<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

[X]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934

For Period Ended June 30, 2000

[ ]  Transition Report Pursuant to Section 13 or 15 (d) of the Securities
     Exchange Act of 1934

For the transition period from ___________ to ___________

Commission File Number 00-23527


                                   eSoft, Inc.
        -----------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)


             DELAWARE                                         84-0938960
---------------------------------                       ------------------------
  (State or other jurisdiction                          (IRS Employer ID Number)
of incorporation or organization)


                         295 Interlocken Boulevard, #500
                              Broomfield, CO 80021
                    ----------------------------------------
                    (Address of Principal Executive Offices)


                                 (303) 444-1600
                    ----------------------------------------
                (Issuer's Telephone Number, Including Area Code)


 ------------------------------------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report)


Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                           YES X    NO
                              ---     ---

Transitional Small Business Disclosure format (check one):

                           YES      NO X
                              ---     ---

The number of shares outstanding of the Registrant's $0.01 par value common
stock on July 31, 2000 was 16,060,508.

<PAGE>

                          eSOFT, INC. AND SUBSIDIARIES

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I   FINANCIAL INFORMATION                                                    Page
                                                                                  ----
<S>                                                                             <C>
         Item 1.  Consolidated Financial Statements                              3 - 14

         Item 2.  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations                                     15 - 26


PART II  OTHER INFORMATION                                                      27 - 30

</TABLE>


                                                                               2
<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

                          eSOFT, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                         December 31,            June 30,
                                                                             1999                  2000
                                                                         ------------          ------------
<S>                                                                      <C>                   <C>
                                     ASSETS
CURRENT ASSETS
     Cash and cash equivalents                                           $  8,576,055          $ 16,756,825
     Accounts receivable:
          Trade, less allowance of $310,453 and $324,616 for
            doubtful accounts                                               1,454,471             2,247,165
          Other                                                               912,500             1,449,500
     Inventories                                                              672,691               335,500
     Prepaid expenses and other                                               158,261               372,198
                                                                         ------------          ------------
           Total current assets                                            11,773,978            21,161,188
                                                                         ------------          ------------
PROPERTY AND EQUIPMENT
     Computer equipment                                                       718,122               926,547
     Furniture and equipment                                                  326,092               389,066
     Automobile                                                                    --                17,000
     Leasehold improvements                                                   176,314               189,034
     Less accumulated depreciation                                           (660,904)             (806,876)
                                                                         ------------          ------------
           Net property and equipment                                         559,624               714,771
                                                                         ------------          ------------
OTHER ASSETS
     Capitalized software costs, net of accumulated amortization              702,417               271,024
     Deferred financing costs                                                 283,215               224,708
     Other assets                                                              39,557                    --
                                                                         ------------          ------------
           Total other assets                                               1,025,189               495,732
                                                                         ------------          ------------
TOTAL ASSETS                                                             $ 13,358,791          $ 22,371,691
                                                                         ============          ============

</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                                                               3
<PAGE>

                          eSOFT, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                             December 31,            June 30,
                                                                1999                   2000
                                                             ------------          ------------
<S>                                                          <C>                   <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
     Accounts payable                                        $    831,496          $    743,568
     Deferred revenue                                             289,590               668,218
     Accrued expenses:
          Payroll and payroll taxes                               185,983               247,376
          Other                                                   454,815               501,870
                                                             ------------          ------------
             Total current liabilities                          1,761,884             2,161,032

LONG TERM LIABILITIES
     Convertible debenture                                      1,198,254             1,361,507
                                                             ------------          ------------
             Total liabilities                                  2,960,138             3,522,539
                                                             ------------          ------------
STOCKHOLDERS' EQUITY
     Common stock, par value $.01 per share;
       Authorized 100,000,000 shares; 14,289,075 and
       16,056,708 issued and outstanding December
       31, 1999 and June 30, 2000, respectively                   142,890               160,567
     Additional paid-in capital                                24,999,820            50,565,661
     Subscriptions receivable                                     (39,704)          (12,508,987)
     Accumulated deficit                                      (14,704,353)          (19,368,089)
                                                             ------------          ------------
             Total stockholders' equity                        10,398,653            18,849,152
                                                             ------------          ------------
TOTAL LIABILITIES AND
    STOCKHOLDERS' EQUITY                                     $ 13,358,791          $ 22,371,691
                                                             ============          ============

</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                                                               4
<PAGE>

                          eSOFT, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                FOR THE SIX MONTHS ENDED                   FOR THE THREE MONTHS ENDED
                                                         JUNE 30,                                    JUNE 30,
                                               1999                  2000                  1999                  2000
                                           ------------          ------------          ------------          ------------
<S>                                        <C>                   <C>                   <C>                   <C>
REVENUES:
  Product                                  $  3,576,551          $  4,494,903          $  1,854,634          $  2,291,102
  Services                                      230,286             1,236,000               230,286               317,000
                                           ------------          ------------          ------------          ------------
    Total revenues                            3,806,837             5,730,903             2,084,920             2,608,102
                                           ------------          ------------          ------------          ------------
COST OF GOODS SOLD:
  Product                                     1,902,692             2,391,857             1,018,082             1,240,369
  Services                                           --               165,502                    --                64,118
                                           ------------          ------------          ------------          ------------
    Total cost of goods sold                  1,902,692             2,557,359             1,018,082             1,304,487

GROSS PROFIT                                  1,904,145             3,173,544             1,066,838             1,303,615
                                           ------------          ------------          ------------          ------------
EXPENSES:
  Sales and marketing expense                 3,802,828             3,685,100             1,343,525             2,130,093
  General & administrative expense            3,486,911             2,249,184             1,942,831             1,119,131
  Engineering expense                           715,089             1,023,017               423,372               468,012
  Software amortization costs                    83,652               431,393                41,826               132,393
  Research and development expense              355,710               481,465               148,616               278,893
                                           ------------          ------------          ------------          ------------
     Total Expenses                           8,444,190             7,870,159             3,900,170             4,128,522
                                           ------------          ------------          ------------          ------------
Loss from operations                         (6,540,045)           (4,696,615)           (2,833,332)           (2,824,907)
                                           ------------          ------------          ------------          ------------
OTHER INCOME (EXPENSE):
  Realized gain(loss) on sale                   292,634                    --               146,317                    --
  Unrealized gain(loss)                        (183,189)                   --                    --                    --
  Interest income                                34,130               305,643                 9,182               202,636
  Interest expense                              (59,990)             (272,764)              (51,045)             (135,980)
  Other                                         (84,433)                   --               (87,985)                   --
                                           ------------          ------------          ------------          ------------
     Total Other Income (Expense)                  (848)               32,879                16,469                66,656
                                           ------------          ------------          ------------          ------------
NET LOSS                                   $ (6,540,893)         $ (4,663,736)         $ (2,816,863)         $ (2,758,251)
                                           ============          ============          ============          ============
BASIC AND DILUTED LOSS PER
  COMMON SHARE                             $       (.65)         $       (.31)         ($       .27)         $       (.18)
                                           ============          ============          ============          ============
BASIC AND DILUTED WEIGHTED
AVERAGE SHARES OUTSTANDING                   10,074,001            15,020,743            10,303,605            15,606,309
                                           ============          ============          ============          ============

</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                                                               5
<PAGE>

                          eSOFT, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                               Common Stock         Additional                                         Total
                                          ----------------------      Paid-in      Subscriptions    Accumulated      Stockholders'
                                            Shares       Amount       Capital       Receivable        Deficit           Equity
                                          ----------    --------    -----------    ------------     ------------     ------------
<S>                                       <C>           <C>         <C>            <C>              <C>              <C>
BALANCE January 1, 2000                   14,289,075    $142,890    $24,999,820    $    (39,704)    $(14,704,353)    $ 10,398,653
Exercise of warrants and options             483,230       4,833        540,197              --               --          545,030
Issuance of common stock for bonus             2,812          28         38,460              --               --           38,488
Collection of notes receivable for
  exercise of options and warrants                --          --             --          30,717               --           30,717
Issuance of common stock pursuant
  to private placement                       640,796       6,408     12,493,592              --               --       12,500,000
Issuance of notes receivable for
  common stock                               640,795       6,408     12,493,592     (12,500,000)              --               --
Net loss for the six months
  ended June 30, 2000                             --          --             --              --       (4,663,736)      (4,663,736)
                                          ----------    --------    -----------    ------------     ------------     ------------
BALANCE June 30, 2000                     16,056,708    $160,567    $50,565,661    $(12,508,987)    $(19,368,089)    $ 18,849,152
                                          ==========    ========    ===========    ============     ============     ============
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                                                               6
<PAGE>
                          eSOFT, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                    FOR THE SIX MONTHS ENDED
                                                                              JUNE 30,
                                                                    1999                  2000
                                                                 -----------          -----------
<S>                                                              <C>                  <C>
CASH FLOW FROM OPERATING ACTIVITIES
  Net loss from operations                                       $(6,540,893)         $(4,663,736)
  Adjustments to reconcile net loss to net
  cash used in operating activities
      Depreciation & software amortization                           133,094              577,365
      Provision for losses on accounts receivable                     21,211               14,163
      Amortization of discount on investments                         (8,459)                  --
      Amortization of debt discounts and financing costs             123,870              221,760
      Amortization of warrant valuation granted
         for prepaid consulting                                      101,767                   --
      Issuance of compensatory options                                29,953                   --
      Issuance of common stock for bonuses                                --               38,488
      Proceeds from sale of securities available for sale             36,872                   --
      Realized loss from sale of securities available for sale       146,317                   --

  Changes in operating assets and liabilities:
      Accounts receivable - trade                                   (305,469)            (806,857)
      Other accounts receivable                                           --             (537,000)
      Inventories                                                    847,291              337,191
      Prepaid expenses                                               (52,595)            (213,937)
      Other assets                                                   (11,589)              39,557
      Accounts payable                                               394,449              (87,928)
      Accrued expenses                                               210,518              108,448
      Deferred revenue                                                28,527              378,628
                                                                 -----------          -----------
Net cash used in operating activities                             (4,845,136)          (4,593,858)
                                                                 -----------          -----------
CASH FLOW FROM INVESTING ACTIVITIES
      Proceeds from sale of investments                            2,000,000                   --
      Purchase of property and equipment                            (106,115)            (301,119)
      Deposits on leased facilities                                   85,000                   --
      Additions to capitalized software                               (2,650)                  --
                                                                 -----------          -----------
Net cash provided by (used in) investing activities                1,976,235             (301,119)
                                                                 -----------          -----------
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                                                               7
<PAGE>
                          eSOFT, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                        1999                 2000
                                                                    -----------          -----------
<S>                                                                 <C>                  <C>
CASH FLOW FROM FINANCING ACTIVITIES
      Proceeds from stock subscription receivable                        56,487               30,717
      Proceeds from line of credit, net                                  80,000                   --
      Payments on short term debt                                       (46,229)                  --
      Proceeds from short term debt                                     117,794                   --
      Proceeds (re-payment) from margin loan on investments             (39,544)                  --
      Proceeds from issuance of convertible debt                      3,000,000                   --
      Debt offering costs paid                                         (340,819)                  --
      Proceeds from exercise of options and warrants
         and sale of common stock                                     1,116,789           13,045,030
                                                                    -----------          -----------
  Net cash provided by financing activities                         $ 3,944,478          $13,075,747

INCREASE IN CASH                                                      1,075,577            8,180,770

CASH: BEGINNING OF PERIOD                                               732,384            8,576,055
                                                                    -----------          -----------
CASH: END OF PERIOD                                                 $ 1,807,961          $16,756,825
                                                                    ===========          ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
   Cash paid for interest                                           $     5,491          $    50,000
   Common stock issued for subscriptions receivable                 $   269,947                   --
   Warrants issued in connection with debt offering                 $ 1,095,578                   --
   Warrants issued to consultants                                   $    96,452                   --
   Common stock issued to Gateway                                            --           12,500,000

</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                                                               8
<PAGE>

                          eSOFT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


1.   Basis of Presentation

          The consolidated interim financial statements include the accounts of
     eSoft, Inc. and its two wholly-owned subsidiaries, Apexx Technology, Inc.
     ("Apexx") and Technologic, Inc. ("Technologic"), (collectively eSoft or the
     "Company") and have been prepared by the Company, without audit, pursuant
     to the rules and regulations of the Securities and Exchange Commission.
     Certain information and footnote disclosures normally included in financial
     statements prepared in accordance with generally accepted accounting
     principles have been condensed or omitted pursuant to such rules and
     regulations, although the Company believes that the disclosures are
     adequate to make the information presented not misleading.

          These statements reflect all adjustments, consisting of normal
     recurring adjustments, which in the opinion of management, are necessary
     for fair presentation of the information contained therein. It is suggested
     that these consolidated financial statements be read in conjunction with
     the financial statements and notes thereto included in the Company's Annual
     Report on Form 10-KSB for the year ended December 31, 1999. The Company
     follows the same accounting policies in preparation of interim reports.

          The consolidated financial statements of the Company for the three
     months and six months ended June 30, 1999 have been restated to give
     retroactive effect to the mergers with Apexx on May 25, 1999 and
     Technologic on September 10, 1999, which have been accounted for using the
     pooling of interests method and, as a result, the financial position,
     results of operations and cash flows are presented as if the combining
     companies had been consolidated for all periods presented and the
     consolidated statement of stockholders' equity reflect the accounts of
     eSoft as if the additional common stock issued in connection with the
     mergers had been issued for all periods presented. It is further suggested
     that these consolidated financial statements be read in conjunction with
     the supplemental consolidated financial statements and notes thereto
     included in the Company's Current Report on Form 8-K and 8-K/A filed with
     the Securities & Exchange Commission on August 9, 1999 and September 27,
     1999, respectively.

          Results of operations for the interim periods are not necessarily
     indicative of annual results.

2.   Business Acquisitions

          Effective May 25, 1999, the Company completed the merger (the
     "Merger") with Apexx located in Boise, Idaho which provided for the
     exchange of all of the outstanding stock of Apexx for 1,591,365 shares of
     eSoft common stock and for the conversion of all Apexx stock

                                                                               9
<PAGE>

                          eSOFT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


     options into eSoft stock options to acquire 1,356,003 shares of eSoft
     common stock. The Merger has been accounted for as a pooling of interests.

          Effective September 10, 1999, the Company completed the merger (the
     "Merger") with Technologic located in Norcross, Georgia which provided for
     the exchange of all of the outstanding stock of Technologic for 1,244,436
     shares of eSoft common stock and for the conversion of all Technologic
     stock options into eSoft stock options to acquire 180,565 shares of eSoft
     common stock. The Company also issued 75,000 shares of the Company's common
     stock to the investment bankers of Technologic in connection with the
     merger. The Merger has been accounted for as a pooling of interests. Merger
     costs of about $725,000 in relation to this merger were expensed during the
     third quarter, which include bankers fees, audit fees, legal fees, and
     printing fees.

<TABLE>
<CAPTION>
     Pooling Company            Nature of Operations                 Merger Date
     ---------------            ---------------------                -----------
<S>                             <C>                                  <C>
     Apexx Technology, Inc.     Internet connectivity solutions      May 25, 1999
     Technologic, Inc.          Internet connectivity solutions      September 10, 1999
</TABLE>

          Revenue and net loss of eSoft, Apexx and Technologic as consolidated
     for the periods presented are as follows:

<TABLE>
<S>                                                    <C>
            REVENUE:
            Six Months Ended June 30, 1999

            eSoft through May 25, 1999                       $   970,647
            Apexx through May 25, 1999                         1,090,821
                                                             -----------
                 Subtotal                                      2,061,468
            eSoft/Apexx from May 25 to June 30, 1999             627,751
            Technologic through June 30, 1999                  1,117,618
                                                             -----------
            eSoft, consolidated                              $ 3,806,837

            NET LOSS:
            Six Months Ended June 30, 1999

            eSoft through May 25, 1999                       $(4,661,057)
            Apexx through May 25, 1999                       $  (600,674)
                                                             -----------
                 Subtotal                                     (5,261,731)
            eSoft/Apexx from May 25 to June 30, 1999            (782,144)
            Technologic through June 30, 1999                   (497,018)
                                                             -----------
            eSoft, consolidated                              $(6,540,893)

</TABLE>

          Intercompany sales of approximately $496,000 have been eliminated
     during the period.

                                                                              10
<PAGE>

                          eSOFT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



3.   Account Receivable - Trade

          The following information summarizes accounts receivable:

<TABLE>
<CAPTION>
                                                    DECEMBER 31,            JUNE 30,
                                                        1999                 2000
                                                    -----------          -----------
<S>                                                 <C>                  <C>
            Accounts Receivable                     $ 1,764,924            2,571,781
            Allowance for doubtful accounts            (310,453)            (324,616)
                                                    -----------          -----------
                                                    $ 1,454,471          $ 2,247,165
                                                    ===========          ===========
</TABLE>


          The Company did not have any customers which accounted for 10% or more
     of the sales through the six months ending June 30, 2000, or which
     individually had outstanding balances which accounted for more than 10% of
     the total outstanding accounts receivable balance as of June 30, 2000.
     International sales represented approximately 25% of revenue for the six
     months ending June 30, 2000 and approximately 38% of outstanding accounts
     receivable at June 30, 2000.

          The Company with regard to its foreign sales does not take the risk of
     foreign currency fluctuation. All sales are designated as payment in US
     denominated funds at the time of sale.


4.   Accounts Receivable -Other

          During 1999, the Company entered into an agreement with a shareholder
     of the Company to jointly architect and design certain software
     applications. The agreement grants the stockholder of the Company the right
     to use or sell the stockholder's products, which include the Company's
     software, as well as the right to modify the software and related products.
     The Company has recognized revenue of $2,500,000 to date in accordance with
     the percentage of completion method of which $1,175,000 is due the Company
     at June 30, 2000. The Company has also entered into other various licensing
     and engineering development agreements during the year, of which the
     receivable balance at June 30, 2000 is $274,500.


5.   Subscriptions Receivable

          The Company issued promissory notes receivable in the amount of
     $76,000 to employees during June 1999 in exchange for the issuance of
     common stock. The notes are full recourse, and are due in June 2001 with
     annual interest at the rate of 5.75% due upon maturity and are secured by
     the shares of common stock being issued. The notes become due and payable
     upon termination of employment. At June 30, 2000, $7,000 in principal and
     $1,987 of interest receivable remained outstanding.

                                                                              11
<PAGE>

                          eSOFT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


          In addition, on April 26, 2000, eSoft entered into a Common Stock and
     Warrant Purchase and Investor Rights Agreement with Gateway Companies, Inc.
     ("Gateway") for the investment of $25,000,000 in exchange for 1,281,591
     shares of common stock, calculated at $19.507 per share. Should an
     underwritten public offering occur within nine months of the closing, the
     price of the stock would be adjusted to the lower of $19.507 or a 6.5%
     discount from the public offering price of the stock. Accordingly, should
     the price be adjusted, the Company would be required to issue additional
     shares of common stock to Gateway. The payment of the purchase price is to
     be made in two equal installments, with 50% paid at closing (April 26,
     2000), and 50% paid ninety days after the closing. At the same time,
     warrants to purchase 600,000 shares of common stock were issued to Gateway.
     The warrants carry a strike price of $19.507, equal to the purchase price
     of the common stock. In addition, this strike price may be adjusted in
     accordance with any change in the purchase price of the common stock as
     discussed above. The warrants vest based upon certain performance
     milestones as indicated in the agreement. At this time, management has
     estimated the fair value of the warrants to be nominal. However, the
     Company will be required to remeasure the warrants at each reporting date.
     The fair value of the warrants will be reflected in shareholders' equity,
     and changes in the fair value of the warrants will be reflected in the
     current period as a charge to operating expense.

          As of August 11, 2000, Gateway had not made the second payment to
     eSoft. A stock certificate for 640,795 shares, or approximately one-half of
     the shares purchased by Gateway, is currently being held in escrow by
     Norwest Bank Colorado National Association and cannot be released by the
     escrow agent without eSoft's consent. In addition, eSoft is currently in
     possession of an irrevocable proxy executed by Gateway giving eSoft the
     power to vote the 640,795 shares of eSoft common stock held in escrow.
     eSoft has been in discussions with Gateway regarding the timing and terms
     of the $12.5 million deferred purchase price, but has not come to any
     resolution with Gateway regarding this matter. eSoft is continuing to
     pursue discussions with Gateway, but no assurance can be given regarding
     the likely outcome of these discussions. The Company has demanded that
     Gateway make payment pursuant to the agreement. eSoft is also considering
     what other specific actions it will take with respect to the Gateway
     payment obligation, which may include the pursuit of legal remedies.


6.   Convertible debenture

          In September 1999, the Company issued to the same debenture holder
     $2,000,000 of unsecured 5% Convertible Debentures issued at a 2.5%
     discount, due June 10, 2002 ("Debentures") and stock purchase warrants
     ("warrants") with a right to purchase an aggregate of 511,182 shares of
     common stock, par value $.01 per share, at an exercise price of $4.4994,
     The principal amount of the Debenture is convertible at any time at the
     investor's option into a fixed number of shares of eSoft common stock at
     $3.9125 per share, subject to certain anti-dilution provisions and
     adjustments. The Company has the ability, under certain circumstances, to
     obligate the investor to


                                                                              12
<PAGE>

                          eSOFT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


     convert the debentures into common stock and to exercise the warrants. The
     investor has the option to purchase an additional $3 million of debentures,
     together with warrants to purchase shares of common stock of the Company
     equal to the quotient obtained by dividing $3 million by the conversion
     price for the debentures with an exercise price of 115% of the debenture
     conversion price. The additional $3 million of debentures would be
     convertible at the lower of (i) the Company's then current market price or
     (ii) $5.50, but in no event less than $3.9125 per share. The debentures are
     manditorily convertible if the average per share market value over thirty
     consecutive trading days exceed 200% of the exercise price of the warrants.
     The Black Scholes value of the warrants issued, of $846,607 plus an initial
     discount of $50,000 related to the aforementioned 2.5% discount, for a
     total of $896,607, was recorded as an original issue discount and is being
     amortized over the term of the debentures and recorded as non-cash interest
     expense. At June 30, 2000, the balance of the unamortized original issue
     discount was $638,493. The balance of the Convertible Debentures at June
     30, 2000 of $1,361,507, represents the original face value of the remaining
     outstanding debentures, of $2,000,000 less the balance of the unamortized
     discount, of $638,493.


7.   Net Loss per Share

          Basic loss per share is calculated by dividing the net loss by the
     weighted average common shares outstanding during the period. For purposes
     of computing diluted earnings per share, dilutive securities are not
     included when the effect is anti-dilutive.

          Options and warrants to purchase 4,388,028 and 3,776,499 shares of
     common stock and notes convertible into 0 shares and 511,182 shares were
     not included in the computation of diluted earnings per share because their
     effect was anti-dilutive for the period ending June 30, 1999 and 2000.

                                                                              13
<PAGE>

                           FORWARD-LOOKING STATEMENTS

          Statements made in this Form 10-QSB that are not historical or current
     facts are "forward-looking statements" made pursuant to the safe harbor
     provisions of Section 27A of the Securities Act of 1933 (the "Securities
     Act") and Section 21E of the Securities Exchange Act of 1934. These
     statements often can be identified by the use of terms such as "may,"
     "will," "expect," "believes," "anticipate," "estimate," "approximate" or
     "continue," or the negative thereof. The Company intends that such
     forward-looking statements be subject to the safe harbors for such
     statements. The Company wishes to caution readers not to place undue
     reliance on any such forward-looking statements, which speak only as of the
     date made. Any forward-looking statements represent management's best
     judgment as to what may occur in the future. However, forward-looking
     statements are subject to risks, uncertainties and important factors beyond
     the control of the Company that could cause actual results and events to
     differ materially from historical results of operations and events and
     those presently anticipated or projected. These factors include adverse
     economic conditions, entry of new and stronger competitors, inadequate
     capital, unexpected costs, failure to gain product approval in foreign
     countries and failure to capitalize upon access to new markets. Additional
     risks and uncertainties which may affect forward-looking statements about
     the Company's business and prospects include the possibility that a
     competitor will develop a more comprehensive or less expensive solution,
     delays in market awareness of eSoft and its products, possible delays in
     eSoft's marketing strategy, which could have an immediate and material
     adverse effect by placing eSoft behind its competitors. Additional risks
     and uncertainties are described in the Company's most recently filed Annual
     Report on Form 10-KSB for the fiscal year ended December 31, 1999. The
     Company disclaims any obligation subsequently to revise any forward-looking
     statements to reflect events or circumstances after the date of such
     statement or to reflect the occurrence of anticipated or unanticipated
     events.

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     TEAM INTERNET IS A REGISTERED TRADEMARK OF eSOFT, INC.

          Our products provide all of the components an organization needs to
     develop, manage, and monitor its Intranet, external web presence and
     Internet-based applications. Our Linux-based applications such as web
     hosting, business-to-business communications, virtual private networks,
     remote information technology services and firewall protection are designed
     to coexist with multiple hardware platforms. Our software applications and
     operating system are engineered to provide a fully integrated, secure and
     reliable solution.

          Our software solutions target small-to-medium sized businesses that
     typically have between ten and two hundred desktop computers connected to a
     local area network, or LAN. The availability of low cost, high speed
     bandwidth, through technologies such as cable modems and digital subscriber
     line or DSL is driving small-to-medium sized business demand for full time
     Internet access across their LANs. The SMB segment comprises the largest
     portion of the installed local area networks and increasingly recognizes
     the importance of the Internet to grow their business and improve
     productivity. Internet penetration has been estimated to increase from
     54.9% of small business PC owners in 1998 to 68.5% in 2002. The number of
     small businesses online is expected to increase from 3.2 million in 1998 to
     4.6 million in 2002.

                                                                              14
<PAGE>

          Our products enable small-to-medium sized businesses to establish and
     enhance their Web presence and conduct business and electronic commerce on
     the Internet. Most of the end users of our products are relatively price
     sensitive, and most have limited in-house technical expertise. eSoft's
     products are designed to provide cost-effective Internet connectivity
     solutions that are easy to install and maintain by the end user's existing
     personnel. Our TEAM Internet product is a complete, stand-alone
     plug-and-play Internet connectivity solution that can be installed and
     maintained by non-technical personnel at a fraction of the cost of a
     traditional solution. Our products can provide all of the users on a LAN
     with a shared dedicated Internet connection, which allows our customers to
     achieve both expense and productivity improvements when compared to
     traditional single user dial-up access. In addition, our Linux-based
     Internet connectivity software solutions allow our customers to access the
     Internet in a reliable, secure and flexible manner. Our software products
     are built using modular architecture, allowing scalability to fit the
     customers' growing needs. The ability to easily add additional Internet
     appliances and application services provides an evolution path that allows
     customers to develop their network services and its architecture according
     to their needs without a high upfront investment. Our Internet applications
     facilitate the migration from limited, dial-up analog modems to an
     economical, feature-rich, easy-to-use Internet communications device. In
     addition, we market and sell the Interceptor and Instagate products that
     were developed by Technologic. These products are UNIX-based products that
     address firewall and virtual private network ("VPN") requirements of
     businesses.

          In addition to our core services, we currently offer managed firewall
     services, URL screening, and web filtering. Managed services provide
     flexibility in meeting the needs of small to medium-sized businesses during
     each stage of their development. We design our managed services offerings
     to allow smaller businesses to outsource the infrastructure and services
     necessary to support the use of these applications. Our remote management
     of these services allows our clients to focus on their core competencies.

          Over the past year, eSoft has been working to design and develop a
     next-generation broadband services platform that builds on the attributes
     and feature-sets of the TEAM Internet, Interceptor and Instagate products.
     The new product is a highly modular, flexible and scalable Linux-based
     architecture specifically designed to address the evolving requirements of
     small-to-medium enterprises who establish a broadband connection to the
     Internet. The product architecture roadmap has a modular design that
     utilizes an Internet gateway providing small and medium-sized businesses
     with basic Internet connectivity and e-mail capabilities. The architecture
     provides for modular applications that provide functions such as web
     server, firewall, enhanced e-mail, virtual private networks and web
     screening. This architecture is designed to enable us to quickly create a
     bundled offering specific to third party manufacturer's requirements. In
     addition, the product architecture enables the rapid introduction of new
     applications and services that can be remotely configured and installed on
     an existing system, thereby addressing new or additional requirements of
     the end user, and creating an incremental, recurring revenue stream for
     eSoft and its partners.

          eSoft has been active in marketing this next generation broadband
     services platform to major hardware manufacturers (OEMs). During 1999, we
     launched our redphish-TM- program. redphish-TM- is targeting the licensing
     of our next-generation software, along with certain customization or
     modifications from our professional engineering services, in order to
     create highly specialized or
                                                                              15
<PAGE>

     customized offerings for hardware manufacturers and broadband service
     providers to integrate into their own offerings. This allows us to leverage
     our expertise in software development and delivery, along with our
     partners' expertise in hardware design, manufacturing and distribution. We
     believe that the redphish-TM- program greatly improves our distribution
     capabilities and helps to drive product requirements, and that it enables
     us to gain time to market advantages in developing new software features,
     as well as building out our distribution network.

          Our redphish-TM- program provides a vehicle through which major
     hardware manufacturers can deliver customized Internet connectivity and
     "edge-of-network" solutions to their small to medium-sized customers.
     Delivered initially as a basic Internet connectivity solution, this
     platform can later serve as a foundation for additional products and
     services, such as enhanced e-mail, virtual private networking, and
     business-to-business applications. Our program is based on revenue sharing,
     which provides incentive at every point of the distribution chain. In 1999,
     we signed our first two redphish-TM- partners, Intel Corporation and
     Hewlett-Packard Corporation. Both companies plan to distribute eSoft
     licensed software beginning in the year 2000. In early 2000, we added
     Compaq Corporation and Gateway, Inc. to our list of redphish-TM- partners.
     Our strategy is to continue to aggressively develop additional redphish-TM-
     licensing partnerships with key hardware and service providers.

          In the second quarter of 2000, we launched our Smart DSL program,
     which focuses on a subscription-based model that minimizes the cash outlay
     requirements for our customers and generates a more predictable recurring
     revenue stream associated with each sale. Previously, most of our product
     revenue was generated from one-time product sales. This approach maximized
     short-term revenue, but made ongoing revenue predictions difficult. eSoft
     believes that a subscription-based pricing model will result in better
     predictability of future revenue, and will also better suit the cash flow
     requirements of our small and medium size business customers.

          Smart DSL offers not only DSL's high speed Internet access, but also
     provides valuable features important for small- to medium-sized businesses
     in a single, upgradable "smart box." These features include RAS, VPN,
     firewall security, Web site hosting, unlimited e-mail, and long-term
     management of the broadband connection and applications. This eliminates
     the historical complications small businesses faced when trying to
     integrate many different features, numerous pieces of hardware, several
     versions of software and more than one access provider into a DSL solution.
     Deployed through existing telephone lines, a broadband solution like DSL is
     a logical and economical choice for businesses wanting to tap into the full
     potential of the Internet and improve communication and work collaboration.
     After small to medium size businesses address their initial connectivity
     and security requirements, they tend to become more sophisticated in their
     use of the Internet, and they require corresponding new capabilities to
     address their needs. For example, web content filtering, virtual private
     networking, and specific business-to-business applications are often
     desired. Our strategy is to develop and license complementary products to
     our customers, further enhancing our life-of-customer relationship and long
     term revenue stream. We are aggressively moving forward with this program
     and expect to introduce the program into six different cities by the end of
     the year.

          DSL is fast becoming an integral component of small- to medium-sized
     business communication strategies, where speed and accessibility are core
     to succeeding in today's competitive marketplace. According to
     International Data Corporation of Framingham, Mass., the U.S. will

                                                                              16
<PAGE>

     experience a 200 percent compound annual growth rate for DSL circuits over
     the next few years, with primarily small- to medium-sized businesses
     accounting for about 25 percent of DSL service.

          Application solution providers, or ASPs, offer solutions that provide
     shared application content to end-users on a need-to-access basis. However,
     most ASPs do not have a means for delivery of local information at the
     business site. Over time, we believe that a local application presence (of
     some components) will be a necessary differentiator for success with
     ASP-based solutions. eSoft will seek to expand its relationships with ASPs
     worldwide, looking for best-of-breed solutions for various market segments.

          Widespread availability of broadband Internet access is a global
     phenomenon. We plan to continue to expand our direct presence in key non-US
     markets. We have established offices in Singapore and the United Kingdom.
     We also expect to establish a local presence in Japan, Korea, and other key
     European and Asian locations.

          The Company expects to use outside financing for the continued company
     wide expansion. Additional employees in sales, marketing, engineering, and
     operations will be hired in connection with increased market penetration.
     With the current increase in headquarters staff and SmartDSL personnel, the
     Company leased additional space in 2000. With the aggressive market
     expansion, the Company anticipates consuming working capital to meet this
     continued growth curve for the near term. As a result of the transition to
     a subscription-based revenue model and an increase in expenses incurred in
     support of the expansion, the Company anticipates future losses. The
     Company expects to turn profitable in 2001 through the increase in sales
     and related margins, while keeping General and Administrative expenses
     fairly constant.


                         LIQUIDITY AND CAPITAL RESOURCES

          The Company's cash position on June 30, 2000 was $16,757,000 an
     increase of $8,181,000 from year end primarily due to the equity investment
     by Gateway. The Company's working capital at June 30, 2000 was $18,700,000,
     an increase of $8,688,000 from December 31, 1999. Management anticipates
     continuing losses in support of the growth initiatives and, thus expects
     continued negative cash flow. The Company is increasing efforts to reduce
     the present accounts receivable balance through more stringent collection
     efforts of the current customer base in an attempt to reduce the days sales
     outstanding. The Company has analyzed its accounts receivable and adjusted
     its allowance for doubtful accounts to $325,000 at June 30, 2000. Other
     accounts receivable relate to software development fees and licensing fees
     from long-term development contracts, which are due upon completion of
     certain performance criteria. In addition, subscriptions receivable are
     related to the equity investment by Gateway. The Company has expended
     $301,000 in capital expenditures, mainly attributable to additional
     computers purchased for new employees, and a videoconferencing system
     intended to enhance communications among the offices, and leasehold
     improvements related to additional space leased. Management believes that
     its current cash position, the anticipated cash receipts from receivables,
     and available sources of additional capital will be sufficient to meet its
     working capital needs for the foreseeable future.

                                                                              17
<PAGE>

CASH FLOW

          Net cash used in operating activities for the six months ended June
     30, 2000 was $4,594,000 compared with $4,845,000 for the six months ended
     June 30, 1999, a decrease of $251,000 for the 2000 period compared to the
     1999 period. The Company's net loss at June 30, 2000 was ($4,664,000), a
     decrease of $1,877,000 from June 30, 1999. This decrease in net loss was
     primarily the result of the intensive marketing campaign done in 1999
     regarding the rebranding of the IPAD products. There were also merger
     related costs incurred during 1999 for legal, accounting, banking, and
     consulting fees. Offsetting these decreases were the increase in accounts
     receivable of ($1,344,000) related to software development and licensing.
     Other items impacting the cash used in operating activities during the six
     months ended June 30, 2000 were adjustments of $577,000 for depreciation
     and amortization and $222,000 for amortization of debt discounts and
     financing costs. In addition, prepaid expenses increased ($214,000),
     inventories decreased $337,000, accounts payable decreased ($88,000),
     accrued expenses increased $108,000 and deferred revenue increased
     $379,000.

          Net cash used in investing activities for the six months ended June
     30, 2000 was $301,000 compared with $1,976,000 provided by investing
     activities for the six months ended June 30, 1999. The decrease of
     $2,277,000 for the 2000 period compared to the 1999 period was primarily
     due to $2,000,000 of investments maturing during 1999. In addition,
     purchases of property and equipment amounted to about $301,000 during 2000
     due to the expansion of the facilities to support the increase in
     headcount in the Smart DSL department and the engineering department.

          Net cash provided by financing activities for the six months ended
     June 30, 2000 was $13,076,000 compared with $3,944,000 for the six months
     ended June 30, 1999. The increase of $9,132,000 for the 2000 period
     compared to the 1999 period was primarily due to $12,500,000 for the
     proceeds from the equity investment by Gateway. In June 1999, proceeds of
     $3,000,000 were received as a result of the issuance of convertible
     subordinated debentures. Additional financing activities during the six
     months ended June 30, 1999 included exercise of options and warrants,
     proceeds from subscriptions receivable, and payments and proceeds from
     the line of credit and short term debt.

           RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 2000
                COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1999

          Quarterly revenues totaled $2,608,000, of which $2,291,000 was related
     to product and $317,000 was related to services, versus revenue of
     $2,085,000 for the comparable quarter in 1999, of which $1,855,000 was
     related to product and $230,000 was related to services. In total, revenue
     increased $523,000 or 25% over the comparable quarter in 1999. Product
     sales increased 24% for the three months ending June 30, 2000 compared to
     the three months ending June 30, 1999. The increase is partly due to the
     addition of sales people towards the end of 1999 in the international
     markets of Europe, Latin America and the Asia Pacific. International sales
     accounted for 25% of product revenue in 2000. Services revenue increased
     38% for the three months ending June 30, 2000 compared to the three months
     ending June 30, 1999. The services revenue was generated from engineering
     fees for development of software and related licensing fees mainly in
     connection with agreements with Intel, Inc., Gateway, and 3Com.

                                                                              18
<PAGE>

          Gross profit margin in the current quarter was $1,304,000, which is
     50% of revenue compared to $1,067,000, which is 51% of revenue for the
     three months ended June 30, 1999. Gross margin on product was 46% and 45%
     for the three months ending June 30, 2000 and 1999, respectively. During
     the current quarter, a higher concentration of sales were made up of the
     Instagate and Interceptor products which have more favorable margins. On
     the other hand certain items were sold on auction sites at little
     above cost and certain unusable items were sold as scrap. Additional
     obsolete items have been identified and reserved during the current
     quarter. Gross profit margin relating to services has decreased from
     100% for the three months ending June 30, 1999 to 80% for the three months
     ending June 30, 2000. The decrease is due to the services revenue in 1999
     being made up of licensing fees which have no costs associated with them.
     In 2000, the services revenue is made up of licensing fees and non
     recurring engineering fees, which do have costs associated with them,
     although they are minimal.

          Selling, General and Administrative Expenses increased $229,000 or 6%
     from $3,900,000 for the quarter ending June 30, 1999 to $4,129,000 for the
     quarter ending June 30, 2000. Sales and marketing expenses increased
     $786,000 from $1,344,000 in 1999 to $2,130,000 in 2000. The increase is
     associated with lead generation expenses, more intense product marketing
     efforts, and marketing efforts in connection with the start up of the Smart
     DSL offering. The sales department salaries and related expenses also
     increased in relation to about seventeen additional sales people hired.
     General and administrative expenses decreased $824,000 from $1,943,000 in
     1999 compared to $1,119,000 for the current quarter. This decrease can be
     attributed to banking fees, consulting fees and printing fees recognized in
     1999 associated with the Apexx merger. Engineering expenses increased
     $45,000 from $423,000 in 1999 to $468,000 in 2000. Amortized software
     development costs total $132,000 for the current quarter, compared to
     $42,000 in the first quarter of 1999. This increase is associated with the
     impairment of certain capitalized software.

          Interest expense increased $85,000 in the three months ended June 30,
     2000 from $51,000 in 1999 to $136,000 in 2000. The additional interest is
     due to the interest and discount amortization on the convertible
     subordinated debentures and amortization of deferred offering costs.
     Interest income increased $194,000 in the quarter in relation to additional
     cash on hand related to a substantial equity investments by Gateway in the
     beginning of the quarter and the exercise of warrants and options in the
     fourth quarter of 1999.

          Net loss from operations was ($2,758,000) for the three months ended
     June 30, 2000, compared to ($2,817,000) for the same period in 1999, a
     decrease in the loss of $59,000 over the same period. The net losses are
     associated with the increased Selling, General and Administrative expense
     necessary to support its current business strategy. Losses are anticipated
     to continue through the current fiscal year due to expenditures in support
     of continued growth and market penetration.

            RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 2000
                 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999

          Revenues for six months of operations totaled $5,731,000 of which
     $4,495,000 was related to product and $1,236,000 was related to services,
     compared to revenues of $3,807,000 for the same period in 1999 of which
     $3,577,000 was related to product and $230,000 was related to services.
     This represents an increase of $1,924,000 or 51% over the comparable six
     month period in 1999. Product sales increased 26% for the six months ending
     June 30, 2000 compared to the six months ending June

                                                                              19
<PAGE>

     30, 1999. The increase is partly due to the addition of sales people
     towards the end of 1999 in the international markets of Europe, Latin
     America and the Asia Pacific. In 2000, international sales accounted for
     25% of product revenue. There were also more sales to end users and
     resellers, which are discounted less than sales to distributors. Services
     revenue increased 437% for the six months ending June 30, 2000 compared to
     the six months ending June 30, 1999. During 2000, the services revenue was
     mainly generated from engineering fees for development of software and
     related licensing fees in connection with agreements with Intel, Inc.,
     Gateway, 3Com, and Compaq.

          Gross profit margin for the six months ending June 30, 2000
     $3,174,000, which is 55% of revenue, compared to $1,904,000, which is 50%
     of revenue for the six months ended June 30, 1999. The increase is
     partially due to $1,236,000 of service revenue included in the six months
     ending June 30, 2000, with related cost of goods of $166,000, and a gross
     margin of 87%. The product gross margin for the current six months was 47%,
     compared to 47% for the six months ended June 30, 1999. An increase in the
     sales of higher margin product was offset by sales promotions in the
     beginning of the year, such as discounts of fifty percent being given
     to new customers or customers who purchased two of the same product. In
     addition, reserves were established for certain obsolete inventory in 2000.

          Selling, General and Administrative Expenses (SG&A) decreased $574,000
     or 7% from $8,444,000 for the first six months in 1999 to $7,870,000 for
     the same six months in the 2000 period. Sales and marketing expenses
     decreased $118,000 from $3,803,000 in 1999 to $3,685,000 in 2000. In 1999
     an extensive marketing campaign was launched with Apexx Technology for the
     rebranding of the products in connection with the merger. Adding to the
     decrease was the careful monitoring of how marketing dollars are best put
     to use. Offsetting the decrease was the cost of additional sales people
     hired to expand sales efforts domestically and internationally, and
     marketing expenses related to the Smart DSL offering. General and
     administrative expense decreased $1,238,000 from $3,487,000 in the 1999
     period compared to total expenses of $2,249,000 in 1999. This decrease can
     be attributed to the costs relating to the Apexx merger in 1999, which
     include filing fees, audit fees, legal fees, banking fees, consulting fees,
     and printing fees that did not recur in 2000. Engineering expenses
     increased $308,000 from $715,000 for the six months ending June 1999 to
     $1,023,000 for the same period in 2000. This increase was related to nine
     additional engineers hired in response to the demand for software
     development under the redphish program and increased travel in relation to
     these projects as well. Engineering expenses also increased due to three
     additional people hired for domestic technical support and technical
     support services being contracted out for the european operations.
     Furthermore, there were additional employees eligible for bonuses, and the
     exercise of options taking place. Amortized software development costs
     total $431,000 for the current quarter, compared to $84,000 in the 1999
     period. This increase is associated with the life of the software being
     reevaluated and amortization being accelerated through June 2000 for
     certain older versions of software.

          Interest expense increased $213,000 for the six months ended June 30,
     2000 from $60,000 in 1999 to $273,000 in 2000. The additional interest is
     due to the interest and discount amortization on the convertible
     subordinated debentures and amortization of deferred offering costs.
     Interest income increased $272,000 for the six month period in relation to
     additional cash on hand related to a substantial equity investments by
     Gateway in the beginning of the quarter and the exercise of warrants and
     options in the fourth quarter of 1999.

                                                                              20
<PAGE>

          Net losses from operations totaled ($4,664,000) for the six months
     ended June 30, 2000, compared to a ($6,541,000) loss for the same period in
     1999, a decrease in the loss of $1,877,000 over the same period. The net
     losses are associated with the Selling, General and Administrative expenses
     necessary to support its current business strategy. Losses are anticipated
     to continue through the current fiscal year due to expenditures in support
     of continued growth and market penetration.


Income Taxes

          At June 30, 2000, a valuation allowance of 100% of the deferred tax
     asset has been recorded, as management of the Company is not able to
     determine that it is more likely than not that its deferred tax assets will
     be realized. The Company's operating loss carryforwards may be limited
     under Section 382 of the Internal Revenue Code.


Other Matters

          The Company has reviewed all other recently issued, but not yet
     adopted, accounting standards in order to determine their effects, if any,
     on the results of operations or financial position of the Company. Based on
     that review, the Company believes that none of these pronouncements will
     have a significant effect on current or future earnings or operations.



                                                                              21
<PAGE>

PART II - OTHER INFORMATION

     Item 1. LEGAL PROCEEDINGS

          The Company is not currently involved in any litigation other than
          routine litigation arising in the ordinary course of business that, if
          determined adversely, is not reasonably likely to have a material
          adverse effect on the Company.

     Item 2. CHANGES IN SECURITIES

          Not applicable

     Item 3. DEFAULTS UPON SENIOR SECURITIES

          Not applicable

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

          The Annual Meeting of Stockholders was held on May 18, 2000 and the
          matters upon which the stockholders voted include:

          1.   Proposal to elect Brian Cohen and Richard Eyestone as Class II
               directors of the Company. With respect to Richard Eyestone, the
               number of votes cast For totaled 11,700,911, and the number of
               votes cast Against/Abstained totaled 70,500. With respect to
               Brian Cohen, the number of votes cast For totaled 11,700,971, and
               the number of votes cast Against/Abstained totaled 69,600.

          2.   Proposal to amend the Company's Certificate of Incorporation to
               increase the authorized capital stock from 50,000,000 to
               100,000,000. The number of votes cast For totaled 11,418,581, and
               the number of votes cast Against/Abstained totaled 352,830.

          3.   Proposal to amend the Company's equity incentive plan to increase
               the number of shares issuable under the plan from 2,900,000
               shares to 5,000,000 shares. The number of votes cast For totaled
               5,059,802, and the number of votes cast Against/Abstained totaled
               680,887.

     Item 5. OTHER INFORMATION

          Not applicable

     Item 6. EXHIBITS AND REPORTS ON FORM 8-K

          a)   Exhibits

               27   Financial Data Schedules.

          b)   Reports on Form 8-K.

               None



                                                                              22
<PAGE>

                                   SIGNATURES


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



Date:  August 14, 2000                 eSoft, Inc.




                                       /s/ Jeffrey Finn
                                       ----------------------------------
                                       Jeffrey Finn
                                       President, Chief Executive Officer


                                       /s/ Amy Beth Hansman
                                       ----------------------------------
                                       Amy Beth Hansman
                                       Chief Accounting Officer



                                                                              23
<PAGE>

                                  Exhibit Index

<TABLE>
<CAPTION>
Exhibit No.         Description
-----------         -----------
<S>                 <C>
   27.1             Financial Data Schedule

   27.2             Financial Data Schedule -Restated


</TABLE>



                                                                              24