<PAGE>
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D. C. 20549
 
                               ----------------
 
                                   FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
    1934
 
    FOR THE FISCAL YEAR ENDED: JULY 31, 1998
 
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
    EXCHANGE ACT OF 1934
 
    FOR THE TRANSITION PERIOD FROM         TO
                                   --------   ---------
                       COMMISSION FILE NUMBER 000-21535
 
                               ----------------
 
                         PROSOFT I-NET SOLUTIONS, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                                          <C>
                   NEVADA                                        87-0448639
       (STATE OR OTHER JURISDICTION OF                         (IRS EMPLOYER
       INCORPORATION OR ORGANIZATION)                        IDENTIFICATION NO.)
</TABLE>
 
                 3001 BEE CAVES RD. STE. 100, AUSTIN, TX 78746
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)   (ZIP CODE)
 
                                (512) 328-6140
             (REGISTRANT'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, PAR VALUE $.001 PER SHARE
                               (TITLE OF CLASS)
 
                               ----------------
 
  Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety (90) days. Yes [X] NO [_]
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K [X]
 
  The aggregate market value of the Registrant's common stock held by non-
affiliates of the Registrant as of October 1, 1998, was $ 34,544,724 based on
the number of shares outstanding on such date and the last sale price for the
common stock on such date of $3.438 per share as reported on the NASDAQ--
SmallCap market.
 
  Part III is incorporated by reference from the Registrant's definitive proxy
statement for its 1998 Annual Meeting of Stockholders to be filed with the
Commission within 120 days of July 31, 1998.
 
  The number of shares of Common Stock issued and outstanding as of October 1,
1998: 11,750,242.
 
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<PAGE>
 
                         PROSOFT I-NET SOLUTIONS, INC.
 
                      INDEX TO ANNUAL REPORT ON FORM 10-K
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           NO.
                                                                           ----
 
                                     PART I
 
 <C>      <S>                                                              <C>
 Item 1.  Business
            General.....................................................     1
            Overview....................................................     1
            Market Background...........................................     2
            The Prosoft Strategy........................................     2
            Products and Services.......................................     4
            Strategic Alliances.........................................     5
            Marketing...................................................     5
            Competition.................................................     6
            Seasonality.................................................     6
            Proprietary Rights..........................................     6
            Employees...................................................     6
 Item 2.  Properties....................................................     7
 Item 3.  Legal Proceedings.............................................     7
 Item 4.  Submission of Matters to Vote of Security Holders.............     8
 
                                    PART II
 
 Item 5.  Market for Registrant's Common Equity and Related Stockholder
          Matters.......................................................     9
 Item 6.  Selected Financial Data.......................................    10
 Item 7.  Management's Discussion & Analysis of Financial Condition &
          Results of Operations.........................................    10
 Item 8.  Financial Statements and Supplementary Data...................    16
 Item 9.  Changes in and Disagreements with Accountants on Accounting &
          Financial Disclosure..........................................    33
 
                                    PART III
 
 Item 10. Directors and Executive Officers of the Registrant............    33
 Item 11. Executive Compensation........................................    33
 Item 12. Security Ownership of Certain Beneficial Owners and
          Management....................................................    33
 Item 13. Certain Relationships and Related Transactions................    33
 
                                    PART IV
 
 Item 14. Exhibits and Financial Statement Schedules and Reports on Form
          8-K...........................................................    33
 Signatures..............................................................   34
 Exhibit Index...........................................................   36
</TABLE>
<PAGE>
 
ITEM 1. BUSINESS
 
GENERAL
 
  Prosoft I-Net Solutions, Inc. ("Prosoft" or the "Company") is an Internet
solutions company committed to providing comprehensive Internet skills
curriculum, vendor-neutral Internet skills certification programs and
instructors who can teach the curriculum and certification. Prosoft offers
more than 50 instructor led Internet skills courses ranging from one-day end-
user workshops to 10-day certification programs. The Certified Internet
Webmaster program offered by Prosoft creates the professional skills required
to develop and implement e-business solutions in the Internet age. The
certification testing program is administered worldwide by testing leader
Sylvan Prometric. The Company also sells its courseware to Authorized Training
Center resellers.
 
ORGANIZATION HISTORY
 
  Prosoft is incorporated under the laws of the State of Nevada. From its
incorporation in May 1985 until March 1996, the Company had no significant
operations. Beginning in February 1995, the Company's business was operated as
a sole proprietorship (the "Proprietorship"). In December 1995, Pro-Soft
Development Corp., a California corporation ("Old ProSoft"), was incorporated
and acquired the business from the Proprietorship effective January 1, 1996.
In March 1996, the Company entered into an Agreement and Plan of
Reorganization (the "Reorganization Agreement") with Old ProSoft and the Old
ProSoft shareholders. Under the terms of the Reorganization Agreement, Old
ProSoft shareholders received one share of Common Stock of the Company in
exchange for each of their shares of Old ProSoft, and Old ProSoft became a
wholly owned subsidiary of the Company (the "Reorganization"). As part of the
Reorganization, all the executive officers and directors of the Company
resigned and the executive officers and directors of Old ProSoft became the
executive officers and directors of the Company and the Company changed its
name from Tel-Fed, Inc. to ProSoft Development, Inc. The Company changed its
name to Prosoft I-Net Solutions, Inc. in October 1996 and recently announced
plans to change its name to prosofttraining.com.
 
  Under applicable accounting rules, for financial statement purposes, the
Reorganization is required to be accounted for as an acquisition of the
Company by Old ProSoft, with the additional shares held by the Company's prior
shareholders reflected as a recapitalization of Old ProSoft. As a result, the
consolidated financial statements included in this annual report for the
Company reflect, for the period before the Reorganization, the operations of
Old ProSoft.
 
OVERVIEW
 
  In response to the current Internet revolution, Prosoft created a courseware
library and instructor led training business. It is the mission of Prosoft to
be a leading source for acquiring Internet skills. The Company works closely
with industry associations, vendors and its partners to define the job roles
and skills essential to deploy e-business solutions. Prosoft is unique in its
ability to provide certification, curriculum and instruction to close the
Internet skills gap created by the rapid adoption of Internet technologies in
homes and businesses.
 
  Prosoft offers comprehensive training solutions. Company services include
certification in critical Internet skills, instructor-led training (ILT),
instructor-facilitated online learning using the Company's proprietary ProFlex
distance learning program, classroom texts, and e-courseware.
 
  The Company's Certified Internet Webmaster (CIW) certification, currently in
its third generation, is offered globally in partnership with IBM, ExecuTrain,
and CompUSA, among others. The program is based on key e-business job roles
and the skills required to perform them. The CIW curriculum and examinations
develop and prove competency in those important job roles. It is a vendor-
neutral, standardized method of ensuring that individuals have demonstrated
technical competency in selected areas. CIW is endorsed by the Association of
Internet Professionals and the World Organization of Webmasters.
<PAGE>
 
  The Company's instructor staff, industry recognized and constantly highly
evaluated by their students, brings the Prosoft curriculum to life in the
classroom. A staff of over forty professionals give the Company what it
believes is the largest group of Internet trainers in the industry.
 
  ProFlex takes the Company's curriculum to cyber classrooms. Avoiding the
technological obstacles that cause most distance learning solutions to fail,
ProFlex delivers a classroom caliber training experience without the
classroom.
 
  E-courseware is browser-based interactive curriculum that can also be used
to augment ILT. It includes built-in assessment, and can be delivered from an
intranet or a stand-alone workstation.
 
  Prosoft is also a certified Microsoft Authorized Technical Education Center
(ATEC) and a Netscape Education Partner (NEP). These certifications allow
Prosoft to conduct official training for Microsoft and Netscape products.
 
  Historically, Internet instruction has been offered through Company-operated
training centers ("Training Centers") that offer training to students from
large and small organizations across the United States. The Company also
offers tailored onsite training using customer facilities. The customer, at
its own expense, sets up onsite training facilities. As of July 31, 1998, the
Company operated 31 Training Centers in 18 states. In addition to Prosoft
managed sites, Prosoft has increased its offerings through wholesale
relationships with other national training companies. The national training
companies can add Prosoft curriculum which provides them a new product line at
a higher price point to augment their desktop applications and operating
system training product lines. The Company provides training services at a
wholesale cost of $1,450 to $2,600 per day.
 
MARKET BACKGROUND
 
  Companies are migrating to Internet and intranet technologies to sell
products, improve customer service, enhance productivity, and access databases
worldwide. International Data Corp. (IDC) and Forrester Research, Inc.
estimate that more than 200 million users will be online by the year 2000.
 
  Companies are also developing private internal networks called intranets,
which use Internet and World Wide Web infrastructure, standards and
technologies, but are inaccessible to the public because of programs known as
firewalls. Intranets are being used to improve internal communication,
facilitate training, and reduce the need for paper materials such as
operational and procedural manuals, internal phone directories, forms, and
other items that require frequent updating.
 
  Training industry market statistics include IDC's estimate of $18 billion
spent worldwide to train workers in various information technologies in 1996,
with the figure growing to $27.9 billion by 2001. In 1997, according to IDC,
instructor-led training in the U.S. was 73 percent of the $8.1 billion U.S.
market for information technology training.
 
THE PROSOFT STRATEGY
 
  Prosoft is positioned at the intersection of two fast-growing markets, the
Internet and the technology training industry. The Company is well positioned
to sell training, courseware, and certification in the marketplace.
 
  Internet software offerings and technologies will continue to evolve, and
the training needed to use them must keep pace. Technology trends indicate
that end-user interfaces will become friendlier, and that systems supporting
them will become more complex. The short curriculum development cycle that the
Company maintains allows it to respond quickly to new technologies.
 
  Prosoft believes that a competitive advantage it possesses over its
competitors is the Company's vendor-neutral certification emphasis and
expertise in Internet technologies. Although other training institutions may
offer a limited number of Internet courses, this type of training is the
primary emphasis at Prosoft.
 
                                       2
<PAGE>
 
  By its very nature, the World Wide Web is an open environment where no
technology supplier dominates. Today's e-business solutions require a team of
professionals whose skills extend across the products of multiple vendors.
Therefore, hardware and software suppliers are not in the best position to
define the job roles and skills required to deploy Internet solutions. Since
certification has already been demonstrated as a valid method to establish
technical competency, the establishment of vendor-neutral job roles and
associated skills is a logical step in the development of the Internet. The
Prosoft vendor-neutral Internet skills certification program known as CIW was
created to fill this gap. It complements and enhances the already successful
certification programs offered by product vendors such as Microsoft, Novell,
and Cisco. No one program has emerged as the industry standard for Internet
skills certification, but CIW is one of the most mature and comprehensive
programs available today. Prosoft believes it is a leader in this
certification marketplace.
 
  As the trend of outsourcing technology training continues, the Company
believes that the largest and fastest growing customer base within this market
is large organizations that require an array of technology training programs,
each designed for a different functional audience. The Prosoft solution-based
curriculum has unique programs for audiences such as solution developers,
systems engineers, marketing professionals, sales representatives, customer
service agents, managers, executives, end users, and dedicated Web
professionals.
 
  Going forward, Prosoft intends to position itself as a wholesale training
services company supplying training and curriculum in the United States and
Europe. Prosoft will market its products through national training companies.
The Company will supply instructors to deliver the courses or train the
customer's trainers. The Company will also continue to offer the same services
to leading local and regional training companies. This new wholesale plan
leverages limited instructor resources and adds a product line in courseware
sales with higher gross margins. Prosoft will eliminate most of its training
sites, which will reduce fixed expenses and lower the Company's breakeven
point. The new plan also includes the retention of a small direct sales force.
This sales group will serve current customers and penetrate specific target
accounts. This allows the Company to maintain direct customer contact to
improve its products and develop the market. The Company will continue to
pursue its vendor-neutral certification program, the cornerstone of its
curriculum architecture. The Company will also continue to direct market its
ProFlex distance learning product, as management believes this product has
significant revenue potential in the next 12 to 24 months.
 
  When the Company's nationwide facilities expansion was originally
undertaken, dedicated training facilities were required to teach much of the
technically oriented curriculum, as customers were only beginning to install
PC networks with Internet connectivity. In addition, much of the Company's
early strategy hinged on a plan to sell seats in public classes to
individuals. However, with the Company's intention to wholesale its curriculum
and services to other training companies, the sites have become less
strategic. National training companies and corporate customers now have most
of the software, connectivity and supporting hardware they need to conduct
Internet skills classes. In addition, as of the fourth quarter of fiscal 1998,
ProFlex customers can get and take Prosoft courses at their desks or home
offices without making a trip to a classroom site. With these changes, site
closures are an obvious way to reduce Prosoft costs without decreasing
distribution. Down from a peak of 45 facilities, Prosoft now leases or manages
31 sites of varying sizes. Under the current plan, the Company is evaluating
these sites and may close or sublease many of them within the next six months.
 
  The Company's previous focus on selling individual seats and on maintaining
a public schedule resulted in very inefficient scheduling, and correspondingly
low instructor utilization. Under a new pricing policy introduced in August
1998, the Company will offer classes at wholesale prices, effectively
transferring the risk of filling classes to customers, either resellers or
corporate clients. Prosoft still bears the risk of whether a class has enough
students to run, but when a Prosoft instructor is sent to teach a class the
Company will be assured of covering its costs and earning the forecasted gross
margin. The Company's strategy of training customer instructors and selling
courseware further leverages the Company's courseware investment and returns
additional margin. These changes also make the Company's back office operation
much simpler and increase the likelihood of utilizing instructors at a higher
rate than under the old model.
 
                                       3
<PAGE>
 
PRODUCTS AND SERVICES
 
 CIW--Certified Internet Webmaster
 
  CIW is the training industry's first and most comprehensive vendor-neutral
Internet skills certification program. Net Guru Technologies first introduced
CIW in 1996. Prosoft acquired Net Guru in January 1998 to further expand and
promote CIW. CIW is endorsed by international bodies and professional
organizations, including the World Organization of Webmasters (WOW), the
Association of Internet Professionals (AIP), and the Institute of
Certification of Computing Professionals (ICCP).
 
  Certification testing is delivered through Sylvan Prometric, with exams
administered at any of the 1200 Sylvan locations worldwide. Although Sylvan
Prometric administers the Prosoft certification exams, the Company retains all
rights to its course content and examinations. This ownership provides a
revenue opportunity in such areas as exam guides, self-study materials, and
online pre-assessments.
 
  The certification framework includes four levels:
 
  Level 1--Generalist (Foundation): Level 1 establishes the foundation skills
that are required for all levels of specialization. It certifies the basic
knowledge needed by an e-business professional and provides the minimum
background required to pursue further specialization.
 
  Level 2--Specialist: Level 2 establishes the specialist skills associated
with e-business job roles. Level 2 tracks are vendor-neutral and emphasize
core concepts, standards, technologies, and product options. The following
tracks provide specialization options for IT professionals:
 
  CIW Site Designer
  CIW Application Developer
  CIW Enterprise Developer
  CIW Server Administrator
  CIW Internetworking Professional
  CIW Security Professional
  CIW E-Commerce Professional
 
  Level 3--Product Specialist: Level 3 establishes product-specific skills.
Such skills are product-unique and enable individuals to implement product-
specific solutions. Prosoft works closely with vendors to introduce courses
associated with CIW Level 3. Vendor's own courses also fulfill requirements
for this level.
 
  Level 4--e-Business Solutions Architect: Level 4 is under development at
this time. It is the highest level of e-business course work and requires
multi-disciplinary skills developed across several job roles. Skills at this
level will be validated using a combination of testing and verification of
practical experience. A certified e-Business Solutions Architect will be able
to integrate multiple products across platforms to deliver e-business
solutions.
 
 Courseware
 
  Once Prosoft has designed the books and materials that will constitute the
courseware for a given class, it is able to internally produce such courseware
on demand. Courseware is used in Prosoft instructor led training and is sold
to authorized resellers. The Company intends to continue to develop courseware
for new Internet product and technology releases.
 
 Distance Learning
 
  The Prosoft distance learning product is called ProFlex Training. ProFlex
Training classes are delivered over the Internet and are instructor-led and
self-paced. Prosoft just completed the first commercial delivery in the
 
                                       4
<PAGE>
 
fourth quarter of fiscal 1998 and has received outstanding feedback. The main
difference between CBT (computer based training), Web-based training, and
ProFlex is that the ProFlex facilitator is live. The instructor conducts class
meetings via conference calls, technology already well deployed in
corporations, as opposed to "streaming" technologies for video and voice. The
product does not rely on third-party distance learning software and requires
no extra client investment. Between "classes," the instructor and students
keep in touch via e-mail messages. The instructor also maintains published
"office hours" to accommodate student phone calls. Students complete offline
assignments focused specifically toward real-life scenarios. Through
repetition, the skills addressed during the conference call sessions are
reinforced. Assignments are sent to the instructor via e-mail before the next
conference call, to ensure student accountability. Students can also interact
with the instructor and other students through discussion threads and in a
chat environment as necessary. This interchange happens in a dedicated online
environment called ProFlex Support. ProFlex Support (PFS) also has a "help
desk" which serves as an e-mail link between student and instructor during the
course. ProFlex allows companies with offices in different areas to ensure a
consistent training standard company-wide. Students in ProFlex courses use the
same proven curriculum as those in traditional Prosoft ILT courses.
 
STRATEGIC ALLIANCES
 
 Authorized Resellers and Partners
 
  In June 1997, Prosoft and Netscape entered into a Development and
Distribution Agreement under which Prosoft created courseware for the Netscape
Communicator product. This courseware is distributed by both Prosoft and
Netscape.
 
  In February 1998, the Company began a relationship with IBM. In May 1998,
that relationship was expanded to a business partnership. A courseware license
contract with IBM was signed on August 26, 1998, expanding the relationship
worldwide. This license allows IBM training sites access to Prosoft curriculum
for one year and has already resulted in ancillary instruction and consulting
business.
 
  In September 1998, the company announced it had signed agreements with
CompUSA and ExecuTrain to provide their worldwide training centers with
Prosoft curriculum, instructors and the CIW program. Worldwide these companies
have almost 500 sites. For these resellers, Internet skills training is a
logical product extension to their already successful training businesses.
Their customers are asking for Internet skills training and the per-seat
revenue on these courses is higher than a typical desktop application course.
 
 Authorized Training Center Program
 
  Prosoft offers selected providers an instructor certification program.
Training providers who meet stringent criteria can become Prosoft Certified
Training Centers (PCTCs). This arrangement allows training organizations to
offer CIW certification and training by licensing Prosoft courseware and
certifying their instructors as CIW Certified Trainers.
 
 Publishing Relationships
 
  Prosoft content is available in a retail format through McGraw-Hill who
publishes a certification guide for CIW Administrator. The Company is working
with other publishers in the industry to make Prosoft content more easily
accessible through retail channels.
 
MARKETING
 
  Prosoft will market Internet and intranet training through its own internal
sales and marketing organization, with additional distribution through key
strategic alliances. As of September 15, 1998, the Company's sales and
marketing organization consisted of 30 employees.
 
                                       5
<PAGE>
 
COMPETITION
 
  Historically, few computer-training companies offered the same breadth and
depth of Internet and intranet courses as Prosoft. However, as the technology
has continued to grow in popularity and become mandatory productivity tools in
the workplace, several existing training companies have increased their focus
on Internet/intranet training.
 
  Although studies by the American Society for Training and Development and
the International Technology Training Association consistently demonstrate
that hands-on, instructor led training is the most effective way to learn
technology-oriented subject matter, most Internet users in the United States
have not had access to this type of training. Historically, most Internet
instruction was delivered seminar-style in hotel auditoriums or similar venues
using passive training techniques such as slides, multimedia presentations or
perhaps an overhead of an instructor's computer in action. Several national
and regionally based Internet/intranet and technology training companies now
have direct, high speed access to the Internet and offer hands-on, instructor-
led training. These include Learning Tree, New Horizons, Productivity Point,
ExecuTrain, Global Knowledge Network, Wave Technologies, Aris, U.S. Web
Learning, Knowledge Universe, and several regional and local training
companies.
 
SEASONALITY
 
  The Company's revenues and income vary from quarter to quarter due to
seasonal and other factors. The Company experiences greater revenue in the
second half of its fiscal year (February through July) than in the first half
of its fiscal year (August through January). This seasonality is due partly to
customers' seasonal spending patterns, corporate training budgets, as well as
weather, holiday and vacation patterns.
 
PROPRIETARY RIGHTS
 
  Most Prosoft courseware is protected by copyright laws. The Company has also
filed for trademark and service mark registration for certain of its products,
tag lines and feature names. The Company will continue to seek copyright
registration on certain newly developed courseware products and on software
products.
 
EMPLOYEES
 
  As of September 15, 1998, Prosoft had 130 full-time employees. Of this
total, 40 were instructors. All Prosoft instructors maintain current
technology and teaching skills through regular Prosoft training preparation
sessions (T-preps). T-preps bring instructors together for intensive and
focused training sessions on new technologies, courses, and interactive
communication skills. Additionally, all Prosoft instructors are certified CIW
professionals. Senior instructors also maintain vendor certification in
Microsoft, Netscape, and Novell technologies. ProFlex instructors undergo
additional training focused on teaching online learning and distance learning
sessions. The Company also uses its instructors for curriculum development,
sales support and consulting.
 
                                       6
<PAGE>
 
ITEM 2. PROPERTIES
 
  As of September 30, 1998, the Company had entered into leases for commercial
space in the following locations:
 
<TABLE>
<CAPTION>
                                                  SQUARE  MONTHLY      RENT
LOCATION                                          FOOTAGE  LEASE    EXPIRATION
--------                                          ------- ------- --------------
<S>                                               <C>     <C>     <C>
Carson, CA*...................................... 11,084  $14,064 December 1999
North Hollywood, CA*.............................  4,377  $ 6,566 April 1999
Santa Ana, CA*+.................................. 16,191  $17,001 September 1999
Jacksonville, FL*+...............................  6,191  $ 6,325 January 2000
Atlanta, GA*.....................................  3,127  $ 3,648 December 2001
New York, NY*....................................  5,558  $ 7,874 March 2002
Austin, TX*+..................................... 10,253  $15,348 July 2003
Dallas, TX*......................................  5,022  $ 8,082 January 2002
Oak Brook, IL*...................................  2,520  $ 3,825 November 1998
Vienna, VA*......................................  3,497  $ 5,732 November 2001
Chapel Hill, NC +................................    473  $   788 Monthly
Charlotte, NC*...................................    850  $ 1,850 April 1999
</TABLE>
--------
*  Open Training Center
+  Administrative Office Space
 
  In addition, Prosoft has entered into an Affiliate Program with several
independent training, consulting, distribution and reseller companies under
which the affiliates provide space to Prosoft for its Training Centers.
Prosoft use of such affiliates' space is not subject to a lease or sublease
arrangement, but rather is set forth in an agreement under which Prosoft is
allowed to use the affiliates' facilities at certain times to provide training
in exchange for commissions or royalties. The lease or rental agreements
reside with the affiliate and Prosoft has no fixed obligation or liability for
this rent. Prosoft is obligated to pay such affiliates a royalty of 5% of the
training revenues generated at affiliates' sites. In addition, the Company is
responsible for all necessary tenant improvements made at the affiliates'
locations, which can range from $5,000 to $50,000 per site. As of September
30, 1998, the Company operated 16 Training Centers under this type of
arrangement in the following locations:
 
<TABLE>
      <S>                           <C>                                 <C>
      Philadelphia, PA              Indianapolis, IN                    Raleigh, NC
      Gaithersburg, MD              Irving, TX                          Richardson, TX
      Nashville, TN                 Largo, FL                           Denver, CO
      Charlotte, NC                 Springfield, VA                     Tulsa, OK
      Chicago, IL                   Overland Park, KS                   Greenville, SC
      Deerfield Beach, FL
</TABLE>
 
ITEM 3. LEGAL PROCEEDINGS
 
  The Company and certain of its present and former officers and/or directors
are defendants in three "class action" lawsuits which allege, among other
things, that the defendants made false and /or misleading public statements
regarding the Company and its financial condition in violation of various
state securities laws. On April 20, 1998, an initial class action complaint
was filed against Prosoft in the case entitled Robertson v. Prosoft I-Net
Solutions, Inc., et al., Orange County (California) Superior Court Case No.
793247. On April 24, 1998, a second class action complaint containing
essentially identical allegations was filed in the case entitled Alvarado v.
Prosoft I-Net Solutions, Inc. et al, Orange County Superior Court Case No.
793468. Finally, a third class action complaint was filed on June 5, 1998, in
the case entitled Calhoun v. Prosoft I-Net Solutions, Inc. et al, Orange
County Superior Court Case No. 795190. The three complaints purport to
establish a class of shareholders who purchased Prosoft stock between July 21,
1997 and April 13, 1998. By stipulation of the parties, Calhoun and Alvarado
have been consolidated with Robertson, lead counsel has been appointed, and
 
                                       7
<PAGE>
 
plaintiffs have filed a consolidated amended complaint. The complaints allege,
among other things, that the defendants made false and/or misleading public
statements regarding the Company and its financial condition in violation of
various state securities laws. The complaints seek compensatory damages,
attorneys' fees, and injunctive relief, as well as other relief. The Company
believes that it has meritorious defenses to the plaintiffs' claims, and it
intends to defend itself vigorously against the actions.
 
  The Company is also engaged in litigation filed in Jackson County (Michigan)
Circuit Court on April 22, 1998. In the case Frank J. DiSanto v. Prosoft I-Net
Solutions, Inc., Jackson County Circuit Court Case No. 98-87738-CK,
plaintiff's complaint alleges misrepresentation in connection with a
confidential offering memorandum, pursuant to which plaintiff purchased
$600,000 worth of stock. Plaintiff is seeking rescission of the stock
purchase, interest, attorney fees and other unspecified damages. The Company
has filed an Answer and Affirmative Defenses denying liability. The Company
believes that it has meritorious defenses to the plaintiffs' claims, and it
intends to defend itself vigorously in this lawsuit.
 
  The Company and certain of its former officers and predecessor entity(s),
among others, are defendants to a lawsuit currently pending before the
Superior Court for the State of California, County of Los Angeles as Case No.
BC194941 (the "Lawsuit") entitled Kassner and Jay v. Prosoft I-Net Solutions,
Inc., et al. The Company believes the Lawsuit was originally filed July 27,
1998; the First Amended Complaint in the Lawsuit was filed on September 30,
1998. Plaintiffs allege in the First Amended Complaint, among other things,
that the Company participated in a conspiratorial scheme to breach fiduciary
duties owed by others to the plaintiffs, to engage in unfair competition and
to defraud the plaintiffs. The plaintiffs seek compensatory damages,
disgorgement of profits, punitive damages, and attorneys' fees, as well as
other relief. The Company believes it has meritorious defenses to the
plaintiffs' claims, and it intends to defend itself vigorously in the Lawsuit.
 
  Separately, the Company is also the defendant in several claims and lawsuits
arising out of the ordinary course of business, whose outcomes cannot be
determined yet. Management believes that any liability the Company may incur
will not materially affect the Company's financial position or results of
operations.
 
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
 
  None.
 
                                       8
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
 
  The Company's Common Stock currently trades on the NASDAQ SmallCap Market,
under the trading symbol of "POSO." Before December 6, 1996, the Company's
Common Stock traded on the National Association of Security Dealers Over-the-
Counter (OTC) Market Bulletin Board. For the period before December 6, 1996,
the following table sets forth the high and low bid quotations for the Common
Stock as reported by various Bulletin Board market makers. For the period on
or after December 6, 1996, the following table sets forth the price range of
high and low last sales price per share for the Common Stock as reported by
NASDAQ.
 
<TABLE>
<CAPTION>
   QUARTER                                                         LOW    HIGH
   -------                                                        ------ ------
   <S>                                                            <C>    <C>
   May 1, 1998--July 31, 1998.................................... $ 2.88 $ 8.00
   February 1, 1998--April 30, 1998.............................. $ 3.50 $ 9.50
   November 1, 1997--January 31, 1998............................ $ 6.50 $14.75
   August 1, 1997--October 31, 1997.............................. $10.00 $17.25
   May 1, 1997--July 31, 1997.................................... $ 6.25 $10.75
   February 1, 1997--April 30, 1997.............................. $11.00 $18.00
   November 1, 1996--January 31, 1997............................ $16.38 $20.00
   August 1, 1996--October 31, 1996.............................. $18.00 $20.00
</TABLE>
 
  On October 1, 1998, the Company had approximately 230 stockholders of
record.
 
  To date, no dividends have been declared or paid on any capital stock of the
Company, and the Company does not anticipate paying any dividends in the
foreseeable future.
 
                                       9
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                                                    PROPRIETORSHIP
                                                        COMPANY       FEBRUARY 1,
                           COMPANY       COMPANY      DECEMBER 6,    1995 (DATE OF
                         FISCAL YEAR   FISCAL YEAR      1995 TO      INCEPTION) TO
                          ENDED JULY    ENDED JULY   ENDED JULY 31,  DECEMBER 31,
                           31, 1998      31, 1997         1996           1995
                         ------------  ------------  -------------- ---------------
<S>                      <C>           <C>           <C>            <C>
Consolidated Statement
 of Operations Data:
  Revenue............... $  8,836,685  $  3,483,140   $   907,772      $  77,477
  Cost of services......   13,685,680    10,197,373       698,725         60,526
                         ------------  ------------   -----------      ---------
  Gross profit (loss)...   (4,848,995)   (6,714,233)      209,047         16,951
  Operating expenses:
    Sales and market-
     ing................    3,962,534     4,918,942       426,221         44,769
    General and adminis-
     trative............    7,959,767     9,215,521     2,788,188        556,382
                         ------------  ------------   -----------      ---------
  Loss from operations..  (16,771,296)  (20,848,696)   (3,005,362)      (584,200)
  Interest income (ex-
   pense)...............      246,173       201,423       (67,961)       (20,126)
                         ------------  ------------   -----------      ---------
  Loss before provision
   for taxes............  (16,525,123)  (20,647,273)   (3,073,323)      (604,326)
  Provision for state
   franchise tax........          --          4,000           800            --
                         ------------  ------------   -----------      ---------
  Net loss.............. $(16,525,123) $(20,651,273)  $(3,074,123)     $(604,326)
                         ============  ============   ===========      =========
  Loss per share--basic
   and diluted.......... $      (1.48) $      (2.48)  $     (0.61)
  Shares used in comput-
   ing loss per share...   11,143,166     8,312,911     5,011,781
<CAPTION>
                         AT JULY 31,   AT JULY 31,    AT JULY 31,   AT DECEMBER 31,
                             1998          1997           1996           1995
                         ------------  ------------  -------------- ---------------
<S>                      <C>           <C>           <C>            <C>
Consolidated Balance
 Sheet Data:
  Working capital (defi-
   ciency).............. $  3,334,066  $  9,529,717   $ 6,764,828      $(561,885)
  Total assets..........   12,524,021    20,793,677     8,997,490        765,990
  Capital lease
   obligations, net of
   current portion......      559,205     1,519,965       437,532        308,671
  Stockholders' equity
   (owner's deficit)....    8,772,884    13,049,062     7,694,729       (194,473)
</TABLE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
       RESULTS OF OPERATIONS
 
  The following discussion should be read in conjunction with the consolidated
financial statements and the accompanying notes. It includes certain forward-
looking statements. Actual results could differ materially and numerous
factors may affect future results, liquidity and capital resources. These
factors include softness in the general economic environment, the Company's
limited operating history and expectation of continuing significant losses,
uncertainty of a rapidly evolving market, future capital requirements and
uncertainty of future funding, the need to respond to rapid technological
change and a highly competitive market. The Company believes that recent
changes in its business strategy will improve operations; however, future
revenues and margin trends cannot be reliably predicted and may cause the
Company to adjust its business strategy during fiscal 1999.
 
 
DEVELOPMENT OF BUSINESS
 
  Prosoft, and previously, the Proprietorship, has delivered training in
vocational and advanced technical subjects since February 1995. Initially,
most of its time and resources were spent in developing government-funded
Joint Training Partnership Agreement (JTPA) vocational business and qualifying
as a recipient of JTPA funds. Resources were also spent training and
developing the initial staff of Microsoft Certified Engineers, Developers and
Trainers and in securing and maintaining its status as a Microsoft ATEC.
Limited vocational training sales started in late 1995.
 
                                      10
<PAGE>
 
  After completing a private placement of stock in February 1996, the Company
expanded its vocational training capacity. While expanding the government-
funded vocational business, the Company embarked on a strategy to build a
nationwide network of Training Centers. To support this expansion strategy,
the Company significantly increased its accounting, operational,
administrative, marketing, sales, courseware development, instructor
development, instructor, information systems and technology staffing. The
overhead costs associated with the network of Training Centers continued to
outpace the revenues generated. As mentioned in earlier sections, Prosoft has
begun to close Training Centers that were not profitable, and refocus its
efforts to provide curriculum and instruction services to the training market.
Recent distribution agreements with ExecuTrain, CompUSA, and IBM should
provide a solid foundation to implement this strategy and remain the leader in
Internet/intranet skills development.
 
RESULTS OF OPERATIONS
 
 Year Ended July 31, 1998 Compared to Year Ended July 31, 1997
 
  Revenues. Revenues for the year ended July 31, 1998, were $8,836,685,
compared with $3,483,140 for the year ended July 31, 1997. The increase in
revenues reflects a higher level of enrollment in the Company's class
offerings and increased sales of courseware through license agreements.
 
  Cost of Services. The Company's cost of services includes the costs
associated with course instructors, content developers, course materials and
equipment and classroom facilities. Cost of services for the year ended July
31, 1998, was $13,685,680, compared with $10,197,373 for the year ended July
31, 1997. The increase is primarily due to fiscal year 1998 being the
Company's first full year of operation as a national training company. Fiscal
year 1998 had an increased number of course events, and a larger course
library.
 
  Sales and Marketing. Sales and marketing expense consists of salaries,
commissions and travel-related costs of sales and marketing personnel, the
costs of designing, producing and distributing direct mail marketing and media
advertisements, and the costs of the information systems to support these
activities. Sales and marketing expenses for the year ended July 31, 1998,
were $3,962,534, compared with $4,918,942 for the year ended July 31, 1997.
The decrease in sales and marketing expenses is the result of a focused
marketing and sales effort that yielded reduced expenditures for advertising
and travel which more than offset increases in sales commissions. Marketing
expenses did increase in the last two quarters of the fiscal year as a direct
result of the Company's attempt to sell more seats in its Training Centers.
This program has been abandoned for fiscal year 1999.
 
  General and Administrative. General and administrative expenses for the year
ended July 31, 1998, were $7,959,767, compared to $9,215,521 for the year
ended July 31, 1997. General and administrative expenses decreased as a result
of a reduction in the number of employees, a reduction in the use of outside
services, and lower recruitment and relocation expenses.
 
  Interest. Net interest income for the year ended July 31, 1998, was
$246,173, compared to $201,423 for the year ended July 31, 1997. Interest
expense, which consists principally of interest paid on capital leases,
increased for the year ended July 31, 1998, due to an increase in the amount
of equipment financed under capital leases. However, this increase was more
than offset by interest earned from higher cash balances generated by the
proceeds from private placement offerings completed in 1997.
 
  Net Loss. Net loss for the year ended July 31, 1998, was $16,525,123,
compared to $20,651,273 for the year ended July 31, 1997. The decrease in the
net loss was the result of increased revenues through a larger number of
students and classes taking place throughout the year, the sale of licenses
for courseware developed by the Company, and a reduction in both sales and
marketing and general and administrative expenses.
 
                                      11
<PAGE>
 
 Twelve Months Ended July 31, 1997 Compared to Eight Months Ended July 31,
1996
 
  Revenues. Revenues for the twelve-month period ended July 31, 1997 were
$3,483,140, compared with $907,772 for the eight-month period ended July 31,
1996. The increase in revenues is attributable to the increase in the number
of students taking classes from the Company. This is a direct result of the
expansion of the Company from six locations on July 31, 1996 to 34 locations
on July 31, 1997.
 
  Cost of Services. The Company's cost of services includes the costs
associated with course instructors, content developers, course materials and
equipment and classroom facilities. Cost of services for the twelve-month
period ended July 31, 1997 was $10,197,373 compared with $698,725 for the
eight-month period ended July 31, 1996. This increase is primarily the result
of an increased number of course events, a larger course library, and an
increase in the number of and training of instructors and content developers
in the twelve-month period ended July 31, 1997 compared to the corresponding
period of the prior year.
 
  Sales and Marketing. Sales and marketing expense consists of salaries,
commissions and travel-related costs of sales and marketing personnel, the
costs of designing, producing and distributing direct mail marketing and media
advertisements, and the costs of the information systems to support these
activities. Sales and marketing expense for the twelve-month period ended July
31, 1997 were $4,918,942, compared with $426,221 for the eight-month period
ended July 31, 1996. The increase in sales and marketing expense is due to an
increase in marketing intended to reach a broader range of potential
customers, to expand the Company's presence in certain U.S. cities and to
communicate the availability of new course titles.
 
  General and Administrative. General and administrative expenses for the
twelve-month period ended July 31, 1997 were $9,215,521, compared to
$2,788,188 for the eight-month period ended July 31, 1996. This increase is
primarily due to the continued buildup of the administrative staffing needed
to support the expansion of sites and the growth in sales.
 
  Interest. Net interest income for the twelve-month period ended July 31,
1997 was $201,423, compared to net interest expense of $67,961 for the eight-
month period ended July 31, 1996. Interest expense, which consists principally
of interest paid on capital leases, increased for the twelve-month period
ended July 31, 1997 due to an increase in the amount of equipment financed
under capital leases. However, this increase was more than offset by interest
earned from higher cash balances generated by the proceeds from private
placements completed in late 1996 and early 1997.
 
  Net Loss. Net loss for the twelve-month period ended July 31, 1997 was
$20,651,273, compared to $3,074,123 for the eight-month period ended July 31,
1996. The increase in net loss resulted from (i) increased staffing, (ii) the
opening of new Training Centers without a corresponding increase in revenues,
(iii) the development of new courseware, and (iv) an increase in the Company's
sales and marketing efforts.
 
 December 8, 1995 to July 31, 1996 Compared to February 1, 1995 (date of
inception) to December 31, 1995
 
  Revenues. Revenues for the period from December 8, 1995 to July 31, 1996
were $907,772, compared to $77,477 for the period from February 1, 1995 to
December 31, 1995. The increase was principally attributable to an increase in
the number of students enrolled in the Company's JTPA vocational training
programs. In January 1995, the number of students enrolled was 16 with monthly
training revenue of $34,000. By July 1996, student enrollment was up to 102
and monthly training revenue was $213,000.
 
  Cost of Services. Cost of services for the period ended July 31, 1996 was
$698,725, compared to $60,526 for the period ended December 31, 1995. For the
period ended July 31, 1996, cost of services primarily consisted of courseware
($244,000), instructor salaries ($177,000) and overhead salaries ($161,000).
The increase was principally attributable to an increase in the number of
classes being conducted, and the related increase in the number of students
attending those classes. The gross margin for the period ended July 31, 1996
was 23%, compared to a gross margin of 22% for the period ended December 31,
1995.
 
 
                                      12
<PAGE>
 
  Sales and Marketing. Sales and marketing expenses for the period ended July
31, 1996 were $426,221, compared to $44,769 for the period ended December 31,
1995. For the period ended July 31, 1996, sales and marketing expenses
primarily consisted of promotions ($200,000), advertising ($90,000) and travel
($75,000). The increase in sales and marketing expenses was based on the
following: (i) new positioning of the Company in the commercial market of
Internet and intranet training, (ii) establishing a national presence and
image, (iii) opening of a national sales office in Jacksonville Florida, (iv)
hiring four regional sales managers, and (v) participating in the Microsoft
World Wide Live promotion.
 
  General and Administrative. General and administrative expenses for the
period ended July 31, 1996 were $2,788,188, compared to $556,382 for the
period ended December 31, 1995. For the period ended July 31, 1996, general
and administrative expenses primarily consisted of payroll ($1,510,000),
depreciation ($257,000) and rent ($206,000). Other than $381,000 of
compensation related to stock issued to the founders, these costs are
substantially fixed costs. The increase in general and administrative expenses
related primarily to expenses incurred in hiring and staffing of additional
personnel to support the business expansion.
 
  Interest Expense. Interest expense for the period ended July 31, 1996 was
$67,961, compared to $20,126 for the period ended December 31, 1995. For the
period ended July 31, 1996, interest expense consisted solely of interest paid
on capital equipment leases. The increase in interest expense was related to
the increase in the amount of equipment financed under capital leases.
 
  Net Loss. Net loss increased for the period ended July 31, 1996 to
$3,074,123, compared to $604,326 for the period ended December 31, 1995. The
increase in net loss resulted from (i) increased staffing, (ii) the opening of
new Training Centers without a corresponding increase in revenues, (iii) the
development of new courseware, and (iv) an increase in the Company's sales and
marketing efforts.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  From inception, the Company has financed its operations and met a portion of
its capital expenditure requirements primarily through net proceeds from
private sales of equity securities. Cash and cash equivalents decreased from
$12,911,684 at July 31, 1997, to $3,311,014 at July 31, 1998. For the year
ended July 31, 1998, operating activities used cash of $15,883,008, primarily
due to a net operating loss of $16,525,123.
 
  From February through April 1997, the Company received gross proceeds of
approximately $22 million in a private placement through the sale of 2,081,758
shares of common stock. Net proceeds from that offering, after payment of
commissions and finders' fees, was $20,811,332. In April 1997, the Company
sold 408,164 shares of its common stock to an institutional investor for $5
million. The net proceeds from this offering were $4,700,008. In November 1997
the Company received proceeds of approximately $8.4 million in a private
placement through the sale of 803,638 shares of common stock. No commissions
or finders' fees were paid for this offering.
 
  In January 1998, the Company purchased 100% of the outstanding common stock
of Net Guru Technologies, Inc. in exchange for $1,000,000 and 152,809 shares
of the Company's common stock. Subsequent operations of Net Guru Technologies,
Inc., which have not been significant to the Company's consolidated
operations, have been included in the Company's operations since the
acquisition date. Shares issued in connection with this purchase have been
valued at $1,700,000, their fair value as of the date the acquisition was
consummated. Goodwill of $2,687,886 arising from the acquisition is being
amortized over a seven-year period that commenced January 1, 1998.
 
  In March 1998, the Company purchased 100% of the outstanding common stock of
The Chapel Hill Group in exchange for 68,728 shares of the Company's common
stock. Subsequent operations of The Chapel Hill Group, which have not been
significant to the Company's consolidated operations, have been included in
the Company's operations since the acquisition date. Shares issued in
connection with this purchase have been
 
                                      13
<PAGE>
 
valued at $500,000, their fair value as of the date the acquisition was
consummated. Goodwill of $459,996 arising from the acquisition is being
amortized over a seven-year period that commenced April 1, 1998.
 
  During the twelve months ended July 31, 1998, the Company invested
$1,018,814 in equipment and leasehold improvements.
 
  The Company has incurred losses of approximately $40 million since
inception, primarily due to the startup nature of its business. However, due
to the recent sales reorganization and refocusing efforts, the Company is
beginning to realize increasing revenue. This shift in the business strategy
should result in a reduction in overhead. If revenues continue to grow as
demonstrated in fiscal 1998, the Company hopes to reach quarterly
profitability in the third quarter of fiscal 1999. In addition, the Company
expects to receive proceeds of approximately $1 million in a private placement
of common stock, $2 million in a private placement of convertible debt secure
a $3.5 million asset based credit line in the second quarter of fiscal 1999.
The Company anticipates that its existing resources, along with these
financings, will be sufficient to meet its needs for working capital
expenditures through at least fiscal 1999. However, no assurances can be given
that the Company will be successful in realizing its goals or obtaining this
new financing. The Company's ability to continue as a going concern depends
upon its ability to obtain necessary financing, grow revenue, attain
operational efficiencies and, ultimately, sustain a profitable level of
operations.
 
  The above discussion concerning future financing needs changes in business
strategy, and factors affecting liquidity are forward-looking statements.
Although management believes that these statements are reasonable in view of
the facts available to it, there can be no assurance that all of these
statements will prove to be accurate. There are numerous factors which could
have a material impact upon whether these projections could be realized or
whether these trends will continue. Among these factors are those set forth in
the following section, as well as those discussed elsewhere herein.
 
ADDITIONAL FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS
 
 Limited Operating History and Expectation of Continuing Significant Losses
 
  The Company has a limited operating history, which makes it difficult to
predict future operating results. The Company incurred a net loss of
$3,074,123 from December 8, 1995 through July 31, 1996. For the twelve months
ended July 31, 1997, the Company incurred a net loss of $20,651,273. For the
twelve months ended July 31, 1998, the Company incurred a net loss of
$16,525,123 and expects to continue to incur losses on a quarterly basis
through at least the second quarter of fiscal 1999. The Company's ability to
generate significant revenues in the future is subject to uncertainty,
particularly with respect to the Internet/intranet training on which it
focuses. There can be no assurances that the Company will be able to address
any of those challenges, that its activities will be successful or that
projected earnings will result from these activities.
 
 Uncertainty of Rapidly Evolving Market
 
  The market for Internet/intranet products and services has only recently
begun to develop and is rapidly evolving. The Company and its prospects must
be considered in light of the risks, costs and difficulties frequently
encountered by companies in their early development, particularly companies in
the new and rapidly evolving Internet market. Moreover, due to the intense
competition in the emerging markets addressed by the Company, it must seek to
expand rapidly, increasing the challenges it faces, and making it more
difficult for the Company to recover from business errors.
 
 Future Capital Requirements and Uncertainty of Future Funding
 
  Since inception, the Company has been dependent on outside financing to fund
its growth. The Company has raised approximately $43 million from the private
placement of common stock since inception and
 
                                      14
<PAGE>
 
anticipates receiving proceeds of approximately $3 million in private
placements of common stock and convertible debt in the second quarter of
fiscal 1999. However, no assurances can be given that the Company will be
successful in obtaining this financing or that such financing will be
available on terms favorable to the Company. Failure to obtain such additional
financing could have a material adverse affect on the Company's business,
financial condition or results of operation.
 
 Need to Respond to Rapid Technological Change
 
  The market for the Company's products and services is characterized by rapid
technological change, changing customer needs, frequent new product
introductions and evolving industry standards. These market characteristics
are exacerbated by the emerging nature of the Internet market and the fact
that many companies will introduce new Internet products and services in the
near future. The Company's future success will depend largely on its ability
to continually and promptly introduce new products, services and technologies
and to improve its products and services in response to evolving market
demands and increasing competition.
 
 Highly Competitive Market
 
  The training market is highly competitive. The Company is subject to intense
competition from a large number of public and private companies providing
training, many of which are older, larger, and have greater financial and
personnel resources than the Company. In addition, the market for Internet
products and services has only recently begun to develop, is rapidly evolving
and is characterized by an increasing number of market entrants with competing
products and services. There can be no assurance that the Company will be able
to compete successfully against its current or future competitors or that
competition will not have a material adverse effect on the Company's business,
operating results and financial condition.
 
 Impact of Year 2000
 
  Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. As a result, such systems
and applications could fail or create erroneous results unless corrected so
that they can process data related to the year 2000. The Company relies on its
systems, applications and devices in operating and monitoring all major
aspects of its business, including financial systems (such as general ledger,
accounts receivable, accounts payable and payroll), student and customer
services, embedded computer chips, networks, and telecommunications equipment
and end products. The Company also relies, directly or indirectly, on external
systems of business enterprises such as customers, suppliers, and creditors,
financial organizations, and governmental entities for accurate exchange of
data. The Company's current estimate is that the costs associated with the
year 2000 issue will not have a material adverse effect on the results of
operations or financial position of the Company. However, despite the
Company's efforts to address the year 2000 impact on its internal systems, the
Company may not have fully identified such impact or whether it can resolve it
without disruption of its business and without incurring significant expense.
In addition, even if the internal systems of the Company are not materially
affected by the year 2000 issue, the Company could be affected through
disruption in the operations of the enterprises with which the Company
interacts.
 
                                      15
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                 PROSOFT I-NET SOLUTIONS, INC. AND PREDECESSOR
 
            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
 
<TABLE>
<S>                                                                         <C>
Reports of Independent Auditors
  Grant Thornton LLP.......................................................  17
  Ernst & Young LLP........................................................  18
  Kelly & Company..........................................................  19

Financial Statements of Prosoft I-Net Solutions, Inc. and Predecessor
  Consolidated Balance Sheets at July 31, 1998 and 1997....................  20
  Consolidated Statements of Operations for the years ended July 31, 1998
   and July 31, 1997, and for the periods ended July 31, 1996 and December
   31, 1995................................................................  21
  Consolidated Statements of Stockholders' Equity for the year ended July
   31, 1998 and July 31, 1997, and for the periods ended July 31, 1996 and
   December 31, 1995.......................................................  22
  Consolidated Statements of Cash Flows for the year ended July 31, 1998
   and July 31, 1997, and for the periods ended July 31, 1996 and December
   31, 1995................................................................  23
  Notes to Consolidated Financial Statements...............................  25

Schedule
  Schedule II--Valuation and Qualifying Accounts...........................  38
</TABLE>
 
                                       16
<PAGE>
 
              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
 
The Board of Directors and Stockholders
Prosoft I-Net Solutions, Inc.
 
  We have audited the accompanying consolidated balance sheet of Prosoft I-Net
Solutions, Inc. and Subsidiaries as of July 31, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. 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 audit.
 
  We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Prosoft I-Net
Solutions, Inc. at July 31, 1998, and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
 
  We have also audited Schedule II for the year ended July 31, 1998. In our
opinion, this Schedule presents fairly, in all material respects, the
information required to be set forth therein.
 
                                          /s/ Grant Thornton LLP
Dallas, Texas
September 11, 1998 (except for the second
paragraph of Note B, as to which
the date is November 12, 1998)
 
                                      17
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders
Prosoft I-Net Solutions, Inc.
 
  We have audited the accompanying consolidated balance sheet of Prosoft I-Net
Solutions, Inc. (formerly known as ProSoft Development, Inc.) as of July 31,
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year ended July 31, 1997 and the period from
December 8, 1995 (date of incorporation) to July 31, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Prosoft I-Net
Solutions, Inc. at July 31, 1997, and the consolidated results of its
operations and its cash flows for the year ended July 31 1997 and the period
from December 8, 1995 (date of incorporation) to July 31, 1996, in conformity
with generally accepted accounting principles.
 
                                                /s/ Ernst & Young LLP
 
Orange County, California
October 24, 1997
 
                                      18
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS
 
To the Owner
Professional Development Institute (a Sole Proprietorship)
 
  We have audited the accompanying balance sheet of Professional Development
Institute (a Sole Proprietorship) as of December 31, 1995, and the related
statements of operations, owner's deficit and cash flows for the period
February 1, 1995 (date of inception) to December 31, 1995 . 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 audit.
 
  We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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 Professional Development
Institute (a Sole Proprietorship) as of December 31, 1995, and results of its
operations and cash flows for the period February 1, 1995 (date of inception)
to December 31, 1995, in conformity with generally accepted accounting
principles.
 
                                          /s/ Kelly & Company
 
Newport Beach, California
March 8, 1996
 
                                      19
<PAGE>
 
                 PROSOFT I-NET SOLUTIONS, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                             JULY 31,
                                                     --------------------------
                                                         1998          1997
                                                     ------------  ------------
<S>                                                  <C>           <C>
                      ASSETS
                      ------
Current assets
Cash and cash equivalents..........................  $  3,311,014  $ 12,911,684
Tuition and accounts receivable, less allowances of
 $329,802 and $506,182 at July 31, 1998 and 1997,
 respectively......................................     2,224,638     1,646,765
Notes receivable from officers/stockholders........       422,750       317,870
Prepaid expenses and other current assets..........       567,596       878,048
                                                     ------------  ------------
Total current assets...............................     6,525,998    15,754,367
Property and equipment
Computer equipment and software....................     5,744,480     5,489,035
Office equipment, furniture and fixtures...........     1,939,270     1,030,460
                                                     ------------  ------------
                                                        7,683,750     6,519,495
Less accumulated depreciation......................     4,584,566     1,480,185
                                                     ------------  ------------
                                                        3,099,184     5,039,310
Other assets
Goodwill, net of accumulated amortization of
 $249,043..........................................     2,898,839           --
                                                     ------------  ------------
Total assets.......................................  $ 12,524,021  $ 20,793,677
                                                     ============  ============
       LIABILITIES AND STOCKHOLDERS' EQUITY
       ------------------------------------
Current liabilities
Accounts payable...................................  $  1,054,866  $  1,817,314
Accrued payroll and related expenses...............       648,802       924,781
Payable to underwriters............................           --      1,454,375
Deferred revenue...................................        23,105        67,959
Current portion of capital lease obligations.......     1,465,159     1,960,221
                                                     ------------  ------------
Total current liabilities..........................     3,191,932     6,224,650
Capital lease obligations, net of current portion..       559,205     1,519,965
                                                     ------------  ------------
Total liabilities..................................     3,751,137     7,744,615
Commitments and contingencies......................           --            --
Common stock subject to redemption.................     2,056,520           --
Stockholders' equity:
  Common stock, $.001 par value; Authorized
   shares--50,000,000; issued and outstanding
   shares--11,502,079 and 10,119,651 shares at July
   31, 1998 and 1997, respectively.................        11,502        10,120
  Additional paid-in capital.......................    47,030,129    36,764,338
  Accumulated deficit..............................   (40,250,519)  (23,725,396)
                                                     ------------  ------------
                                                        6,791,112    13,049,062
  Less common stock in treasury, at cost; 11,912
   shares..........................................        74,748           --
                                                     ------------  ------------
    Total stockholders' equity.....................     6,716,364    13,049,062
                                                     ------------  ------------
    Total liabilities and stockholders' equity.....  $ 12,524,021  $ 20,793,677
                                                     ============  ============
</TABLE>
 
                                       20
<PAGE>
 
                 PROSOFT I-NET SOLUTIONS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                     PREDECESSOR
                                         COMPANY                       ENTITY
                         ------------------------------------------ -------------
                                                      PERIOD FROM    PERIOD FROM
                                                      DECEMBER 8,    FEBRUARY 1,
                                                     1995 (DATE OF  1995 (DATE OF
                           YEARS ENDED JULY 31,      INCORPORATION) INCEPTION) TO
                         --------------------------   TO JULY 31,   DECEMBER 31,
                             1998          1997           1996          1995
                         ------------  ------------  -------------- -------------
<S>                      <C>           <C>           <C>            <C>
Revenue................. $  8,836,685  $  3,483,140   $   907,772     $  77,477

Costs and expenses
  Cost of services......   13,685,680    10,197,373       698,725        60,526
  Sales and marketing...    3,962,534     4,918,942       426,221        44,769
General and
 administrative.........    7,959,767     9,215,521     2,788,188       556,382
                         ------------  ------------   -----------     ---------
    Total costs and
     expenses...........   25,607,981    24,331,836     3,913,134       661,677
                         ------------  ------------   -----------     ---------
    Loss from
     operations.........  (16,771,296)  (20,848,696)   (3,005,362)     (584,200)
Interest income.........      246,173       201,423           --            --
Interest expense........          --            --        (67,961)      (20,126)
                         ------------  ------------   -----------     ---------
    Loss before provi-
     sion for income
     taxes..............  (16,525,123)  (20,647,273)   (3,073,323)     (604,326)
Provision for state
 income tax.............          --          4,000           800           --
                         ------------  ------------   -----------     ---------
    Net loss............ $(16,525,123) $(20,651,273)  $(3,074,123)    $(604,326)
                         ============  ============   ===========     =========
Loss per share--basic
 and diluted............ $      (1.48) $      (2.48)  $      (.61)
                         ============  ============   ===========
Weighted average shares
 outstanding............   11,143,166     8,312,911     5,011,781
                         ============  ============   ===========
</TABLE>
 
 
 
        The accompanying notes are an integral part of these statements.
 
                                       21
<PAGE>
 
                PROSOFT I-NET SOLUTIONS, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                   PRO-SOFT
                  PREDECESSOR  DEVELOPMENT CO.
                    ENTITY       COMMON STOCK         COMMON STOCK                    TREASURY STOCK
                  ----------- -------------------  -------------------  ADDITIONAL   -----------------
                    OWNER'S                                               PAID-IN                       ACCUMULATED
                    DEFICIT     SHARES    AMOUNT     SHARES    AMOUNT     CAPITAL    SHARES    AMOUNT     DEFICIT
                  ----------- ----------  -------  ----------  -------  -----------  -------  --------  ------------
<S>               <C>         <C>         <C>      <C>         <C>      <C>          <C>      <C>       <C>
Capital
contributions to
sole
proprietorship..   $ 409,853         --   $   --          --   $   --   $       --       --   $    --   $        --
Net loss........    (604,326)        --       --          --       --           --       --        --            --
                   ---------  ----------  -------  ----------  -------  -----------  -------  --------  ------------
Balances at
December 31,
1995............    (194,473)        --       --          --       --           --       --        --            --
Contributions of
net assets of
Predecessor to
Pro-Soft
Development
Corp. in
exchange for
common stock....     194,473   1,000,000    1,000         --       --      (195,473)     --        --            --
Issuance of
common stock for
cash, note and
services........         --    3,576,250    3,576         --       --     1,380,174      --        --            --
Conversion of
accounts payable
to common
stock...........         --      150,000      150         --       --        37,350      --        --            --
Shares
outstanding
prior to
reorganization..         --          --       --      480,060      480         (455)     --        --            --
Acquisition of
ProSoft
Development
Corp. by the
Company.........         --   (4,726,250)  (4,726)  4,726,250    4,726          --       --        --            --
Issuance of
common stock for
cash, net of
issuance costs
of $338,000.....         --          --       --    1,169,462    1,169    8,307,221      --        --            --
Exercise of
warrants........         --          --       --      960,632      961    1,242,199      --        --            --
Net loss........         --          --       --          --       --           --       --        --     (3,074,123)
                   ---------  ----------  -------  ----------  -------  -----------  -------  --------  ------------
Balances at July
31, 1996........         --          --       --    7,336,404    7,336   10,771,016      --        --     (3,074,123)
Issuance of
common stock for
cash, net of
issuance costs
of $1,628,375...         --          --       --    2,502,922    2,503   25,669,052      --        --            --
Exercise of
warrants........         --          --       --      111,807      112      140,325      --        --            --
Exercise of
stock options...         --          --       --      168,518      169      183,945      --        --            --
Net loss........         --          --       --          --       --           --       --        --    (20,651,273)
                   ---------  ----------  -------  ----------  -------  -----------  -------  --------  ------------
Balances at July
31, 1997........         --          --       --   10,119,651   10,120   36,764,338      --        --    (23,725,396)
Issuance of
common stock for
cash............         --          --       --      803,638      804    8,437,395      --        --            --
Issuance of
common stock for
services........         --          --       --       12,750       13       77,148      --        --            --
Acquisition of
businesses......         --          --       --      221,537      222    2,199,778      --        --            --
Less redemption
price of stock
issued..........         --          --       --     (221,537)    (222)  (2,131,046)     --        --            --
Purchase of
common stock
subject to
redemption......         --          --       --       11,912       12       74,736  (11,912)  (74,748)          --
Exercise of
stock options...         --          --       --      472,463      472      921,443      --        --            --
Exercise of
warrants........         --          --       --       81,665       81      686,337      --        --            --
Net loss........         --          --       --          --       --           --       --        --    (16,525,123)
                   ---------  ----------  -------  ----------  -------  -----------  -------  --------  ------------
Balances at July
31, 1998........   $     --          --   $   --   11,502,079  $11,502  $47,030,129  (11,912) $(74,748) $(40,250,519)
                   =========  ==========  =======  ==========  =======  ===========  =======  ========  ============
<CAPTION>
                     TOTAL
                  -------------
<S>               <C>
Capital
contributions to
sole
proprietorship..  $        --
Net loss........           --
                  -------------
Balances at
December 31,
1995............           --
Contributions of
net assets of
Predecessor to
Pro-Soft
Development
Corp. in
exchange for
common stock....      (194,473)
Issuance of
common stock for
cash, note and
services........     1,383,750
Conversion of
accounts payable
to common
stock...........        37,500
Shares
outstanding
prior to
reorganization..            25
Acquisition of
ProSoft
Development
Corp. by the
Company.........           --
Issuance of
common stock for
cash, net of
issuance costs
of $338,000.....     8,308,390
Exercise of
warrants........     1,243,160
Net loss........    (3,074,123)
                  -------------
Balances at July
31, 1996........     7,704,229
Issuance of
common stock for
cash, net of
issuance costs
of $1,628,375...    25,671,555
Exercise of
warrants........       140,437
Exercise of
stock options...       184,114
Net loss........   (20,651,273)
                  -------------
Balances at July
31, 1997........    13,049,062
Issuance of
common stock for
cash............     8,438,199
Issuance of
common stock for
services........        77,161
Acquisition of
businesses......     2,200,000
Less redemption
price of stock
issued..........    (2,131,268)
Purchase of
common stock
subject to
redemption......           --
Exercise of
stock options...       921,915
Exercise of
warrants........       686,418
Net loss........   (16,525,123)
                  -------------
Balances at July
31, 1998........  $  6,716,364
                  =============
</TABLE>
 
       The accompanying notes are an integral part of these statements.
 
                                       22
<PAGE>
 
                 PROSOFT I-NET SOLUTIONS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                      PREDECESSOR
                                           COMPANY                       ENTITY
                           ------------------------------------------ --------------
                                                                      PERIOD FROM
                                                        PERIOD FROM   FEBRUARY 1,
                                                        DECEMBER 8,       1995
                                                       1995 (DATE OF      (DATE OF
                             YEARS ENDED JULY 31,      INCORPORATION)  INCEPTION) TO
                           --------------------------   TO JULY 31,   DECEMBER 31,
                               1998          1997           1996          1995
                           ------------  ------------  -------------- --------------
<S>                        <C>           <C>           <C>            <C>
OPERATING ACTIVITIES:
  Net loss...............  $(16,525,123) $(20,651,273)  $(3,074,123)   $(604,326)
  Adjustments to
   reconcile net loss to
   cash used in operating
   activities:
   Depreciation and
    amortization.........     3,353,424     1,235,129       257,454       40,441
   Operating expenses
    paid in common
    stock................        77,161           --        397,250          --
  Changes in operating
   assets and
   liabilities:
   Tuition and accounts
    receivables..........      (499,741)     (880,360)     (766,405)     (89,487)
   Prepaid expenses and
    other current
    assets...............       312,275      (566,456)     (311,592)     (28,200)
   Accounts payable and
    payable to
    underwriter..........    (2,258,493)    2,908,275       363,414      293,305
   Accrued liabilities...      (297,657)      836,307        88,474       16,811
   Deferred revenue......       (44,854)       67,959           --        38,744
   Other.................           --            --          2,200          --
                           ------------  ------------   -----------    ---------
     Net cash used in
      operating
      activities.........   (15,883,008)  (17,050,419)   (3,043,328)    (332,712)

INVESTING ACTIVITIES:
  Acquisition of
   Predecessor, net of
   cash acquired.........           --            --       (194,893)         --
  Acquisition of Tel-Fed,
   Inc., net of cash
   acquired..............           --            --           (560)         --
  Acquisition of other
   businesses, net of
   cash acquired.........      (997,231)          --            --           --
  Purchases of property
   and equipment.........      (664,299)   (1,214,914)     (570,838)         --
  Purchases of licenses..           --            --            --       (52,450)
  Increase in notes
   receivable from
   officers/stockholders..     (104,880)     (222,770)      (85,600)         --
                           ------------  ------------   -----------    ---------
     Net cash used in
      investing
      activities.........    (1,766,410)   (1,437,684)     (851,891)     (52,450)

FINANCING ACTIVITIES:
  Capital contributions..           --            --            --       409,853
  Issuance of common
   stock.................    10,046,533    25,996,106    10,528,575          --
  Purchase of treasury
   stock.................       (74,748)          --            --           --
  Principal payments on
   debt and capital
   leases................    (1,923,037)   (1,062,779)     (228,728)     (24,271)
  Proceeds from notes
   payable...............           --            --         61,832          --
                           ------------  ------------   -----------    ---------
     Net cash provided
      by financing
      activities.........     8,048,748    24,933,327    10,361,679      385,582
                           ------------  ------------   -----------    ---------
Net increase (decrease)
 in cash and cash
 equivalents.............    (9,600,670)    6,445,224     6,466,460          420
Cash and cash equivalents
 at beginning of period..    12,911,684     6,466,460           --           --
                           ------------  ------------   -----------    ---------
Cash and cash equivalents
 at end of period........  $  3,311,014  $ 12,911,684   $ 6,466,460    $     420
                           ============  ============   ===========    =========
</TABLE>
 
                                       23
<PAGE>
 
                 PROSOFT I-NET SOLUTIONS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                    PREDECESSOR
                                           COMPANY                    ENTITY
                            -------------------------------------- -------------
                                                     PERIOD FROM    PERIOD FROM
                                                     DECEMBER 8,    FEBRUARY 1,
                                                    1995 (DATE OF  1995 (DATE OF
                             YEARS ENDED JULY 31,   INCORPORATION) INCEPTION) TO
                            -----------------------  TO JULY 31,   DECEMBER 31,
                               1998         1997         1996          1995
                            -----------  ---------- -------------- -------------
<S>                         <C>          <C>        <C>            <C>
Supplementary disclosure
 of cash paid during the
 period for:
   Interest...............  $   340,166  $  171,349    $ 84,772      $  3,315
                            ===========  ==========    ========      ========
   Income taxes...........  $       --   $    4,000    $    --       $    --
                            ===========  ==========    ========      ========
Supplementary disclosure
 of non-cash financing ac-
 tivities:
  Accounts payable con-
   verted to common
   stock..................  $       --   $      --     $ 37,500      $    --
                            ===========  ==========    ========      ========
  Equipment acquired under
   capital leases.........  $   417,215  $3,691,693    $393,460      $635,874
                            ===========  ==========    ========      ========
  Acquisition of busi-
   nesses
   Assets acquired........  $ 3,293,749  $      --     $    --       $    --
   Liabilities assumed....      (96,518)        --          --            --
   Common stock issued....   (2,200,000)        --          --            --
                            -----------  ----------    --------      --------
  Net cash paid for acqui-
   sitions................  $   997,231  $      --     $    --       $    --
                            ===========  ==========    ========      ========
</TABLE>
 
 
        The accompanying notes are an integral part of these statements.
 
                                       24
<PAGE>
 
                PROSOFT I-NET SOLUTIONS, INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE A. SIGNIFICANT ACCOUNTING POLICIES
 
 Company Background
 
  Prosoft I-Net Solutions, Inc. (Prosoft or the Company) is a Nevada
corporation (previously named Tel-Fed, Inc. and ProSoft Development, Inc.)
that is engaged in the business of training individuals in small, medium and
large organizations in Internet and intranet technologies. Such training is
accomplished at Company classrooms, client sites, and over the Internet with
Company instructors, through authorized resellers as well as through the sale
and licensing of the Company's courseware.
 
  Professional Development Institute, the predecessor entity, (a sole
proprietorship formed on February 1, 1995), acquired and developed training
curricula and commenced a marketing program for a private vocational training
institution. On December 8, 1995, Pro-Soft Development Corp. was formed as a
California corporation, and effective January 1, 1996, the assets and
liabilities of the Professional Development Institute, (Predecessor) were
contributed to Pro-Soft Development Corp. in exchange for 1,000,000 shares of
common stock.
 
  In March 1996, Pro-Soft Development Corp. entered into an Agreement and Plan
of Reorganization whereby Pro-Soft Development Corp.'s shareholders received
one share of common stock of the Company in exchange for each of the 4,726,250
outstanding shares, and Pro-Soft Development Corp. became a wholly owned
subsidiary of the Company. For accounting purposes, Pro-Soft Development Corp.
is deemed to be the acquiring corporation and, therefore, the transaction is
being accounted for as a reverse acquisition of the Company by Pro-Soft
Development Corp.
 
 Basis of Consolidation
 
  The financial statements include the accounts of the Company and its wholly
owned subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
 
 Cash Equivalents
 
  The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
 
 Concentration of Business and Credit Risk
 
  Financial instruments, which potentially subject the Company to
concentration of credit risk, consist of accounts receivable. Concentrations
of credit risk with respect to accounts receivable are limited due to the
number of customers comprising the Company's customer base, and their
dispersion across many different industries and geographic regions. Generally,
the Company does not require collateral or other security to support customer
receivables. The Company routinely assesses the financial strength of its
customers and, as a consequence, believes that its accounts receivable credit
risk exposure is limited.
 
 Advertising Costs
 
  The Company expenses the costs of advertising as incurred. Advertising
expenses aggregated $926,791 in fiscal 1998, $805,301 in fiscal 1997, and
$90,000 in fiscal 1996.
 
 Property and Equipment
 
  Property and equipment are recorded at cost. Depreciation and amortization
are computed on a straight-line basis over the lesser of the estimated useful
lives of the related assets or the lease term. The estimated useful lives
range from two to seven years. Depreciation expense includes amortization of
assets recorded under capital leases.
 
                                      25
<PAGE>
 
                PROSOFT I-NET SOLUTIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Goodwill and Amortization
 
  Goodwill resulting from acquisitions is being amortized using the straight-
line method over a period of 7 years.
 
 Stock Options
 
  In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-
Based Compensation". As permitted by SFAS 123, the Company has elected to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", and related Interpretations ("APB 25"), in accounting
for stock-based awards to employees, and has made pro forma disclosures
required by SFAS 123. Under APB 25, the Company has generally recognized no
compensation expense with respect to such awards.
 
 Recognition of Revenue and Costs
 
  Tuition revenue is recognized when training is delivered. Amounts charged
customers are deferred until earned. Costs of providing services to students
are charged to expense as incurred. Cost of developing courses is expensed as
incurred. Revenues from the sale of courseware are recognized when courseware
is shipped to customers.
 
  In fiscal 1998, the Company sold then existing courseware and authorization
for the reproduction of such courseware to third parties. The two agreements
allow purchasers to reproduce and sell such courseware and provide exclusive
rights to sell courseware to customer groups specified therein. The Company
recognizes revenue on these contracts as cash payments are received. During
fiscal 1998, the Company recognized $1,600,000 pursuant to these contracts. At
July 31, 1998, $1,800,000 had not yet been collected from these transactions.
 
 Tuition Receivable
 
  At various times, the Company will have unbilled receivables for tuition
earned prior to, or in excess of, billings under the terms of various
contracts with paying agencies. Tuition receivable, which is included in
Tuition and Accounts Receivable, consists of the following:
 
<TABLE>
<CAPTION>
                                                                  JULY 31,
                                                             -------------------
                                                               1998      1997
                                                             -------- ----------
   <S>                                                       <C>      <C>
   Billed tuition........................................... $178,097 $1,218,787
   Unbilled tuition.........................................      --     104,110
                                                             -------- ----------
                                                             $178,097 $1,322,897
                                                             ======== ==========
</TABLE>
 
 Loss Per Share
 
  In fiscal 1998, the Company adopted the provisions of SFAS 128, "Earnings
Per Share". In accordance with SFAS 128, basic loss per share is computed
based on the weighted average number of common shares outstanding and diluted
earnings per share is computed based on the weighted average number of common
shares outstanding plus the number of additional common shares that would have
been outstanding if dilutive potential common shares had been issued. In
fiscal years 1996, 1997 and 1998 all potential common shares were
anti-dilutive. Accordingly, the adoption of SFAS 128 had no effect on loss per
share.
 
                                      26
<PAGE>
 
                PROSOFT I-NET SOLUTIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Recently Issued Pronouncements
 
  In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income".
The Statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements. SFAS 130 is effective for fiscal years beginning after December
15, 1997. The Company will adopt SFAS 130 during the first quarter of fiscal
year 1999, and does not expect the impact to be material.
 
  In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information". The Statement requires public business
enterprises to report certain information about operating segments in complete
sets of financial statements of the enterprise and in condensed financial
statements of interim periods issued to shareholders. It also requires that
public business enterprises report certain information about their products
and services, the geographic areas in which they operate, and their major
customers. SFAS 131 is effective for fiscal years beginning after December 15,
1997. The Company will adopt SFAS 131 in its fiscal year 1999.
 
Reclassifications
 
  Certain prior year amounts have been reclassified to conform to current year
presentation.
 
 Use of Estimates
 
  In preparing financial statements in conformity with generally accepted
accounting principles, management is required 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 revenues and expenses during the reporting period. Actual
results could differ from those estimates.
 
NOTE B. LIQUIDITY
 
  The Company has incurred losses aggregating approximately $40 million since
inception, primarily due to the start-up nature of its business. In August
1998, the Company changed its business strategy and began marketing its
products to national training companies, as well as enacting cost-cutting
measures.
 
  In November 1998, the Company obtained a commitment for a $3.5 million line
of credit and had sold shares of its common stock for $1,000,000. The Company
anticipates that its existing resources, along with these financings, will be
sufficient to meet its needs for working capital expenditures through at least
fiscal 1999.
 
NOTE C. BUSINESS COMBINATIONS
 
  In January 1998, the Company purchased all of the outstanding common stock
of Net Guru Technologies, Inc. ("Net Guru") in exchange for $1,000,000 and
152,809 shares of the Company's common stock. Shares issued in connection with
this purchase have been valued at $1,700,000, their fair value as of the date
the acquisition was consummated. Net Guru is a market leader in Internet
skills certification with testing administered by testing leader Sylvan
Learning Systems.
 
 
                                      27
<PAGE>
 
                PROSOFT I-NET SOLUTIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  In March 1998, the Company purchased all of the outstanding common stock of
The Chapel Hill Group-Technology Consultants, Inc. ("The Chapel Hill Group")
in exchange for 68,728 shares of the Company's common stock. Shares issued in
connection with this purchase have been valued at $500,000, their fair value
as of the date the acquisition was consummated. The Chapel Hill Group is an
Internet technology services firm, specializing in Internet strategy
consulting and Internet technology education, specifically Java curriculum.
 
  The acquisitions have been accounted for as a purchase and the operations of
the purchased companies have been included in the Company's statement of
operations since their date of acquisition.
 
  As more fully described in Note D, the shares issued are subject to put
rights given to the holder.
 
UNAUDITED PRO FORMA INFORMATION
 
  The following unaudited pro forma information for fiscal years 1998 and 1997
presents a summary of consolidated results of operations of the Company as if
the acquisitions had occurred at the beginning of the respective periods
presented, giving effect to the amortization of goodwill:
 
<TABLE>
<CAPTION>
                                                        YEAR ENDED JULY 31,
                                                     --------------------------
                                                         1998          1997
                                                     ------------  ------------
   <S>                                               <C>           <C>
   Net sales........................................ $  9,664,587  $  5,570,104
                                                     ============  ============
   Net loss......................................... $(16,723,455) $(21,100,973)
                                                     ============  ============
   Loss per share................................... $      (1.50) $      (2.54)
                                                     ============  ============
</TABLE>
 
  The pro forma financial information should be read in conjunction with the
related historical information and is not necessarily indicative of the
results that would have been attained had the transaction actually occurred.
 
NOTE D. STOCKHOLDERS' EQUITY
 
 Formation of Pro-Soft Development Corp.
 
  Upon the formation of Pro-Soft Development Corp., two of the founders
acquired an aggregate of 2,000,000 shares of common stock in exchange for
$19,000. For financial statement purposes, these shares were valued at $.20
per share and compensation expense of $381,000 was recorded to reflect the
difference between the amount paid and the deemed fair market value of the
shares issued.
 
 Stock Options
 
  The Company's stock option plan provides for the granting of options to
purchase shares of the Company's common stock to employees, officers,
consultants, and directors. The plan includes nonstatutory options and
incentive stock options. Options generally vest over three to four years and
expire no later than ten years after the date of grant.
 
  As a result of the reorganization (Note A), nonstatutory stock options to
purchase 1,042,500 shares of common stock of Pro-Soft Development Corp. were
converted into options to purchase 1,042,500 shares of the Company's common
stock at an exercise price of $1.00 per share.
 
                                      28
<PAGE>
 
                PROSOFT I-NET SOLUTIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Information relating to the outstanding stock options is as follows:
 
<TABLE>
<CAPTION>
                                                        SHARES       PRICE
                                                       ---------  ------------
   <S>                                                 <C>        <C>
   Outstanding at December 8, 1995 (incorporation)
     Granted..........................................   697,500  $3.50--20.00
     Conversion of Pro-Soft Development Corp.
      options......................................... 1,042,500         $1.00
     Cancelled........................................   (46,250)        $1.00
                                                       ---------
   Outstanding at July 31, 1996....................... 1,693,750  $1.00--20.00
     Granted..........................................   752,500  $6.75--18.00
     Exercised........................................  (168,518) $1.00-- 5.00
     Cancelled........................................  (116,913) $1.00--18.00
                                                       ---------
<CAPTION>
                                                                    WEIGHTED
                                                                    AVERAGE
                                                                    EXERCISE
                                                                     PRICE
                                                                  ------------
   <S>                                                 <C>        <C>
   Outstanding at July 31, 1997....................... 2,160,819         $5.04
     Granted..........................................   871,802         $6.81
     Exercised........................................  (472,463)        $1.95
     Cancelled........................................  (441,538)        $7.76
                                                       ---------
   Outstanding at July 31, 1998....................... 2,118,620         $4.99
                                                       =========
   Exercisable at July 31, 1997....................... 1,487,286         $3.52
                                                       =========  ============
   Exercisable at July 31, 1998....................... 1,165,699         $4.41
                                                       =========  ============
</TABLE>
 
  The following table summarizes information concerning options outstanding
and exercisable as of July 31, 1998:
 
<TABLE>
<CAPTION>
                                                                  OPTIONS
                                   OPTIONS OUTSTANDING          EXERCISABLE
                              ------------------------------ ------------------
                                                  WEIGHTED
                                        WEIGHTED   AVERAGE             WEIGHTED
                                        AVERAGE   REMAINING            AVERAGE
                                        EXERCISE CONTRACTUAL           EXERCISE
   RANGE OF EXERCISE PRICES    NUMBER    PRICE      LIFE      NUMBER    PRICE
   ------------------------   --------- -------- ----------- --------- --------
   <S>                        <C>       <C>      <C>         <C>       <C>
   $1.00--$3.50.............    464,550  $ 1.17     1.12       464,550  $ 1.17
   $5.00--$7.12.............  1,431,052    5.26     3.41       552,881    5.26
   $9.50--$11.00............    193,018    9.97     3.03       125,768    9.97
   $15.00--$19.75...........     30,000   19.33     2.67        22,500   19.33
                              ---------                      ---------
                              2,118,620                      1,165,699
                              =========                      =========
</TABLE>
 
  Pro forma information regarding net loss and net loss per share is required
by SFAS 123 for awards granted after January 31, 1995 as if the Company had
accounted for its stock-based awards to employees under the fair value method
of SFAS 123. The fair value of the Company's stock-based awards to employees
was estimated using the Black-Scholes multiple option pricing model. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, the Black-Scholes model requires the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock-based awards to employees have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock based awards
to employees.
 
                                      29
<PAGE>
 
                PROSOFT I-NET SOLUTIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The fair value of the Company's stock-based awards to employees was
estimated assuming no expected dividends and the following assumptions:
 
<TABLE>
<CAPTION>
                                                                  1998 1997 1996
                                                                  ---- ---- ----
   <S>                                                            <C>  <C>  <C>
   Weighted average expected life (years)........................ 3.00 1.00 1.00
   Expected stock price volatility............................... 0.70 0.75 0.75
   Risk-free interest rate (percent)............................. 5.50 4.85 4.85
</TABLE>
 
  For purpose of pro forma disclosures, the excess of the estimated fair value
of the options over the quoted market price of the Company's stock is
amortized to expense over the options' vesting period. The Company's pro forma
information for the years ended July 31, 1998 and 1997, and the period from
December 8, 1995 to July 31, 1996 is as follows:
 
<TABLE>
<CAPTION>
                                          1998           1997         1996
                                      -------------  ------------  -----------
   <S>                                <C>            <C>           <C>
   Net loss--actual.................. $ (16,525,123) $(20,651,273) $(3,074,123)
   Net loss--pro forma............... $(18,284,022)  $(22,453,127) $(3,944,187)
   Net loss per share--actual........ $       (1.48) $      (2.48) $      (.61)
   Net loss per share--pro forma..... $       (1.64) $      (2.70) $      (.79)
</TABLE>
 
  Because SFAS 123 is applicable only to options granted subsequent to
December 8, 1995, its pro forma effect will not be fully reflected until
fiscal 2000. The weighted average fair value of options granted during the
years ended July 31, 1998 and 1997 and the period from December 8, 1995 to
July 31, 1996 was $3.77, $3.89 and $.98, respectively.
 
 Warrants
 
  During fiscal 1996, the Company issued warrants to purchase 1,556,461 shares
of common stock to purchasers of its common stock and other parties at prices
ranging from $1.00 to $11.00 per share. During fiscal 1997, warrants for
111,807 shares of common stock were exercised at prices ranging from $1.00 to
$5.00, and warrants for 2,476 shares expired. During fiscal 1998, warrants for
81,664 were exercised at prices ranging from $5.75 to $11.00. At July 31,
1998, warrants for 289,999 shares of common stock, exercisable at $1 to $11
per share and expiring through 2001, remained outstanding.
 
 Put Rights on Common Stock
 
  In connection with the fiscal 1998 acquisitions, the Company guaranteed the
value of the common stock issued in the acquisitions by granting put rights
covering 68,728 and 152,809 shares at $6.275 and $11.125 per share,
respectively. The Company is obligated through these put rights to repurchase
the shares for cash. As a result, the redemption amount has been reclassified
from permanent equity to temporary equity under the caption, "common stock
subject to redemption". During fiscal 1998, 11,912 shares have been
repurchased under these rights and rights covering 56,816 shares at $6.275 per
share and 152,809 shares at $11.125 per share remain outstanding.
 
                                      30
<PAGE>
 
                PROSOFT I-NET SOLUTIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE E. COMMITMENTS AND CONTINGENCIES COMMITMENTS
 
  The Company leases certain facilities as well computers and production
equipment under noncancellable lease agreements. The Company's future minimum
lease payments at July 31, 1998 under such agreements are as follows:
 
<TABLE>
<CAPTION>
                                                         CAPITAL    OPERATING
                                                         LEASES       LEASES
                                                       -----------  ----------
   <S>                                                 <C>          <C>
   1999............................................... $ 1,687,796  $1,190,220
   2000...............................................     421,658     944,673
   2001...............................................     164,500     956,249
   2002...............................................      80,621     375,053
   2003...............................................         --      194,408
                                                       -----------  ----------
                                                         2,354,575  $3,660,603
                                                       -----------  ==========
   Less amounts representing interest.................    (330,211)
                                                       -----------
   Present value of minimum lease payments............   2,024,364
   Less current portion...............................  (1,465,159)
                                                       -----------
   Obligations under capital leases, net of current
    portion........................................... $   559,205
                                                       ===========
</TABLE>
 
  Assets held under capital leases are included in property and equipment and
had a total cost of $5,351,689 and $4,934,474, respectively, and a net book
value of $1,850,761 and $3,804,667, at July 31, 1998 and 1997, respectively.
 
  Rent expense for the periods ended July 31, 1998, 1997, and 1996 totaled
$1,269,779, $930,675 and $166,763, respectively.
 
CONTINGENCIES
 
  The Company and certain of its present and former officers and/or directors
are defendants in three "class action" lawsuits which allege, among other
things, that the defendants made false and/or misleading public statements
regarding the Company and its financial condition in violation of various
state securities laws. The three complaints purport to establish a class of
shareholders who purchased the Company's stock between July 21, 1997 and April
13, 1998. No class has been certified at this time. The complaints seek
compensatory damages, attorneys' fees, and injunctive relief, as well as other
relief. The Company believes that it has meritorious defenses to the
plaintiffs' claims, and it intends to vigorously defend itself against the
actions.
 
  The Company is also engaged in the defense of certain claims and lawsuits
arising out of the ordinary course and conduct of its business, the outcome of
which are not determinable at this time. In the opinion of management, any
liability that might be incurred by the Company upon the resolution of these
claims and lawsuits will not, in the aggregate, have a material adverse effect
on the Company's consolidated results of operations, cash flows or financial
condition.
 
NOTE F. EMPLOYEE BENEFIT PLAN
 
  The Company has adopted a defined contribution plan for the benefit of its
employees who have met certain eligibility requirements. The Prosoft 401(k)
Plan (the "401(k) Plan") is a profit-sharing plan qualifying under Section
401(k) of the Internal Revenue Code, and provides employees with tax deferred
salary deductions and alternative investment options. Employees may contribute
up to 20% of their salary, subject to certain limitations. The Company, at the
discretion of the Company's Board of Directors, may make contributions to the
401(k) Plan. The Company has not contributed to the 401(k) Plan.
 
                                      31
<PAGE>
 
                PROSOFT I-NET SOLUTIONS, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE G. INCOME TAXES
 
  There was no significant provision for federal or state income taxes for any
period as the Company has incurred operating losses, and there can be no
assurance that the Company will realize the benefit of the resulting net
operating loss carryforwards.
 
  Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their bases
for financial reporting purposes. Temporary differences which give rise to
deferred tax assets are as follows:
 
<TABLE>
<CAPTION>
                                  1998         1997
                              ------------  -----------
   <S>                        <C>           <C>
   Net operating loss
    carryforwards............ $ 14,434,000  $ 8,585,000
   Accrued expenses..........      113,000      185,000
   Allowance for returns and
    for doubtful accounts....      189,000      217,000
   Other.....................       (1,000)      23,000
                              ------------  -----------
     Total deferred tax
      assets.................   14,735,000    9,010,000
   Valuation allowance.......  (14,735,000)  (9,010,000)
                              ------------  -----------
   Net deferred tax assets... $        --   $       --
                              ============  ===========
</TABLE>
 
  Due to the uncertainties surrounding the timing of realizing the benefits of
its favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against its otherwise recognizable deferred tax assets.
The valuation allowance increased by approximately $5,725,000 during the year
ended July 31, 1998 and by approximately $8,000,000 during the period ended
July 31, 1997. The increase in the valuation allowance is primarily due to the
increase in the net operating loss carryforwards.
 
  At July 31, 1998, the Company has net operating loss carryforwards available
to offset future federal and state taxable income of approximately $38,046,000
and $16,962,000, respectively. Such carryforwards expire principally in 2012
to 2013 and 2002 to 2003, respectively. Because of the equity transactions
completed by the Company in 1996, utilization of certain net operating loss
carryforwards for federal income tax reporting purposes created prior to those
transactions will be subject to annual limitations under the change in
ownership provisions of the Tax Reform Act of 1986.
 
NOTE H. RELATED PARTY TRANSACTIONS
 
  During fiscal years 1998, 1997 and 1996, the Company made short-term loans
and advances to certain officers and shareholders generally bearing interest
at 10%. Such advances are generally repayable on demand.
 
                                      32
<PAGE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE
 
  As previously reported on a Form 8-K filed by the Company on April 13, 1998,
the Company's former auditors resigned. The Company has engaged the firm of
Grant Thornton as its principal accountant to audit its financial statements
for the fiscal year ended July 31, 1998. During the Company's two most recent
fiscal years, prior to the engagement of Grant Thornton, neither the Company
nor anyone acting on its behalf consulted Grant Thornton regarding either: (i)
the application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the Company's financial statements, and either a written report was provided
to the Company or oral advice was provided that Grant Thornton concluded was
an important factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issue; or (ii) any matter that was
either the subject of a disagreement (as defined in paragraph 304(a)(1)(iv) of
Regulation S-K of the Securities Act of 1933) or a reportable event, as
described in paragraph 304(a)(1)(v) of Regulation S-K.
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  The information required by this item will be included in the Company's
Proxy Statement with respect to its 1998 Annual Meeting of Stockholders to be
filed with the Commission within 120 days of July 31, 1998 and is incorporated
herein by this reference.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  The information required by this item will be included in the Company's
Proxy Statement with respect to its 1998 Annual Meeting of Stockholders to be
filed with the Commission within 120 days of July 31, 1998 and is incorporated
herein by this reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The information required by this item will be included in the Company's
Proxy Statement with respect to its 1998 Annual Meeting of Stockholders to be
filed with the Commission within 120 days of July 31, 1998 and is incorporated
herein by this reference
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  The information required by this item will be included in the Company's
Proxy Statement with respect to its 1998 Annual Meeting of Stockholders to be
filed with the Commission within 120 days of July 31, 1998 and is incorporated
herein by this reference.
 
                                    PART IV
 
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
 
  a. The following documents are filed as part of this report.
 
    1. Consolidated Financial Statements
 
     See "Index to Consolidated Financial Statements"-- Item 8.
 
    2. Exhibits
 
     See "Exhibit Index."
 
  b. Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of the fiscal year ended July 31, 1998.
 
                                      33
<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.
 
                                          PROSOFT I-NET SOLUTIONS, INC.
 
                                                /s/ Kimberly V. Johnston
                                          By: _________________________________
                                                    Kimberly V. Johnston
                                                  Chief Financial Officer
 
Dated: November 12, 1998
 
  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.
 
<TABLE>
<CAPTION>
             SIGNATURE                         CAPACITY                  DATE
             ---------                         --------                  ----
 
<S>                                  <C>                           <C>
      /s/ Jerrell M. Baird           Chief Executive Officer and    November 12, 1998
____________________________________  Chairman of the Board
          Jerrell M. Baird            (Principal Executive
                                      Officer)
 
       /s/ Uday O. Pabrai            Vice Chairman and Director     November 12, 1998
____________________________________
           Uday O. Pabrai
 
    /s/ Kimberly V. Johnston         Chief Financial Officer        November 12, 1998
____________________________________  (Principal Financial and
        Kimberly V. Johnston          Accounting Officer)
 
      /s/ Andrew Stallman            Director                       November 12, 1998
____________________________________
          Andrew Stallman
 
      /s/ Jeffrey G. Korn            Director                       November 12, 1998
____________________________________
          Jeffrey G. Korn
 
       /s/ Rich Groeneweg            Director                       November 12, 1998
____________________________________
           Rich Groeneweg
</TABLE>
 
                                      34
<PAGE>
 
                 PROSOFT I-NET SOLUTIONS, INC. AND SUBSIDIARIES
 
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
                                BALANCE
                                  AT     CHARGED TO    DEDUCTIONS     BALANCE
                               BEGINNING COSTS AND     WRITE-OFFS,    AT END
                                OF YEAR   EXPENSES  NET OF RECOVERIES OF YEAR
                               --------- ---------- ----------------- --------
<S>                            <C>       <C>        <C>               <C>
Allowance for doubtful
 accounts
  Year ended July 31, 1998.... $131,182   $707,815      $(509,195)    $329,802
  Year ended July 31, 1997....      --    $150,000      $ (18,818)    $131,182

Allowance for returns
  Year ended July 31, 1998.... $375,000   $ 36,792      $(411,792)         --
  Year ended July 31, 1997....      --    $375,000            --      $375,000
</TABLE>
 
                                       35
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
 EXHIBIT
   NO.                           DESCRIPTION OF EXHIBITS
 -------                         -----------------------
 <C>     <S>
  2      Agreement and Plan of Reorganization dated March 26, 1996 between the
         Company, Pro-Soft Development Corp. and the shareholders of Pro-Soft
         Development Corp. Filed as Exhibit 2 to the Company's Registration
         Statement on Form S-1 (No. 333-11247) ("Registration Statement
         No. 333-11247") and incorporated herein by reference.
  3.1    Restated Articles of Incorporation of the Company, as amended. Filed
         as Exhibit 3.1 to Registration Statement No. 333-11247 and
         incorporated herein by reference.
  3.2    Amended and Restated Bylaws of the Company. Filed as Exhibit 3.2 to
         Registration Statement No. 333-11247 and incorporated herein by
         reference.
 10.1    Pro-Soft Development Corp. 1996 Stock Option Plan. Filed as Exhibit
         10.1 to Registration Statement No. 333-11247 and incorporated herein
         by reference.
 10.2    ProSoft I-Net Solutions, Inc. Amended 1996 Stock Option Plan. Filed as
         Exhibit 10.2 to Registration Statement No. 333-11247 and incorporated
         herein by reference.
 10.3    Stock and Warrant Purchase Agreement dated April 15, 1996 by and among
         the Company, Donald L. Danks, Keith D. Freadhoff, Douglas Hartman and
         various investors. Filed as Exhibit 10.3 to Registration Statement No.
         333-11247 and incorporated herein by reference.
 10.4    Form of Registration and Lock-Up Agreement dated September   , 1996
         between the Company and certain of the Selling Stockholders. Filed as
         Exhibit 10.5 to Registration Statement No. 333-11247 and incorporated
         herein by reference.
 10.5    Form of Indemnification Agreement between the Company and its
         Directors and Officers. Filed as Exhibit 10.13 to Registration
         Statement No. 333-11247 and incorporated herein by reference.
 10.6    Office Building Lease dated as of December 16, 1996 between COSCAN
         California Limited Partnership and the Company. Filed as Exhibit 10 to
         the Company's Report on Form 10-Q for the quarter ended January 31,
         1997 and incorporated herein by reference.
 10.7    Form of Subscription Agreement, entered into in February through April
         1997, between the Company and various investors. Filed as Exhibit
         10.16 to Registration Statement No. 333-11247 and incorporated herein
         by reference.
 10.8    Registration Rights Agreement dated as of March 13, 1997 among the
         Company and various investors. Filed as Exhibit 10.17 to Registration
         Statement No. 333-11247 and incorporated herein by reference.
 10.9    Subscription Agreement between the Company and General Electric
         Pension Trust dated April 4, 1997. Filed as Exhibit 10.18 to
         Registration Statement No. 333-11247 and incorporated herein by
         reference.
 10.10   Escrow Agreement among the Company, General Electric Pension Trust and
         State Street Bank and Trust dated April 4, 1997. Filed as Exhibit
         10.19 to Registration Statement No. 333-11247 and incorporated herein
         by reference.
 10.11   Secured Promissory Note dated April 9, 1997 in favor of the Company.
         Filed as Exhibit 10.20 to Registration Statement No. 333-11247 and
         incorporated herein by reference.
 10.12   Form of Subscription Agreement, entered into in November 1997 between
         the Company and various investors. Filed as Exhibit 10.21 to the
         Company's Registration Statement on Form S-3 (No. 333-35249) and
         incorporated herein by reference.
 10.13   Registration Rights Agreement dated as of November 12, 1997 among the
         Company and various investors. Filed as Exhibit 10.22 to the Company's
         Registration Statement on Form S-3 (No. 333-35249) and incorporated
         herein by reference.
</TABLE>
 
                                       36
<PAGE>
 
<TABLE>
 <C>   <S>
 10.14 Stock Purchase Agreement dated as of January 1, 1998 by and between
       Prosoft I-Net Solutions, Inc. and Uday O. Pabrai with respect to all
       outstanding capital stock of Net Guru Technologies, Inc. Filed as
       Exhibit 2.1 to the Company's Current Report on Form 8-K dated January 1,
       1998 and incorporated herein by reference.
 10.15 Employment Agreement dated January 1, 1998 between Prosoft I-Net
       Solutions, Inc. and Uday O. Pabrai. Filed as Exhibit 10.1 to the
       Company's Current Report on Form 8-K dated January 1, 1998 and
       incorporated herein by reference.
 10.16 Promissory Note dated June 18, 1998, made by Uday Pabrai in favor of the
       Company.
 10.17 Consulting Agreement dated April 30, 1998, between Investment
       Transaction, LLC, and the Company.
 21    Subsidiaries of the Company
 23.1  Consent of Grant Thornton LLP
 23.2  Consent of Ernst & Young LLP, Independent Auditors
 23.3  Consent of Kelly & Co.
 27    Financial Data Schedule.
</TABLE>
 
                                       37