales, in fiscal year 1997 from approximately $879,000, or 33.5%
of net sales, in fiscal 1996. The decrease in the rate is the result of the
change in product mix from higher margin sales of Prologic's proprietary
software to sales of third party software and hardware, due to the acquisition
of both GRSI and BASIS. The fiscal 1997 gross profit on software sales, which
was predominantly third party software, was 10.1%. In 1996 the gross profit on
software sales, which included a larger percentage of proprietary software, was
approximately 37.6%. The Company's gross margin on Prologic proprietary software
will generally be higher than the gross margin on third-party software,
principally because the capitalized cost of the development of the Prologic
software is low and amortized over a 48 month period while all other direct
costs such as media and packaging are low in relation to the market price of the
software. Third party software normally carries a high cost in relation to the
market price. The margin on services decreased to approximately 33.3% in fiscal
1997 from 69.5% in fiscal 1996, and sales of third party hardware generated a
margin of 15.6% in fiscal 1997 and a margin of 16.7% in fiscal 1996.

      Selling and Marketing. Sales and marketing expenses were approximately
$1,516,000, or 10.9% of net sales, in fiscal 1997 and $650,000, or 24.8% of net
sales, in fiscal 1996 an increase of approximately $866,000. This included sales
and marketing expenditures of $725,000 by BASIS, $351,000 by GRSI and $440,000
by Prologic, and included a planned increase in the number of sales and
marketing personnel, the production of new marketing tools including product
brochures, a national advertising campaign aimed at the manufacturing market,
and the participation in several trade shows and seminars geared at the
manufacturing, data collection and commercial internet markets. The Company
plans to continue to expand its marketing effort during the next fiscal year.

      General and Administrative. General and administrative expenses were
approximately $2,597,000 and $695,000 in fiscal years 1997 and 1996,
respectively, or as a percentage of net sales, approximately 18.7% and 26.5%,
respectively. The increase of approximately $1,902,000 in fiscal 1997 was
attributable in part to the addition of BASIS, which accounted for $857,000 of
the increase and GRSI which included expenses for the entire twelve month period
in fiscal 1997 of $409,000. Administrative expenses included increases
attributable to an increase in management personnel, additional reserves for bad
debt, the amortization of goodwill on the acquisition of GRSI and BASIS, as well
as, legal and accounting expenses incurred indirectly in connection with the
acquisition strategy and the cost of consulting and promotion involving investor
relations. The Company believes that during the next several years the
administrative expenses of the Company will be reduced as a percentage of sales,
as administrative functions are consolidated at the Tucson headquarters.

      Research and Development. Research and development expenses were
approximately $327,000 and $170,000 in fiscal years 1997 and 1996, respectively,
or as a percentage of net sales, approximately 2.4% and 6.5%, respectively.
Research and development is primarily involved in upgrading current proprietary
software modules and developing additional applications for the current
software. The increase in expenditures reflected the cost of additional
personnel in Research and Development.

      Write-off of Capitalized Software. The Company wrote off approximately
$426,000 in software costs in fiscal 1997 and approximately $326,000 in fiscal
1996. The write-off during both years was associated with software which,
although not being actively marketed, is continuing to be used internally on
customer projects and generates service revenue and is being sold to the
existing customer base. However, software sales are currently not projected to
generate sufficient revenue to recover the carrying value of the software. As a
result of the fiscal 1997 write-off; no capitalized software costs remain on the
consolidated balance sheet. The write-off will eliminate, in future periods, the
amortization of software development expenses, which are included in cost of
sales and amounted to approximately $140,000 during fiscal 1997.

      Loss from Operations. The Company had an operating loss of approximately
$2,601,000, or 18.8% of net sales, in fiscal 1997 and a loss of approximately
$961,000, or 36.6% of net sales, in fiscal 1996. The


                                                                              13
<PAGE>   14
1997 loss was the result of the operating expenses incurred as the Company
continued to implement its business plan, through acquisition and expansion in
operating areas, as well as the write-off of the capitalized software costs. The
reduction of the loss as a percent of net sales, from 36.6% to 18.8%, is the
result of efficiencies gained as the Company implements its expansion strategy.

      The Company expects that operating results will fluctuate as a result of a
number of factors, including: the availability of adequate capital; the timing
of new product and service introductions by the Company, 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 licensees' 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 commercial software 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 and Other Expenses. The Company incurred approximately $526,000
in interest and other expenses during fiscal 1997 and $802,000 in fiscal 1996.
Fiscal 1996 included interest on the bridge financing and the write-off of the
discounts associated with the common stock and warrants issued as part of the
bridge financing agreements. During the fourth quarter of fiscal 1996 the
Company incurred interest expense associated with the bridge financing which was
approximately $458,000. This included discounts associated with bridge financing
acquired during the fourth quarter of fiscal 1996. The unamortized portion of
the discount related to other bridge financing, which was due in quarterly
installments through April 1997, was approximately $330,000 at March 31, 1996.
In April and May of fiscal 1997 the Company repaid the remainder of the bridge
financing using its line of credit with its bank and wrote - off the $330,000
balance of the unamortized discount on the bridge notes. The interest rate
payable to the bank was much more favorable to the Company than the rates of the
bridge notes.

      Income Taxes. The Company had no income tax expense. As of March 31, 1997,
the Company had Federal net operating loss carryforwards of approximately
$6,400,000 (see Note 9, page F-15 of the Consolidated Financial Statements for a
further discussion of the loss carryforwards). The utilization of net operating
loss carryforwards will be limited as determined pursuant to applicable
provisions of the Internal Revenue Code and U.S. Treasury regulations
thereunder.

      Net Loss. The Company had a net loss of approximately $3,128,000 or $0.88
per share in fiscal 1997 and a net loss of approximately $1,763,000 or $0.76 per
share in fiscal 1996. The net loss in fiscal 1997 was attributable to the
decrease in margins resulting from the change in sales mix to lower margin third
party hardware and software revenues, the increased operating expenses which
included the continued expansion of sales and marketing staff and the increase
in administrative expense which included the amortization of goodwill of
approximately $181,000, the increase in staff at the corporate level and the
additional expenses from the subsidiaries. Non-recurring operating expenses
include the write off of approximately $426,000 in capitalized software costs.

      Liquidity and Capital Resources. At March 31, 1997, working capital was
approximately $230,000 compared to working capital of approximately $2,297,000
at March 31, 1996. The cash balance at March 31, 1997 was approximately
$1,815,000, of which $1,000,000 was restricted as security on its line of credit
with its bank.

      Cash used by operations during the year totaled approximately $2,240,000
in 1997 and $784,000 in 1996. Cash used in investing activities in 1997 was
approximately $1,731,500 and included the purchase of BASIS. Cash provided by
financing activities in 1997 totaled $1,360,000 and included the issuance of new
debt.


                                                                              14
<PAGE>   15
      Prior to March 31, 1996 the Company had raised approximately $2,124,000 in
bridge debt and as of March 31, 1996 had repaid approximately $1,199,000. The
remaining portion was paid off in April 1996, using cash borrowed from the
Company's bank line of credit which reduced the effective interest rate on the
debt from 14% to the bank's prime borrowing rate.

      As of March 31, 1996, the Company had raised the net amount of
approximately $4,011,000 in its initial public offering. The proceeds were net
of approximately $736,000 in underwriters fees and $633,000 in other cost of
obtaining the financing such as printing, legal and accounting fees.

      The Company has a $1,000,000 line of credit with its bank which is subject
to renewal in August 1997. Management has discussed the renewal with its bank
and believes that the line of credit will be renewed under substantially the
same terms. The interest rate under the line of credit is the bank's prime rate.
The line of credit is secured by the Company's $1,000,000 money market account.
As of March 1997 borrowings under this agreement were $994,562.

      The Company also maintains a $2,200,000 facility for the financing of
accounts receivable and inventory with Deutsche Financial Services ("DFS") for
its BASIS subsidiary. This financing facility is subject to a twelve month
renewal in August 1997. Management has discussed the renewal with DFS and
believes that the line of credit will be renewed under substantially the same
terms. The interest rate is at the prime rate plus 1%. The credit facility is
collateralized by a $300,000 irrevocable letter of credit from the Company's
bank. As of March 31, 1997 borrowings under this agreement were $107,886.

      In August 1996, Prologic completed its acquisition of BASIS. All of the
outstanding stock of BASIS was acquired for 337,349 shares of common stock of
the Company plus $500,000 in cash. The acquisition was accounted for as a
purchase and accordingly the purchase price and all expenses directly associated
with the acquisition were allocated to the assets acquired and the liabilities
assumed based on their fair market values at the date of the acquisition
determined by management estimates. Goodwill in the amount of $1,459,661 was
recorded in connection with the acquisition.

      During the year, the Company borrowed approximately $100,000 of current
debt due on June 30, 1997 at a rate of 8%. During July 1997 the note holder
agreed to extend the date of the payment to October 31, 1997. In addition, the
Company borrowed $820,000 in a private offering of 10% Subordinated Convertible
Notes. The Notes are due on December 31, 1999. The Notes and all accrued
interest payable are convertible at any time on or after September 30, 1997 into
Common Stock of the Company. The Notes are convertible to common stock at the
option of each note holder at a discounted rate based on the average closing
price quoted on the NASDAQ Stock Market for the ten consecutive days preceding
the date of the note holders notice of conversion.

      During the year the Company also borrowed $240,000 in short term notes
collateralized by its computer equipment and office furnishings. These notes are
due on July 31, 1997. Interest on these notes is paid monthly at a rate of 2%.
In July 1997 the note holders agreed to extend the payment of the notes until
October 31, 1997.

      Year to date, the Company has purchased approximately $466,000 in capital
equipment and purchased software.

      Through this fiscal year the Company has not generated sufficient cash
flows from operations to fund its current operations and, at the same time, the
additional overhead required to continue the Company's growth strategy and has
therefore had to supplement its cash sources with borrowings from its lines of
credit, the Subordinated Convertible Note Offering, and other short term
borrowings. The Company has not been able to implement its plan of integrating
the sale of its software into the newly acquired subsidiaries and has not
generated the software sales it had anticipated and has therefore not


                                                                              15
<PAGE>   16
generated the higher margin sales that it had expected. Management believes that
it must rely on outside sources of funds until revenues from both hardware and
software generate margins which will offset cash outflows.

      During the fourth quarter ended March 31, 1997 and continuing on into the
first quarter of the current fiscal year the Company has taken steps to reduce
its corporate overhead associated with acquisitions. The Company believes that
these cutbacks will not significantly impact the overall strategy of the Company
and will create efficiencies that will begin generating positive cash flows from
operations during the Company's second quarter of its current fiscal year.

      During April 1997 the Company initiated an offering of $3,000,000 of 8%
Cumulative Convertible Preferred Stock. These shares have rights to convert to
common stock and warrants to purchase additional shares of common stock of the
Company. The offering was made to non-U. S. persons as defined in Regulation S
of the Securities Act of 1933. Shares were offered in minimum quantities of
16,667 shares ($100,000) and a maximum quantity of 500,000 shares ($3,000,000)
at a price of $6.00 per share. The offering period ends at the earlier of the
sale of all of the shares offered or on December 31, 1997. Convertible shares
may be converted by the buyer on the earlier of June 30, 1998 or on the first
day that the common stock of the Company is traded publicly on the Second
Market of the Paris Stock Exchange after a secondary offering on such exchange
has been effected. The conversion rate per share of preferred stock is $6.00
divided by the conversion price. The conversion price is the average trading
price of the Company's common stock during the month of June 1998 with a minimum
price of $2.00 per share. For each share of common stock received through
conversion the holder will receive one warrant (which will expire three years
after the date of the execution of the holders subscription) to purchase one
share of common stock of the Company at an exercise price equivalent to the
effective conversion price. The net proceeds from this offering will be used for
general working capital and possible future acquisitions and product
development. Through the end of July 1997 the Company had received subscriptions
for $100,000 of the Preferred Stock.

      In the future, the Company will require additional equity and/or debt
financing to achieve its current as well as future plans for expansion. No
assurance can be given of the Company's ability to obtain such financing on
favorable terms, if at all. If the Company is unable to obtain additional
financing, its ability to meet current and future plans for expansion could be
materially adversely affected. The Company, as part of its expansion strategy,
regularly reviews possible opportunities to acquire systems integration
companies and businesses which would expand the Company's geographic market
presence.

      Accounting Matters. Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" (SFAS No. 121), which the Company will adopt for its fiscal year
ended March 31, 1997, required "that long-lived assets and certain identifiable
intangible assets to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable." In the opinion of management, the adoption of
SFAS No. 121 did not have any effect on the Company's financial position.

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995

      This Form 10KSB may contain forward-looking statements which are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve risks and
uncertainties, including, but not limited to, the impact of competitive
products and pricing, product demand and market acceptance risks, the presence
of competitors with greater financial resources, product development and
commercialization risks, costs associated with the integration and
administration of acquired operations, capacity and supply constraints or
difficulties, and the results of financing efforts. Further information
regarding these and other risks is described from time to time in the Company's
filings with the Securities and Exchange Commission.

RECENT ACCOUNTING PRONOUNCEMENTS

      In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share". This Statement establishes standards for computing
and presenting earnings per share ("EPS"), and supersedes APB Opinion No. 15.
This statement replaces primary EPS with basic EPS and requires dual
presentation of basic and diluted EPS. This statement is effective for periods
ending after December 15, 1997. Basic and diluted loss per share, as calculated
under SFAS No. 128, would have been $.88 and $.88 for the year ended March 31,
1997, respectively.


                                                                              16
<PAGE>   17
                                    PART IV.

ITEM 7. FINANCIAL STATEMENTS

      The financial statements attached to this Report on Form 10-KSB as pages
F-1 to F-17 are incorporated herein by reference.

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

      Not applicable.



                                     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 Company's
Board of Directors, and business experience of the directors is set forth below.
Each director has served continuously with the Company since his election as
indicated below.

<TABLE>
<CAPTION>
                                                                                   Director
Name                            Age         Position                                 Since
----                            ---         --------                                 -----
<S>                             <C>         <C>                                    <C>
James M. Heim (2) (3)           46          President, Chief Executive Officer       1984
                                            and Director

Richard E. Metz                 51          Executive Vice President and             1984
                                            Director

William E. Wallin               52          Vice President of Finance, and           1997
                                            Director

Herbert F. Day (1) (2) (3)      53          Director                                 1995

Craig W. Rauchle (1) (2) (3)    43          Director                                 1996
</TABLE>

(1)    Member of Audit Committee

(2)    Member of Compensation Committee

(3)    Member of Nominating Committee


JAMES M. HEIM, President, Chief Executive Officer and Director.  Mr. Heim is
a co-founder of the Company and has served as President 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.  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, Executive Vice President, Chief Administrative Officer and
Director.  Mr. Metz, the Company's Chief Administrative Officer, is a
co-founder of the Company and has served as a director since its inception
in 1984.  Mr. Metz has over twenty-five 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 management


                                                                              17
<PAGE>   18
consulting and investment firm specializing in contract negotiations and dispute
avoidance and resolution. Mr. Metz is a member of the American Arbitration
Association and serves on its regional Advisory Council, and is an Associate of
the American Bar Association, Dispute Resolution and Intellectual Property
Sections.

WILLIAM E. WALLIN, Vice President, Finance, Chief Financial Officer,
Secretary and Treasurer. Mr. Wallin, who became Chief Financial Officer,
Secretary and Treasurer of the Company in February of 1995, has over
twenty-four years of experience in accounting and financial management,
serving in positions ranging from auditor to Chief Financial Officer. From
1989 to 1991, and from 1991 to 1994, Mr. Wallin was the Corporate Controller
and Chief Financial Officer, respectively, of AlphaGraphics, Incorporated, a
large international franchising company. Mr. Wallin holds a Bachelors Degree
in accounting from Southern Illinois University.

HERBERT F. DAY, Director.  Mr. Day, who became a Director in 1995, has over
twenty-five years of experience in the computer industry with IBM
Corporation.  He has held professional and management positions in sales,
marketing, product management and product and business planning.  Mr. Day
received his Bachelors of Science degree in Electrical Engineering from the
University of Maryland.  He is currently employed as a Program Director by
the IBM Corporation.

CRAIG W. RAUCHLE, Director. Mr. Rauchle, who became Director in 1996, serves
as the Executive Vice President Corporate Development of Inter-Tel
Incorporated of Chandler, Arizona, and also holds the position of President
of Inter-Tel DataCom, Inc., a wholly-owned subsidiary. Founded in 1969,
Inter-Tel designs, produces and markets business telephone systems. Prior to
joining Inter-Tel, Mr. Rauchle was Director of Sales and Marketing for
American Business Communications in Denver, Colorado. He holds a B.A. in
Communications from the University of Denver and is a graduate of the Philip
Crosby Quality College. Mr. Rauchle is an active member of the Young
Presidents Organization and has previously served in various capacities of
that organization. He has also served as a Board Member of the North
American Telecommunications Association.


ITEM 10. EXECUTIVE COMPENSATION

      The following table sets forth certain information regarding compensation
paid or awarded by the Company to Mr. Heim, the Company's Chief Executive
Officer, during the Fiscal year ended March 31, 1997. No officer of the Company
received compensation in excess of $100,000 during the fiscal year.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                     Long - Term
                        Annual Compensation         Compensation
                        -------------------         ------------
Name and                                             Stock             All
Other
Principal Position      Year    Salary     Bonus    Options/SARs(#)
------------------      ----    ------     -----    --------------
        Compensation
        ------------
<S>                     <C>     <C>        <C>      <C>
James M. Heim           1997    $70,500    0                 0         0
President and Chief
Executive Officer
</TABLE>


During the fiscal year ended March 31,1997, no stock options were granted or
exercised by Mr. Heim.


                                                                              18
<PAGE>   19
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


PRINCIPAL SHAREHOLDERS AND SHAREHOLDINGS OF MANAGEMENT

The following table sets forth information, as of July 15, 1997, concerning the
Common Stock benefically owned by (I) each director and nominee of the Company
(ii) the Company's Chief 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, nominees 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
Name(1)                                      Owned           of Class
-------                                      -----           --------
<S>                                          <C>             <C>  
James M. Heim & Marlene Heim (2)             1,089,060       29.6%

Richard Metz                                   169,200       4.6%

William E. Wallin                                    0       0%

Herbert F. Day                                       0       0%

Craig W. Rauchle                                     0       0%

Joseph A. Sisneros(3)                          216,320       5.9%

All directors, nominees and
executive officers as a group (5 persons)    1,258,260       34.2%
</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 July 15, 1996 or written 60 days thereafter.
     Except as otherwise noted, the addresses for the persons named in the table
     is 2030 East Speedway Boulevard, Tucson, Arizona 85719.

(2)  Includes 697,320 shares owned by HFG Ltd. Properties, 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)   Mr. Sisneros is a former Officer and Director of the Company.



ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In February 1996, the Company executed an agreement with HFG Properties, LTD, a
Limited Partnership partly owned by the Company's President Mr. Heim. The terms
of the lease are from July 1996 through June 2001, with monthly rent based on an
independent appraised market rate reduced by 5%. The rent is to be increased
annually in a percentage amount equal to one-half of the percentage increase in
the Consumer Price Index for the previous year.


                                                                              19
<PAGE>   20
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-1 to F-18
               and incorporated herein by reference:


<TABLE>
<CAPTION>
               Financial Statement                                           Page
               -------------------                                           ----
               <S>                                                           <C>  
               Independent Auditors' Report                                  F-2, 18
               Consolidated Balance Sheet                                    F-3, 19
               Consolidated Statements of Operations                         F-4, 20
               Consolidated Statements of Changes in Shareholders' Equity    F-5, 21
               Consolidated Statements of Cash Flows                         F-6, 22
               Notes to Consolidated Financial Statements                    F-8, 24
</TABLE>

            2.    Exhibit:

<TABLE>
<CAPTION>
               Exhibit Number       Document                                                             Page
               --------------       --------                                                             ----
               <S>                  <C>                                                                  <C>
               3.1                  Articles of Incorporation by the Company*
               3.2                  Bylaws of the Company*
               3.3                  Articles of Incorporation of Great River Systems, Inc.*
               3.4                  Bylaws of GRSI*
               4.1                  Form of Warrant Agency Agreement by and between
                                    Prologic Management Systems, Inc. and American Stock
                                    Transfer & Trust Company, with form of redeemable
                                    warrant*
               4.2                  Specimen of Common Stock Certificate*
               4.3                  Specimen Redeemable Common Stock Purchase Warrant
                                    Certificate*
               4.4                  [Form of] Representative's Warrant*
               10.15                1994 Stock Option Plan, Form of Incentive Option
                                    Agreement, Form of Non-Qualified Stock Option
                                    Agreement*
               10.17                Employment Agreement of James M. Heim*
               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*
               10.21                Employment Agreement with Patricia Shanks
               10.22                Employment Agreement with Donald Legnitto

               10.23                Employment Agreement with Sharon O'Reilly*
               10.24                Employment Agreement with Michael Lowther*
               10.25                Stock Option Agreement with Sharon O'Reilly*
               10.26                Stock Option Agreement with Michael Lowther*
               10.27                Line of Credit Agreement with Norwest Bank***
               10.28                Office Lease with HFG Properties***
               10.30                SYMRP Purchase Agreement*
               10.31                Agreement and Plan of Reorganization dated as of
                                    June 1, 1996 among Prologic Management Systems,
</TABLE>


                                                                              20
<PAGE>   21
<TABLE>
               <S>                  <C>
                                    Inc., BASIS, Inc., BASIS Acquisition Corp. and certain
                                    Principal Shareholders of BASIS, Inc.**
               11.1                 Earnings Per Share Calculation
               23.1                 Independent Auditors' Consent
               27                   Financial Data Schedule
</TABLE>

               * 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 1, 1996.

      B.  Report on Form 8-K.

      No report on Form 8-K. was filed by the Company during the quarter
      ended March 31, 1997.


                                       21
<PAGE>   22
                                  POWER OF ATTORNEY

      KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James M. Heim and William E. Wallin, 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: August 11, 1997        By:     /s/  James M. Heim
                                           --------------------
                                           James M. Heim
                                           President and 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>
                                    James M. Heim,
                                    President and Chief Executive Officer
        /s/  James M. Heim          (Principal Executive Officer), and Director   August 11, 1997
       -------------------------


                                    Richard E. Metz,
                                    Executive Vice President, Chief
                                    Administrative Officer, Secretary and
        /s/  Richard E. Metz        Director                                      August 11, 1997
       -------------------------

                                    William E. Wallin,
                                    Vice President, Chief Financial Officer,
                                    Treasurer (Principal Financial and
        /s/  William E. Wallin      Accounting Officer), and Director              August 11, 1997
       -------------------------


                                    Craig Rauchle,
        /s/  Craig Rauchle          Director                                      August 11, 1997
       -------------------------

                                    Herbert F. Day,
        /s/  Herbert F. Day         Director                                      August 11, 1997
       -------------------------
</TABLE>


                                                                              22
<PAGE>   23
                          INDEPENDENT AUDITORS' REPORT



The Board of Directors and Stockholders
Prologic Management Systems, Inc.:


We have audited the accompanying consolidated balance sheet of Prologic
Management Systems, Inc. and subsidiaries (the Company) as of March 31, 1997,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the years in the two-year period ended March
31, 1997. 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. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the 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, 1997, and the results of their
operations and their cash flows for each of the years in the two-year period
ended March 31, 1997 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 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has continued uses of cash from operating activities that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.


Phoenix, Arizona
June 27, 1997, except for the first
    paragraph of note 15 which is
    as of July 17, 1997


                                      F-2
<PAGE>   24
                        PROLOGIC MANAGEMENT SYSTEMS, INC.

                           Consolidated Balance Sheet

                                 March 31, 1997


<TABLE>
<CAPTION>
                                     ASSETS
<S>                                                                                              <C>
Current assets:
    Cash and cash equivalents                                                                    $   815,120
    Restricted cash                                                                                1,000,000
    Trade accounts receivable, less allowance for doubtful accounts and sales returns
      of $228,594 at March 31, 1997                                                                2,696,444
    Notes receivable                                                                                  58,333
    Inventory                                                                                        293,478
    Prepaid expenses                                                                                  91,030
                                                                                                 -----------
           Total current assets                                                                    4,954,405
                                                                                                 -----------
Property and equipment, net                                                                          545,113
Goodwill, net                                                                                      1,514,162
Other assets                                                                                         112,444
                                                                                                 -----------
           Total assets                                                                          $ 7,126,124
                                                                                                 ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Lines of credit                                                                              $ 1,102,448
    Current installments of long-term debt                                                            63,074
    Notes payable                                                                                    394,570
    Accounts payable                                                                               2,697,341
    Accrued expenses                                                                                 352,659
    Deferred maintenance revenue                                                                     114,633
                                                                                                 -----------
           Total current liabilities                                                               4,724,725
                                                                                                 -----------
Long-term debt, excluding current installments                                                       980,309

Commitments, contingency, and subsequent events (notes 2, 4, 6, 10, 14 and 15)

Stockholders' equity:
    Preferred stock, no par value.  Authorized 1,000,000 shares; no shares issued or
      outstanding                                                                                         --
    Common stock, no par value.  Authorized 10,000,000 shares; 3,675,395 shares
      issued and outstanding at March 31, 1997                                                     8,038,955
    Accumulated deficit                                                                           (6,617,865)
                                                                                                 -----------
           Total stockholders' equity                                                              1,421,090
                                                                                                 -----------
           Total liabilities and stockholders' equity                                            $ 7,126,124
                                                                                                 ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-3
<PAGE>   25
                        PROLOGIC MANAGEMENT SYSTEMS, INC.

                      Consolidated Statements of Operations

                       Years ended March 31, 1997 and 1996

<TABLE>
<CAPTION>
                                                   1997                 1996
                                               ------------        ------------
<S>                                            <C>                 <C>
Net sales:
    Hardware                                   $  9,512,835           1,350,172
    Licenses                                      2,082,894             726,501
    Services and other                            2,268,645             547,187
                                               ------------        ------------
                                                 13,864,374           2,623,860
                                               ------------        ------------
Cost of sales:
    Hardware                                      8,032,195           1,124,479
    Licenses                                      1,871,689             453,226
    Services and other                            1,513,911             166,686
                                               ------------        ------------
                                                 11,417,795           1,744,391
                                               ------------        ------------
           Gross profit                           2,446,579             879,469
                                               ------------        ------------
Operating expenses:
    Selling and marketing                         1,515,998             650,207
    General and administrative                    2,597,103             694,822
    Research and development                        327,381             169,677
    Write-off of software costs                     425,807             325,818
    Goodwill amortization                           181,304                  --
                                               ------------        ------------
           Total operating expenses               5,047,593           1,840,524
                                               ------------        ------------
           Operating loss                        (2,601,014)           (961,055)

Other expense:
    Interest expense                               (562,763)           (803,230)
    Other                                            35,798                 990
                                               ------------        ------------
           Total other expense                     (526,965)           (802,240)
                                               ------------        ------------
           Net loss                            $ (3,127,979)         (1,763,295)
                                               ============        ============
Net loss per common share                      $      (0.88)              (0.76)
                                               ============        ============
Shares used in per share calculations             3,541,385           2,330,209
                                               ============        ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>   26
                        PROLOGIC MANAGEMENT SYSTEMS, INC.

           Consolidated Statements of Changes in Stockholders' Equity

                       Years ended March 31, 1997 and 1996

<TABLE>
<CAPTION>
                                                COMMON STOCK                                   TOTAL
                                        ---------------------------       ACCUMULATED      STOCKHOLDERS'
                                          SHARES           AMOUNT          DEFICIT            EQUITY
                                        ----------       ----------       ----------        ----------
<S>                                     <C>              <C>              <C>              <C>   
Balances at March 31, 1995               2,031,280       $1,759,898       (1,726,591)           33,307

Issuance of common stock in
    connection with acquisition            100,000           40,000               --            40,000

Issuance of common stock in
    connection with issuance of
    bridge notes                           146,790          587,160               --           587,160

Issuance of stock warrants in
    connection with issuance of
    bridge notes                                --          196,250               --           196,250

Issuance of common stock in
    connection with an initial
    public offering                      1,050,000        4,011,855               --         4,011,855

Net loss                                        --               --       (1,763,295)       (1,763,295)
                                        ----------       ----------       ----------        ----------
Balances at March 31, 1996               3,328,070        6,595,163       (3,489,886)        3,105,277

Issuance of common stock in
    connection with an acquisition         337,325        1,400,000               --         1,400,000

Issuance of common stock in
    connection with issuance of a
    note                                    10,000           26,560               --            26,560

Issuance of stock warrants in
    connection with an initial
    public offering                             --           17,232               --            17,232

Net loss                                        --               --       (3,127,979)       (3,127,979)
                                        ----------       ----------       ----------        ----------

Balances at March 31, 1997               3,675,395       $8,038,955       (6,617,865)        1,421,090
                                        ==========       ==========       ==========        ==========
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>   27
                        PROLOGIC MANAGEMENT SYSTEMS, INC.

                      Consolidated Statements of Cash Flows

                       Years ended March 31, 1997 and 1996

<TABLE>
<CAPTION>
                                                                              1997               1996
                                                                          -----------        -----------
<S>                                                                       <C>                 <C>        
Cash flows from operating activities:
    Net loss                                                              $(3,127,979)        (1,763,295)
    Adjustments to reconcile net loss to net cash used in operating
      activities:
      Depreciation and amortization                                           514,344            198,788
      Change in accounts receivable allowances                                 75,852             56,687
      Non-cash interest expense                                                26,560            458,210
      Write-off of software costs                                             425,807            325,818
      Increase (decrease) in cash resulting from changes in:
        Trade accounts receivable                                          (2,291,382)          (278,966)
        Accounts payable and accrued expenses                               2,477,045            402,401
        Other assets and liabilities                                         (340,459)          (183,770)
                                                                          -----------        -----------
           Total adjustments                                                  887,767            979,168
                                                                          -----------        -----------
           Net cash used in operating activities                           (2,240,212)          (784,127)
                                                                          -----------        -----------
Cash flows from investing activities:
    Increase in restricted cash                                            (1,000,000)                --
    Purchase of Great Rivers, Inc., net of cash acquired                           --           (247,956)
    Purchase of BASIS, Inc., net of cash acquired                            (207,566)                --
    Purchase of software                                                           --            (75,000)
    Purchase of equipment                                                    (465,600)           (83,546)
    Capitalized software development costs                                         --           (120,842)
    Increase in notes receivable                                              (58,333)                --
                                                                          -----------        -----------
           Net cash used in investing activities                           (1,731,499)          (527,344)
                                                                          -----------        -----------
Cash flows from financing activities:
    Issuance of notes payable and debt                                      2,509,764          1,967,367
    Repayment of debt                                                      (1,167,146)        (1,254,233)
    Net decrease in related party debt                                             --            (53,281)
    Issuance of common stock                                                       --          4,011,855
    Issuance of warrants                                                       17,232                 --
                                                                          -----------        -----------
           Net cash provided by financing activities                        1,359,850          4,671,708
                                                                          -----------        -----------
Net increase (decrease) in cash and cash equivalents                       (2,611,861)         3,360,237
Cash and cash equivalents, beginning of year                                3,426,981             66,744
                                                                          -----------        -----------
Cash and cash equivalents, end of year                                    $   815,120          3,426,981
                                                                          ===========        ===========
</TABLE>

                                                                     (Continued)


                                      F-6
<PAGE>   28
                        PROLOGIC MANAGEMENT SYSTEMS, INC.

                Consolidated Statements of Cash Flows, Continued

                       Years ended March 31, 1997 and 1996

<TABLE>
<CAPTION>
                                                                                   1997                1996
                                                                             -----------------       -------
<S>                                                                          <C>                     <C>    
SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION:
    Cash paid during the year for interest                                   $         238,254       179,804
                                                                             =================       =======
    Noncash financing and investing activities:
      Software purchased in exchange for debt                                $              --       187,386
                                                                             =================       =======
      Issuance of warrants in connection with issuance of bridge notes
                                                                             $              --       196,250
                                                                             =================       =======
      Issuance of common stock in connection with an acquisition             $       1,400,000            --
                                                                             =================       =======
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-7
<PAGE>   29
                        PROLOGIC MANAGEMENT SYSTEMS, INC.

                   Notes to Consolidated Financial Statements

                             March 31, 1997 and 1996

(1)      ORGANIZATION

         Prologic Management Systems, Inc. (the Company) provides systems
         integration services, networking services and applications software for
         the commercial market. The Company's system integration services
         include 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. Prologic 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 Prologic proprietary
         applications software is licensed for use to manufacturers and for use
         in the wholesale distribution industry. The Company's products are not
         directed to the retail consumer market. The Company's customers are
         primarily located in the continental United States.


(2)      LIQUIDITY

         The Company's consolidated financial statements have been prepared
         assuming that the Company will continue as a going concern. The Company
         reported consolidated net losses of $3,127,979 and $1,763,295 in the
         fiscal years ended March 31, 1997 and 1996, respectively. Cash used in
         operating activities totaled $2,240,212 in 1997 and $784,127 in 1996.
         The Company's net working capital and cash and cash equivalent balances
         have decreased by $2,067,374 and $2,611,861, respectively, during the
         current year. Management intends to convert certain long-term debt to
         equity, increase sales of software, reduce certain operating expenses
         and obtain additional debt and equity financing. The consolidated
         financial statements do not include any adjustments that might result
         from the outcome of this uncertainty.


(3)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements include the accounts of the
         Company and its subsidiaries. Significant intercompany accounts and
         transactions have been eliminated in consolidation.

         CASH AND CASH EQUIVALENTS

         All short-term investments with a maturity of three months or less at
         the date of acquisition are considered to be cash equivalents. Cash and
         cash equivalents primarily include cash on hand and amounts on deposit
         with financial institutions.

         RESTRICTED CASH

         Restricted cash consists of a certificate of deposit that secures the
         Company's revolving line of credit. This certificate of deposit earns
         interest at a rate of 5.5%.


                                      F-8
<PAGE>   30
                        PROLOGIC MANAGEMENT SYSTEMS, INC.

              Notes to Consolidated Financial Statements, Continued




         INVENTORY

         Inventory consists principally of purchased computer hardware and parts
         and are stated at the lower of cost (first-in, first-out) or market.

         PROPERTY AND EQUIPMENT

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

         SOFTWARE COSTS

         The Company expenses software development costs as research and
         development until the underlying product has achieved technological
         feasibility, after which these costs are capitalized in accordance with
         Statement of Financial Accounting Standards No. 86. Capitalized
         software costs are amortized over a four-year period using the greater
         of (1) the straight-line method or (2) the units-of-anticipated-revenue
         method. The Company will charge identified capitalized software costs
         to operations when the carrying value is deemed not to be recoverable
         over its remaining useful life.

         The Company amortizes purchased software costs straight-line over four
         years.

         During 1997 and 1996, the Company determined that certain prior
         capitalized software costs had limited future value; and, therefore,
         charged operations for these costs $425,807 and $325,818 in 1997 and
         1996, respectively.

         GOODWILL

         Goodwill arose from the acquisition of GRSI and BASIS and represents
         the excess of the purchase price over the estimated fair value of the
         net assets of GRSI and BASIS. Goodwill is being amortized on a
         straight-line basis over the period of expected benefit of 7 years. The
         Company assesses the recoverability of this intangible asset by
         determining whether the amortization of the goodwill balance over its
         remaining life can be recovered through undiscounted future operating
         cash flows of the acquired operation. The amount of goodwill
         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 goodwill
         will be impacted if estimated future operating cash flows are not
         achieved. Accumulated amortization totaled $181,227 at March 31, 1997.


                                      F-9
<PAGE>   31
                        PROLOGIC MANAGEMENT SYSTEMS, INC.

              Notes to Consolidated Financial Statements, Continued

         INCOME TAXES

         The Company uses the asset and liability method of accounting for
         income taxes. Deferred tax assets and liabilities are recognized for
         the future tax consequences attributable to differences between the
         financial statement carrying amounts of existing assets and liabilities
         and their respective tax bases. 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. The effect on deferred tax assets and liabilities
         of a change in tax rates is recognized in income in the period that
         includes the enactment date. A valuation allowance is recorded against
         deferred tax assets when it is more likely than not that the deferred
         tax assets will not be realized.

         REVENUE RECOGNITION

         The Company recognizes revenue from hardware sales at the time of
         shipment and from software sales at the time of delivery, net of an
         allowance for future returns and uncollectible accounts. Royalties
         related to agreements with original equipment manufacturers (OEM) are
         recorded when the OEM's ship their product incorporating the Company's
         software to their end customers. Revenue associated with agreements to
         provide product maintenance and support are recognized ratably over the
         contractual term. Revenues from consulting arrangements are recorded
         when the services are provided. The Company's revenue recognition
         policies are in accordance with the American Institute of Certified
         Public Accountants' Statement of Position No. 91-1, Software Revenue
         Recognition.

         CONCENTRATIONS OF CREDIT RISK

         The Company places its cash and cash equivalents in checking and money
         market accounts at three financial institutions. At March 31, 1997, the
         Company had approximately $1,200,000 in deposits at a bank in excess of
         the FDIC insurance limit of $100,000.

         The Company performs ongoing credit evaluations of its customers and
         generally does not require collateral. The Company maintains reserves
         for estimated credit losses.

         COMPUTATIONS OF NET LOSS PER SHARE

         The net loss per share is based upon the weighted average number of
         common shares outstanding. The 1996 loss per share includes Staff
         Accounting Bulletin No. 83 issuances and grants.

         STOCK OPTIONS

         The Company has elected to follow Accounting Principles Board Opinion
         No. 25 - Accounting for Stock Issued to Employees ("APB 25") in
         accounting for the incentive stock option and nonqualified stock option
         plan. Under APB 25, since the exercise price of the Company's stock
         options equals the market price of the underlying stock on the date of
         grant, no compensation expense is recognized.


                                      F-10
<PAGE>   32
                        PROLOGIC MANAGEMENT SYSTEMS, INC.

              Notes to Consolidated Financial Statements, Continued

         FAIR VALUE OF FINANCIAL INSTRUMENTS

         Statement of Financial Accounting Standards No. 107 - Disclosures about
         Fair Value of Financial Instruments, requires that the Company disclose
         estimated fair values for its financial instruments. The following
         summary presents a description of the methodologies and assumptions
         used to determine such amounts.

         The carrying amount of cash and cash equivalents approximates fair
         value because their maturity is three months or less at the date
         acquired. The carrying amount of accounts receivables, accounts payable
         and accrued expenses approximates 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.

         USE OF ESTIMATES

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

         LONG-LIVED ASSETS

         In March 1995, Statement of Financial Accounting Standards (SFAS) No.
         121, Accounting for the Impairment of Long-Lived Assets and for
         Long-Lived Assets to be Disposed Of, was issued. SFAS No. 121 requires
         that long-lived assets and certain identifiable intangibles to be held
         and used or disposed of by an entity be reviewed for impairment
         whenever events or changes in circumstances indicate that the carrying
         amount of any asset may not be recoverable. The Company adopted this
         statement effective April 1, 1996. In connection with its ongoing
         evaluation of capital software costs, the Company wrote off $425,807 of
         capitalized software costs in fiscal 1997.

         EARNINGS PER SHARE

         In February 1997, the Financial Accounting Standards Board issued SFAS
         No. 128, Earnings Per Share. This Statement establishes standards for
         computing and presenting earnings per share ("EPS"), and supersedes APB
         Opinion No. 15. This statement replaces primary EPS with basic EPS and
         requires dual presentation of basic and diluted EPS. This statement is
         effective for periods ending after December 15, 1997. Basic and diluted
         loss per share, as calculated under SFAS No. 128, would have been $.88
         and $.88 for the year ended March 31, 1997, respectively.


                                      F-11
<PAGE>   33
                        PROLOGIC MANAGEMENT SYSTEMS, INC.

              Notes to Consolidated Financial Statements, Continued

(4)      ACQUISITIONS

         In September 1995, the Company completed the acquisition of Great River
         Systems, Inc. (GRSI), a regional systems integration firm based in St.
         Paul, Minnesota. All of the outstanding common stock of GRSI was
         acquired for 100,000 shares of common stock of the Company, valued at
         $40,000, $100,000 in cash and issuance of a promissory note in the
         amount of $150,000. The acquisition was accounted for as a purchase.
         Accordingly, the purchase price was allocated to the assets acquired
         and liabilities assumed based on their estimated fair values at the
         date of acquisition determined by management estimates. Goodwill in the
         amount of $259,746 was recorded in connection with the acquisition. The
         accompanying consolidated statement of operations for the year ended
         March 31, 1996 include the operations of GRSI from October 1, 1995.

         In August 1996, Prologic completed its acquisition of BASIS, Inc.
         ("BASIS"), a commercial systems integration company located in the San
         Francisco Bay Area with additional offices in Portland, Oregon. All of
         the outstanding stock of BASIS was acquired for 337,325 shares of
         common stock of the Company plus $500,000 in cash. The acquisition was
         accounted for as a purchase and accordingly the purchase price and all
         expenses directly associated with the acquisition totalling $2,231,533
         were allocated to the assets acquired and the liabilities assumed based
         on their fair market values (current assets, $2,417,506; property,
         plant and equipment, $170,482; and liabilities, $1,816,116) at the date
         of the acquisition determined by management estimates. The remainder of
         the excess purchase price representing goodwill in the amount of
         $1,459,661 was recorded in connection with the acquisition. The
         accompanying consolidated statement of operations for the year ended
         March 31, 1997 include the operations of BASIS from August 1, 1996.

         The following financial information presents the unaudited pro forma
         combined results of the Company as if the GRSI and BASIS acquisitions
         had occurred at April 1, 1995.

<TABLE>
<CAPTION>
                                                   YEARS ENDED MARCH 31,
                                          -------------------------------------
                                              1997                      1996
                                          ------------               ----------
                                                         (UNAUDITED)
<S>                                       <C>                        <C>       
Net sales                                 $ 16,434,020               18,342,971

Net loss                                    (3,197,769)              (1,454,658)

Loss per share                                   (0.90)                   (0.62)
</TABLE>

         The above pro forma results give effect to (1) estimated adjustments to
         net sales, cost of sales, selling and general and administrative
         expenses, including amortization of intangibles resulting from the
         acquisition, and (2) estimated income tax effects thereon. The pro
         forma information presented is for informational purposes only and is
         not necessarily indicative of future earnings (loss) or of what the
         earnings (loss) actually would have been had the combinations been
         consummated at the beginning of the respective periods.


                                      F-12
<PAGE>   34
                        PROLOGIC MANAGEMENT SYSTEMS, INC.

              Notes to Consolidated Financial Statements, Continued

         In January of 1996, the Company completed the purchase of SYMRP
         scheduler software from Symmetrix, Inc., a Massachusetts based
         consulting firm. The purchase included the software, the underlying
         patent, copyright and trade secrets regarding the scheduling
         technology. The consideration included $50,000 in cash, a short-term
         promissory note for $150,000, bearing interest at 10% with equal
         quarterly payments through January 1, 1997, and a long-term 8%
         promissory note in the amount of $187,386 (note 8). In order to secure
         the promissory note and minimum royalty payment thereon, the Company
         has provided a security interest to Symmetrix in the technology as well
         as reversion rights in the technology. In addition, the Company is to
         pay a 10% royalty for sales in excess of $2,500,000 through June 30,
         2000. The purchased software was included in the write-off of software
         costs in 1997 (note 3).


(5)      PROPERTY AND EQUIPMENT

         A summary of property and equipment as of March 31, 1997 follows:

<TABLE>
<S>                                                                   <C>       
Furniture                                                             $  215,344
Equipment and software                                                   999,774
                                                                      ----------
                                                                       1,215,118
Less accumulated depreciation                                            670,005
                                                                      ----------
Net property and equipment                                            $  545,113
                                                                      ==========
</TABLE>

(6)      LINES OF CREDIT

         The Company has a $1,000,000 revolving line of credit with a bank
         subject to renewal in August 1997. The interest rate on borrowings
         under the agreement is the "prime" rate of interest as established by
         the bank. Interest is due monthly. The line of credit is secured by the
         Company's $1,000,000 money market account. As of March 31, 1997, the
         Company had borrowings under this line of credit in the amount of
         $994,562.

         The Company also maintains a $2,200,000 letter of credit facility for
         the financing of accounts receivable and inventory with a financial
         institution for its BASIS subsidiary. This financing facility is
         subject to a twelve-month renewal in August 1997. The interest rate is
         at the prime rate plus 1%. Interest is due monthly. The credit facility
         is collateralized by a $300,000 irrevocable letter of credit from the
         Company's bank. As of March 31, 1997, borrowings under this agreement
         were $107,886.


                                      F-13
<PAGE>   35
                        PROLOGIC MANAGEMENT SYSTEMS, INC.

              Notes to Consolidated Financial Statements, Continued

(7)      LONG-TERM DEBT

         A summary of long-term debt as of March 31, 1997 follows:

<TABLE>
<S>                                                                                   <C>  
10% unsecured convertible promissory notes; principal due in December 1999;
  these notes are subject to optional redemption, in whole or in part and are
  also convertible into shares of the Company's common stock upon certain terms
  and conditions                                                                      $  820,000

8% imputed interest licensing agreement with a face value of
  $250,000; principal payments due in annual installments of $25,000
  through June 2000 at which time the remaining principal and
  interest are due; secured by purchased software
                                                                                         176,996

Other                                                                                     46,387
                                                                                      ----------
       Total long-term debt                                                            1,043,383

Less current installments of long-term debt                                               63,074
                                                                                      ----------
       Long-term debt, excluding current installments                                 $  980,309
                                                                                      ==========
</TABLE>

         A summary of long-term debt maturities after March 31, 1997 follows:
         1998 -- $63,074; 1999 -- $33,313; 2000 -- $845,000; and 2001 --
         $101,996.

(8)      NOTES PAYABLE

         A summary of notes payable as of March 31, 1997 follows:

<TABLE>
<S>                                                                     <C>     
Equipment notes payable                                                 $240,000
Notes payable to Symmetrix                                                50,000
Other current notes payable                                              104,570
                                                                        --------
                                                                        $394,570
                                                                        ========
</TABLE>

         The Company issued six promissory notes totaling $240,000, secured by
         various equipment, bearing interest at a rate of 2% per month.
         Principal and interest on these notes is due July 31, 1997.

         In connection with the Company's purchase of scheduling software (note
         4), the Company issued a promissory note, secured by the purchased
         software, in the amount of $150,000, bearing interest at 10% per annum,
         principal and interest due in four quarterly installments of $25,000
         commencing on March 31, 1996.


                                      F-14
<PAGE>   36
                        PROLOGIC MANAGEMENT SYSTEMS, INC.

              Notes to Consolidated Financial Statements, Continued

(9)      INCOME TAXES

         The actual tax expense (benefit) differs from the "expected" tax
         expense (benefit) for the years (computed by applying the U.S. Federal
         corporate income tax rate of 34% in 1997 and 1996 to loss before income
         taxes) as follows:

<TABLE>
<CAPTION>
                                                                     YEARS ENDED MARCH 31,
                                                               ------------------------------
                                                                   1997               1996
                                                               -----------        -----------
<S>                                                            <C>                   <C>      
Computed "expected" tax benefit                                $(1,063,513)          (599,520)
State income taxes (net of federal benefit)                       (187,679)          (105,797)
Increase in valuation allowance related to net operating
  loss carryforward                                              1,251,192            705,317
                                                               -----------        -----------
          Income taxes                                         $        --                 --
                                                               ===========        ===========
</TABLE>

         The tax effects of temporary differences that give rise to significant
         portions of the deferred tax assets and deferred tax liabilities
         follow:

<TABLE>
<CAPTION>
                                                              YEARS ENDED MARCH 31,
                                                           ---------------------------
                                                              1997              1996
                                                           ----------       ----------
<S>                                                        <C>               <C>      
Deferred tax assets:
  Net operating loss carryforward                          $2,497,835        1,246,643
  Allowances for doubtful accounts and sales returns           91,438           61,097
  Deferred maintenance revenue                                 45,853           42,944
  Employee compensation and other accruals                      5,266            5,257
                                                           ----------       ----------
          Total gross deferred tax assets                   2,640,392        1,355,941

  Less valuation allowance                                  2,640,392        1,355,941
                                                           ----------       ----------
          Net deferred tax assets                          $       --               --
                                                           ==========       ==========
</TABLE>

         Utilization of the net operating loss carryforward will be
         significantly limited or eliminated as a result of the change in
         ownership resulting from the initial public offering in fiscal 1996.
         The valuation allowance for deferred tax assets as of March 31, 1997
         and 1996 was $2,640,392 and $1,355,941, respectively. The Company has a
         net operating loss carryforward approximating $6,400,000 for federal
         income tax purposes which expires in varying amounts from 2000 through
         2011.


                                      F-15
<PAGE>   37
                        PROLOGIC MANAGEMENT SYSTEMS, INC.

              Notes to Consolidated Financial Statements, Continued

(10)     OPERATING LEASES

         In February 1996, the Company executed a lease agreement with HFG
         Properties, Ltd., a Limited Partnership (HFG) partly owned by the
         Company's President and Chief Executive Officer. The terms of the lease
         are from July 1996 through June 2001, with monthly rent based on an
         independent appraised market rate reduced by 5%. The rent is increased
         annually in a percentage amount equal to one-half of the percentage
         increase in the Consumer Price Index for the previous year. Rent
         expense for this operating lease was $68,879 in fiscal 1997. Accounts
         payable at March 31, 1997 include $52,836 due HFG. At March 31, 1997,
         the Company had approximately $70,000 in deposits with HFG Properties,
         Ltd.

         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. The Company's President has also personally guaranteed
         amounts pertaining to certain operating leases. Total rent expense for
         these operating leases was $223,365 and $50,547 for the years ended
         March 31, 1997 and 1996, respectively. Future minimum lease payments
         under operating leases that have remaining noncancelable lease terms in
         excess of one year at March 31, 1997 follows: 1998 - $279,268, 1999 -
         $185,235, 2000 - $160,107, 2001 - $138,282, and 2002 - $34,571 for a
         total of $797,463.


(11)     COMMON STOCK

         In September 1995, the Company issued 100,000 shares of common stock,
         valued at $40,000, in connection with the acquisition of GRSI (note 4).

         During fiscal 1996, the Company issued 146,790 shares of common stock,
         valued at $4 per share, in connection with the sale of additional
         bridge notes.

         During fiscal 1996, the Company issued 196,250 warrants to purchase
         common stock, valued at $1 per share, in connection with the sale of
         additional bridge notes.

         In March 1996, the Company issued 1,050,000 shares of common stock,
         valued at $5 per share and 1,050,000 warrants at $.125, in connection
         with the initial public offering. Expenses associated with the offering
         totaled $1,369,395.

         During fiscal 1997, the Company issued 337,325 shares of common stock,
         valued at $4.15 per share, in connection with the acquisition of BASIS
         (note 4).

         During fiscal 1997, the Company issued 10,000 shares of common stock
         valued at $2.66 per share, in connection with the issuance of a
         promissory note. The Company recognized $26,560 of administrative
         expense related to this issuance during the year ended March 31, 1997.

         During fiscal 1997, the Company issued 157,500 warrants, valued at
         $0.109, to purchase common stock in connection with the initial public
         offering.


                                      F-16
<PAGE>   38
                        PROLOGIC MANAGEMENT SYSTEMS, INC.

              Notes to Consolidated Financial Statements, Continued

(12)     STOCK OPTIONS

         During 1995, the Company's Board of Directors approved both an
         incentive stock option and a nonqualified stock option plan. The
         maximum number of options that may be issued pursuant to the plan is
         500,000. The options granted under the plan may be exercisable over a
         10-year period at an option price equal to the fair market value of the
         common stock at the date of grant.

         As of March 31, 1997, 122,750 options had been granted and were
         outstanding under this plan as follows: 1997 - 72,750 at an exercise
         price of $3.88; 1996 - 50,000 at an exercise price of $5. At March 31,
         1997, the weighted average remaining contractual life of outstanding
         options was 9.1 years. The number of options exercisable at March 31,
         1997 was 31,818 and the weighted-average exercise price of those
         options was $5.00.

         Pro forma information regarding net income and earnings per share is
         required by Statement of Financial Accounting Standards No. 123 -
         Accounting for Stock-Based Compensation (SFAS 123), and has been
         determined as if the Company had accounted for its employee stock
         options under the fair value method of SFAS 123. The fair value for
         these options was estimated at the date of grant using a Black-Scholes
         option pricing model with the following weighted-average assumptions
         for fiscal years ended March 31, 1997 and 1996, respectively: risk-free
         interest rates of 6.5% and 6.5%, dividend yields of 0%; volatility
         factors of the expected market price of the Company's common stock of
         64%; and a weighted-average expected life of the options of 4 years.
         The per share weighted-average fair value of the stock options granted
         in fiscal years ended March 31, 1997 and 1996 was $1.37 and $2.10,
         respectively.

         Had the Company determined compensation cost based on the fair value at
         the grant date for its stock options under SFAS 123, the Company's net
         loss would have been increased to the following pro forma amounts
         indicated below:

<TABLE>
<CAPTION>
                                                 1997                  1996
                                             -------------        --------------
<S>                                          <C>                  <C>        
Net loss:
  As reported                                $  (3,127,979)          (1,763,295)
  Pro forma                                     (3,212,649)          (1,798,230)

Net loss per common share:
  As reported                                        (0.88)               (0.76)
  Pro forma                                          (0.91)               (0.77)
</TABLE>

(13)     ECONOMIC DEPENDENCE

         The Company sells its products to customers located throughout the
         United States. Sales to two customers accounted for 16% of net sales
         for the year ended March 31, 1997. Sales to two customers accounted for
         38% of net sales for the year ended March 31, 1996.


                                      F-17
<PAGE>   39
                        PROLOGIC MANAGEMENT SYSTEMS, INC.

              Notes to Consolidated Financial Statements, Continued

(14)     PENSION PLAN

         The Company has a 401(k) plan for the benefit of its employees. Under
         the plan, eligible employees can contribute up to 15% of their
         compensation or a maximum of $9,500. The Company may also make
         discretionary contributions to the Plan in amounts determined by
         management. Participants will be immediately vested in their personal
         contributions and in management's contributions. Pension expense
         totaled $140 and $1,000 for the years ended March 31, 1997 and 1996,
         respectively.


(15)     LITIGATION

         In June 1997 the Company was served with a complaint by a purported
         stockholder, seeking damages in excess of $50,000,000 in connection
         with the Company's previously announced joint venture with Compagnie
         des Signaux. The Company believes that the stockholder claim is without
         merit and if that stockholder continues to prosecute the action, the
         Company will mount a vigorous defense. On July 17, 1997, a United
         States Magistrate Judge recommended that the lawsuit be dismissed
         without prejudice against the Company. The parties have ten days to
         file written objections to the recommendation.

         The Company is involved in various claims and actions arising in the
         ordinary course of business. In the opinion of management, based on
         consultation with legal counsel, the ultimate disposition of these
         matters will not have a materially adverse effect on the Company.


                                      F-18