================================================================================
                    U. S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                  FORM 10-KSB/A
                                   AMENDMENT 1



[ ]        ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
           ACT OF 1934
           For the fiscal year ended

[X]        TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934
           For the transition period from APRIL 1, 2000 to JUNE 30, 2000

           Commission file number              033-23138-D
                                  ----------------------------------------------

                                 HEARTSOFT, INC.
--------------------------------------------------------------------------------
                 (Name of small business issuer in its charter)

           DELAWARE                                     87-0456766
-------------------------------             ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
        or organization)

             3101 NORTH HEMLOCK CIRCLE, BROKEN ARROW, OKLAHOMA 74012
--------------------------------------------------------------------------------
                    (Address of principal executive offices)

                                 (918) 362-3600
--------------------------------------------------------------------------------
                           (Issuer's Telephone Number)

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

      Title of each class                             Name of each exchange
                                                      on which registered

            NONE                                              NONE
            ----                                              ----

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

                                      NONE
                                      ----
                                (Title of class)
================================================================================
<PAGE>

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [X] Yes [ ] 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 or any
amendment to this Form 10-KSB. [X]

The Company is amending its 10-KSB for the transition period from April 1, 2000
to June 30, 2000 as a result of recently discovering two agreements for
consulting services, one dated September 20, 1998, which will have an impact on
the Company's financial statements and a second dated February 1, 1999, which
will not affect the Company's financial statements.

Part II, items 6 and 7 and Part III, item 13 of the 10-KSB have been amended.

The issuer's revenue for the year ended March 31, 2000 was $315,557 and for the
three months ended June 30, 2000 was $164,307.

The aggregate market value of the voting stock held by non-affiliates at
September 15, 2000 was $15,313,492. This amount was computed using the average
bid and ask price as of September 15, 2000. For purposes of this computation,
all officers, directors and 5% beneficial owners of the issuer are deemed to be
affiliates.

As of September 15, 2000, the issuer had outstanding a total of 11,101,837
shares of its $.0005 par value Common Stock.

Transitional Small Business Disclosure Format (Check one):  Yes  [_]   No  [X]



















                                       2
<PAGE>

                                 HEARTSOFT, INC.
                                   FORM 10-KSB
                                TABLE OF CONTENTS



ITEM NUMBER AND CAPTION                                             PAGE NUMBER




PART II

Item 6.  Management's Discussion and Analysis or Plan of Operation        4

Item 7.  Financial Statements                                             9




PART III

Item 13.  Exhibits and Reports on Form 8-K                                9
































                                       3
<PAGE>

ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

           The following discussion should be read in conjunction with the
audited financial statements as well as the associated Notes to the audited
financial statements.

GENERAL
-------

           The Company is a provider of proprietary educational computer
software products distributed to the education and consumer markets. Its
products are sold through an internal sales organization, national and
international resellers, United States based catalogers with an annual aggregate
circulation of approximately 5,000,000 catalogs and online through four
corporate websites, www.heartsoft.com, www.internet-safari.com,
www.thinkology.com, and www.isafari.com.

           Through the fiscal year ending March 31, 2000 and the three months
ended June 30, 2000, the Company's product line was comprised of approximately
50 educational software programs that assist young children in pre-kindergarten
through the 6th grade to practice and learn basic curriculum subjects. However,
during Fiscal Year 2001, the Company anticipates the release of its new secure
Internet browser for children, INTERNET SAFARI(TM). The release of INTERNET
SAFARITM will broaden the Company's product line to include an Internet-based
software solution. A beta version of INTERNET SAFARI(TM) on the Apple Macintosh
platform was released on September 23, 2000 and the Company anticipates that it
will release a beta version of INTERNET SAFARI(TM) on the Windows platform on or
before September 30, 2000.

           The Company intends to continue to expand its traditional educational
software business through internal growth as well as by focusing a substantial
portion of its resources on the introduction and sale of INTERNET SAFARI(TM).
Beginning in Fiscal Year 2001, the Company intends to use the Internet to expand
its geographic reach deeper into the consumer market both in the United States
and internationally.

           For the year ended March 31, 2000, the Company experienced a loss of
$1,620,448 and accumulated a total deficit of $4,901,959. For the three months
ended June 30, 2000, the Company experienced a loss of $494,755 and accumulated
a total deficit of $5,396,714. These losses and accumulated deficit have been
primarily caused by the Company's efforts in positioning itself for the release
of INTERNET SAFARI(TM) and are related, for the most part, to marketing and
general and administrative expenses. The Company does not anticipate reaching
profitability for at least 15 months.

           To reach profitability, the Company plans, among other things, to do
the following:

o    introduce its secure Internet browser, INTERNET SAFARI(TM) during Fiscal
     Year 2001;

o    expand the marketing of all of the Company's products for the consumer and
     school markets by utilizing additional marketing resources such as direct
     mail, on-line purchasing, demonstration versions of key products, magazine
     advertising and more;

                                        4
<PAGE>

o    establish strategic joint venture partners both in the United States and
     internationally.

           The Company plans to strengthen its brand name awareness and position
and to utilize its technological infrastructure and software development
capabilities to continue refining and upgrading its current and future products.
Accordingly, the Company intends to invest heavily in marketing and advertising,
new partnerships and strategic alliances, and its technology infrastructure. The
Company also anticipates that it will continue to experience losses similar to
or greater than those described above during the next 15 months. Significant
increases in the Company's advertising and marketing campaigns will contribute
to such loss. The Company believes that this program of expansion is necessary
to continue building its brand recognition and ability to generate revenues.

           Further, if the investments mentioned above are successful, the
Company anticipates that it will see an increase in revenues and a narrowing of
losses as percentage of revenues. The Company expects that the combination of
increased revenues and decreased expenses as percentage of revenues will lead to
profitability.

           The Company believes that its investment in the development of
INTERNET SAFARI(TM) and the secure browser's release represents a key element of
its future and that the Company can become a leading player in the children's
Internet market.

RESULTS OF OPERATIONS
---------------------

THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999

Net Revenue

           Revenue for the three months ended June 30, 2000 increased to
$164,307 from $117,800 for the three months ended June 30, 1999, an increase of
$46,507 or 39%. The increase is primarily the result of hiring a Vice President
of Sales and Marketing in late 1999, reorganizing and expanding the education
sales division from five to eleven employees, and continuing the implementation
of a broad-based marketing strategy. The marketing strategy focused on adding
quality sales personnel and directing their efforts in promoting educational
programs to schools while maintaining existing reseller business. It also
included higher attendance at trade shows and increased direct mailings, both of
which contributed to the increase in revenues.

Cost of Production

           Cost of production includes all costs associated with the acquisition
of raw materials, assembly of finished products, warehousing, shipping, and
payroll associated with production and shipping of finished products. This
expense category also includes labor costs associated with maintaining and
implementing enhancements to existing educational programs as well as
miscellaneous costs related to the needs of the Production Department. Cost of
production for the three months ended June 30, 2000 was $62,322 compared to
$20,783 for the three months ended June 30, 1999, an increase of $41,539 or
200%. Cost for the acquisition of raw materials increased approximately $11,887
as a result of increased sales as noted in the Net Revenue discussion above.
Miscellaneous expenses for production supplies, cabling, wiring, etc.,

                                        5
<PAGE>

increased approximately $15,228. Labor costs associated with maintaining and
enhancing existing educational programs increased approximately $7,124.

General and Administrative

           Total general and administrative (G&A) expense for the three months
ended June 30, 2000 was $352,647 compared to $152,258 for the same period in
1999, an increase of $200,389 or 132%. The increase in G&A expense is directly
attributable to building the infrastructure, assuming full reporting status to
become compliant with SEC regulations, and strengthening strategic customer and
investor relationships all of which are critical to minimizing risks to the
Company and execution of its business plan. Additionally, on a historical basis,
executive management focused primarily on the development of educational
programs resulting in capitalization of appropriate executive salaries.
Beginning in late 1999, this focus shifted from development to more of an
administrative role resulting in an expensing of appropriate executive salaries
and an increase in related G&A payroll costs. An approximate breakdown by
component of the major increases in G&A expense follows: payroll and benefits
$75,722, professional fees $62,196, and travel $34,368.

           G&A expense includes $24,079 and $23,814 associated with consulting
advisory services disclosed in Note 11 to the financial statements for the three
months ended June 30, 2000 and the three months ended June 30, 1999,
respectively.

Sales and Marketing

              Sales and marketing expenses for the three months ended June 30,
2000 was $196,814 versus $54,992 for the three months ended June 30, 1999, an
increase of $141,822 or 258%. As noted previously, in the Net Revenue
discussion, a Vice President of Sales and Marketing was hired in late 1999, the
education sales division was reorganized and expanded, and the Company's
broad-base marketing strategy is continuing to be implemented. All of the above
factors, coupled with direct mail campaigns targeted at schools, new advertising
materials and higher attendance at industry trade-shows lead to increased
expenses in sales and marketing. An approximate breakdown by component of the
major increases in sales and marketing expense follows: payroll and benefits
$67,160, advertising $54,737 and conferences $7,956.


                                        6
<PAGE>

YEAR ENDED MARCH 31, 2000 VS. YEAR ENDED MARCH 31, 1999

Net Revenue

           Revenue for the year ended March 31, 2000 decreased to $315,557 from
$527,915 for the year ended March 31, 1999, a decrease of 40%. The decrease is
primarily attributable to the implementation of a new long-term business plan
that included plans for internal reorganization of the Company's sales and
marketing division as well as the development of significant new software
products. In October, 1999, the Company hired Ms. Nita Seng, a veteran of the
educational software market as Vice President of Sales and Marketing.
Immediately upon joining the Company, Ms. Seng began an extensive analysis of
product sales, which included configuration, price and positioning. Ms. Seng
substantially reorganized the Company's education sales division and began
hiring and training additional sales personnel.

Cost of Production

           The Company includes in cost of production all costs associated with
the acquisition of components, assembly of the finished products, warehousing,
shipping and payroll for personnel associated with the production and shipping
of the finished product. Cost of production for the year ended March 31, 2000
was $158,988 compared to $102,600 for the year ended March 31, 1999. This
represents a 55% increase in cost of production.

           During the reorganization of the Sales and Marketing Division, which
began in October, 1999, the Company reduced the pricing of certain
configurations of its educational software. During ensuing months, the Company
saw an increase in the sale of the number of units shipped, but the revenue
received from each unit was lower causing an increase of cost of materials as a
percentage of total revenues.

           The Company anticipates that costs of production will decrease as a
percentage of sales as the internal reorganization positively impacts efficiency
of operations and revenues increase over the next 1-2 years. The Company also
anticipates that an increased focus on district-wide school purchases of the
Company's products and the ability to increase the purchase of raw materials in
bulk will further reduce cost of production as a percentage of sales.

General and Administrative

           Total general and administrative expenses for the year ended March
31, 2000 increased to $1,021,477 as compared to $602,518 for the same period in
1999, an increase of 70%. This increase in G&A expenses is again directly
attributable to the initial execution of a new business plan as described
elsewhere in this Form 10-KSB.

In addition, G&A costs related to hiring additional staff Company-wide combined
with increased infrastructure costs related to the general expansion impacted
expenses, such as office space, office furnishings and computer and
telecommunication equipment. Costs related to legal and

                                        7
<PAGE>

accounting fees rose by 369% as the Company resumed its fully reporting status
and compliance to expanding SEC guidelines.

           G&A expenses for consulting advisory services disclosed in Note 11 to
the financial statements totaled $96,315 for the year ended March 31, 2000
compared to $50,803 for the year ended March 31, 1999.

Sales and Marketing

           Sales and Marketing expenses for the fiscal year ending March 31,
2000 were $462,643 compared to $239,756 for the year ending March 31, 1999, an
increase of 93%. Again, implementation of the Company's expanded business plan,
as discussed above in General and Administrative, contributed to this increase.
The Company significantly expanded its Sales and Marketing group during the last
five months of fiscal year ended March 31, 2000 by hiring nine new personnel,
including Ms. Nita Seng, Vice President of Sales and Marketing.

           Other expenses associated with numerous direct mail campaigns
targeted to schools, new advertising print materials and a substantial increase
in expenses related to the attendance of industry trade-shows also contributed
to the increase in sales and marketing expenses. The Company utilizes a direct
mail approach to notify educators of the Company's planned presence at key
conferences throughout the year and for promotional purposes during school
funding cycles. Costs associated with direct mail campaigns are reflected in
advertising.

           Advertising costs for the fiscal year ended March 31, 2000 were
$171,701 compared to $125,686 for the fiscal year ended March 31, 1999, a 37%
increase.

           The costs associated with conferences include booth rental fees,
equipment and travel expenses. Expenses associated with conferences for fiscal
year ended March 31, 2000 were $83,352 compared to $29,710 in fiscal year ended
March 31, 1999, a 180% increase.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

           At March 31, 2000 the Company's principal sources of liquidity
include cash and accounts receivable of $365,449. Total assets for the Company
increased 53% to $1,221,635 for fiscal year ended March 31, 2000 compared to
$798,310 for the fiscal year ended March 31, 1999.

           The Company reduced total liabilities by 39% to $503,850 for the
fiscal year ended March 31, 2000 compared to $831,965 for the fiscal year ended
March 31, 1999. During the year ended March 31, 2000, the Company received an
aggregate total of $2,083,521 from financing activities. This represents
proceeds received from private placements of convertible debt and Common Stock
as discussed under Working Capital in Item 1 of this Form 10-KSB.

           In order to maintain current level of operations, the Company will
need to secure additional funding sources to meet its operating expenses. Such
funding sources may include,

                                        8
<PAGE>

but are not limited to, additional private placements of common or convertible
equities, placement of debt with banks, private or public investors, or other
lending institutions and/or licensing agreements with strategic partners.

           The Company believes that through a combination of outside sources of
capital and revenues generated from product sales it will have sufficient
sources of capital to meet its operating needs. However, any substantial delays
in receipt of or failure to obtain such capital may prevent the Company from
operating as a going concern, given its limited revenues and capital reserves.

ITEM 7.    FINANCIAL STATEMENTS.

           The Financial Statements of the Company are set forth on pages F-1
through F-15 inclusive, found at the end of this report.


                         INDEX TO FINANCIALS STATEMENTS


Independent Auditors' Report.................................................F-1

Balance Sheets at March 31, 2000 and June 30, 2000...........................F-2

Statements of Operations for the years ended March 31, 1999 and 2000
And for the three months ended June 30, 1999 and 2000........................F-4

Statements of Changes in Stockholders' Equity for the years ended March
31, 1999 and 2000 and for the three months ended June 30, 1999 and 2000......F-5

Statements of Cash Flows for the years ended March 31, 1999 and 2000
and for the three months ended June 30, 1999 and 2000........................F-6

Notes to Financial Statements................................................F-7



PART III

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

(a)   Exhibits:

EXHIBIT NO.                       DESCRIPTION
--------------------------------------------------------------------------------

*3.1       Articles of Incorporation of the Company.

*3.2       By-Laws of the Company.

                                        9
<PAGE>

*4.1       Specimen of Certificate for Heartsoft, Inc. Common Stock.

*10.1      Corporate Note to Dale Hill dated October 21, 1998.

*10.2      Corporate Note to Dale Hill dated February 10, 1998.

*10.4      Promissory Note dated October 16, 1999 to Tulsa National Bank.

*10.5      Promissory Note dated December 16, 1999 to Bank of Oklahoma.

*10.6      Equipment Lease with Auto & Equipment Leasing by Flex, Inc. dated
           February 12, 1998.

*10.7      Software Agreement dated May 16, 1997 between Heartsoft, Inc. and
           Heartsoft 1997 Limited Partnership.

*10.8      Acquisition Note dated May 16, 1997 from Heartsoft 1997 Limited
           Partnership.

*10.9      Assumption Agreement dated April 30, 1997 by and among Heartsoft 1997
           Limited Partnership, Heartsoft, Inc. and Limited Partners.

*10.10     Joint Venture Agreement dated May 16, 1997 between Heartsoft, Inc.
           and Heartsoft 1997 Limited Partnership.

*10.11     Software Agreement dated July 30, 1997 between Heartsoft, Inc. and
           Heartsoft II 1997 Limited Partnership.

*10.12     Acquisition Note dated July 30, 1997 from Heartsoft II 1997 Limited
           Partnership.

*10.13     Assumption Agreement dated July 30, 1997 by and among Heartsoft II
           Limited Partnership, Heartsoft, Inc. and Limited Partners.

*10.14     Joint Venture Agreement dated July 30, 1997 between Heartsoft, Inc.
           and Heartsoft II 1997 Limited Partnership.

*10.15     Software Agreement dated October 28, 1997 between Heartsoft, Inc. and
           Heartsoft III 1997 Limited Partnership.

*10.16     Acquisition Note dated October 28, 1997 from Heartsoft III 1997
           Limited Partnership.

                                       10
<PAGE>

*10.17     Assumption Agreement dated July 30, 1997 by and among Heartsoft III
           1997 Limited Partnership, Heartsoft, Inc. and Limited Partners.

*10.18     Joint Venture Agreement dated October 28, 1997 between Heartsoft,
           Inc. and Heartsoft III 1997 Limited Partnership.

**10.19    Convertible Promissory Note dated August 30, 1999 between Heartsoft,
           Inc. and Hi-Tel Group, Inc.

**10.20    Letter Agreement by and between Heartsoft, Inc. and the Weather
           Channel Enterprises, Inc. dated September 1, 1999.

**10.21    Cobranding Program Agreement by and between Heartsoft, Inc. and Ask
           Jeeves, Inc. dated September 16, 1999.

**10.22    Engagement Agreement by and between Heartsoft, Inc. and Juanita Seng
           dated October 1, 1999.

**10.23    Lease dated November, 1999 for commercial office space in Broken
           Arrow, Oklahoma.

**10.24    Lease dated January, 2000 for commercial office space in Broken
           Arrow, Oklahoma.

**10.25    Stock Purchase Agreement by and between Heartsoft, Inc. and Hi-Tel
           Group, Inc. dated March 1, 2000 with Certificate of Designation of
           the Series A Convertible Preferred Stock attached as Exhibit A and
           Common Share Purchase Warrant between Heartsoft, Inc. attached as
           Exhibit B.

**10.26    Web Service Agreement by and between Heartsoft, Inc. and Gaggle, Inc.
           dated June 9, 2000.

10.27      Amendment to Stock Purchase Agreement by and between Heartsoft, Inc.
           and Hi-Tel Group, Inc. dated September 27, 2000.

10.28      Amendment to Heartsoft, Inc. Common Share Purchase Warrant by and
           between Heartsoft, inc. and Hi-Tel Group, Inc. dated September 27,
           2000.

10.29      Consulting Agreement by and between Heartsoft, Inc. and Intercap
           Funding LTD dated September 20, 1998. (Incorporated by reference to
           the Company's Form 10-QSB for the period ended March 31, 2001, which
           was filed on May 15, 2001.)

                                       11
<PAGE>

10.30      Non Circumvention and Consulting Agreement by and between Intercap
           Funding LTD dated February 1, 1999. (Incorporated by reference to the
           Company's Form 10-QSB for the period ended March 31, 2001, which was
           filed on May 15, 2001.)

*21.1      Subsidiaries of Heartsoft.

23.1       Consent of Tullius Taylor Sartain & Sartain LLP.

27.1       Financial Data Schedule.

-------------
*  Incorporated by reference to the Company's Form 10-KSB/A for the period ended
   March 1, 1999, which was filed on January 22, 2000.
** Incorporated by reference to the Company's Form 10-KSB for the period ended
   March 31, 2000, which was filed on July 14, 2000.

      (b) Reports on Form 8-K:

FORM 8-K FILED ON FEBRUARY 9, 2000:

      During the beginning of the calendar year 2000, the Company discovered
that some reports that the Company believed had been previously filed with the
Securities and Exchange Commission were in fact not filed. One of these reports
was a Form 8-K for the period ended March 31, 1997. On February 9, 2000, the
Company filed this Form 8-K along with several other SEC reports. The Form 8-K
filed on February 9, 2000, included Unaudited Financial Statements of the
Company for the quarter ending March 31, 1997 and reported the following events
that occurred during the period ended March 31, 1997:

           1.  Due to changes in personnel employed by the Company's Certifying
           Accountants, Cross & Robinson, Tulsa, Oklahoma, the Company's Board
           of Directors is currently considering a change in the Company's
           certifying accountants. The Board's consideration of this decision
           has delayed release of fiscal 1996's audited financial statement and
           related 10-K filing. The Company hopes to remedy this situation and
           to file its fiscal 1996 10-K within 90 days from March 31, 1997.

           2.  During the fourth quarter of fiscal 1996, the Company's board of
           directors, by unanimous consent, agreed to discontinue the company's
           Advanced Technologies Division in Dallas, Texas. Although the
           division had been in existence for only 18 months, it was unable to
           reach profitability, and the Company's board of directors unanimously
           agree that continued investment in the division would not cause a
           turn around in the immediate future. The closing of the Advanced
           Technologies division will have a material affect on the Company's
           ongoing operations by reducing related expenses and reducing gross
           revenues. Subsequently, the Board also decided to re-focus all of the
           Company's resources into the promulgation of its core products
           division related to the development and sales of its proprietary
           educational software products for schools.

                                       12
<PAGE>

           3.  During the fourth quarter of fiscal 1996, Charles R. Carlson
           agreed to and did resign from the Company's Board of Directors. Mr.
           Carlson's decision was related to the Board's unanimous consent to
           discontinue the operations of the Company's Advanced Technologies
           Division in Dallas, Texas.


FORM 8-K FILED ON APRIL 10, 2000:

      On April 10, 2000, the Company filed a Form 8-K reporting that on March
31, 2000, the Company issued a press release stating that the release of its
secure Internet browser for children, INTERNET SAFARI(TM), would be moved from
the first calendar quarter to the second calendar quarter of 2000. This Form 8-K
did not include any financial statements.


FORM 8-K FILED ON JUNE 29, 2000:

           On June 29, 2000, the Company filed a Form 8-K reporting that on June
21, 2000, the Company issued a press release stating that INTERNET SAFARI(TM),
Heartsoft's new secure Internet browser for children, is in final beta testing
prior to its release. The Form 8-K also reported that on June 27, 2000, the
Company issued a press release stating that Heartsoft is planning to have
INTERNET SAFARI(TM) available to meet its district-wide shipping schedule to
schools for the upcoming school year.

           Heartsoft had previously stated in reports filed with the Securities
and Exchange Commission and press releases that it expected to release INTERNET
SAFARITM during second calendar quarter of 2000. Heartsoft now expects to
release INTERNET SAFARI(TM) during the third calendar quarter of 2000. This Form
8-K did not include any financial statements.
























                                       13
<PAGE>

SIGNATURES

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

                                       HEARTSOFT, INC.
                                       (Registrant)


Date: 07/13/01                         /s/  Benjamin P. Shell
                                       -----------------------------------------
                                       Benjamin P. Shell, Chairman of the Board,
                                       President, and Chief Executive Officer


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


Date: 07/13/01                         /s/ Benjamin P. Shell
                                       -----------------------------------------
                                       Benjamin P. Shell, Chairman of the Board,
                                       President, and Chief Executive Officer
                                       (Principal Executive Officer)


Date: 07/13/01                         /s/ Jimmy L. Butler, Jr.
                                       -----------------------------------------
                                       Jimmy L. Butler, Jr., Director and
                                       Vice-President


Date: 07/13/01                         /s/ Rodger Graham
                                       -----------------------------------------
                                       Rodger Graham, Chief Financial Officer
                                       (Principal Financial Officer)


Date: 07/13/01                         /s/ Kathy Howell
                                       -----------------------------------------
                                       Kathy Howell, Chief Financial Controller
                                       (Principal Accounting Officer)










                                       14
<PAGE>


                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
Heartsoft, Inc.

We have audited the accompanying balance sheets of Heartsoft, Inc., as of June
30, and March 31, 2000, and the related statements of operations, changes in
stockholders' equity, and cash flows for the three month period ended June 30,
2000, and the years ended March 31, 2000, and 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Heartsoft, Inc. as of June 30,
and March 31, 2000, and the results of its operations and its cash flows for the
three month period ended June 30, 2000, and the years ended March 31, 2000, and
1999, in conformity with accounting principles generally accepted in the United
States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 9 to the
financial statements, the Company has experienced recurring operating losses and
negative cash flows from operating activities, which increased to $494,755 and
$375,801, respectively, for the three months ended June 30, 2000, and $1,620,448
and $1,244,884, respectively, for the year ended March 31, 2000. These
conditions raise substantial doubt about its ability to continue as a going
concern. Management's plans regarding those matters are also described in Note
9. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.



TULLIUS TAYLOR SARTAIN & SARTAIN LLP

Tulsa, Oklahoma
July 13, 2001









                                       F-1
<PAGE>
                                 HEARTSOFT, INC.

                                 BALANCE SHEETS


                                                        June 30,      March 31,
                                                          2000          2000
                                                       ----------    ----------
Assets
Current assets:
   Cash                                                $   93,820    $  334,794
   Accounts receivable, trade, net of allowance
      of $18,672 and $8,000 at June 30, 2000
      and March 31, 2000, respectively                     64,412        30,655
   Inventories, at cost                                    47,020        45,694
   Other                                                    7,059         9,219
                                                       ----------    ----------

Total current assets                                      212,311       420,362

Property and equipment, at cost:
   Property and equipment                                 227,744       218,962
   Less accumulated depreciation                          121,615       115,716
                                                       ----------    ----------

Property and equipment, net                               106,129       103,246

Other assets:
   Developed software, net                                745,378       693,419
   Other                                                    4,668         4,608
                                                       ----------    ----------

Total other assets                                        750,046       698,027
                                                       ----------    ----------
Total assets                                           $1,068,486    $1,221,635
                                                       ==========    ==========


















                       See notes to financial statements.

                                       F-2
<PAGE>
                                 HEARTSOFT, INC.

                                 BALANCE SHEETS


                                                         June 30,      March 31,
                                                          2000          2000
                                                       ----------    ----------
Liabilities and Stockholders' Equity
Current liabilities:
   Accounts payable                                    $  283,639    $  218,753
   Notes payable                                           66,551        83,927
   Accrued expenses                                       247,766       201,170
                                                       ----------    ----------

Total current liabilities                                 597,956       503,850

Commitments and contingencies                                --            --

Stockholders' equity:
   Preferred stock, $0.01 par value, 5,000,000
      shares authorized, 827,000 shares issued              8,270         8,270
   Common stock, $0.0005 par value, 30,000,000
      shares authorized, 11,080,337 shares and
      11,055,337 shares issued, at June 30 and
      March 31, Respectively                                5,653         5,528
   Additional paid-in capital                           5,853,321     5,605,946
   Accumulated deficit                                 (5,396,714)   (4,901,959)
                                                       ----------    ----------

Total stockholders' equity                                470,530       717,785
                                                       ----------    ----------

Total liabilities and stockholders' equity             $1,068,486    $1,221,635
                                                       ==========    ==========



















                       See notes to financial statements.

                                       F-3
<PAGE>
                                 HEARTSOFT, INC.

                            STATEMENTS OF OPERATIONS



<TABLE><CAPTION>
                                           Three month
                                          periods ended                    Years ended
                                             June 30,                        March 31,
                                   ----------------------------    ----------------------------
                                       2000            1999            2000            1999
                                   ----------------------------    ----------------------------
                                                   (unaudited)
<S>                                <C>             <C>             <C>             <C>
Net sales                          $    164,307    $    117,800    $    315,557    $    527,915

Costs and expenses:
   Costs of production                   62,322          20,783         158,988         102,600
   Sales and marketing                  196,814          54,992         462,643         239,756
   General and administrative           352,647         152,258       1,021,477         602,518
   Depreciation and amortization         40,337          29,286         148,837         181,697
                                   ------------    ------------    ------------    ------------

Total operating expenses                652,120         257,319       1,791,945       1,126,571
                                   ------------    ------------    ------------    ------------

Operating loss                         (487,813)       (139,519)     (1,476,388)       (598,656)

Other income and (expense):
   Gain on sale of interest in
      software library                     --              --              --           153,277
   Interest expense                      (3,101)        (12,118)       (143,089)       (121,897)
   Other, net                            (3,841)           (704)           (971)        (10,608)
                                   ------------    ------------    ------------    ------------

                                         (6,942)        (12,822)       (144,060)         20,772
                                   ------------    ------------    ------------    ------------

Loss before income taxes               (494,755)       (152,341)     (1,620,448)       (577,884)

Income taxes                               --              --              --              --
                                   ------------    ------------    ------------    ------------

Net loss                           $   (494,755)   $   (152,341)   $ (1,620,448)   $   (577,884)
                                   ============    ============    ============    ============
Net loss per common share -
   basic and diluted               $      (0.04)   $      (0.02)   $      (0.15)   $      (0.08)
                                   ============    ============    ============    ============
</TABLE>





                       See notes to financial statements.

                                       F-4
<PAGE>
                                 HEARTSOFT, INC.

                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                     Years ended March 31, 2000 and 1999 and
                     Three month period ended June 30, 2000

<TABLE><CAPTION>
                                     Preferred Stock               Common Stock           Additional
                              --------------------------------------------------------      Paid-in      Accumulated
                                Shares          Amount        Shares          Amount        Capital        Deficit         Total
                              -----------    -----------    -----------    -----------    -----------    -----------    -----------
<S>                           <C>            <C>            <C>            <C>            <C>            <C>            <C>
Balance, March 31, 1998         1,218,500    $    12,185      6,329,157    $     3,165    $ 2,898,537    $(2,703,627)   $   210,260

Common stock issued in lieu
   of preferred dividends            --             --           10,287              5             (5)          --             --
Convert preferred stock to
   common                        (840,000)        (8,400)       678,000            339          8,061           --             --
Warrant exercise                     --             --          444,600            222           --             --              222
Sale of common stock                 --             --          925,743            463        239,569           --          240,032
Stock issued for services            --             --          757,427            379         69,336           --           69,715
Stock issued for repayment
   of debt                           --             --           24,000             12         23,988           --           24,000
Net loss                             --             --             --             --             --         (577,884)      (577,884)
                              -----------    -----------    -----------    -----------    -----------    -----------    -----------

Balance, March 31, 1999           378,500          3,785      9,169,214          4,585      3,239,486     (3,281,511)       (33,655)

Convert preferred stock to
   common                        (326,500)        (3,265)       165,200             83          3,182           --             --
Sale of preferred stock           775,000          7,750           --             --          689,750           --          697,500
Sale of common stock                 --             --        1,500,000            750      1,385,271           --        1,386,021
Stock issued for services            --             --          191,835             96        148,271           --          148,367
Stock issued for debt
   repayment                         --             --          140,000             70        139,930           --          140,000
Common stock issued in lieu
   of preferred dividends            --             --           39,088             19            (19)          --             --
Adjustments of previous
   issuances                         --             --         (150,000)           (75)            75           --             --
Net loss                             --             --             --             --             --       (1,620,448)    (1,620,448)
                              -----------    -----------    -----------    -----------    -----------    -----------    -----------

Balance, March 31, 2000           827,000          8,270     11,055,337          5,528      5,605,946     (4,901,959)       717,785

Stock issued for services            --             --           25,000            125           (125)          --             --
Cash received for stock
   unissued                          --             --             --             --          247,500           --          247,500
Net loss                             --             --             --             --             --         (494,755)      (494,755)
                              -----------    -----------    -----------    -----------    -----------    -----------    -----------

Balance, June 30, 2000            827,000    $     8,270     11,080,337    $     5,653    $ 5,853,321    $(5,396,714)   $   470,530
                              ===========    ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>



                       See notes to financial statements.

                                       F-5
<PAGE>
                                 HEARTSOFT, INC.

                            STATEMENTS OF CASH FLOWS

<TABLE><CAPTION>
                                                      Three month
                                                     periods ended                    Years ended
                                                        June 30,                        March 31,
                                              ----------------------------    ----------------------------
                                                  2000            1999            2000            1999
                                              ------------    ------------    ------------    ------------
                                                               (unaudited)
<S>                                           <C>             <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
------------------------------------
Net loss                                      $   (494,755)   $   (152,341)   $ (1,620,448)   $   (577,884)
Adjustments to reconcile net loss to net
  Cash used in operating activities:
   Depreciation and amortization                    40,337          29,286         148,836         181,697
   Stock issued for services                          --              --           148,268          69,505
   Gain on sale of software library                   --              --              --          (153,277)
   Changes in:
      Accounts receivable                          (33,757)        (19,630)         15,943         221,498
      Inventories                                   (1,328)        (12,836)        (25,343)        (10,744)
      Other assets                                   2,220           2,280           5,380          (3,234)
      Accounts payable                              64,886         (32,635)         25,013          14,559
      Accrued expenses                              46,596           6,108          57,467         120,681
                                              ------------    ------------    ------------    ------------
Net cash used in operating activities             (375,801)       (179,768)     (1,244,884)       (137,199)


CASH FLOWS FROM INVESTING ACTIVITIES
------------------------------------
Capitalized software development costs             (86,397)        (32,378)       (199,283)       (136,128)
Capitalized intangible costs                          --              --              --              --
Payments for the purchase of property               (8,775)         (3,205)        (75,554)           --
                                              ------------    ------------    ------------    ------------
Net cash used in investing activities              (95,172)        (35,583)       (274,837)       (136,128)


CASH FLOWS FROM FINANCING ACTIVITIES
------------------------------------
Proceeds from sale of software library                --              --              --           165,512
Proceeds from issuance of long-term debt              --            79,500            --           345,000
Proceeds from issuance of common and
   preferred stock                                 247,375         175,509       2,083,521         264,465
Repayments of debt                                    --           (77,070)
Repayments under line of credit                       --              --              --          (152,500)
Principal payments on notes payable                (17,376)           --          (270,595)       (311,972)
                                              ------------    ------------    ------------    ------------
Net cash provided by financing activities          229,999         177,939       1,812,926         310,505
                                              ------------    ------------    ------------    ------------

Net increase (decrease) in cash                   (240,974)        (37,412)        293,205          37,178
Cash at beginning of period                        334,794          41,589          41,589           4,411
                                              ------------    ------------    ------------    ------------

Cash at end of period                         $     93,820    $      4,177    $    334,794    $     41,589
                                              ============    ============    ============    ============

Supplemental disclosures:
   Cash paid during the period for interest   $      3,101    $      8,112    $    203,089    $     46,676
                                              ============    ============    ============    ============
   Common stock issued for debt repayment     $       --      $       --      $    140,000    $       --
                                              ============    ============    ============    ============
</TABLE>

                       See notes to financial statements.

                                       F-6
<PAGE>
                                 HEARTSOFT, INC.

                          NOTES TO FINANCIAL STATEMENTS

     Three month periods ended June 30, 2000 (audited) and 1999 (unaudited)
                       Years ended March 31, 2000 and 1999


NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Heartsoft, Inc., including its subsidiary described below ("Heartsoft" or the
"Company"), a publicly held Delaware corporation, was formed on January 15,
1988. On August 16, 1991, Heartsoft Software, Inc., an Oklahoma corporation, was
organized as a wholly owned subsidiary of Heartsoft, in which the actual
day-to-day operations of the Company are conducted.

CHANGE IN YEAR END

The Company changed its fiscal year end from March 31 to June 30 effective June
30, 2000.

NATURE OF OPERATIONS

The Company is engaged in publishing its own proprietary educational software
and licensing technological products for distribution to the education market.
The Company sells its products to schools and to end-users through telephone
sales and direct response reseller catalogs. The Company's principal market is
in the United States and Canada. Heartsoft's operations include only one
business segment.

REVENUE RECOGNITION

Revenues from the sale of software products are recognized upon shipment,
provided that no significant obligations remain outstanding and collection of
the receivable is probable. Shipments of software previews to customers include
the right of return for 30 days. Sales on these shipments are not recognized
until expiration of the preview period. Allowances for estimated returns are
provided at the time of sale. The Company evaluates the adequacy of allowances
for returns and doubtful accounts primarily based upon its evaluation of
historical and expected sales experience. The allowances for returns and
doubtful accounts are based upon information available at the reporting date. To
the extent the future market, customer mix, channels of distribution, product
pricing and general economic and competitive conditions change, the estimated
allowances required for returns and doubtful accounts may also change.











                                       F-7
<PAGE>

INVENTORIES

Inventories consist primarily of raw materials such as CD-ROM and floppy discs
and manuals. They are stated at the lower of cost, determined by using the
first-in, first-out method, or market.

ADVERTISING AND MARKETING COSTS

The Company expenses advertising costs, excluding co-operative advertising, as
incurred. Co-operative advertising programs are initially capitalized and then
expensed over the period of the specific contract for services. Capitalized
advertising costs are not material at June 30 and March 31, 2000. Advertising
costs totaled $74,596 and $9,040 for the periods ended June 30, 2000 and 1999,
respectively, and $171,701 and $125,686 for the years ended March 31, 2000 and
1999, respectively.

DEPRECIATION

The Company's property and equipment is carried at cost and depreciated over the
estimated useful lives of the related assets. Depreciation is computed using the
straight-line method over a seven-year period for both financial reporting and
federal income tax purposes.

DEVELOPED SOFTWARE

Costs for new software products and enhancements to existing software products
are expensed as incurred until technological feasibility has been established.
Once the project reaches technological feasibility, all software development
costs are capitalized until the project is ready for release. Software
development costs are amortized on the straight-line method over a maximum of
seven years or the expected life of the product, whichever is less. Amortization
expense of software development costs was $34,438 for the period ended June 30,
2000.

INCOME TAXES

Deferred tax liabilities and assets are determined based on the differences
between the financial statement basis and tax basis of assets and liabilities,
using enacted tax rates in effect for the year in which the differences are
expected to reverse. Statement of Financial Accounting Standards ("SFAS") 109,
"Accounting for Income Taxes," also requires a valuation allowance against net
deferred tax assets if, based upon the available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash, accounts receivable, accounts payable and accrued expense amounts reported
in the accompanying balance sheet approximate fair value. Accounts receivable
are unsecured. Based on the borrowing rates currently available to the Company,
the carrying amounts reported in the accompanying balance sheet for notes
payable approximate fair value.




                                       F-8
<PAGE>

CONCENTRATIONS OF CREDIT RISK

Heartsoft markets to educators nationwide, which is a large, diverse group
governed by unrelated buying decisions. Thus, no single customer represents a
significant portion of the Company's revenues or accounts receivable. The
education market consists of both school systems and individual educators
requiring core curriculum materials as well as supplemental materials.

EMPLOYEE STOCK OPTIONS

When the exercise price of employee stock options equals or exceeds the market
value of the stock at date of grant, the Company recognizes no compensation
expense.

EARNINGS PER SHARE

Basic net loss per share is computed using the weighted average number of common
shares outstanding during the period. Diluted net loss per share is computed
using the weighted average number of common shares outstanding during the
period, plus the dilutive effect of common stock equivalents.

COMPREHENSIVE INCOME

The Company has no comprehensive income items for the three months ended June
30, 2000. Therefore, net loss equals comprehensive income.

NEW ACCOUNTING STANDARDS

The Company will adopt SFAS No. 133, "Accounting for Derivative Investments and
Hedging Activities" during 2001. Currently, the Company does not engage in
hedging activities or transactions involving derivatives.

MANAGEMENT ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
regarding items such as allowances for sales returns and uncollectible accounts,
and valuation allowances for deferred tax assets that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.

NOTE 2 - CANADIAN LIMITED PARTNERSHIPS

During 1997, the Board of Directors of the Company authorized the sale of an
aggregate undivided 45% interest of the Company's "K-8 Library" (the "Software
Library") pursuant to the terms of a Software Agreement ("Software Agreement")
entered into between the Company and Heartsoft


                                       F-9
<PAGE>

1997 Limited Partnership, Heartsoft II 1997 Limited Partnership, and Heartsoft
III 1997 Limited Partnership, all Ontario, Canada limited partnerships (the
"Partnerships").

The Partnerships were formed by their general partner to acquire the investment
in the Software Library and to take advantage of certain Canadian tax laws. The
general partner of the Partnerships, which is unrelated to Heartsoft, is
responsible for their operation. The Company has no involvement or association
with the Partnerships other than through the Joint Venture Agreement.

Pursuant to the terms of the Software Agreement, the Company sold 45% interest
in the Software Library for $4,940,000 (Canadian), less related expenses, which
was payable 30% in cash and 70% by promissory notes (the "Acquisition Notes")
bearing interest at 5%, due in 2007. The Acquisition Notes are payable from
funds generated by the Partnerships through a joint venture with the Company
(evidenced by a Joint Venture Agreement).

Pursuant to the Joint Venture Agreement between the Company and the
Partnerships, Heartsoft retained the sole marketing rights, while Heartsoft and
the Partnerships jointly share in the revenues attributable to the future sales
of product utilizing the Software Library. The Partnerships are entitled to 100%
of all "gross sales" each year until all interest owed to the Company under the
Acquisition Notes is paid in full. After all interest has been paid, and until
all principal and interest has been paid, the Partnerships and the Company each
are entitled to 50% of the "gross margin" from sales attributable to the
interest in the Software Library. The "gross margin" is all gross revenues
generated from the interest in the Software Library, less returns, discounts and
cost of goods sold. After the Acquisition Notes have been paid in full
(including all accrued interest), the Company is entitled to 75% of the gross
margin, and the Partnerships the remaining 25%.

As of January 1, 1999, the Company has the option to terminate the Joint Venture
and reacquire the interest in the Software Library at a price to be negotiated
in good faith.

After deducting the allocable cost of the Software Library, the Company reported
gain on sale of $153,277 in fiscal 1999. The gain associated with the
Acquisition Notes has been deferred because its realization depends on the
Company's success in marketing the Software Library, resulting in no net
carrying value for the Acquisition Notes. Such gain will be recognized as the
Acquisition Notes are collected. In fiscal 1999, representing the Partnerships'
tax year ended December 31, 1998, interest on the Acquisition Notes amounted to
$112,313, and the principal balances were reduced by $26,800. During the year
ended March 31, 2000, representing the Partnership's tax year ended December 31,
1999, interest on the Acquisition Notes amounted to $119,647, and the principal
balances were reduced by $19,757. Since these amounts are realized through
software sales, they are reported in the statements of operations as such. The
principal balance of the Acquisition Notes at March 31 and June 30, 2000, is
approximately $2,300,000.







                                      F-10
<PAGE>

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

                                                      June 30,      March 31,
                                                        2000           2000
                                                    ------------   ------------
         Office furniture, fixtures and equipment   $    146,049   $    137,267
         Production and development equipment             72,464         72,464
         Leasehold improvements                            9,231          9,231
                                                    ------------   ------------
                                                    $    227,744   $    218,962
                                                    ============   ============

Depreciation expense was $5,899 and $4,791 for the three month periods ended
June 30, 2000 and 1999, and $19,164 for each of the years ended March 31, 2000
and 1999.


NOTE 4 - NOTES PAYABLE

Notes payable consist of the following:

                                                    June 30,       March 31,
                                                      2000           2000
                                                   ----------     ----------
         Notepayable to a finance company,
             $4,575 monthly including interest
             at 14.82%, due February 2001,
             secured by property and equipment     $   62,491     $   73,781

         Notepayable to a bank, due $1,050
             monthly including interest at
             Wall Street Prime + 2% (10.75% at
             March 31, 2000), due June 2000             --             3,127

         Note payable to a bank, due $1,034
             monthly including interest at 9%,
             due October 2000                           4,060          7,019
                                                   ----------     ----------
         Total                                         66,551         83,927

         Current portion                               66,551         83,927
                                                   ----------     ----------
         Noncurrent portion                        $   --         $   --
                                                   ==========     ==========









                                      F-11
<PAGE>

NOTE 5 - COMMITMENTS AND CONTINGENCIES

The Company leases office facilities under an operating lease for $6,578 per
month plus adjustments over the life of the lease. Rental expense was $19,071
and $14,420 for the three month periods ended June 30, 2000 and 1999,
respectively, and $67,318 and $56,382 for the year ended March 31, 2000 and
1999, respectively. Future annual payments under operating leases are $78,936
annually for fiscal 2001 through fiscal 2003 and $32,890 for fiscal 2004.


NOTE 6 - STOCKHOLDERS' EQUITY

PREFERRED STOCK

As of June 30, 2000, the Company had 52,000 shares of $.01 par value preferred
stock outstanding, convertible into common stock at the rate of .8 shares of
common stock per share of preferred stock.

During fiscal 2000, the Company sold 775,000 shares of $.01 par value preferred
stock, Series A, in a private placement. Proceeds of the sale aggregated
$775,000, less offering expenses of $77,500. The holders of Series A preferred
stock are not entitled to receive any dividends, and are entitled to $1.00 per
share preference in liquidation. Except in limited circumstances, the holders of
Series A preferred stock are not entitled to any voting rights. The Series A
preferred stock is convertible into common based on the average closing bid
price for 20 consecutive trading days preceding conversion, times 60%.
Conversion rights are at the option of the holder during the period that a
registration statement relating to the common stock underlying the Series A
preferred stock is effective. Conversion is automatic at the date such
registration is terminated.

Purchasers of the Series A preferred stock also received warrants to purchase
200,000 shares of common stock. The warrants expire on February 1, 2005, and are
exercisable at the lesser of (1) 60% of the closing bid price of the Company's
common stock or (2) $3.00.

Under the terms of the Series A Preferred Stock Purchase Agreement, the Company
agreed to file a registration statement with the Securities and Exchange
Commission relating to the common shares into which the Series A preferred stock
are convertible, and the common shares issuable upon exercise of the warrants.
The Company agreed to cause such registration statement to become effective by
August 1, 2000, which condition was not met. If it did not meet this condition,
the Company agreed to pay the purchaser $100,000 per month in common stock,
based on 60% of the closing bid price. (See Note 10).

COMMON STOCK

During the three months ended June 30, 2000, the Company sold 325,000 shares of
restricted common stock. Proceeds of the sale aggregated $275,000 less offering
expenses of $27,500. The shares were unissued at the period end. In connection
with the sale, Heartsoft agreed to file a registration statement relating to the
325,000 shares sold. If the registration statement is not




                                      F-12
<PAGE>

effective by September 30, 2000, a penalty of 10,000 shares per month shall be
awarded until the 325,000 shares become free-trading. In addition, the Company
issued 25,000 shares as compensation for services.

During fiscal 2000, the Company borrowed $1,010,000 under a convertible note
agreement. These borrowings were satisfied by conversions into 1,100,000 shares
of restricted common stock. These transactions are included in the statements of
changes in stockholders' equity and cash flows with sales of common stock.

During the years ended March 31, 2000 and 1999, the Company entered into various
agreements with vendors under which the vendors received shares of Company
common stock in exchange for their services. The Company issued 203,835 and
338,827 shares of its common stock during the years ended March 31, 2000 and
1999, respectively, under these agreements and recognized general and
administrative expenses of $148,367 and $69,505, respectively. The transactions
were valued based on the underlying price of the Company's common stock on the
dates of issuance.

During the year ended March 31, 2000, 140,000 shares of common stock were issued
in repayment of $140,000 of debt.

EMPLOYEE BENEFIT AND STOCK OPTION PLAN

The Heartsoft, Inc. Employee Benefit and Stock Option Plan ("Plan") was
effective June 15, 1997, and terminates June 30, 2005. Awards under the Plan may
be granted by the Heartsoft Board of Directors in the form of stock issuance,
incentive stock options, or nonqualified stock options. The total number of
shares of common stock as to which stock issuances or options may be granted
under the Plan shall be 2,000,000. The option price of incentive stock options
shall not be less than 100% of the fair market value of the stock on the date of
grant. The option price of nonqualified stock options shall not be less than 25%
of the fair market value of the stock on the date of grant. The duration of each
option granted shall not exceed 10 years.

The weighted-average grant date fair value of shares issued to vendors and for
extinguishments of debt during the years ended March 31, 2000 and 1999, was
$1.29 and $0.21, respectively.


NOTE 7 - INCOME TAXES

At June 30, 2000, the Company had approximately $5,225,000 in net operating loss
carryforwards ("NOL's") expiring in 2009 through 2020. Management believes that
the Company does not meet the criteria for recognizing the tax benefit of net
operating loss carryforwards as a deferred tax asset and has established a
valuation allowance for the entire balance of the NOL's.

There are no material temporary differences between the bases of assets and
liabilities for income tax and financial reporting purposes that would give rise
to deferred tax assets and




                                      F-13
<PAGE>

liabilities. Therefore, no provision for income taxes has been reflected in the
Company's statements of operations.

NOTE 8 - EARNINGS PER SHARE

Basic and diluted EPS are computed as follows:

                          Three month periods ended         Years ended
                                   June 30,                   March 31,
                              2000          1999         2000          1999
                          -------------------------   -------------------------
Basic EPS computation:

  Net loss                $  (494,755)  $  (152,341)  $(1,620,448)  $  (577,884)

  Weighted average
    shares outstanding     11,062,480     9,944,326    10,739,719     7,310,970
                          -----------   -----------   -----------   -----------
  Basic and diluted net
    loss per share        $     (0.04)  $     (0.02)  $     (0.15)  $     (0.08)
                          ===========   ===========   ===========   ===========


NOTE 9 - UNCERTAINTIES

The Company has experienced recurring operating losses and negative cash flows
from operating activities, which increased to $494,755 and $375,801,
respectively, for the three months ended June 30, 2000, and $1,620,448 and
$1,244,884, respectively, for the year ended March 31, 2000. Management
implemented a program to increase the marketing and sales staff, and these
additional expenses are not expected to have a substantial impact on revenues
until fiscal 2001. Management also plans to introduce significant new products
in fiscal 2001.

While product development expenditures have been substantial, the product
introductions have been delayed until fiscal 2001. In order to finance these
negative cash flows, the Company placed issues of preferred stock with warrants,
and common stock during the fifteen months ended June 30, 2000, realizing in
excess of $2,000,000 after offering expenses.

Management plans to introduce new products, including Heartsoft's children's
internet browser, "Internet Safari," in fiscal 2001. With new products and a
strengthened sales staff, management believes revenues from product sales will
increase dramatically. In order to finance the continuing costs of product
development and operating losses, management intends to raise additional capital
through equity offerings. However, the Company has no formal commitments for
equity placements. The ability of the Company to implement its operating plan
and to continue as a going concern depends on its ability to raise equity
capital and, ultimately, to achieve profitable operations.






                                      F-14
<PAGE>

NOTE 10 - SUBSEQUENT EVENT

On September 26, 2000, the Company and the holder of the Series A preferred
stock entered into an amendment to the Stock Purchase Agreement (the
"Amendment"). Under the Amendment, the Company agreed to file a registration
statement relating to the common shares into which the Series A preferred stock
are convertible, and the common shares issuable upon exercise of the warrants,
and to cause such registration statement to become effective within a reasonable
time after October 1, 2000. The penalty for not having an effective registration
statement by August 1, 2000, was removed. In return, the Company agreed to issue
300,000 shares of common stock to the Series A preferred stockholder.

Note 11 - Restatement of  Financial Statements

On September 20, 1998, Heartsoft and Intercap Funding LTD ("Intercap") entered
into an agreement whereby Intercap agreed to provide consulting advisory
services over a three year period, primarily related to capital formation, in
exchange for 1.2 million shares of Heartsoft's Convertible Preferred Stock. On
March 16, 2001, Heartsoft issued 1.2 million shares of its common stock to
satisfy the Company's obligation under the agreement.

Upon issuance of the common stock, it was determined that the Company had not
previously given accounting recognition to the agreement. The value of the
agreement, based on the September 20, 1998, trading price of the common stock
into which the preferred stock was to have been convertible, was $240,000. This
value has been allocated to general and administrative expenses over the term of
the agreement. The Company's legal counsel has advised that the preferred stock
called for in the agreement could not have been validly issued prior to the time
the services were rendered. As a result, the obligation will be reported as an
accrued liability as it is accrued over the period October 1998 through March
2001. For the three months ended June 30, 2000 and June 30, 1999, a total of
$24,079 and $23,813, respectively, were recognized as general and administrative
expense for these consulting advisory services.

On February 1, 1999 the Company also entered into a Non Circumvention and
Consulting Agreement with Intercap Funding LTD. Under the agreement, Intercap
was to provide Heartsoft with various services for a period of 180 days and it
automatically renewed on the first day of each month thereafter for nine months.
Intercap was to receive a finder's fee in cash equal to a certain percentage of
all amounts invested in the Company. In addition, the Company was to issue
warrants equal to a specified percentage of the number of shares purchased by
any introduced parties. In connection with this agreement the Company must issue
178,763 warrants to Intercap. The warrants are exercisable over five years at
values ranging from $1.3437 to $3.4375 per warrant. The warrants are a cost of
the capital that was raised and their issuance will not affect the Company's
financial statements.










                                      F-15
<PAGE>


On June 1, 2001, the Company and Intercap Funding LTD entered into a new
Consulting Agreement. The new agreement cancelled the Non Circumvention and
Consulting Agreement, dated February 1, 1999. Pursuant to the new agreement, the
Consultant also agreed to surrendered any and all rights that the Consultant had
to any warrants to purchase shares of common stock of the Company to which the
Consultant was entitled under the Non Circumvention and Consulting Agreement.





































                                      F-16