<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC  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:  APRIL 30, 1998

     [_]  Transition period under Section 13 or 15(d) of the Securities
          Exchange Act of 1934
         For THE  transition  period  from ____________ to _____________

     Commission file number:  0-13652
 
                    _______________________________________   

                  COMMUNICATIONS  WORLD  INTERNATIONAL,  INC.
                  -------------------------------------------
                 (Name of Small Business Issuer in Its Charter)

          Colorado                                          84-0917382
-------------------------------                     ----------------------------
State or other jurisdiction of                           (I.R.S. Employer
 incorporation or organization)                          Identification No.)

6025 South Quebec, Suite 300, Englewood, Colorado              80111
-------------------------------------------------   ----------------------------
(Address of principal executive offices)                    (Zip Code)

                                (303) 721-8200
                 ----------------------------------------------
                 Issuer's Telephone Number, Including Area Code

     Securities Registered Pursuant to Section 12(b) of the Act:     None

     Securities Registered Pursuant to Section 12(g) of the Act:

                      Common Stock, no par value per share
                      ------------------------------------
                                (Title of class)

  Check whether the issuer: (1) has filed all reports required to be filed by
  Section 13 or 15(d) of the Exchange Act of 1934 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 there is no disclosure of delinquent filers in response to Item 405
  of Regulation S-B contained in this form, and no disclosure will be contained,
  to the best of registrant's knowledge, in definitive proxy or information
  statements incorporated by reference in Part III of this Form 10-KSB.   [X]

  The issuer's revenues for its most recent fiscal year:  $ 13,238,000

  The aggregate market value of the voting stock held as of August 4, 1998 by
  non affiliates of the issuer was $3,832,142. As of August 4, 1998, the issuer
  had 1,916,071 shares of its no par value Common Stock issued and outstanding.

<PAGE>
 
                                     PART I

ITEM  I. DESCRIPTION OF BUSINESS
         -----------------------

Business Development

Communications World International, Inc. ("Registrant", "Company" or
"CommWorld") was incorporated in 1983 under Colorado law and has its principal
executive offices at 6025 South Quebec Street, Suite 300, Englewood, Colorado
80111. CommWorld has established a distribution network for a variety of
telecommunications products and services, including business telephone systems,
through franchises under the CommWorld name and Company-owned outlets. The
Company had 53 franchises located in 25 states and 4 Company-owned outlets at
April 30, 1998. Through its distribution network the Company sells and services
private telephone systems and peripheral products, such as voice messaging and
related systems, for business users. The Company's franchisees and Company-owned
outlets market their products primarily to small and medium-size businesses
while the Company's national accounts subsidiary markets the same products and
services directly to multi-location businesses.

The Company purchases telephone and related communications equipment from
manufacturers and supply houses.  The Company sells this equipment to the
franchisees who, in turn, sell the equipment to their customers and connect this
equipment to local telephone company lines servicing areas in which their
customers are located.  The principal telephone systems sold to customers are
Key telephone systems which differ from larger PBX systems in that each incoming
telephone line can be accessed by each telephone in the particular business.

During the past five fiscal years, the Company has acquired certain franchises
and other companies as wholly owned subsidiaries.  The acquisitions were
accomplished through the issuance of a combination of common stock, preferred
stock, notes payable and cash.  The acquisitions have all been accounted for as
purchases and the excess of consideration paid over the fair value of net assets
acquired has been recorded as goodwill and is being amortized on a straight line
basis over ten years.

The subsidiary operations service the Southwest United States with offices in
Phoenix and Tucson, Arizona; the Baltimore and Washington D.C. area with offices
in Alexandria, Virginia and Baltimore, Maryland; the Colorado front range area
with offices in Englewood and Fort Collins, Colorado; and multi-location
customers through its national accounts subsidiary with an office in Englewood,
Colorado.  The acquisition of the Tucson, Arizona operation was completed during
the most recent two fiscal years and is further described in the Notes to the
consolidated financial statements.

                                       1
<PAGE>
 
In June 1998 the Company entered into a letter of intent to merge with
Interconnect Acquisition Corporation ("IAC"), a privately-held company headed by
former Connecting Point of America President Jim Ciccarelli.  IAC is a
development stage company that was started with the intent to acquire select
interconnect companies located in key southwestern cities.  IAC has signed
letters of intent to acquire five interconnect providers in Texas and Colorado
with aggregate historical revenues of approximately $17 million.  The letters of
intent are subject to several contingencies, including the finalization of
definitive agreements and the completion of due diligence and financial reviews
or audits.

The Company's merger with IAC is subject to board approvals, due diligence
reviews and approval of the Company's principal supplier, Toshiba America
Information Systems, Inc. ("TAIS').  The Company has received preliminary
approval from TAIS of this transaction.  The Company is currently conducting its
due diligence reviews of these acquisition candidates, and currently anticipates
that the merger with IAC, barring unforeseen developments, will close by the end
of August, 1998.  If the merger is completed, the Company intends to issue to
the IAC shareholders a new series of convertible preferred stock which will be
convertible (subject to shareholder approval of an increase in the Company's
authorized Common Stock) into 2,000,000 shares of the Company's Common Stock.
In connection with the proposed merger with IAC, the Company effected management
changes, including the election of Jim Ciccarelli as Chief Executive Officer and
a director of the Company.  In addition, Lionel Brown, Chief Operating Officer
and a director of IAC, will become President of the Company in connection with
the merger.  Biographical information regarding Messrs. Ciccarelli and Brown is
provided in Item 9.

Franchise Program
-----------------

Pursuant to the terms of the Company's franchise program, a franchisee will pay
a one time, non-refundable, franchise fee of $12,500 or $7,500, depending upon
the number of businesses in the potential franchisee's market place.  The
franchise fee is payable upon the execution of the franchise agreement.

The franchisee is entitled to purchase equipment from or through the Company on
a "cost mark-up royalty" basis, meaning based on the cost to the Company of
equipment and products purchased plus a mark-up to the franchisee.  The amount
of the cost mark-up royalty varies by manufacturer and by the volume of
purchases of the individual franchisee.  A franchisee only pays royalties on
equipment purchased through or from the Company.

The franchisee is not required to make any purchases of equipment through the
Company; however, the Company believes that it will be able to obtain favorable
pricing from suppliers based on negotiated purchases and quantity buying
arrangements.  The Company anticipates that these prices will be lower than
prices which the franchisee could negotiate directly with suppliers.  Currently,
most franchises purchase some equipment or services from the Company.  The
franchisee is responsible for all warranty service on equipment sold by it and
manufacturers' warranties are passed through to the franchisee.  The Company
also offers sales and marketing training and other assistance to the franchisees
for scheduled fees.

                                       2

<PAGE>
 
The franchisee is granted a license to use the "COMMWORLD" name and trademarks
in the franchised territory.  The franchisee is required to conform to certain
standards of business practices, to maintain minimum inventories of products and
services, and to make arrangements with local telephone companies as necessary
to provide installation services to customers.  The installation and the service
work performed by the franchisees is either done by their staff or is
subcontracted through installation companies which are independently owned and
operated.  Each franchise is run as an independent business and, as such, is
responsible for the operation of its business including the collection of
receivables, arrangement of any customer financing, and employment of adequate
staff.

Franchisees are permitted to assign their franchise provided that the Company
receives advance notice of the proposed assignment, the transferee assumes the
obligations under the franchise agreement, the transferee meets certain
conditions and qualifications, and the Company receives a transfer fee equal to
10 percent of the franchise fee then in effect.  In addition, the Company has
the right of first refusal to purchase the franchise prior to its sale to
another party.

The term of the franchise is for 10 years unless earlier terminated provided
that, during the first 12 months of the franchise, the franchisee has the right
to terminate the franchise without a refund of the franchise fee.  The Company
has the right to terminate any franchise in the event of the franchisee's
bankruptcy, a default under the franchise agreement, or other events.  The
franchisee has the right to renew the initial term of the agreement for an
additional 10 years if, at the time of renewal, the franchisee is in good
standing and pays a successor franchisee fee in the amount of 10 percent of the
franchise fee then in effect.

Competition
-----------

The Company's principal business is in the interconnect telephone industry which
sells and services private telephone systems for the business user.  The
interconnect industry, so-called because it involves the connection of privately
manufactured and owned equipment to local telephone systems, developed from the
divestiture of the Bell operating companies and court and regulatory rulings
allowing telephone customers to connect separately purchased equipment to
existing local telephone systems.

The interconnect industry continues to expand beyond sales of traditional
telephone equipment, with the greatest growth in sales of voice processing, data
communications, and data processing equipment.  The Company competes with other
interconnect telephone companies on the basis of the equipment offered by the
Company's franchisees, price and after-sale service.  Although the Company
concentrates on the sale of Key systems as opposed to larger PBX systems, the
manufacturers of these systems have been successful in providing state-of-the
art electronic equipment for this market segment.  The Company believes that
consumating its intended acquisitions will enable it to market larger PBX
Systems.

                                       3

<PAGE>
 
The Company faces intense competition from AT&T, Willtel, the various Bell
operating companies and over 10,000 other companies believed to be engaged in
the interconnect telephone industry.  Many of these companies have resources
substantially greater than those of the Company.  It can be expected that
competition in the interconnect telephone industry will be intense for the
foreseeable future.


Product  Supply
---------------

The Company currently purchases telephone systems and various peripheral
equipment from seven major suppliers. One of the suppliers, Toshiba America
Information Systems, Inc. (TAIS), provides approximately 85% of the inventory
and products purchased by the Company while offering flexible credit terms.  If
the Company's relationship with TAIS was to cease, it could have a significant
adverse impact on the operations of the Company.  Product availability from
suppliers under open lines of credit has been sufficient for the Company's
current franchise and Company owned locations in the last two years.  However,
all products may not necessarily be available to future franchise locations.
The Company continually monitors changes in products offered by these
manufacturers, as well as others, to review its current and future product mix.
The Company's products are warranted by their vendors for at least one year for
defects in material and workmanship.

Regulation
----------

The Federal Communications Commission ("FCC") regulates the telephone industry.
The FCC has a registration program providing minimum specifications for
customer-owned equipment.

The Federal Trade Commission ("FTC") requires franchisers to provide prospective
franchisees with a Uniform Franchise Offering Circular which sets forth detailed
information about the franchiser and the franchise program.

A number of states require a franchiser to register prior to selling franchises
in those particular states and the Company registers its offering of the
franchise program in those states in which registration is required.  In
addition, states may impose certain minimum requirements on franchises located
within that state.  For example, franchises in Iowa, by law, have a three-mile
exclusive territory.

Backlog  and  Employees
-----------------------

As of April 30, 1998 and 1997, the Company had backlogs of unfilled franchisees'
orders of less than $50,000.  As of August 4, 1998, the Company had
approximately 65 full-time employees involved in administration, sales,
accounting, warehousing, franchise relations, and Company owned branches.

                                       4


<PAGE>
 
Special Cautionary Notice Regarding Forward-Looking Statements
--------------------------------------------------------------

This Report contains certain forward-looking statements and information relating
to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management.  Such
forward-looking statements are principally contained in and include without
limitation the Company's plans for its business following the proposed merger
with IAC, including the introduction of new products and services, expansion
into new markets, and mergers and acquisitions.  In addition, in those and other
portions of the Report, the words "anticipates," "believes," "estimates,"
"expects," "plans," "intends" and similar expressions, as they relate to the
Company or its management, are intended to specifically identify forward-looking
statements.  Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions, including the risk factors described in this Report.  In addition
to factors that may be described elsewhere in this Report, the Company
specifically cautions that the factors listed under the caption "Risk Factors"
could cause actual results to differ materially from those expressed in any
forward-looking statement.  Should one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated or expected.  The Company does not intend to update these
forward-looking statements.


RISK FACTORS
------------


In evaluating the Company and its business, this entire Report (including the
Exhibits) should be read carefully and special consideration given to, among
others, the following risk factors in addition to the other information
contained in this Report.


Recent Operating Losses ; Accumulated Deficit
---------------------------------------------


The Company is reporting a loss of $1,091,000 for the fiscal year ended April
30, 1998, and had an accumulated deficit at that date of approximately
$5,542,000.  Management believes that much of the loss in recent periods has
been related to the Company's acquisition efforts, increase in interest expense
and increases in allowance for doubtful accounts.  In addition, the Company's
losses have been a direct result of the increased level of general and
administrative expense associated with its direct sales efforts.  Management is
currently evaluating the extent to which general and administrative expenses
will need to be increased to maintain support for the planned acquisitions of
interconnect companies and an increased base of franchisees.  It is not known
whether sufficient revenues will be generated in order to restore profitability
on a consistent basis in the future.


Lack of Working Capital; Need for Additional Financing
------------------------------------------------------


The Company's operations have been adversely affected by a lack of working
capital.  The Company's line of credit is fully utilized to the extent of
available collateral.  The lack of available funding impedes the Company's
ability to fund additional equipment purchases and to expand its business
operations.

                                       5

<PAGE>
 
In order to improve the Company's liquidity and working capital position, the
Company recently completed a "bridge loan" offering in which it received
proceeds of $400,000. The Company is currently attempting to obtain additional
equity financing which is expected to be used for the payment of accounts
payable, improvements in information systems and operating capital to support
growth. Depending on the amount raised, the Company's operating results will
need to improve substantially, or the Company will need to obtain additional
funds from other sources (neither of which is assured), or the Company's working
capital position will again deteriorate. Moreover, the Company will need
substantial additional capital in order to have reasonable prospects for
achieving its strategic objective of growth through acquisitions, including the
acquisitions currently contemplated by IAC.

Changes In Technology
---------------------

The interconnect industry in which the Company operates has experienced rapid
technological advances and, in order to satisfy customer demands, the Company
has to offer the latest available equipment and services. Although the Company
has established relationships  with  several  major  suppliers  of  telephone
interconnect equipment, there is no assurance that, in the event other suppliers
offer more advanced equipment, the Company would be able to establish
satisfactory relationships with these other manufacturers.

Relationships With Suppliers
----------------------------

Although the Company has established relationships with several suppliers of
telephone equipment including Toshiba America Information Systems, Inc.
("TAIS"), Tadiran Telecommunications, Inc., Panasonic Communications & Systems
Company, a Division of Matsushita Electric Corporation of America, Sprint/North
Supply, Inc., Applied Voice Technologies, Inc., and Voice Systems Research,
Inc., there is no assurance that the Company will continue to be able to
maintain these relationships, to purchase products under advantageous terms and
conditions from its suppliers, or that all products will be available to future
franchise locations.  This may adversely affect the Company's ability to sell
future franchises to offer products to its franchisees and customers and to
obtain mark-up royalties from sales to existing franchisees.

TAIS provides approximately 85% of the inventory and products purchased by the
Company while offering flexible credit terms. TAIS must also approve the merger
with IAC.  If the Company's relationship with TAIS were to cease or to
deteriorate, it could have a significant adverse impact on the Company's
operations.

                                       6
<PAGE>
 
Lack of Information Regarding Acquisition Candidates
----------------------------------------------------

Acquisitions of other companies in the telecommunications industry is a
principal strategic objective of the Company.  The Company has entered into a
letter of intent with IAC.  IAC was recently organized to acquire select
interconnect companies in key southwestern cities.  IAC has signed letters of
intent to acquire five interconnect providers in Texas and Colorado, which
letters of intent are subject to several contingencies, including the
finalization of definitive agreements and the completion of due diligence and
financial statement reviews or audits, and are not expected to close prior to
the Company's merger with IAC.

In addition, the Company has identified other candidates for acquisition, but
has no firm arrangements for acquisition.  The Company has determined not to
provide information regarding any of the acquisition candidates in this Report
inasmuch as any letter of intent it or IAC has entered into, or may enter into,
with an acquisition candidate would be non-binding, subject to execution of
definitive agreements and other conditions.  Although management of the Company
will endeavor to evaluate the risks inherent in any particular acquisition
candidate, there can be no assurance that the Company will properly ascertain
all such risks.  Management of the Company will have virtually unrestricted
flexibility in identifying and selecting prospective acquisition candidates and
may have broad discretion with respect to the specific application of proceeds
of future financing.

Although the Company intends to consider the ability of the management of a
prospective acquisition candidate in connection with evaluating the desirability
of effecting a business combination, there can be no assurance that the
Company's assessment of management will prove to be correct.  The Company does
not intend to rely upon the assistance of outside consultants to assess the
management skills of acquisition candidates.  In addition, there can be no
assurance that management of the acquired companies will have the necessary
skills to manage a company intending to implement an aggressive acquisition
program.

Appropriate Acquisitions May Not Be Available
---------------------------------------------

Results of the Company's business plan are dependant upon the Company's ability
to identify, attract and acquire attractive acquisition candidates, which may
take considerable time.  No assurances can be given that the Company will be
successful in identifying, attracting or acquiring desirable acquisition
candidates, that such candidates will be successfully integrated into the
Company, or that the acquisition candidates, once acquired, will be profitable.
The failure to complete acquisitions or to operate the acquired companies
profitably could be expected to have a material adverse effect on the Company's
business, financial condition and results of operations.

                                       7

<PAGE>
 
Integration of Acquisitions
---------------------------

The Company's strategic objective, which is subject to additional financing,
anticipates an aggressive acquisition program.  The success of the Company will
depend, in part, on the Company's ability to integrate the operations of the
acquired companies.  There can be no assurance that the Company's management
team will effectively be able to oversee the combined entity and implement the
Company's operating and growth strategies.  No assurance can be given that the
Company will be able to successfully integrate any future acquisitions without
substantial cost, delays or other problems.  The cost of integration could have
an adverse effect on short-term operating results.  Such costs could include
severance payments to employees of such acquired companies, restructuring
charges associated with the acquisitions and expenses associated with the change
of control.

There can be no assurance that the Company will be able to execute successfully
its consolidation strategy or anticipate all of the changing demands that
successive consolidation transactions will impose on its management personnel,
operational and management information systems and financial systems.  The
integration of newly acquired companies may also lead to diversion of management
attention from other ongoing business concerns.  In addition, there can be no
assurance that the rapid pace of acquisitions will not adversely affect the
Company's efforts to integrate acquisitions and manage those acquisitions
profitably.  Any or all of these factors could have a material adverse effect on
the Company's business, financial condition or results of operations.

Risks Related to Acquisition Financing; Leverage
------------------------------------------------

The Company is currently planning to attempt to obtain additional financing.  If
the Company is successful in obtaining this financing and other financing
related specifically to acquisitions (of which there is no assurance) the
Company plans to use a significant portion of its resources to pursue its
business strategy for growth. The timing, size and success of the Company's
acquisition efforts and any associated capital commitments cannot be readily
predicted. The Company currently intends to finance future acquisitions by using
shares of its Common Stock(subject to shareholder approval of an increase in
authorized shares), preferred stock, cash, borrowed funds (including the
issuance of promissory notes to the sellers of the companies to be acquired) or
a combination thereof. If the Common Stock does not maintain a sufficient market
value, or if potential acquisition candidates are otherwise unwilling to accept
Common Stock as part of the consideration for the sale of their businesses, the
Company may be required to use more of its cash resources or more borrowed
funds, in each case if available, in order to initiate and maintain its
acquisition program. If the Company does not have sufficient cash resources, its
growth could be limited unless it is able to obtain additional capital through
debt or equity financing. There can be no assurance that the Company will he
able to obtain any additional financing that it may need for its acquisition
program on terms that the Company deems acceptable.

                                       8

<PAGE>
 
Risks Related to Acquisition Financing; Leverage(Continued)
-----------------------------------------------------------

The Company may borrow money to consummate the acquisitions or assume or
refinance the indebtedness of acquired companies if the Company's management
deems it to be beneficial to the Company.  The Company anticipates it will need
to borrow substantial funds to complete the acquisitions identified by IAC, the
availability of which is not assured.  Among the possible adverse effects of
borrowings are: (i) if the Company's operating revenues after the acquisitions
were to be insufficient to pay debt service, there would be a risk of default
and foreclosure on the Company's assets; (ii) if a loan agreement contains
covenants that require the maintenance of certain financial ratios or reserves,
and any such covenant were breached without a waiver or re-negotiation of the
terms of that covenant, then the lender could have the right to accelerate the
payment of the indebtedness even if the Company has made all principal and
interest payments when due; (iii) if the terms of a loan did not provide for
amortization prior to maturity of the full amount borrowed and the "balloon"
payment could not be refinanced at maturity on acceptable terms, the Company
might be required to seek additional financing and, to the extent that
additional financing were not available on acceptable terms, to liquidate its
assets; and (iv) if the interest rate of a loan is variable, the Company would
be subject to interest rate fluctuations which could increase the Company's debt
service obligations.


Consideration for Operating Companies May Substantially Exceed Asset Value
--------------------------------------------------------------------------

The purchase prices of the Company's acquisitions will not be established by
independent appraisals, but generally through arms'-length negotiations between
the Company's management and representatives of such companies.  The
consideration paid for each such company will be based primarily on the value of
such company as a going concern and not on the value of the acquired assets.
Valuations of these companies determined solely by appraisals of the acquired
assets are likely to be substantially less than the consideration that is paid
for the companies.  No assurance can be given that the future performance of
such companies will be commensurate with the consideration paid. Moreover, the
Company expects to incur significant amortization charges resulting from
consideration paid in excess of the fair value of the net assets of the
companies acquired in business combinations accounted for under the purchase
method of accounting.

                                       9

<PAGE>
 
Material Amount of Intangible Assets
------------------------------------

It is likely that a substantial portion of the Company's total assets subsequent
to the acquisitions will be goodwill. Goodwill is an intangible asset that
represents the difference between the aggregate purchase price for the assets
acquired and the amount of such purchase price allocated to such assets for
purposes of the balance sheet. It is expected that any acquisitions completed by
the Company would involve amortization of goodwill over long-term periods with
the amount amortized in a particular period constituting an expense that reduces
the Company's net income for that period. Generally, the Company may amortize
goodwill over a 15-year period for income tax purposes. Under accounting rules,
the Company is required to periodically evaluate if goodwill has been impaired
by reviewing the cash flows of acquired companies and comparing such amounts
with the carrying value of the associated goodwill. If goodwill is impaired, the
Company would be required to write down goodwill and incur a related charge to
its income. A reduction in net income resulting from the amortization or write
down of goodwill could have an adverse impact upon the market price of the
Common Stock.

Hart-Scott-Rodino Requirements
------------------------------

The Company's acquisition strategy may be subject to the requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which could
adversely affect the pace of the Company's acquisitions.  In addition,
acquisitions of businesses in regulated industries would subject the Company to
regulatory requirements which could limit the Company's flexibility in growing
and operating its businesses.

Tax Considerations
------------------

As a general rule, Federal and state tax laws and regulations have a significant
impact upon the structuring of business combinations. The Company will evaluate
the possible tax consequences of any prospective business combination and will
endeavor to structure the business combination so as to achieve the most
favorable tax treatment to the Company, the acquisition candidate and their
respective stockholders. There can be no assurance, however, that the Internal
Revenue Service (the "IRS") or appropriate state tax authorities will ultimately
assent to the Company's tax treatment of a consummated business combination. To
the extent the IRS or state tax authorities ultimately prevail in re-
characterizing the tax treatment of a business combination, there may be adverse
tax consequences to the Company, the acquisition candidate and their respective
stockholders.

The Company expects to encounter substantial competition in making acquisitions
from other companies with objectives similar to the Company as well as from
companies engaged in other acquisition type activities.  Many companies have
acquisition strategies similar to that of the Company in the telecommunications
industry, including companies which are attempting to effect consolidations
concurrent with conducting an initial public offering of securities.
Consequently, the Company may expect stiff competition in attracting acquisition
candidates and the price to be paid for such candidates may be higher than the
price which would be paid in a less competitive environment.

                                       10

<PAGE>
 
Tax Considerations (Continued)
------------------------------

Even if the Company is successful in obtaining additional financing and
completing several acquisitions, it is likely that certain of its competitors
will be substantially larger than the Company and have greater financial
resources.


Volatility of Stock Price
-------------------------

There has been significant volatility in the market price for the Company's
Common Stock.  On August 4, 1998, the closing bid price of the Company's Common
Stock was $2.00 per share. There can be no assurance that the price of the
Common Stock will remain at or exceed current levels.  Factors such as
announcements relating to the Company's operations, acquisitions, new products
and services, prices and costs of supplies, sales of products, new technology
offered by the Company's competitors, government regulation or other matters may
have a significant impact on the market price of the Company's securities.
Moreover, trading in the Company's Common Stock is not generally heavy, which
may contribute to volatility of the market price.

 Preferred Shares Available For Issuance; Current Acquisitions and Financing
----------------------------------------------------------------------------
Plans
-----

The Company has 2,700,000 shares of Preferred Stock authorized.  There are
currently outstanding 80,800 shares of Series B Preferred Stock, 436,679 shares
of Series C Preferred Stock, 143,000 shares of Series F Preferred Stock, and
83,500 shares of Series G Preferred Stock which were issued in connection with
the acquisition of the Company's subsidiaries. The Company has also issued
169,818 shares of Series F Preferred Stock in connection with  the conversion of
notes issued in connection with certain acquisitions and issued 45,000 shares of
Series F Preferred Stock for cash. Shares of Preferred Stock may be issued by
the Company in the future without shareholder approval and upon such terms as
the Board of Directors may determine.  The rights of the holders of Common Stock
will be subject to and may be affected adversely by the rights of holders of any
Preferred Stock that may be issued in the future.  The availability of Preferred
Stock, while providing desired flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of discouraging
a third party from acquiring control of the Common Stock of the Company.  The
Company plans to issue convertible preferred stock in connection with the IAC
merger and to obtain additional capital.  In addition, IAC has identified
potential acquisition candidates, and may issue additional shares of Preferred
Stock in connection with new acquisitions. The Company presently has no
definitive arrangements for any acquisitions, and there can be no assurance that
the Company will be successful in obtaining additional financing or completing
any acquisitions.  Moreover, the terms of any such financing and/or acquisition
may not be beneficial to the Company.

ITEM  2.   DESCRIPTION OF PROPERTY
           -----------------------

The Company leases approximately 7,700 square feet of space at 6025 South Quebec
Street, Suite 300, Englewood, Colorado for approximately $14,100 per month
pursuant to a lease which expires in July 2003.

                                       11

<PAGE>
 
In addition, the Company leases (i) 5,310 square feet of office and warehouse
space in Englewood, Colorado for approximately $4,100 per month under a lease
which expires in March 2000, (ii) 1,400 square feet of office and warehouse
space in Scottsdale, Arizona on a month-to-month basis for approximately $2,200
per month, (iii) 4,950 square feet of office and warehouse space in Seattle,
Washington for approximately $5,400 per month under a lease which expires in
July 2001, (iv) 4,340 square feet of office and warehouse space in Alexandria,
Virginia  for approximately $5,400 per month, under a lease which expires in
September, 2003, (v) 2,200 square feet of office space in Fort Collins, Colorado
under a lease which expires in April, 1999 for approximately $2,300 per month,
and (vi) 900 square feet of office and warehouse space in Tucson, Arizona for
$600 per month under a lease which expires in December, 2001.

ITEM  3.   LEGAL PROCEEDINGS
           -----------------

The Company is not currently a party to any material pending or threatened legal
proceedings.

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

During the Company's quarter ended April 30, 1998, no matter was submitted to a
vote of the Company's security holders.

                                       12

<PAGE>
 
                                    PART II
                                        
Item  5.  MARKET  FOR COMMON  EQUITY  AND  RELATED STOCKHOLDER  MATTERS
          --------------------------------------------------------------

The Company's common stock (the "Common Stock") trades on the NASDAQ Small-Cap
Market under the symbol "CWII."  Set forth in the following table are high and
low bid quotations for each quarter in the fiscal years ended April 30, 1998 and
1997.  The quotations represent inter-dealer quotations without retail markups,
markdowns or commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
 
                           Common Stock
                           ------------
 
Quarter Ended       High           Low
------------------  -----         -----
<S>                 <C>           <C>
July 31, 1996       $1.50         $ .78
 
October 31, 1996     1.25           .69
 
January 31, 1997     1.38           .69
 
April 30, 1997       1.18           .75
 
July 31, 1997        1.56          1.00
 
October 31, 1997     2.50          1.06
 
January 31, 1998     2.68          2.00
 
April 30, 1998       2.38          1.25
</TABLE>

There were approximately 224 holders of record of the Common Stock as of August
4, 1998.

No dividends have been declared or paid on the shares of Common Stock and the
Company does not anticipate paying cash dividends on the shares of Common Stock
in the foreseeable future.  The Company may not pay dividends without the
consent of its accounts receivable finance company.  No dividends may be paid on
the Common Stock unless accumulated dividends on the Preferred Stock have been
paid.

                                       13
<PAGE>
 
Item  6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
          ----------------------------------------------------------

Overview
--------

The forward-looking statements herein are based on management's current
expectations.  In light of the assumptions and uncertainties inherent in
forward-looking information, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the plans
of the Company will be realized.

The focus of the Company in fiscal years 1998 and 1997 concentrated on operating
the Company-owned outlets.  The revenues of direct equipment and related
services produced by these operations increased by $2,286,000 or 34% in fiscal
1997 and were relatively unchanged in fiscal 1998, being down $112,000 or 1.4%.
The gross margins realized on this portion of the Company's revenues were 40.5%
in fiscal 1998 and 43.4% in fiscal 1997.  The decline in gross margin resulted
primarily from increased costs of sub-contractor labor in the Company's national
account subsidiary that could not be passed on to the national account
customers.  Management is reviewing national account agreements and anticipates
increasing pricing to partially offset increased costs.

The Company has entered into a letter of intent to merge with IAC.  If the
merger is completed, the Company plans to complete several acquisitions of
companies in the interconnect industry.  Management expects to consolidate
certain aspects of the operations and reduce general and administrative expenses
related to the operations of existing subsidiaries and those related to the
acquisitions.  Although several letters of intent have been signed, there are no
definitive agreements in place at the current time.

Liquidity and Capital Resources
-------------------------------

For the fiscal year ending April 30, 1998, the Company incurred a loss from
operations before income taxes of $924,000.  An additional loss of $168,000 was
incurred in the operations of its Seattle subsidiary which was closed during the
year.  A significant portion of this loss was comprised of non-cash expenses
including deprecation and amortization of $396,000; provision for bad debts of
$299,000;  stock option and warrant compensation of $55,000; and a provision for
inventory obsolescence of $233,000.  Increased borrowings under the Company's
line of credit along with increases in accounts payable and reduced accounts
receivable were used to fund principal reductions of notes payable and operating
needs.

The loss before provision for income taxes incurred for the year ended April 30,
1997 was offset by non-cash expenses of depreciation and amortization.
Increases in accounts receivable were funded primarily with comparable increases
in trade accounts payable.  Increased borrowings under the Company's line of
credit were used to fund repayments on other notes payable.

Management has taken the following actions to improve its liquidity and
capitalization in the current and prior years:

                                       14


<PAGE>
 
(A) In April of 1998, the Company undertook a private placement of Units of its
    common stock and common stock purchase warrants.  Each Unit in the offering
    sold for $1.25 and consisted of one share of common stock and one common
    stock purchase warrant exercisable at $2.50 per share for a period of five
    years.  A total of 283,000 Units were sold which provided gross proceeds to
    the Company of $353,750.  There were no offering expenses netted out of the
    proceeds as the placement agent received 40,000 common stock purchase
    warrants exercisable at $1.25 per share.  The funding of this private
    placement was completed in May, 1998.

(B) As part of the merger with IAC, the Company has committed to raise between
    $1 million and $4 million in additional equity. As of July 29, 1998, the
    Company completed funding of a $400,000 bridge loan (net proceeds to the
    Company of $380,000) in anticipation of completion of the equity offering.
    The bridge loan is comprised of units at $10,000 each with each unit having
    a promissory note of $9,900 and 2,000 common stock purchase warrants
    exercisable at $2.50 per share for a period of five years. The notes bear
    interest at 10% per annum and mature six months after funding. If the notes
    are not retired at maturity, the interest rate will be increased to 16% per
    annum. The note holders will be offered the right to convert their notes
    into equity in the Company's new offering.

(C) In October 1996, the Company renegotiated and renewed its accounts
    receivable financing agreement with its lender.  Pursuant to the new
    agreement, the Company may be extended credit of up to $2,000,000
    ($1,500,000 in fiscal 1997) based upon its outstanding accounts receivable,
    at an interest rate of 5.0% in excess of the prime rate (7.5% in excess
    during fiscal 1997).  The agreement is subject to termination upon 30 days
    notice by either party.  Advances under the line of credit are limited to
    75% of eligible receivables, as defined.  All receivables over 90 days past
    due and all receivables from customers with 90-day past due balances in
    excess of 10% of their total balances are not considered eligible.  The
    outstanding amount is reduced by accounts receivable collections and
    increased periodically by advances supported by new receivables and
    collection activity.  The outstanding balance under this line of credit was
    $1,120,022 and $1,001,891 at April 30, 1998 and 1997, respectively.

(D) Effective December 22, 1995, the Company negotiated with TAIS, its major
    supplier and unsecured creditor, to transfer $1,530,950 of current trade
    accounts payable and a short-term note payable to a long-term note payable
    (the "Note") and to increase the current credit facility by $400,000.  This
    allowed the Company to meet its immediate obligations, provided a short-term
    increase in cash flow, and increased working capital by the long-term
    portion of the Note, approximately $1,260,000.

                                       15

<PAGE>
 
   Pursuant to the Note, the Company is required to make 60 equal installments
   of $29,598, including interest at 6% per annum, which began in February 1996.
   In addition to the monthly installments, the Company is required to make
   prepayments of principal of at least $10,000 per month if the monthly net
   operating cash flow of the Company, defined as pre-tax income plus
   depreciation and amortization, exceeds $75,000 for three consecutive months.
   Thereafter, 60% of each additional $5,000 of monthly net operating cash flow
   in excess of $75,000 must be paid.  The Company is also required to use a
   portion of the net proceeds from any offering of its stock or debt securities
   to make a principal prepayment.  The prepayment will be equal to a percentage
   of the net proceeds in excess of $350,000 as follows: 40% of net proceeds
   between $350,000 and $1 million, 50% of net proceeds between $1 million and
   $2 million, 60% of net proceeds between $2 million and $3 million and 100% of
   net proceeds in excess of $3 million, but not to exceed the remaining
   principal balance of the Note.  The remaining principal balance of this Note
   at April 30, 1998 is $731,816.  The Note has been guaranteed personally by
   the former president of the Company.  The Company has indemnified the former
   president relative to this guarantee.

   Effective April 30, 1997 TAIS agreed to treat the Note as a non-interest
   bearing obligation from inception through April 30, 1997, resulting in a
   discount of the note balance of approximately $103,000.  The discount was
   treated as a reduction of cost of franchise equipment sales for the year
   ended April 30, 1997.  Imputed interest in the amount of $96,471 was
   recognized on the Note during the year ended April 30, 1997.

   Effective August 15, 1997, TAIS agreed to treat the Note as a non-interest
   bearing obligation provided that future monthly payments continue to be made
   on a timely basis.  The Note was further discounted by $128,000 and the
   discount was treated as a reduction of cost of franchise equipment sales for
   the year ended April 30, 1998.  Imputed interest in the amount of $68,796 was
   recognized on the Note during the year ended April 30, 1998.

The Company believes that it has sufficient financial resources available to
meet its short-term working capital needs based on the private placement of
equity completed in May, 1998, the bridge loan funded in July, 1998, and the
availability of credit from the Company's accounts receivable financing company
and major supplier.  However, there can be no assurance that the Company will be
able to successfully implement its acquisition plans and thereby increase
revenue, improve gross profit margins and contain general and administrative
expenses.  The successful completion of the acquisition plan, including the
raising of additional new equity, is necessary for the Company to finance its
operations over the longer term.

                                       16
<PAGE>
 
Results of Operations
---------------------

For the Year Ended April 30, 1998
---------------------------------

The Company reported a net loss of $1,091,000 for the year ended April 30, 1998
as compared to net income of $83,000 for the year ended April 30, 1997. The
change in net income (loss) of $1,174,000 is largely attributable to a decrease
in margins realized on equipment sales to franchises, a decrease in margins
realized on direct equipment sales and service, an increase in general and
administrative expenses of $175,000, an increase in interest expense of
$84,000, and an increase in provision for bad debts of $87,000. The Company
recognized $400,000 of income tax credit for the year ended April 30, 1998
related to its net operating loss carryforward compared to $385,000 of tax
credit recognized for the prior year. Additionally, the Company recorded a loss
of $400,000 related to the discontinued operations of its Seattle subsidiary.
This loss is net of tax credits of $260,000.

Effective October 31, 1997, the Company closed its Seattle subsidiary. The
subsidiary incurred substantial operating losses and management determined the
resources necessary to invest in the operation to return it to profitability
were not available. The operating losses of the Seattle subsidiary for the
current fiscal year through October 31, 1997 were $168,000 compared to an
operating loss of $171,000 for the fiscal year ended April 30,1997. The
estimated loss on the disposal of the discontinued operations of $400,000 (net
of income tax benefit of $260,000) represents the estimated loss on the disposal
of the assets of the subsidiary, write off of the remaining intangible assets of
$209,000, and a provision of $100,000 for expenses expected to be incurred
subsequent to October 31, 1997.

Franchise equipment sales decreased $329,000 or 6% for the year ended April 30,
1998. The decrease in revenue is reflective of a net decrease of 4 franchises in
the past fiscal year and an overall decrease in the purchasing volume of several
franchises. The gross margin percentage realized on this revenue was 10% during
the current fiscal year compared to 13.1% for the previous year. The Company for
the last three years has recorded a charge to the cost of franchise equipment
sales on a monthly basis to allow for obsolescence in its inventory.  In the
fourth quarter of the current fiscal year, the overall obsolescence of the
inventory was reviewed and an additional charge of $195,000 was recorded. This
additional charge accounts for the decrease in the gross margins on this revenue
for the year ended April 30, 1998.

                                       17

<PAGE>
 
Revenue from direct equipment and service sales for the year ended April 30,
1998 decreased $111,000 or 1.4% from the previous year. The gross margin
percentage realized on this revenue was 40.5% for the current fiscal year
compared to 43.4% for the previous year. The decrease in margins resulted in a
decrease of $224,000 in gross margins realized by the Company. The most
significant contributing factor to the decreased margin is the increased cost of
outside labor used to service the national account customers. The Company was
not able in the current fiscal year to pass those increases on to its customers.
Also contributing to the decrease in margin were several larger and more complex
installations in the southwest that required additional time to complete. The
margins realized on these installations were well below average margins for the
operation. Management has started the process of re-pricing the services
provided to national account customers in order to pass on some of the Company's
increased costs. Management has also restructured the operations in the
southwest and will concentrate on traditional sources of revenue where margins
are more predictable.

Other revenue sources for the current fiscal year were $147,000 compared to
$165,000 for the previous year. Initial franchise fees for the current year were
$22,000 lower than in the previous year. Although the Company is seeking
qualified companies to become new franchises, only one new franchise was added
during the current fiscal year.

Selling expenses in fiscal year 1998 of $742,000 were 5.6% of gross revenue
compared to selling expenses in fiscal year 1997 of $759,000 or 5.5% of gross
revenues. The decrease in expense is directly related to the decrease in gross
revenues.

General and administrative expenses for the year ended April 30, 1998 were
$3,264,000 compared to $3,089,000 for the previous year or an increase of
$175,000. Although management continues to assess these expenses and take action
to reduce them when necessary and appropriate, there were some obligations
incurred in the current year that were not comparable to prior years. The
Company actively pursued the acquisition of a significant company in the
interconnect industry. In connection with this attempted acquisition, the
services of a new investment banker were secured along with significant outside
legal advice. Costs for outside services and professional fees were $245,000
higher in the current fiscal year than in the previous year. A portion of the
fees accrued for the services of the investment banker will be paid in fiscal
year 1999 by the issuance of 25,000 shares of common stock. This obligation was
valued at approximately $58,000. Partially offsetting the increase in the costs
of outside services and professional fees was a decrease in the current year in
salaries and employee benefits of $91,000 compared to the previous year. This
reduction is primarily due to attrition and management choosing not to replace
certain positions.

Interest expense and loan fees for the current year of $421,000 increased
$84,000 from the previous year. Approximately $75,000 of the increase is related
to costs incurred in securing financing for the acquisition that was not
completed. These commitment fees were expensed at the time that it was
determined that the acquisition would not close.

                                       18

<PAGE>
 
For the Year Ended April 30, 1997
---------------------------------

The Company reported net income of approximately $83,000 for the year ended
April 30, 1997 as compared to a net loss of approximately $1,180,000 for the
year ended April 30, 1996.  Earnings before interest, taxes, depreciation and
amortization (EBITDA) for the year ended April 30, 1997 was a positive $463,000
compared to a negative EBITDA of $486,000 for the year ended April 30, 1996.
The change in the net income (loss) of $1,263,000 and the increase in EBITDA of
$949,000 were largely due to increased revenues from the Company-owned outlets.
The gross profit realized on this revenue was $3,396,000 in fiscal 1997 or
$1,296,000 higher than fiscal 1996.  The increased gross margin was partially
offset by an increase of $137,000 in selling expenses, an increase of $120,000
in general and administrative expenses and an increase of $71,000 in interest
expense.  Additionally, for the year ended April 30, 1997 the Company recognized
$385,000 of income tax credit related to its net operating loss carryforward.

Revenue from franchise equipment sales increased $124,000 or 2.3% during the
year ended April 30, 1997.  The gross margin percentage realized on this revenue
was 13.1% during fiscal 1997 compared to 9.4% for the previous fiscal year.  The
increased revenue and increased gross margin percentage provided an increase of
$214,000 in gross margin from this revenue for the year ended April 30, 1997
compared to the previous year.  Contributing to the improved gross margin for
fiscal 1997 was the TAIS discount of $103,000 related to their agreement and
treatment of the Note as a non-interest bearing obligation from inception
(December 22, 1995) through April 30, 1997.

Revenue from direct sales of equipment and services increased $3,096,000 during
the year ended April 30, 1997.  The gross margin percentage realized on this
revenue was 44% for both fiscal year 1997 and 1996.  The increased revenue for
the year ended April 30, 1997 resulted in increased gross margin of $1,296,000.

Initial franchise fees of $35,000 for the year ended April 30, 1997 were lower
than the previous year by $47,500.

Selling expenses in fiscal year 1997 of $759,000 were 5.5% of gross revenue
compared to selling expenses in fiscal year 1996 of $623,000 or 5.8% of gross
revenues.  The increase in dollars of expense relates directly to the increases
in gross revenues.

General and administrative expenses for fiscal year 1997 increased $120,000 or
4.0% from the prior fiscal year.  This slight increase in expenses in this area
occurred while gross revenues increased 28.1%.

                                       19

<PAGE>
 
Year 2000 Issue

The Company has determined that it may need to modify or replace portions of its
software, so that its computer system will function properly with respect to
dates in the year 2000 and beyond.  Additionally, the Company is reviewing the
year 2000 readiness of the software included in all of the products sold by the
Company.  The Company has initiated discussions with its significant suppliers,
large customers and financial institutions to ensure that those parties have
appropriate plans to remediate year 2000 issues where  their systems interface
with the Company's system or otherwise impact its operations.  The Company is
assessing the extent to which its operations are vulnerable, should those
organizations fail to properly remediate their computer systems.


ITEM  7.  FINANCIAL  STATEMENTS
          ----------------------

Consolidated financial statements required to be filed hereunder are included
following Part III.

Item  8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           ----------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------

None.

                                       20

<PAGE>
 
                                    PART III
                                        
Item  9.  DIRECTORS, EXECUTIVE  OFFICERS, PROMOTERS AND CONTROL PERSONS;
          --------------------------------------------------------------
          Compliance with Section 16(a) of the Exchange Act
          -------------------------------------------------

The  directors  and  executive  officers  of  the  Company  are  as follows:

Name                  Position
----                  --------

Samuel D. Addoms      Director

James M. Corboy       Director

James M. Ciccarelli   Chief Executive Officer
                      and Chairman of the Board of Directors

Scott E. Harris       Executive Vice President, Secretary, Treasurer,
                      and Chief Financial Officer

Samuel D. Addoms  Age 58.  Mr. Addoms has been a director of the Company since
----------------                                                              
October 1992.  From November 1993 to January 1995 he served as the Executive
Vice President of Frontier Airlines, Inc. and has served as President from
January 1995 to present.  He has also served as a Director of Frontier Airlines,
Inc. from November 1993 to present.  From February 1996 to present, he has been
an Independent General Partner and a Director of Boettcher Venture Capital
Partners.  From February to October 1993, he served as the President and
Director of Brainwave Systems, Inc., a software company. From September 1992 to
September 1993, he served as a financial consultant to various companies.  Mr.
Addoms received a B.A. degree from Wesleyan University.

Scott E. Harris  Age 44.  Mr. Harris has served as Chief Financial Officer of
---------------                                                              
the Company since August 15, 1995.  From October 1992 to November 1994, he
served as Chief Financial Officer of Mortgage Alliance Corporation.  From April
1989 to October 1992, he served as Vice President of Finance for the AMC Cancer
Research Center.

James M. Corboy  Age 57.  Mr. Corboy has served as President of Century Capital
---------------                                                                
Group, Inc., investment bankers, and its predecessor, SKB Corby, Inc. since
1995. From 1988 to 1995 he was the general partner of Corboy and Company, L.P.
Mr. Corboy received a B.A degree from Alleghany College and a M.B.A. Degree from
the University of Colorado.

James M. Ciccarelli  Age 46.  Mr. Ciccarelli has served  as Chief Executive
-------------------                                                        
Officer of the Company since July 1, 1998.  He has served as President and CEO
of IAC from its founding in 1997 and continues to serve in that capacity.  He
also serves as Chairman of the Board for Wireless Telcom, Inc. and has served in
that capacity since 1993.  From 1990 to 1993, Mr. Ciccarelli was the Vice
President of Intelligent Electronics and the President and CEO of its Reseller
Network Division from 1987 to 1989.  From 1988 to 1990, he was President of
Connecting Point of America.

                                       21

<PAGE>
 
Lionel Brown  Age 50.  In connection with the planned IAC merger Mr. Brown will
------------                                                                   
become President of the Company.  He has served as Secretary and Chief
Operations Officer of IAC from its founding in 1997 and continues to serve in
that capacity.  From 1996 to 1997, he served as the Chief Information Officer of
the Reseller Network Division and XL Source, two operating divisions of
Intelligent Electronics, Inc.  From 1993 to 1995, he served as the Vice
President of Operations and Information Systems for Wireless Telcom, Inc.  From
1989 to 1993, he held the position of Vice President of Operations and
Information Systems for the Reseller Network Division of Intelligent
Electronics, Inc.

Each of the directors was elected to serve until the next annual meeting of
shareholders and until their successors have been elected and have qualified.
There are no family relationships between any director or executive officer of
the Company.

Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the Company pursuant to Rule 16a-3(e) of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), during its most recent fiscal year and Form 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and written representations from reporting persons, to the Company's
knowledge, no officer, director, or beneficial owner of more than ten percent of
the Company's equity securities failed to file on a timely basis, as disclosed
in the above forms, reports required by Section 16(a) of the 1934 Act during the
most  recent fiscal year.

ITEM  10.           EXECUTIVE  COMPENSATION
                    -----------------------

The following table sets forth information concerning all compensation paid by
the Company and options granted by the Company to the Chief Executive Officer of
the Company and to each officer who earned more than $100,000, during the years
ended April 30, 1998 and 1997.
<TABLE>
<CAPTION>
 
                                                                Long-Term  Compensation
                                                              -----------------------------
                                      Annual Compensation            Awards         Payouts
                                  --------------------------  --------------------  -------
                                                     Other
                                                     Annual    Restricted                     All other
Name and                          Salary           Compensa-     Stock     Options/   LTIP    Compensa-
Principal Position (1)     Year     ($)    Bonus   tion (2)     Awards      SARs    Payouts    tion
========================  ======  =======  =====  ==========  ==========  ========  =======  =========
<S>                       <C>     <C>      <C>     <C>         <C>         <C>       <C>      <C>
 
Richard D. Olson, CEO     1998    102,000  -0-     -0-         -0-         -0-       -0-      -0-
Richard D. Olson, CEO     1997     87,000  -0-     -0-         -0-         -0-       -0-      -0-
</TABLE>

(1)   The Company pays health insurance premiums for its executive officers, and
      provides its President with the use of a Company-owned automobile. The
      aggregate amount of such compensation is less than either $50,000 or 10%
      of the total of annual salary and bonus for the above executive officer,
      which includes automobile expense of approximately $4,000. Mr. Olson
      resigned as CEO effective June 30, 1998. See Item 12.

<TABLE>
<CAPTION>
 
                                                     Option Grants in Last Fiscal Year
                                               ---------------------------------------------
                                                     Number of           Percent of Total
                                               Securities Underlying       Options/SAR's
                                                   Options/SAR's       granted to employees       Exercise or       Expiration
Name                                                Granted (#)           in fiscal year      or base price ($/sh)     Date
=============================================  ======================  =====================  ====================  ==========
<S>                                                <C>                       <C>                  <C>               <C> 
Richard D. Olson, CEO                               100,000                   39.2%                $1.30             8/12/2001
</TABLE>

                                       22

<PAGE>
 
401(k) Plan
-----------

On August 1, 1985, the Company established an Employees' Savings Plan (ESP) for
all full-time employees who have at least twelve months of continuous service by
August 1 of each plan year and who have attained the age of twenty-one.  As
amended, the Company may make matching contributions up to 50% of the
participant's contribution (made via salary reduction arrangements) as described
in the ESP.  In addition, the Company may also make an annual contribution from
its profits.  The Company made no contribution to the ESP in 1998 or 1997.

STOCK OPTION AND STOCK APPRECIATION PLANS
-----------------------------------------

In 1994, the Company adopted the 1994 Stock Option Plan (the "Plan"), subject to
shareholder approval, pursuant to which options to purchase up to 207,000 shares
of Common Stock could be granted to employees of the Company.  There are
currently outstanding options to purchase 12,500 shares of Common Stock at $1.00
per share and options to purchase 10,000 shares of Common Stock at $1.125 per
share, all of which were granted at the market value on the date of grant.  The
options have been granted subject to shareholder approval of the Plan and become
exercisable over a three-year period and must be exercised within five years of
the date of grant.  The Company has no plans to grant any additional options
under this plan.

In fiscal year 1998, the Company adopted the 1997 Stock Option Plan (the "97
Plan"), subject to shareholder approval, pursuant to which options to purchase
up to 150,000 shares of common stock could be granted to employees of the
Company.  None of these options have been granted.  Additionally, the Plan
provided for the specific grant of 115,000 options to certain key employees,
directors, and outside consultants.  These options were granted at $1.30 per
share, which was the market value on the date of grant.  The options have been
granted subject to shareholder approval of the 97 Plan, become exercisable upon
such approval and will expire in August 2001.

COMPENSATION OF DIRECTORS
-------------------------

In 1993, the Company adopted a Non-discretionary Stock Option Plan for non-
employee directors pursuant to which options to purchase up to 20,000 shares of
the Company's Common Stock would be granted to directors of the Company who are
not employees of the Company.  Options to purchase 10,000 shares of the
Company's Common Stock are currently outstanding and exercisable at prices
ranging from $.88 to $5.13 per share.  The Plan expired in November, 1997.

The exercise price for all outstanding options is the fair market value of the
Common Stock on the respective dates of grant.  Each director is entitled to
receive options to purchase 1,000 shares of Common Stock on November 1 of each
year.  During the fiscal year ended April 30, 1998, both Samuel D. Addoms and
Edwin B. Spievack (former Director) received options to purchase 1,000 shares of
Common Stock.  The options are exercisable for five years from the date of
grant.

                                       23


<PAGE>
 
The Company does not pay directors for meetings attended.  During the year ended
April 30, 1998, the Company held four meetings of the Board of Directors and
took action at other times by written consent.  Each director attended 75
percent or more of the meetings held during the period he served as a director.

ITEM  11.  SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT
           ---------------------------------------------------------------

The following table sets forth the persons known to the Company to own
beneficially more than five percent of the outstanding Common Stock on August 4,
1998 and information as of August 4, 1998 with respect to the ownership of
equity by each director of the Company and by all officers and directors as a
group.

Certain Beneficial Owners
-------------------------

<TABLE>
<CAPTION>

      Name  &  Address  of                                  Shares Beneficially
       Beneficial  Owner              Title of Class             Owned (1)           Percent
--------------------------------  -----------------------  ---------------------  --------------

<S>                               <C>                      <C>                    <C>
Samuel D. Addoms (2)                Common Stock             36,000                  1.2%
1900 Fairfax Street
Denver, Colorado  80220
 
Richard  D.  Olson (3)              Common Stock             393,424                13.4%
10414 Strasburg Way
Parker, Colorado  80134

James M. Ciccarelli (4)
6025 S. Quebec St.
Englewood, Colorado 80111
 
Steven M. Bathgate                  Common Stock             248,100                 8.4%
5350 S. Roslyn, Suite 380
Englewood, Colorado  80111
 
James M. Corboy (3)                 Common Stock             60,000                  2.0%
6530 S. Yosemite St.
Englewood, Colorado 80111
 
Eugene C. McColley                  Common Stock             148,500                 5.1%      
5350 S. Roslyn, Suite 380
Englewood, Colorado 80111

M.H. Meyerson and Co., Inc.         Common Stock             175,000                 5.9%
525 Washington Blvd.
Jersey City, New Jersey 07303

Officers and Directors as           Common Stock             536,924                18.3%
a Group (4 persons)(2)
</TABLE>

                                       24


<PAGE>
 
(1)  Beneficial ownership results in each case from the possession of sole or
     shared voting and investment power with respect to the shares.

(2)  The number of shares set forth opposite the name of Samuel D. Addoms
     include options to purchase 34,000 shares.  The number of shares set forth
     opposite the name of James M. Corboy include options to purchase 10,000
     shares.  The number of shares set forth opposite the officers and directors
     as a group include the aforementioned options to Messrs. Addoms and Corboy.

(3)  The shares set forth opposite the name of Richard D. Olson, include 135,084
     shares pledged to TAIS as security for a note payable by Mr. Olson to TAIS.
     Mr. Olson has provided a proxy to Mr. Corboy to vote his shares in 
     shareholders meetings in the next two years.

(4)  Mr. Ciccarelli does not currently own any shares.  In connection with the
     planned merger with IAC, he will become the owner of preferred stock which
     will convert into 1,000,000 shares of common stock of the Company upon
     shareholder approval of an increase in authorized shares of common stock.

(5)  The shares set forth opposite the names of Steven M. Bathgate, Eugene C.
     McColley and M.H. Meyerson and Co., Inc. include warrants to purchase
     65,000; 55,000; and 175,000 shares, respectively.

ITEM  12.  CERTAIN  RELATIONSHIPS  AND  RELATED  TRANSACTIONS
           --------------------------------------------------

As discussed in Item 6, the Company negotiated with TAIS, effective December 22,
1995, to transfer $1,530,950 of current trade accounts payable and a short-term
note payable to a long-term note payable.  The note has been guaranteed
personally by the former president of the Company, Richard D. Olson. The Company
has indemnified the former president relative to this guarantee. The remaining
principal balance of the note on April 30, 1998 was $731,816.

Effective June 30, 1998, Richard D. Olson resigned as President and Chief
Executive Officer and Director of the Company.  The Company has retained the
services of Olson as a consultant for a period of six months during which time
Olson will be compensated at his previous salary level.  At the end of the
consulting period, Olson will receive $127,100 and Olson will repay a $25,000
loan from the Company.  Also, as part of the agreement with Olson, the Company
has agreed to indemnify him for personal guarantees he made of the Company's
obligation to TAIS.

Effective July 1, 1998, Jim Ciccarelli, CEO of IAC, became the CEO of the
Company.  Lionel Brown, Chief Operations Officer of IAC, will become President
of the Company upon completion of the merger with IAC. The Company expects to
enter into three year employment agreements with Messers. Ciccarelli and Brown
providing for annual salaries of $160,000 and $120,000, respectively.

In May 1997, the Company entered into an agreement with M. H. Meyerson & Co., 
Inc. ("Meyerson") for Meyerson to provide the Company with investment banking 
services for a five year period. The Company has granted Meyerson warrants to 
purchase up to 175,000 shares of Common Stock at $1.20 per share, which vested 
over a one year period. No warrants may be exercised until the Company's 
shareholders approve an increase in the Company's authorized Common Stock to a 
minimum of 3,000,000 shares. The Company has agreed to include the Common Stock 
underlying the warrants in any registration statement that may be filed by the 
Company during the term of the warrants.

In September 1997, the Company entered into an agreement with Century Capital
Group, Inc. ("Century Capital") for Century Capital to provide the Company with
financial advisory and investment banking services. James M. Corboy, a
director of the Company, is President of Century Capital. The Company agreed to
pay Century Capital $1,000 per month and additional compensation if certain
acquisitions were completed. In June 1998, the Company entered into a new
agreement with Century Capital which superseded the September 1997 agreement.
Century Capital has agreed to provide financial advisory services to the
Company, including due diligence and a fairness opinion in connection with
the Company's proposed merger with IAC. The Company has agreed to pay Century
Capital a minimum of $5,000 per month, as well as a fee of $25,000 for the
fairness opinion. The term of the June 1998 agreement is 12 months, but may
be earlier terminated by the Company or Century Capital on 30 days notice.

ITEM  13.  EXHIBITS AND REPORTS ON FORM 8-K
           --------------------------------

(a)  Exhibits
     --------

   2.  Plan of Acquisition

                                       25

<PAGE>
 
       (a) Plan and Agreement of Merger with Communications World of Seattle-
           North filed as Exhibit 10.13 to the Report on Form 10-KSB for the
           year ended April 30, 1994 is incorporated herein by this reference.

       (b) Plan and Agreement of Merger with Digital Telecom, Inc. filed as
           Exhibit to the Report on Form 8-K filed on October 5, 1994 is
           incorporated herein by reference.

       (c) Merger Agreement dated as of August 1, 1995 among Communications
           World International, Inc., CommWorld National Capitol Area, Inc.,
           Communications World of Columbia, Inc., John E. Hanner and John C.
           Hanner filed as Exhibit 2(c) to the report on Form 10-KSB for the
           year ended April 30, 1996 is incorporated herein by this reference.

       (d) Merger Agreement dated as of August 1, 1995 among Communications
           World International, Inc., CommWorld National Capitol Area, Inc.,
           Alpha Communications & Technology, Inc. and Bennie R. Hester filed as
           Exhibit 2(c) to the report on Form 10-KSB for the year ended April
           30, 1996 is incorporated herein by this reference.

       (e) Asset Acquisition Agreement between William R. Heath d.b.a. CommWorld
           of Tucson and Communications World International, Inc., filed as
           Exhibit 2 to the Report on Form 10-QSB for the quarter ended October
           31, 1996 is incorporated herein by reference.

3.  Articles of Incorporation and Bylaws.

       (a) Articles of Incorporation, as amended, filed as Exhibit 3(a) to the
           Registration Statement on Form SB-2 (File No. 33-87808) is
           incorporated herein by this reference.

       (b) Bylaws, as amended, filed as Exhibit 3.2 to the Registration
           Statement on Form S-1 (File No. 33-53550) is incorporated herein by
           this reference.

       (c) Articles of Amendment to the Articles of Incorporation of
           Communications World International, Inc. filed as Exhibits 2 and 3 to
           the Form 8-K dated October 16, 1997 is incorporated herein by this
           reference.
     
       (d) Articles of Amendment to the Articles of Incorporation dated 
           August 4, 1998.

4.  Instruments defining the rights of holders, incl. indentures

       Certificates of Designation establishing Series B, C and E Preferred
       Stock filed with Amendments to Articles of Incorporation in 3(a) above.

       Certificates of Designation establishing Series F and G Preferred Stock
       filed with Amendments to the Articles of Incorporation in 3(c) above.
 

                                       26

<PAGE>
 

    10. Material Contracts

       (a) Asset Purchase, Sale and Security Agreement dated as of July 31,
           1992, between Registrant and Donaldson & Associates, Inc., filed as
           Exhibit 10.5 to the Registration Statement on Form S-1 (File No. 33-
           53550) is incorporated herein by this reference.

       (b) Current Form of Franchise Agreement filed as Exhibit 10(f) to the
           Registration Statement on Form SB-2 (File No. 33-87808) is
           incorporated herein by this reference.

       (c) 1994 Stock Option Plan filed as Exhibit 10(g) to the Registration
           Statement on Form SB-2 (File No. 33-87808) is incorporated herein by
           this reference.

       (d) Non-Discretionary Stock Option Plan filed as Exhibit 10(h) to the
           Registration Statement on Form SB-2 (File No. 33-87808) is
           incorporated herein by this reference.

       (e) Non-Compete Agreement and Employment Agreement dated as of April 29,
           1994 with Roland Heath, filed as Exhibit 10.12 to the Report on Form
           10-KSB for the year ended April 30, 1994 is incorporated herein by
           this reference. Non-Compete Agreements and Employment Agreements
           dated as of July 15, 1994 with David Lepsig and Diane Lepsig, filed
           as Exhibit 10.13 to the Report on Form 10-KSB for the year ended
           April 30, 1994 is incorporated herein by this reference.

       (g) Accounts Receivable Financing Agreement dated January 19, 1995 with
           Republic Acceptance Corporation filed as Exhibit 10(m) to the
           Registration Statement on Form SB-2 (File No. 33-87808) is
           incorporated herein by this reference.

       (h) Security Agreement dated January 19, 1995 with Republic Acceptance
           Corporation filed as Exhibit 10(n) to the Registration Statement on
           Form SB-2 (File No. 33-87808) is incorporated herein by this
           reference.

       (i) Non-Compete Agreement and Employment Agreement dated as of August 1,
           1995 with Bennie R. Hester, filed as Exhibit 2(c) to the Report on
           Form 10-KSB for the year ended April 30, 1996 is incorporated herein
           by this reference.

                                       27

<PAGE>
 
        (j)  Agreement to Restructure Debt, effective December 22, 1995 between
             Registrant and Toshiba America Information Systems, Inc.,
             Promissory Note dated December 22, 1995 in the amount of $1,530,950
             made by Registrant to Toshiba America Information Systems, Inc.,
             and Personal Guaranty by Richard D. Olson, President of Registrant,
             in favor of Toshiba America Information Systems, Inc. effective
             December 22, 1995, filed as Exhibit (a) to the Report on Form 10-
             QSB for the quarter ended January 31, 1996 is incorporated herein
             by this reference.

        (k)  Telecommunications Master Dealer Agreement between Registrant and 
             Toshiba America Information Systems, Inc., dated April 1, 1998.

        (l)  Amended and Restated 1997 Stock Option Plan.

        (m)  Consulting and Severance Agreement dated July 24, 1998 with Richard
             D. Olson, including Warrant and Proxy.

        (n)  Agreement between Registrant and M.H. Meyerson and Co., Inc., dated
             May 20, 1997.

        (o)  Agreement between Registrant and Century Capital Group, Inc., dated
             June 23, 1998.

(b)  Reports on Form 8-K
     -------------------
             None.

                                       28

<PAGE>
 
                                  SIGNATURES

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

     Dated: August 7, 1998

                              COMMUNICATIONS  WORLD  
                               INTERNATIONAL, INC.
                              (a Colorado Corporation)


                              By:  /s/  James M. Ciccarelli
                                  -------------------------
                                  James M. Ciccarelli,  Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.


Dated:  August 7, 1998        By:  /s/  James M. Ciccarelli
                                  ------------------------------------------
                                  James M. Ciccarelli, Chief Executive
                                  Officer and Director


Dated:  August 7, 1998        By:  /s/  Scott E. Harris
                                  ------------------------------------------
                                  Scott E. Harris, Executive Vice President
                                  Secretary, Treasurer and Chief Financial
                                  Officer



Dated:  August 7, 1998        By:  /s/  Samuel D. Addoms
                                  ------------------------------------------
                                  Samuel D. Addoms, Director


Dated:  August 7, 1998        By:  /s/  James M. Corboy
                                  ------------------------------------------
                                  James M. Corboy, Director

                                       29

<PAGE>

[LETTERHEAD OF LEVINE, HUGHES & MITHUEN, INC.]
 
                         Independent Auditors' Report
                         ----------------------------
                                        

THE BOARD OF DIRECTORS AND STOCKHOLDERS
COMMUNICATIONS WORLD INTERNATIONAL, INC.:


We have audited the accompanying consolidated balance sheet of Communications
World International, Inc. and subsidiaries as of April 30, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards required 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 Communications World
International, Inc. and subsidiaries as of April 30, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.

 
                                        LEVINE, HUGHES & MITHUEN, INC.



Denver, Colorado
July 24, 1998

<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1998 AND 1997
===============================================================================

<TABLE>
<CAPTION>
                                                                   1998           1997  
                                                                ----------     ----------
Assets                                                          
------                                                          
<S>                                                             <C>            <C> 
Current assets:
 Cash                                                           $   13,594     $   80,560
 Trade accounts and current portion of notes receivable, less
  allowance for doubtful accounts of $363,735 in 1998 and
  $218,093 in 1997                                               1,711,959      2,620,735
 Inventory                                                         624,610        947,551
 Prepaid expenses                                                   16,678         72,637
 Deferred tax asset                                                100,240        100,240
                                                                ----------     ----------
 
       TOTAL CURRENT ASSETS                                      2,467,081      3,821,723
 
Property and equipment, net                                        246,805        391,747
Deposits and other assets                                           49,818         39,474
Notes receivable                                                    81,017         71,442
Intangible assets, net                                             864,425      1,299,557
Deferred tax asset                                                 944,760        284,760
                                                                ----------     ----------
 
                                                                $4,653,906     $5,908,703
                                                                ==========     ==========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-2
<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS, CONTINUED
APRIL 30, 1998 AND 1997
===============================================================================
<TABLE>
<CAPTION>
                                                                         1998            1997
                                                                     -----------     -----------
LIABILITIES AND STOCKHOLDERS' EQUITY                
------------------------------------
CURRENT LIABILITIES:
<S>                                                                  <C>                   <C>
 Trade accounts payable                                              $ 1,809,766     $ 2,139,165
 Revolving line of credit                                              1,120,022       1,001,891
 Current portion of notes payable, including amounts due to
  related parties of  $69,537 in 1998 and $63,574  in 1997               387,541         372,839
  Accrued expenses, deposits and other liabilities                       699,921         270,252
  Current portion of capital lease obligations                            13,200          25,419
                                                                     -----------     ----------- 
       Total current liabilities                                       4,030,450       3,809,566
 
LONG-TERM LIABILITIES:
  Capital lease obligations                                               10,218          29,598
  Notes payable, including amounts due to related parties         
   of $37,177 in 1998 and $106,705 in 1997                               415,013         900,402
                                                                     -----------     -----------
                                                                       4,455,681       4,739,566
                                                                     -----------     -----------
 
Commitments and contingencies (NOTE 9)
STOCKHOLDERS' EQUITY (Notes 10, 11 and 12):
 Convertible preferred stock, $1.00 par value, 3,000,000
  shares authorized:
  Series B (cumulative)  80,088 shares issued and
   outstanding in 1998 and 1997 (Liquidation preference $105,716)         80,088          80,088
  Series C (cumulative)  436,679 shares issued and
   outstanding in 1998 and 426,679 in 1997 (Liquidation preference                                       
   $552,219)                                                             436,679         426,679  
  Series F (cumulative) - 357,818 shares issued and
   outstanding in 1998 and 1997 (Liquidation preference $402,162)        357,818         357,818
  Series G (cumulative) - 83,500 shares issued and
     outstanding in 1998 and 1997 (Liquidation preference $94,060)        83,500          83,500
 Common stock, no par value, 2,000,000 shares authorized;
  issued and outstanding 1,668,071 shares in 1998 and                  4,290,012       4,224,512
  1,620,571 shares in 1997
 Additional paid-in capital                                              492,009         447,009
 Accumulated deficit                                                  (5,541,881)     (4,450,469)
                                                                     -----------     -----------
       TOTAL STOCKHOLDERS' EQUITY                                        198,225       1,169,137
                                                                     -----------     -----------
                                                                     $ 4,653,906     $ 5,908,703
                                                                     ===========     ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED APRIL 30, 1998 AND 1997
===============================================================================
<TABLE>
<CAPTION>
                                                               1998           1997
                                                           -----------     -----------          
REVENUE:
<S>                                                        <C>             <C>
 Franchise equipment sales                                 $ 5,159,968     $ 5,489,240
 Direct equipment and service sales                          7,707,784       7,819,398                        
 Royalty fees                                                  222,987         213,960         
 Initial franchise fees                                         12,500          35,000         
 Leasing fees                                                   60,277          62,205         
 Interest and other income                                      74,245          67,593         
                                                           -----------     -----------          
                                                            13,237,761      13,687,396         
                                                           -----------     -----------         
Costs and expenses:                                                                           
 Cost of franchise equipment sales                           4,645,942       4,767,837         
 Cost of direct equipment and service sales                  4,588,660       4,422,899         
 Selling                                                       742,050         758,981         
 General and administrative                                  3,264,385       3,089,275         
 Interest expense and loan fees, including related party                                       
   interest of $11,875 in 1998 and $20,813 in 1997             421,345         337,556         
 Amortization of intangible assets                             200,273         229,424         
 Provision for bad debts                                       299,000         212,000         
                                                           -----------     -----------         
                                                            14,161,655      13,817,972         
                                                           -----------     -----------         
                                                                                              
LOSS FROM OPERATIONS BEFORE INCOME TAXES                      (923,894)       (130,576)
                                                                                              
Income tax benefit                                             400,000         385,000         
                                                           -----------     -----------          
                                                                                              
INCOME (LOSS) FROM CONTINUING OPERATIONS                      (523,894)        254,424         
                                                                                              
DISCONTINUED OPERATIONS, NET OF INCOME TAXES:                                                 
 Loss from operations of Comm World of Seattle                (167,518)       (171,604)
 Loss on disposal of Comm World of Seattle, net of                                            
 income tax benefit of $260,000                               (400,000)                       
                                                           -----------     -----------          
LOSS FROM DISCONTINUED OPERATIONS                             (567,518)       (171,604)
                                                           -----------     -----------         
                                                                                              
Net income (loss)                                          $(1,091,412)    $    82,820         
                                                           ===========     ===========         
                                                                                              
                                                                                              
EARNING (LOSS) PER SHARE:                                                                     
 Basic:                                                                                       
   Income (loss) from continuing operations                $      (.37)    $       .11         
                                                           ===========     ===========         
   Net income (loss)                                       $      (.72)    $       .01         
                                                           ===========     ===========         
 Diluted:                                                                                     
   Income (loss) from continuing operations                $      (.37)    $       .10         
                                                           ===========     ===========         
   Net Income (loss)                                       $      (.72)    $       .01         
                                                           ===========     ===========         
                                                                                              
WEIGHED  AVERAGE NUMBER OF OUTSTANDING COMMON SHARES                                          
 Basic:                                                      1,622,824       1,589,459         
                                                           -----------     -----------         
 Diluted:                                                    1,960,464       1,776,592         
                                                           -----------     -----------         
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED APRIL 30, 1998 AND 1997
===============================================================================
<TABLE>
<CAPTION>
                                    (Note 10)
                                 Preferred Stock                                    
                                Series B, C, F & G       Common Stock                                                     
                                ------------------------------------------     Additional      Accumulated   Shareholders'
                                Shares    Amount     Shares      Amount     Paid-in Capital      Deficit         Equity
                                -------  ---------  ---------  -----------  ----------------  -------------  --------------
<S>                             <C>      <C>        <C>        <C>          <C>               <C>            <C>
BALANCES, APRIL 30, 1996        506,767   $506,767  1,546,349   $4,141,012         $452,884    $(4,533,289)    $   567,374
 
ISSUANCES OF PREFERRED STOCK    271,500    271,500          -            -           (5,875)             -         265,625
 
ISSUANCES OF COMMON STOCK             -          -     74,222       83,500                -              -          83,500
 
CONVERSION OF DEBT TO
     PREFERRED STOCK            169,818    169,818          -            -                -              -         169,818
 
NET INCOME                            -          -          -            -                -         82,820          82,820
                                -------   --------  ---------   ----------         --------    -----------     -----------
 
BALANCES, APRIL 30, 1997        948,085   $948,085  1,620,571   $4,224,512         $447,009    $(4,450,469)    $ 1,169,137
 
ISSUANCES OF PREFERRED STOCK     10,000     10,000          -            -                -              -          10,000
 
ISSUANCES OF COMMON STOCK             -          -     47,500       65,500                -              -          65,500
 
ISSUANCE OF OPTIONS AND
     WARRANTS TO CONSULTANTS          -          -          -            -           45,000              -          45,000
 
NET LOSS                              -          -          -            -                -     (1,091,412)     (1,091,412)
                                -------   --------  ---------   ----------         --------    -----------     -----------
 
BALANCES, APRIL 30, 1998        958,085   $958,085  1,668,071   $4,290,012         $492,009    $(5,541,881)    $   198,225
                                =======   ========  =========   ==========         ========    ===========     ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30, 1998 AND 1997
===============================================================================
<TABLE>
<CAPTION>
                                                                        1998                1997
                                                                    -----------          ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                 <C>                  <C>
 Net income (loss)                                                  $(1,091,412)         $  82,820
 Adjustments to reconcile to net cash provided by
   (used in) operating activities, net of effect of
    acquisitions:
     Depreciation and amortization                                      396,372            420,496
     Provision for bad debts on accounts and notes
       Receivable                                                       299,000            224,593
     Provision for inventory obsolescence                               233,000             39,600
     Stock options and warrant compensation                              55,000
     Intangible write off-discontinued operations                       209,055                  -
     Changes in operating assets and liabilities:
       Trade accounts and notes receivable                              615,505           (945,801)
       Inventories                                                       89,941           (162,450)
       Prepaid expenses                                                  55,959            (39,568)
       Deferred taxes                                                  (660,000)          (385,000)
       Deposits and other assets                                        (10,344)           (11,785)
       Trade accounts payable                                          (368,819)           898,846
       Accrued expenses, deposits and other liabilities                 429,669             (8,242)
                                                                    -----------          ---------

           Net cash provided by operating activities                    252,926            113,509
                                                                    -----------          ---------
 
CASH FLOWS FROM INVESTING ACTIVITIES
 Capital expenditures                                                   (40,657)           (21,254)
                                                                    -----------          ---------
           Net cash used in investing activities                        (40,657)           (21,254)
                                                                    -----------          ---------
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 Net borrowings under line-of-credit agreement                          157,551            312,831
 Payments of notes payable                                             (470,687)          (430,080)
 Principal payments on capital lease obligations                        (31,599)           (37,319)
 Issuance of preferred stock, net of offering costs                           -             39,125
 Issuance of common stock                                                65,000                  -
                                                                    -----------          ---------
 
           Net cash used in financing activities                       (279,235)          (115,443)
                                                                    -----------          ---------
 
           Net decrease in cash                                         (66,966)           (23,188)
 
CASH AT BEGINNING OF THE YEAR                                            80,560            103,748
                                                                    -----------          ---------
 
CASH AT END OF THE YEAR                                             $    13,594          $  80,560
                                                                    ===========          =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30, 1998 AND 1997
===============================================================================

                                                        1998             1997
                                                      --------         --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 Interest paid                                        $351,843         $248,755
                                                                               
NON-CASH INVESTING ACTIVITIES:                                                 
 Business acquisitions financed by:                                            
   Issuance of common stock                                  -           83,500
   Issuance of preferred stock                               -          226,500
                                                                               
NON-CASH FINANCING ACTIVITIES:                                                 
   Issuance of preferred stock as                                              
     bonus compensation                                 10,000                -
   Issuance of stock options to outside                                        
     consultants                                        45,000                -
                                                                               
CONVERSION OF:                                                                 
 Notes payable to preferred stock                            -          169,818
 Inventory to rental property                                -           23,783


See accompanying notes to consolidated financial statements.


                                      F-7
<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    PRESENTATION

    The consolidated financial statements presented are those of Communications
    World International, Inc. and its subsidiaries, CommWorld of Phoenix, Inc.,
    CommWorld of Seattle, Inc., Digital Telecom, Inc. (d.b.a. CommWorld
    NationWide) and CommWorld National Capitol Area, Inc. (collectively, the
    "Company" or "CommWorld"). All significant intercompany balances and
    transactions have been eliminated in consolidation.

    ORGANIZATION AND NATURE OF OPERATIONS

    CommWorld was incorporated under Colorado law in 1983 and has its principal
    executive offices at 6025 South Quebec Street, Suite 300, Englewood,
    Colorado 80111. CommWorld is engaged in the distribution of franchise
    licenses within the telephone interconnect industry. The Company derives
    income primarily from the sale of equipment and services to franchisees,
    multi-location customers (national accounts), and through its Company-owned
    outlets, leasing fees and initial franchise fees.

    Revenue Recognition

    Initial Franchise Fees
    ----------------------

    Franchise fees are recognized upon execution of the franchise agreement as
    all material services and conditions relating to the sale have been
    substantially performed or satisfied. Direct costs associated with the sale,
    including franchiser obligations, are expensed upon the recognition of the
    related revenue.

    Royalty Fees
    ------------

    Royalty fees are cost mark-up fees charged to certain franchisees who
    purchase equipment directly from suppliers with whom the Company has
    purchasing contracts. The Company is notified by the supplier of the
    purchases by the franchisees and the fees are charged to the franchisee and
    recognized as income on a monthly basis.

    Franchise Equipment Sales
    -------------------------

    Revenue from franchise equipment sales is generally recognized when products
    are shipped. The franchisee is entitled to purchase equipment from or
    through the Company on a "cost mark-up royalty" basis, i.e. based on the
    cost to the Company of the equipment and products purchased plus a mark-up
    to the franchisee. The amount of the cost mark-up royalty varies by
    manufacturer and by the volume of purchases of the individual franchise.

    Direct Equipment and Service Sales
    ----------------------------------

    Revenue from direct equipment and service sales is generally recognized upon
    completion of the installation of the equipment or upon completion of the
    service provided by the Company for telephone systems, voice processing
    products and related peripherals.


                                      F-8
<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================

(1) Summary of Significant Accounting Policies (continued)

    USE OF ESTIMATES

    The preparation of financial statements in conformity with generally
    accepted accounting principles requires management to make estimates and
    assumptions that affect the reported amounts of assets and liabilities and
    disclosure of contingent assets and liabilities 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.

    INVENTORY

    Inventory is valued at the lower of cost (first-in, first-out method) or
    estimated market value and includes used and replacement stock items.

    PROPERTY AND EQUIPMENT

    Property and equipment are reported at cost. Depreciation is computed over
    the estimated useful lives of the assets using the straight-line method for
    financial reporting purposes.

    INTANGIBLE ASSETS

    Goodwill and Non-compete Agreements
    -----------------------------------
 
    Acquisitions of interconnect dealers, including franchise outlets, are
    accounted for using the purchase method of accounting. Under this method,
    the purchase price is allocated to assets acquired and liabilities assumed
    based on their estimated fair values as of the date of acquisition. The
    excess of the consideration paid over the fair value of net assets acquired
    has been recorded as goodwill and is amortized on the straight-line basis
    over ten years. Non-compete agreements associated with business acquisitions
    are amortized over the term of the agreement. The Company reviews
    unamortized intangible assets whenever events or changes in circumstances
    indicate that the carrying value of the asset may not be recoverable. If
    there is an indication the carrying amount may not be recoverable, the
    Company estimates the future cash flows expected to result from the
    operation of the applicable Company-owned outlet and its eventual
    disposition. If the sum of the expected future cash flows (undiscounted and
    without interest charges) is less than the carrying amount of the intangible
    asset, the Company recognizes an impairment loss by reducing the unamortized
    cost of the intangible asset to its estimated fair value.

    REACQUIRED FRANCHISES
    ---------------------

    Reacquired franchises include individual franchises taken over by the
    Company upon termination of the franchise agreements and/or abandonment by
    the franchisee. Reacquired franchises are recorded based upon the estimated
    fair value of the assets received less any liabilities assumed by the
    Company, but not in excess of the Company's cost. Cost in excess of amounts
    allocated to inventory, equipment and other assets is classified as
    franchises reacquired to the extent supportable by the fair value of the
    customer base(s) and territories acquired based upon estimates by Company
    management.

                                      F-9
<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================


(1) Summary of Significant Accounting Policies (continued)

    The Company amortizes its investment in franchises reacquired to the extent
    of the annual pre-tax operating income (if any) of the reacquired franchise
    and may recognize additional amortization to reduce the investment to its
    net realizable value as estimated by Company management.

    Reacquired franchises also include the cost of master franchise territories
    reacquired. Reacquired master franchise territories are amortized when
    individual franchises in the related territories are sold. The maximum
    amortization period for reacquired franchises is five years from the date of
    reacquisition. There were no franchises reacquired in fiscal years 1998 or
    1997.

    Income (Loss) Per Common Share

    Income (loss) per common share is computed using the weighted average number
    of common shares outstanding during each period. Common stock equivalents
    are not material and do not affect the income per share. Common stock
    equivalents are not included in the calculation of loss per share as they
    are anti-dilutive.

    Income Taxes

    The Company provides for income taxes using the asset and liability method
    as prescribed by Statement of Financial Accounting Standards No. 109,
    Accounting for Income Taxes. Under the asset and liability method, deferred
    tax assets and liabilities are recognized for the future tax consequences
    attributable to differences between the financial statement carrying amount
    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. Under Statement 109, 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.

    FINANCIAL INSTRUMENTS

    The Company periodically maintains cash balances at a commercial bank in
    excess of the Federal Deposit Insurance Corporation Insurance limit of
    $100,000.

    RECENT PRONOUNCEMENTS

    In June 1997, the Financial Accounting Standards Board (FASB) issued
    Statement No. 130 (SFAS 130), Reporting Comprehensive Income, which
    establishes standards for reporting and display of comprehensive income and
    its components (net revenues, expenses, gains and losses) in a full set of
    general-purpose financial statements. The Company will adopt SFAS 130 in its
    fiscal year 1999.

    In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
    Enterprise and Related Information, which changes the way public companies
    report information about operating segments. SFAS No. 131, which is based on
    the management approach to segment reporting, establishes requirements to
    report selected segment information quarterly and to report entity-wide
    disclosures about products and services, major customers and the material
    countries in which the entity holds assets and report revenues. The Company
    has not yet evaluated the effects of this change on its reporting of segment
    information. If necessary, Company will adopt SFAS No. 131 in its fiscal
    year 1999.

    RECLASSIFICATIONS

    Certain amounts in the 1997 consolidated financial statements have been
    reclassified to conform to the presentation used in the 1998 consolidated
    financial statements.
 

                                      F-10
<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================

(2) BUSINESS ACQUISITIONS

    During September 1996, the Company acquired the assets of its franchise in
    Tucson, Arizona, CommWorld of Tucson (CWT). The operations of CWT will be
    continued as part of the operations of the Company's wholly owned
    subsidiary, CommWorld of Phoenix, Inc. The Company acquired inventory of
    approximately $41,000 and fixed assets with a net book value of
    approximately $21,000. The Company issued 74,222 shares of common stock,
    valued at the market price of the common stock of $1.125 per share, 83,500
    shares of Series G Preferred Stock valued at $1.00 per share, and 143,000
    shares of Series F Preferred Stock valued at $1.00 per share.

    The acquisition of CWT was accounted for as a purchase and, accordingly, the
    purchase price was allocated to the assets acquired based on their estimated
    fair values as of the date of the merger. The excess of the consideration
    paid over the fair value of net assets acquired of approximately $248,000
    was recorded as goodwill and is being amortized on a straight line basis
    over ten years.

    The operations of CWT for the periods prior to acquisition would not have
    had a material effect on net sales or net income (loss) of the consolidated
    operations on a pro forma basis.

(3) REVOLVING LINE OF CREDIT

    The Company entered into a revolving line of credit agreement in January
    1995 with a finance company. The revolving line of credit permits the
    Company to borrow up to $2,000,000 subject to certain collateral
    limitations. Interest at the rate of prime plus 5% per annum is due monthly.
    The revolving line of credit is collateralized by substantially all of the
    assets of the Company. At April 30, 1998 and 1997 the Company had
    outstanding borrowings on the line of credit of $1,120,022 and $1,001,891,
    respectively.

(4) NOTES RECEIVABLE

    Occasionally, amounts due on open account from various franchisees were
    converted to promissory notes bearing interest at rates ranging from 8.5% to
    12% per annum, payable in installment periods ranging from 12 to 36 months,
    and secured by the franchisee's business assets. In prior years, the Company
    sold various Company-owned outlets (see Note 7) with a portion of the sales
    financed with promissory notes.

    The Company also may finance payments of initial franchise fees with
    promissory notes for up to four months. Notes receivable consist of the
    following at April 30:

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

        Equipment sales                     $ 81,975         $ 52,190
        Company-owned outlet sales            97,987          108,987
        Franchise fees                         9,375           12,667
        Former President of the Company       25,000           25,000
                                            --------         --------
                                             214,337          198,844

         Less current portion                133,320          127,402
                                            --------         --------
         
          Non-current portion               $ 81,107         $ 71,442
                                            ========         ========


                                      F-11
<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================

(5) Property and Equipment

    Property and equipment consists of the following at April 30:

                                            Estimated
                                           useful life      1998         1997
                                           -----------   ----------   ----------

    Furniture, fixtures and equipment          3-5       $  957,371   $  928,648
    Rental property                             5            33,830       33,830
    Vehicles                                    5           115,087      103,393
    Leasehold improvements and other            5               967        5,039
                                                         ----------   ----------
                                                          1,107,255    1,070,910
     Less accumulated depreciation and
       amortization                                         860,450      679,163
                                                         ----------   ----------
 
     Property and equipment, net                         $  246,805   $  391,747
                                                         ==========   ==========

(6) NOTES PAYABLE
 
    Notes payable consist of the following at April 30:
<TABLE> 
<CAPTION> 
                                                                 1998        1997
                                                               --------   ----------
    <S>                                                        <C>        <C> 
    Installment note payable to Toshiba America Information    
     Systems, Inc. (TAIS), net of discount                     $675,275   $1,086,986
    Notes payable to sellers of acquired companies
    (see Note 11 )                                              106,705      170,279
    Other notes payable                                          20,574       15,976
                                                               --------   ----------
                                                                802,554    1,273,241
     
       Less current portion                                     387,541      372,839
                                                               --------   ----------
     
       Non-current portion                                     $415,013   $  900,402
                                                               ========   ==========
</TABLE> 

    Effective December 22, 1995, the Company entered into an agreement with
    TAIS, its major supplier and unsecured creditor, to transfer $1,530,950 of
    accounts and note payable to a long-term obligation (the "Note") and to
    increase the current credit facility by $400,000. Under the terms of the
    Note, the Company is required to make 60 equal installments of $29,598,
    including interest at 6% per annum, commencing in February 1996.
    Additionally, the Company is required to make principal prepayments of at
    least $10,000 per month if the monthly net operating cash flow of the
    Company, defined as pre-tax income plus depreciation and amortization,
    exceeds $75,000 for three consecutive months. Thereafter, 60% of each
    additional $5,000 of monthly net operating cash flow in excess of $75,000
    must be paid. The Company is also required to use a portion of the net
    proceeds from the offering of its stock or debt securities to make a
    principal prepayment. The prepayment will be equal to a percentage of the
    net proceeds in excess of $350,000 as follows: 40% of net proceeds between
    $350,000 and $1 million, 50% of net proceeds between $1 million and $2
    million, 60% of net proceeds between $2 million and $3 million and 100% of
    net proceeds in excess of $3 million, but not to exceed the remaining
    principal balance of the Note ($731,816 as of April 30, 1998). The Note
    contains the personal guarantee of the Company's former president. The
    Company has indemnified the former president relative to this guarantee.


                                      F-12
<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================


    Effective April 30, 1997 TAIS agreed to treat the Note as a non-interest-
    bearing obligation from inception through April 30, 1997, resulting in a
    discount of the note balance of approximately $103,000. The discount has
    been treated as a reduction of cost of franchise equipment sales for the
    year ended April 30, 1997. During the year ended April 30, 1998, TAIS agreed
    to treat the note as a non-interest bearing obligation provided monthly
    payments are continued in a timely manner. A discount of $127,958 was
    recorded on the Note and treated as a reduction of cost of franchise
    equipment sales for the year ended April 30, 1998. Imputed interest in the
    amount of $68,796 and $96,471 was recognized on the Note during the years
    ended April 30, 1998 and 1997.

    The fair value of the note payable to TAIS is estimated based on the amount
    of future cash flows discounted using the Company's current borrowing rate
    for loans of comparable maturity. At April 30, 1998 and 1997, the estimated
    fair value of the TAIS note was approximately $599,000 and $790,000,
    respectively.

    The scheduled maturities of notes payable, by fiscal year, are, $387,541 in
    1999, $382,423 in 2000 and $32,590 in 2001.

(7) FRANCHISED AND COMPANY-OWNED OUTLETS

    The following table provides data on franchised outlets and Company-owned
    outlets:
 
                                    Franchised     Company-owned
                                     outlets          outlets
                                    ----------     -------------

        Total at April 30, 1996         65               4
        -----------------------
          Sold                           3               -
          Terminated                   (10)              -
          Acquired franchises           (1)              1
                                       ---              --

        Total at April 30, 1997         57               5
        -----------------------
          Sold                           1               -
          Terminated                    (5)             (1)
          Acquired franchises            -               -
                                       ---              --
 
        Total at April 30, 1998         53               4
        -----------------------        ===              ==

                                        
(8) Intangible Assets
 
    Intangible assets consist of the following at April 30:

                                       Amortization
                                          period         1998         1997
                                       ------------   ----------   ----------

    Goodwill                             10 years     $1,259,608   $1,496,395
    Franchises reacquired                 5 years        315,567      315,567
    Non-compete agreements              2-5 years        172,500      184,500
                                                      ----------   ----------
                                                       1,747,675    1,996,462
 
     Less accumulated amortization                       883,250      696,905
                                                      ----------   ----------
 
       Intangible assets, net                         $  864,425   $1,299,557
                                                      ==========   ==========


                                      F-13
<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================

(9) Commitments

    OPERATING LEASES

    The Company leases office space and related facilities, equipment and
    vehicles under noncancelable operating leases. Future minimum lease payments
    for such operating leases are as follows:

        Year ended April 30:
            1999                       $  434,281
            2000                          362,672
            2001                          305,784
            2002                          254,784
            2003 and thereafter           248,846
                                       ----------
 
                                       $1,606,367
                                       ==========

    Aggregate rental expense under operating leases was $343,655 and $359,243
    for the years ended April 30, 1998 and 1997, respectively.

    CAPITAL  LEASES

    The Company leases computer equipment and vehicles under capital leases. At
    April 30, 1998, scheduled future minimum payments under capital leases with
    initial or remaining terms of one year or more are as follows:

        Year ended April 30:
 
            1999                                 $13,926
            2000                                  13,925
                                                 -------
 
               Total minimum lease payments       27,851
               Less executory costs                  600
                                                 -------
 
               Net minimum lease payments         27,251
               Less interest                       3,833
                                                 -------

               Present value of net minimum
                 lease payments                   23,418
 
               Less current portion               13,200
                                                 -------
 
               Non-current portion               $10,218
                                                 =======


                                      F-14
<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================

(9)  Commitments (continued)

     The following is a summary of property and equipment under capital leases
     at April 30:

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

        Computer equipment             $  80,692          $ 80,692
        Vehicles                          78,935            78,935
                                       ---------          --------
                                         159,627           159,627
        Accumulated amortization        (119,796)          (87,871)
                                       ---------          --------
                                       $  39,831          $ 71,756
                                       =========          ========

     Amortization of assets held under capital leases is included in
     depreciation expense.

     EMPLOYMENT AGREEMENTS

     The Company has entered into Employment Agreements (the "Agreements") with
     several individuals in connection with various business acquisitions
     originating during fiscal years 1994 to 1997. Generally, the terms of these
     Agreements provide for a three year term of employment and a fixed minimum
     amount of annual compensation and bonus-performance incentives. Total
     compensation paid under these Agreements during fiscal years ended April 30
     1998 and 1997 was $193,345 and $459,390, respectively.

     The future minimum payments required under these Agreements at April 30,
     1998 are as follows:

        Year Ended April 30:
 
            1999                       $ 96,000
            2000                         33,000
                                       --------
 
                                       $129,000
                                       ========

(10) SHAREHOLDERS' EQUITY AND RELATED PARTY TRANSACTIONS

     Series A Preferred Stock

     In October 1992, the Company authorized the establishment and designation
     of 1,000,000 shares of Series A Preferred Stock. There were no Series A
     Preferred Stock shares issued and outstanding at April 30, 1998 and 1997.

                                      F-15
<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
 
(10) Shareholders' Equity and Related Party Transactions (continued)

     SERIES B PREFERRED STOCK

     In connection with the Company's acquisition of Master Franchise, Inc. and
     Communications World of Phoenix South, Inc. in April 1994, the Company
     authorized 100,000 shares of Series B Preferred Stock and issued 80,088
     shares to the sole shareholder of the acquirees. Shares of the Series B
     Preferred Stock were convertible into common stock at the election of the
     holders. The conversion rights were not exercised and expired April 30,
     1997. Dividends on the Series B Preferred Stock are paid, when declared by
     the Board of Directors, at the rate of $.08 per share per annum before any
     dividends on shares of the Company's common stock are paid. Upon
     liquidation, dissolution or winding up of the Company, the Series B
     Preferred Stock shall have a preference of $1.00 per share plus accumulated
     and unpaid dividends, payable from the proceeds of sale or distribution of
     the Company's assets prior to any distribution to the holders of common
     stock. The Company may redeem the Series B Preferred Stock at $1.00 per
     share plus accrued and unpaid dividends by giving thirty days notice to the
     holders of the Series B Preferred Stock. At April 30, 1998 there were
     $25,628 in accumulated dividends.

     Series C Preferred Stock

     The Company authorized 440,000 shares of Series C Preferred Stock and
     issued 140,060 shares to the shareholders of CommWorld of Seattle North,
     Inc., and issued 181,484 shares to the shareholders of Digital Telecom
     Incorporated, and issued 40,000 shares to the shareholders of
     Communications World of Columbia, Inc., and issued 65,135 shares to the
     sole shareholder of Alpha Communications & Technology, Inc. and issued
     10,000 shares to employees as incentive compensation. Shares of the Series
     C Preferred Stock were convertible into common stock at the election of the
     holders. Effective July 16, 1997 the conversion rights expired. Dividends
     on the Series C Preferred Stock are paid when declared by the Board of
     Directors, at the rate of $.08 per share per annum before any dividends on
     shares of the Company's common stock are paid. Upon liquidation,
     dissolution or winding up of the Company, the Series C Preferred Stock
     shall have a preference of $1.00 per share plus accumulated and unpaid
     dividends, payable from the proceeds of sale or distribution of the
     Company's assets prior to any distribution to the holders of common stock.
     The Company may redeem the Series C Preferred Stock at $1.00 per share plus
     accrued and unpaid dividends by giving thirty days notice to the holders of
     the Series C Preferred Stock. At April 30, 1998, there were $115,541 in
     accumulated dividends.

 

                                      F-16
<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================

(10) Shareholders' Equity and Related Party Transactions (continued)

     SERIES F PREFERRED STOCK

     The Company authorized 1,100,000 shares of Series F Preferred Stock. Shares
     of the Series F Preferred Stock are convertible into Common Stock at the
     election of the holders at a conversion price equal to 50% of the current
     market price determined by the 30 day average price prior to conversion.
     The shares of Series F Preferred Stock will automatically be converted into
     fully-paid and non-assessable shares of Common Stock upon the effective
     date of a registration statement covering the Common Stock. Dividends on
     the Series F Preferred Stock are paid when declared by the Board of
     Directors, at the rate of $.08 per share per annum before any dividends on
     shares of the Company's common stock are paid. Upon liquidation,
     dissolution or winding up of the Company, the Series F Preferred Stock has
     a preference of $1.00 per share plus accumulated and unpaid dividends,
     payable from the proceeds of sale or distribution of the Company's assets
     prior to any distribution to the holders of common stock. At April 30,
     1998, there were $44,344 in accumulated dividends.
 
     The Company issued 143,000 shares of Series F Preferred Stock in connection
     with the acquisition of the assets of its franchise, CommWorld of Tucson
     (see Note 2). The Company also issued 45,000 shares of Series F Preferred
     Stock, realizing net proceeds of $39,150, in connection with a private
     offering of the shares. The Company issued 169,818 shares in connection
     with the conversion of certain notes payable into equity (see Note 11).

     SERIES G PREFERRED STOCK

     The Company authorized and issued 83,500 shares of Series G Preferred Stock
     to an individual in connection with the acquisition of the assets of
     CommWorld of Tucson (see Note 2). Shares of the Series G Preferred Stock
     are convertible into common stock at the election of the holders at a
     conversion price of $1.625. Dividends on the Series G Preferred Stock are
     paid when declared by the Board of Directors, at the rate of $.08 per share
     per annum before any dividends on shares of the Company's common stock are
     paid. Upon liquidation, dissolution or winding up of the Company, the
     Series G Preferred Stock shall have a preference of $1.00 per share plus
     accumulated and unpaid dividends, payable from the proceeds of sale or
     distribution of the Company's assets prior to any distribution to the
     holders of common stock. The Company may redeem the Series G Preferred
     Stock at $1.00 per share plus accrued and unpaid dividends by giving thirty
     days notice to the holders of the Series G Preferred Stock. At April 30,
     1998 there were $10,560 in accumulated dividends.


                                      F-17
<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================

     The following schedule summarizes the preferred stock activity for Series
     B, C, F and G for fiscal years ended April 30, 1998 and 1997:
<TABLE>
<CAPTION>
                                      SERIES B         SERIES C           SERIES F           SERIES G     TOTAL PREFERRED STOCK
                                  --------------------------------------------------------------------------------------------------
                                  Shares  Amount   Shares    Amount   Shares    Amount   Shares  Amount   Shares          Amount
                                  ------  -------  -------  --------  -------  --------  ------  -------  -------        --------
<S>                               <C>     <C>      <C>      <C>       <C>      <C>       <C>     <C>      <C>            <C>
     Balances, April 30, 1996     80,088  $80,088  426,679  $426,679        -  $      -       -  $     -  506,767        $506,767   
     Issuances of preferred                                                                                                         
       Stock                           -        -        -         -  188,000   188,000  83,500   83,500  271,500         271,500   
     Conversions of debt to                                                                                                         
       Preferred stock                 -        -        -         -  169,818   169,818       -        -  169,818         169,818   
                                  ------                                                                                            
     Balances, April 30, 1997     80,088  $80,088  426,679  $426,679  357,818  $357,818  83,500  $83,500  948,085        $948,085   
     Issuance of preferred                                                                                                          
       Stock                           -        -   10,000    10,000        -         -       -        -   10,000          10,000   
     Balance, April 30, 1998      80,088  $80,088  436,679   436,679  357,818  $357,818  83,500  $83,500  958,085        $958,085   
                                  ======  =======  =======  ========  =======  ========  ======  =======  =======        ========   
</TABLE>
 
     COMMON STOCK PURCHASE WARRANTS
     ------------------------------

     During the year ending April 30, 1993, the Company received $2,185,000 in
     gross proceeds from the sale of 874,000 units, with each unit consisting of
     two shares of common stock of the Company and one redeemable Common Stock
     Purchase Warrant ("Warrant"). Ten Warrants entitled the holder thereof to
     purchase, at any time for a period of three years from the date of the
     Prospectus, one share of common stock, at a price of $9.38. The Company
     sold to the underwriter, for $100, a warrant to purchase up to 80,000 units
     at a price of $3.00 per unit. These warrants were not exercised and expired
     June 30, 1997. During the year ended April 30, 1997, the Company issued
     warrants to purchase 5,850 shares of Common Stock at a price of $1.00 per
     share. These warrants were not exercised and expired December 31, 1997.

     On May 20, 1997, the Company entered into an investment banking agreement
     (the Agreement) with M.H. Meyerson & Co., Inc. (Meyerson). Under the terms
     of the Agreement, Meyerson provides investment banking services for the
     Company, on a best efforts basis, including assistance with mergers and
     acquisitions, internal capital structuring and the placement of new debt
     and equity issues for a period of up to five years commencing from the date
     of the Agreement. In consideration of the services to be performed, the
     Company granted Meyerson warrants to purchase 175,000 shares of common
     stock at a price of $1.20 per share. Subject to vesting and approval of the
     Company's shareholders of an increase in the number of authorized shares,
     the warrants may be exercised at any time from May 20, 1997 to and
     including May 20, 2002. These warrants vest and become irrevocable as
     follows: 75,000 warrants on May 29, 1997, 50,000 warrants on November 17,
     1997, and 50,000 warrants on May 19, 1998. The warrants carry piggyback
     registration rights. The warrants have been valued at $.30 each and a
     charge of $37,000 was recorded in the current year with an offsetting
     increase to additional paid-in capital.


                                      F-18
<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================


(11)  CONVERSION OF DEBT TO EQUITY

      In September 1996, certain notes payable in the amount of $169,818 were
      converted into 169,818 shares of Series F Preferred Stock. These notes,
      which were issued in connection with acquisitions of certain operating
      subsidiaries, were converted on a dollar for dollar basis into shares of
      Series F Preferred Stock valued at $1 per share. The note holders are also
      holders of Series B AND SERIES C PREFERRED STOCK.

(12)  BENEFIT PLANS

      STOCK OPTIONS

      During 1998, the Company, with the approval of its board of directors,
      adopted the 1997 Stock Option Plan (the "1997 Plan") which is subject to
      shareholder approval. The 1997 Plan provides for the reservation of
      150,000 shares of the Company's common stock. Pursuant to the terms of the
      1997 Plan, options may be granted to employees of the Company and
      consultants to the Company. In addition to the shares reserved under the
      Plan for future issuance, there was a specific grant of 255,000 options to
      certain employees, directors and consultants. These options were issued
      with a purchase price of $1.30 per share and expire 4 years from the date
      of grant.

      During 1994, the Company, with the approval of its board of directors,
      adopted the 1994 Stock Option Plan (the "Plan") which is subject to
      shareholder approval. The Plan provides for the reservation of 207,000
      shares of the Company's common stock. Pursuant to the terms of the Plan,
      options may be granted to persons who are employees of the Company and any
      subsidiary thereof. Generally, the options are non-transferable and cannot
      be exercised for a period of six (6) months from the date granted.
      Furthermore, options are granted at fair market value on the date of grant
      and expire up to ten years from that date. At April 30, 1998 the Company
      had 72,500 options granted pursuant to the Plan to purchase common stock
      at prices ranging from $1.00 to $2.75 per share with expirations occurring
      between August 3, 1998 and October 1, 1999. The company has no plans to
      grant any additional options under the plan. During fiscal years 1998 and
      1997, no stock options were exercised.

      Additionally, in accordance with a stock option plan adopted in February
      1993, the Company's board of directors authorized the issuance of options
      to purchase up to 20,000 common shares to non-employee directors of the
      Company. Options are granted at the market value on the date of grant. The
      options granted become exercisable over a three-year period and must be
      exercised within five years from the date of grant. At April 30, 1998, the
      Company had 10,000 options granted to purchase common stock at prices
      ranging from $.88 to $5.13 per share, with expirations occurring between
      November 1, 1998 and November 1, 2002. The company has no plans to grant
      any options under the plan. During fiscal years 1998 and 1997, no stock
      options were exercised. This plan expired in the current fiscal year.

      Furthermore, the board of directors has granted options to certain
      individuals that were not issued pursuant to any plan. At April 30, 1998,
      the company had 132,500 options outstanding to purchase common stock at
      prices ranging from $1.00 to $3.25 per share, with expirations occurring
      between August 3, 1998 and September 20, 1999. During fiscal year 1998 and
      1997, no stock options were exercised.

                                      F-19

<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================


    The following is a summary of the status of options granted:
<TABLE>
<CAPTION>
<S>                                  <C>                <C>                <C>                                  
                                          Number            Aggregate        Weighted Average     
                                        of Shares        Exercise Price       Exercise Price                    
                                    -----------------  -----------------  --------------------                 

Balances, April 30, 1996                 211,083           $ 543,904              $2.58                 
Options granted                           62,000              63,000               1.02                 
Options canceled                         (56,500)           (135,938)              2.41                 
                                       ---------          ----------          ---------                              
Balances, April 30, 1997                 216,583             470,966               2.17                 
Options granted                          257,000             335,500               1.30                 
Options canceled                          (3,583)            (20,590)              5.75                 
                                       ---------          ----------         ----------
Balances, April 30, 1998                 470,000           $ 785,876              $1.67                 
                                       =========          ==========         ==========                  

    The weighted average fair value of options granted during fiscal years 1998 and 1997 was $1.30 and $1.02
per share, respectively.
 
(12)    BENEFIT PLANS (CONTINUED)

        The Company has adopted the disclosure-only provisions of
        Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting
        for Stock-Based Compensation.  Accordingly, no compensation cost has been
        recognized.  Had compensation cost for these option plans been determined
        based on the fair value at the grant date for options granted in 1998 and
        1997, consistent with the provisions of SFAS 123, the Company's net income
        (loss) and net income (loss) per share applicable to common stock for 1998
        and 1997 would have been the pro forma amounts indicated below:
 
                                                                        1998                   1997
                                                                        ----                   ----
                Net income (loss) applicable to
                  common stock - as reported                        $(1,168,059)             $22,680
                Net income (loss) applicable to
                  common stock - pro forma                           (1,264,879)              17,040
                Income (loss) per common share
                  as reported                                              (.72)                 .01
                Income (loss) per common share
                  pro forma                                         $      (.78)             $   .01

        The fair value of each option grant is estimated on the date of
        grant using the Black-Scholes option-pricing model with the following
        assumptions:

                                 Risk-fee interest                      5.0% - 6.0%
                                 Expected life                          3 years
                                 Expected volatility                    30%
                                 Expected dividend                      $0

The following table summarizes the stock options outstanding at April 30, 1998:  
</TABLE>

                                      F-20
<PAGE>
 
<TABLE> 
<CAPTION> 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
============================================================================================================

                                 Options Outstanding                        Options Exercisable
                                 -------------------                        -------------------
Range of                        Number         Weighted Average           Number           Weighted Average
Exercise Prices              Outstanding        Exercise Price          Exercisable         Exercise Price
---------------              -----------        --------------          -----------         --------------    
<S>                          <C>                      <C>                  <C>                   <C>
$  0.88 - 2.00                 348,000                  $1.25                6,000                 $1.38
   2.25 - 2.75                  70,000                   2.57                    -                     -
   3.13 - 3.25                  50,000                   3.19                    -                     -
   5.13 - 5.13                   2,000                   5.13                2,000                  5.13
                               -------                                       -----
 
$  0.88 - 5.13                 470,000                  $1.67                8,000                 $2.31
                               =======                                       =====
</TABLE>

401(K) PLAN

      On August 1, 1985, the Company established an Employees' Savings Plan
      (ESP) for all full-time employees who have at least twelve months of
      continuous service and who have attained the age of twenty-one. The
      Company may make matching contributions of up to 50% of the participant's
      contribution (made via salary reduction arrangements) as described in the
      ESP. In addition, the Company may also make an annual contribution from
      its profits. The Company made no contributions to the ESP in fiscal 1998
      or 1997.

(13)  INCOME TAXES

      There was no income tax expense attributable to income from operations for
      the years ended April 30, 1998 and 1997 due to losses incurred from
      operations. The Company's net deferred tax asset for future deductions and
      its net operating loss carryforward in excess of future taxable amounts is
      offset by a valuation allowance.

      The tax effects of temporary differences that give rise to significant
      portions of the deferred tax assets and liabilities at April 30, 1998 and
      1997 are as follows:

<TABLE>
<CAPTION>
                                                                       1998                 1997
                                                                       ----                 ----         
<S>                                                                <C>                  <C>
Net operating loss carryforwards                                   $ 2,492,000          $ 1,731,000
Allowance for doubtful accounts  accounts                              145,000               78,000
Allowance for obsolete inventory                                       139,000               24,000
Amortization of goodwill                                               153,000               60,000
Other, net                                                              16,000              (21,000)
                                                                   -----------          -----------
   Total gross deferred taxes                                        2,945,000            1,872,000
Valuation allowance                                                 (1,900,000)          (1,487,000)
                                                                   -----------          -----------
   Net deferred taxes                                              $ 1,045,000          $   385,000
                                                                   ===========          ===========
</TABLE>

                                      F-21

<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================



      As of April 30, 1998 the Company had accumulated net operating loss
      carryforwards of approximately $6,230,000. Generally, these operating
      losses are available to offset future federal and state taxable income.
      Based upon the anticipated change in control, resulting from the issuance
      of the Company's equity securities, the Company expects that the annual
      use of portions of the operating loss carryforwards will be limited under
      Section 382 of the Internal Revenue Code of 1986, as amended. As a result
      the Company expects that the utilization of its net operating loss will be
      limited to approximately $3,013,000 in future years.
      
(14)  CERTAIN RISKS AND CONCENTRATIONS
  
      The Company currently purchases telephone systems and various peripheral
      equipment from seven major suppliers. One of the suppliers provides
      approximately 85% of the inventory and products purchased by the Company
      while offering flexible credit terms. If the Company's relationship with
      the supplier was to cease, it could have a significant adverse impact on
      the operations of the Company. The Company had 53 franchises located in 25
      states and four Company-owned outlets at April 30, 1998.
  
      The Company sells its products and services primarily to franchisees,
      multi-location customers, and to customers of Company-owned outlets,
      generally without requiring any collateral. The Company maintains adequate
      allowances for potential credit losses and performs ongoing credit
      evaluations.
  
      The Company's products are concentrated in the telephone interconnect
      industry, which is highly competitive and rapidly changing. Significant
      technological changes in the industry could affect operating results
      adversely. The Company's inventories include spare parts and components
      that may be specialized in nature and subject to technological
      obsolescence. While the Company has programs to minimize the required
      inventories on hand and considers technological obsolescence in estimating
      required allowances to reduce recorded amounts to market values, such
      estimates could change in the future.
  
(15)  SUBSEQUENT EVENTS
  
      The Company completed a private placement of equity securities on May 25,
      1998. The private placement consisted of 283,000 Units with each Unit
      consisting of one share of common stock and one common stock purchase
      warrant exercisable at $2.50 for a period of five years. The Units were
      sold for $1.25 each for total proceeds of $353,750. Proceeds of $43,750
      were received on April 30, 1998 and have been included in the accompanying
      financial statements. In addition to the Units, the Company sold to the
      Placement Agent 40,000 common stock purchase warrants for $100,
      exercisable at $1.25 per share. All of the warrants are subject to
      shareholder approval of additional authorized shares of common stock.
  
      The Company entered into a letter of intent on June 25, 1998 to merge with
      Interconnect Acquisition Corporation (IAC), a privately held company. The
      merger provides that, among other things, the Company will issue to the
      shareholders of IAC convertible preferred stock that will be convertible
      into 2 million shares of common stock. It is anticipated that the merger
      will be completed by August 31, 1998. The Company is currently pursuing
      financing that will facilitate the acquisitions delivered by IAC. The
      chief executive officer of IAC has become the chief executive officer of
      the Company effective July 1, 1998.

                                      F-22
<PAGE>
 
COMMUNICATIONS WORLD INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================


(15) SUBSEQUENT EVENTS (CONTINUED)

     As part of the merger with IAC, the Company has committed to raise between
     $1 million and $4 million in additional equity. The Company has undertaken
     efforts to obtain this equity. As of July 29, 1998, the Company completed
     funding of a $400,000 bridge loan (net proceeds to the Company of $380,000)
     in anticipation of completion of the equity offering. The bridge loan is
     comprised of units at $10,000 each with each unit having a promissory note
     of $9,900 and 2,000 common stock purchase warrants exercisable at $2.50 per
     share for a period of five years. The units bear interest at 10% per annum
     and mature six months after funding. If the notes are not retired at
     maturity, the interest rate will be increased to 16% per annum. The note
     holders will be offered the right to convert their notes into equity in the
     Company's new offering.

     Effective June 30, 1998, Richard D. Olson resigned as President and Chief
     Executive Officer and Director of the Company. The Company has retained the
     services of Olson as a consultant for a period of six months during which
     time Olson will be compensated at his previous salary level. At the end of
     the consulting period, Olson will receive $127,100 and Olson will repay a
     $25,000 loan from the Company. Moreover, as part of the agreement with
     Olson, the Company has agreed to indemnify him for personal guarantees he
     made in behalf of the Company's obligation to TAIS.

(16) YEAR 2000 ISSUE (UNAUDITED)

     The Company has determined that it may need to modify or replace portions
     of its software, so that its computer system will function properly with
     respect to dates in the year 2000 and beyond. Additionally, the Company is
     reviewing the year 2000 readiness of the software included in all of the
     products sold by the Company. The Company has initiated discussions with
     its significant suppliers, large customers and financial institutions to
     ensure that those parties have appropriate plans to remediate year 2000
     issues where their systems interface with the Company's system or otherwise
     impact its operations. The Company is assessing the extent to which its
     operations are vulnerable, should those organizations fail to properly
     remediate their computer systems.

                                      F-23

<PAGE>
 
                               LIST OF EXHIBITS
                    COMMUNICATIONS WORLD INTERNATIONAL, INC.
                                  FORM 10-KSB


3(d)   Articles of Amendment to Articles of Incorporation

10(k)  Telecommunications Master Dealer Agreement

10(l)  Amended and Restated 1997 Stock Option Plan

10(m)  Olson Agreement, Warrant and Proxy

10(n)  Meyerson Letter Agreement

10(o)  Century Capital Group Agreement