<PAGE>

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

                                   FORM 10-KSB

 X    Annual report pursuant to section 13 or 15(d) of the Securities
---   Exchange Act of 1934 for the fiscal year ended September 30, 2002.

      Transition report pursuant to section 13 or 15(d) of the Securities
___   Exchange Act of 1934 for the transition period from ______ to _____ .

                          Commission File No. 000-29741

                                CE SOFTWARE, INC.
             (Exact name of registrant as specified in its charter)

                        Iowa                            42-1298712
          (State or other jurisdiction of            (I.R.S. employer
         incorporation or organization)              Identification No.)

            1801 Industrial Circle
            West Des Moines, Iowa                          50265
   (Address of principal executive offices)              (Zip Code)

       Registrant's telephone number, including area code: (515) 221-1801

        ----------------------------------------------------------------

        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 $0.10 per share
                                (Title of class)

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

                           YES   X             NO ____
                                ---

                             (Cover page continued)

<PAGE>

Indicate by mark (X) if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B 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 this Form 10-KSB or any amendment to
this Form 10-KSB. [_]

Issuer's revenues for its most recent fiscal year:  $1,653,620

Aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price on the OTCBB of the Common Stock on
November 30, 2002: $742,042

Number of shares outstanding of each of the registrant's classes of common stock
as of November 30, 2002:

Common Stock          1,454,984


                      DOCUMENTS INCORPORATED BY REFERENCE:

List hereunder the following documents if incorporated by reference and the Part
of the 10-KSB into which the document is incorporated.

Portions of the Proxy Statement to be delivered to stockholders in connection
with the Annual Meeting of Stockholders to be held February 28, 2003 are
incorporated by reference into Part III.

<PAGE>

                                CE SOFTWARE, INC.
                         2002 FORM 10-KSB ANNUAL REPORT
                                Table of Contents

<TABLE>
<CAPTION>
                                                                                    Page
                                                                                    ----
<S>                                                                                 <C>
Trademarks/Definitions                                                                1

                                     PART I

Item 1.    Business                                                                   2
Item 2.    Properties                                                                 8
Item 3.    Legal Proceedings                                                          8
Item 4.    Submission of Matters to a Vote of Security Holders                        8


                                     PART II

Item 5.    Market for the Registrant's Common Equity and Related Stockholder
           Matters                                                                    9
Item 6.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations                                                      9
Item 7.    Financial Statements                                                      14
Item 8.    Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure                                                      27


                                    PART III

Item 9.    Directors and Executive Officers of the Registrant                        28
Item 10.   Executive Compensation                                                    28
Item 11.   Security Ownership of Certain Beneficial Owners and Management            28
Item 12.   Certain Relationships and Related Transactions                            28
Item 13.   Exhibits, Financial Statements, and Reports on Form 8-K                   28
Item 14.   Controls and Procedures                                                   29
Signatures                                                                           30
</TABLE>

<PAGE>

TRADEMARKS/DEFINITIONS

BackMatic(TM), CEToolbox(TM), Choosy(TM), DialogKeys(TM), InOut Tracker(TM),
MailManager(TM), Mounty(TM), Mousies(TM), NameFinder(TM), NameServer(TM),
ProKey(TM), QM Server(TM), QM Administrator(TM), QM Config(TM), QM-Data
Collection Bridge(TM), QM-Direct Bridge(TM), QM Forms(TM), QM-Internet(TM)
Gateway, QM Menu(TM), QM-QM Bridge(TM), QM Remote(TM), QM-Script Gateway(TM),
QM-Serial Gateway(TM), QM Server(TM), QM TimeOuts(TM), QuickConference(R),
QuicKeys(R), QuickMail(R), QuickMessenger(TM), QuickSend(TM), QuickTimer(TM),
Scrap Ease(TM), Screen Ease(TM), Speak Ease(TM), TAA(TM), Technical Assistance
Assistant(TM), and Vaccine(TM) are trademarks or U. S. registered trademarks of
CE Software, Inc., an Iowa corporation.

IBM(R) is a registered trademark of International Business Machines Corporation
("IBM"). Macintosh(R) and Apple(R) are registered trademarks and Mac(TM) is a
trademark of Apple Computer, Inc. ("Apple"). MS-DOS(R), Windows(R) and
Microsoft(R) are registered trademarks of Microsoft Corporation ("Microsoft").

                                       1

<PAGE>

                                     PART I

Item 1:  Business

General
CE Software, Inc., an Iowa corporation, develops computer software products that
enhance communications, connectivity and productivity for businesses and
home-based personal computer users for both Windows and Macintosh operating
systems. The Company's products include both personal and group productivity
tools. The QuicKeys products represent personal productivity. The products
QuickMail, QuickConference and InOut Tracker represent group productivity. The
primary products are QuicKeys, a utility that automates time-consuming and
repetitive tasks with customized hot keys or toolbars, and QuickMail, an
all-in-one business e-mail solution for the Internet and for internal office
use.

The Company
CE Software, Inc. (the Company) was formed in January 1987 as the successor to a
business started in 1981 as the software development arm of a retail computer
store known as Computer Emporium. The three founders of the Company, Richard A.
Skeie, Donald M. Brown and John S. Kirk still beneficially and collectively own
approximately 26% of the Company's outstanding common stock. All three founders
remain involved in the Company.

In February 1990, all the common stock of the Company was acquired by Anubis
Corporation, which then changed its name to CE Software Holdings, Inc. The
merger was accounted for as a reverse acquisition. CE Software Holdings, Inc.
existed primarily as a stock holding company, and accordingly, the Company was a
subsidiary of CE Software Holdings, Inc.

On March 1, 2000, the Company filed Amended and Restated Articles of
Incorporation to effect a ten for one stock split of the Company's Common Stock.
From and after the amendment, the Company has been authorized to issue
10,000,000 shares of Common Stock, par value $.10.

On April 28, 2000, the Company was spun-off by its parent by means of a dividend
to shareholders of CE Software Holdings, Inc. Shareholders of CE Software
Holdings, Inc. received one (1) share of the Company's common stock for each
share of CE Software Holdings, Inc. stock held as of the close of business on
April 28, 2000.

Early in the 1980's, the original business focused on developing accounting
software, games, and programming products for the Apple II computer. Shortly
after the release of the Macintosh computer in 1984, the Company released its
first Macintosh program. For several years, the bulk of the Company's product
development and sales was for the Macintosh. In 1987 the Company released its
automation software QuicKeys. In 1988 the Company released its e-mail software
QuickMail. Beginning in 1990, the Company focused on re-engineering its existing
Macintosh e-mail product for use with Microsoft's DOS operating system. In 1992,
an upgrade extended the functionality of QuickMail to users of Microsoft's
Windows operating system.

In 1996 the Company re-engineered QuickMail LAN from a proprietary system into
QuickMail Pro based on the Internet's open standards. In 1997 the Company
released its

                                        2

<PAGE>

QuickMail server for Macintosh. The Macintosh and Windows client software along
with the Macintosh QuickMail server comprise QuickMail Office, a complete,
client-server business e-mail solution for small to mid-sized companies running
Windows or Mac OS clients with a Macintosh server.

In 1998 the Company re-engineered QuicKeys to operate within Microsoft's Windows
operating system. Like the Macintosh version, QuicKeys for Windows automates any
repetitive, multi-step function to save the time of numerous repetitive
keystrokes.

In 2001 the Company developed a new product, QuicKeys X, to operate within
Apple's new Mac OS X operating system. This product was released in October
2001.

In 2001 the Company also released two new products, QuickConference and InOut
Tracker. QuickConference provides a secure instant messaging within the business
environment. InOut Tracker replaces the traditional in/out board with magnets,
while providing information on when someone is returning as well as contact
information.

Products
The Company's group and personal productivity software products have received
awards from professional groups, user groups, and industry trade publications
both in the United States and internationally.

The Company's products can be divided into two distinct groups, personal
productivity and group productivity applications. The personal productivity
group consists of QuicKeys while group productivity includes QuickMail Office,
QuickMail Pro, QuickConference and InOut Tracker. The Company's approximate net
revenues are as follows:

                                       Years ended September 30,
-------------------------------------------------------------------
                                        2002              2001
-------------------------------------------------------------------
Group productivity                  $  799,000           776,000
Personal productivity                  855,000           772,000

-------------------------------------------------------------------
Total net revenues                  $1,654,000         1,548,000

The Company believes that the products in both groups, as updated from time to
time, will continue to make revenue contribution. Of course, these products are
at risk of reduced sales if the Company is unable to produce competitive
products or respond to changes in customer demands or operating system
requirements.

Group Productivity
QuickMail Office is an easy-to-use electronic mail package aimed at small to
mid-sized businesses. It was originally released as an e-mail system for
Macintosh-centric local area networks (LAN) in 1988 (QuickMail LAN). Due to the
new direction of the e-mail industry, QuickMail LAN was upgraded in 1996 and
1997 to QuickMail Office to offer full support for industry messaging standards.
QuickMail Office provides important communications functionality such as sending
and receiving of messages, remote access to e-mail and connectivity to other
office locations and e-mail systems.

                                        3

<PAGE>

The Company also continues to sell, but does not support QuickMail LAN. Gateway
and bridge software that connects QuickMail LAN with the Internet and with other
applications is also still available from the Company.

In November 1996, the Company released QuickMail Pro, an Internet e-mail client
for Windows and Macintosh. Originally available as a client-only solution,
QuickMail Pro became part of a complete, all-in-one-box business e-mail solution
with the addition of a Macintosh e-mail server. The result was the debut of
QuickMail Office in 1997.

In November 2000, the Company released QuickMail Pro 2.1 for Macintosh and
Windows, a major upgrade of its easy-to-use Internet and personal e-mail client.
This version features all-new HTML previewing, automatic updates, system
multi-user support, advanced contact management features, lock client feature
and dozens of other improvements. In February 2002 QuickMail was further
upgraded for Windows XP and Macintosh OS X. In July 2002 we released another
upgrade of QuickMail 3.1 with improved HTML viewing.

In March 2001, the Company acquired QuickConference and InOut Tracker. Free
upgrades to both for Macintosh OS X were released in August 2002.

Personal Productivity
QuicKeys, the Company's automation utility, was first introduced in 1987 for
Macintosh users and is now available for Microsoft's Windows users as well.
QuicKeys automates any repetitive, multi-step function performed on a Macintosh
or Windows computer. Since its release, QuicKeys has been the leading desktop
automation package for the Macintosh computing environment and has won several
awards from key computer industry publications such as Macworld magazine. The
Windows version of QuicKeys was written up in the November 27, 2000 issue of PC
World in an article titled "A Control Freak's Best Friend."

The Company first released QuicKeys for Windows in November 1998. This
automation software is designed to save time and boost productivity for anyone
who uses Microsoft Windows. QuicKeys is designed to save a PC user's time and
effort by automatically performing hundreds of common but time-consuming
computer tasks, such as opening programs, typing text, choosing from menus, plus
many more. QuicKeys also automates longer tasks that require several consecutive
steps, such as compressing and sending files via e-mail. QuicKeys simply records
the keystrokes and mouse-clicks involved in the task then plays the entire
sequence back, quickly and accurately, whenever the user presses the hot key or
clicks the toolbar button designated for that task. In addition to helping PC
users work faster and easier, QuicKeys makes all the elements of the user's
computer system -- programs, documents, operating system and Internet connection
-- work together more efficiently. For instance, a single QuicKeys sequence can
easily perform a task that involves steps in several programs. With a wide range
of features, QuicKeys can automate and control almost any function of any PC
software. QuicKeys has garnered very favorable feedback from the press and
customers.

QuicKeys 5.0 for Macintosh was released in June 2000. Version 5.0 added greatly
enhanced tabbed toolbars, pop-out toolbars, speech activated triggers,
create/view palette, OS 9 multi-user compatibility, many improvements to
shortcuts, and many other new enhancements. This product has won many top awards
and reviews for its usefulness and quality.

                                        4

<PAGE>

QuicKeys 2.0 for Windows was released in October 2000, and version 2.5 in April
2002. This was a greatly enhanced version of QuicKeys for Windows that added a
multitude of enhancements, actions, and features requested by customers. Some of
the new enhancements include Pop out Toolbars, Check Spelling, Zip Files,
QuickType, Screen Capture, Screen Saver, and Set System Clock as well as many
other improvements and enhancements. This new version has been highly ranked in
comparative reviews of automation software and has received many outstanding
reviews from leading PC reviewers.

Product Support
The Company believes that customer technical support is an important part of its
overall performance. As of September 30, 2002, the Company had two employees
involved in technical support services, available to all customers by electronic
mail, Worldwide Web site, telephone, or fax. Certain customers are charged an
annual maintenance fee for upgrades and support. Support services include
explaining how the customer's computer works, how their other software works in
relation to CE products, solving problems with software operation, and
suggesting solutions to business and personal computing issues.

Distribution and Marketing
The Company's products are marketed through independent distributors in the
United States, through numerous independent dealers and distributors in other
countries, directly to large corporate accounts under site licensing agreements,
and directly to end-users through electronic distribution and direct marketing
campaigns.

Of the Company's total net revenues for fiscal 2002, approximately 30% are
through independent, domestic, nonexclusive distributors. Domestic distributors
purchase product at a discount from list prices. The Company also distributes
its products electronically from its Web site through the services of Digital
River, which accounted for 22% of total net revenues.

Of the Company's total net revenues for fiscal 2002, approximately 18% are
through independent, international distributors. Several of these distributors
are limited by contract to distribution within a specified geographic area. The
Company expects to continue emphasizing its international sales in upcoming
periods. It currently provides translations of certain programs in German,
French, Japanese and Swedish languages. Sales to three such distributors,
Computers Unlimited in the United Kingdom, Moreware in Sweden, and Prisma in
West Germany, accounted for approximately 8%, 2%, and 2% of total net revenues,
respectively. International distributors generally require a somewhat larger
discount, in return for various advertising, customer service, and customer
registration duties performed by them.

The Company gives its distributors industry-standard rights of return for stock
balancing and for defective products and replacement rights when products are
upgraded to new versions. A reserve for returns has been recorded and was
$19,300 and $16,500 at September 30, 2002 and 2001, respectively. Returns
exchanged for product upgrades and new version releases do not have a material
impact on the financial statements because of the Company's low cost to replace
such returns. Returns from end users, for any reason, have not been significant.

                                        5

<PAGE>

Product Development
The personal computer software industry continues to undergo rapid technological
change, requiring a continuous high level of enhancement of existing products
and development of new products. The Company is committed to the creation of new
products and is planning to continue the enhancement of existing products.

The Company's future financial performance will depend, in part, on the
successful development, completion, and introduction of new software products,
such as QuickConference and InOut Tracker, and of enhanced versions of existing
products, and customer acceptance of those products. In the future, there is no
assurance that the Company will not encounter difficulties that could delay or
prevent the successful development of, or marketing of, new products and/or
enhancements of existing products. There also can be no assurance that such
products will yield positive results or that such results can be obtained on a
timely basis or without the expenditure of substantial funds.

The Company's software products are primarily developed internally, although the
Company has increased the amount of extended development with several partners
and has purchased and/or licensed software products from independent authors and
other software companies. As of September 30, 2002, seven employees were engaged
full time in product development. During fiscal years 2002 and 2001, the Company
spent approximately $602,000 and $766,000, respectively, on product development
and enhancement activities, representing approximately 36% and 49%,
respectively, of net revenues in each of these periods.

Competition
The personal computer software market is highly competitive and has been subject
to rapid change, which is expected to continue. The Company's competitors
include many software vendors that have financial, marketing, and technological
resources far in excess of those of the Company. Certain of these include
Microsoft, IBM (Lotus), Qualcomm, Netscape Division of America Online, and
Novell Corporation. Certain computer manufacturers have obtained software
directly competitive with the Company's products and have included that software
within their computers and computer systems without additional charge to
consumers. This practice negatively impacts the Company's ability to market its
products.

The Company's group and personal productivity products are marketed primarily
through the retail channel. All of these products face competing products
offering many similar features. The Company believes that the principal
competitive factors in the market include product features and functions, ease
of understanding and operating the software, product reliability,
price/performance characteristics, name recognition, and availability and
quality of support and training services. Because of the economy, price
competition is likely to become an increasing factor in the personal computer
software market, which could, in turn, be expected to increase pressures on
profit margins in the future.

Product Protection
The Company regards its software as proprietary and attempts to protect it with
copyrights, trade secret laws, and internal nondisclosure safeguards, as well as
restrictions on disclosure and transferability that are incorporated into its
software license agreements. The Company licenses its software products to
customers rather than transferring title. Despite these restrictions, it may be
possible for competitors or users to copy aspects of the Company's products or
to obtain information which the Company regards as trade secrets. Computer

                                        6

<PAGE>

software generally can be patented only with difficulty, and existing copyright
laws afford only limited practical protection. Policing unauthorized use of such
a broadly disseminated product as computer software is difficult, and software
piracy can be expected to be a persistent problem for the packaged software
industry. These problems may be particularly acute in international markets.
However, because of the rapid pace of technological change in its industry, such
protections are less significant than factors such as knowledge, ability and
experience of the Company's employees, frequent product enhancement, and the
timeliness and quality of Company support services.

Employees
As of September 30, 2002, the Company employed 18 individuals. Over the previous
few years, the Company has steadily taken steps to reduce its workforce. These
steps have included both normal employee attrition, as well as employee
severance. Historically, such reductions within the areas of development, sales
and marketing have been in response to the Company's focus on a smaller number
of products and the outsourcing of some functions requiring a particular
expertise. Within the administrative areas, reductions have been in response to
reduced workloads caused by a smaller volume of transactions. During the fiscal
year ended September 30, 2002, the Company's work force decreased in all areas.
At November 30, 2002, the Company employed 18 individuals.

The term full-time equivalent employee (FTE) is defined as one full-time
employee or two or more part-time employees working an aggregate of a 40-hour
workweek. As of September 30, 2002, the Company employed 17 FTEs. At November
30, 2002, the Company employed 17 FTEs.

Forward-looking statements
The Company or management may make or may have made certain forward-looking
statements, orally or in writing, such as those within Management's Discussion
and Analysis contained in its various SEC filings. The Company wishes to ensure
that such statements are accompanied by meaningful cautionary statements, so as
to ensure to the fullest extent possible the protections of the safe harbor
established in the Private Securities Litigation Reform Act of 1995. Such
statements are therefore qualified in their entirety by reference to and are
accompanied by the following discussion of certain important factors that could
cause actual results to differ materially from those described in such
forward-looking statements.

The Company cautions the reader that this list of factors is not intended to be
exhaustive. The Company operates in a continually changing business environment,
and new risk factors emerge from time to time. Management cannot predict such
factors, nor can it assess the impact, if any, of such factors on the Company's
business or the extent to which any factors may cause actual results to differ
materially from those described in any forward-looking statement. None of the
Company's forward-looking statements should be relied upon as prediction of
actual results.

The Company faces risks and uncertainties that could render actual events
materially different than those described in our forward-looking statements.
These risks and uncertainties include, but are not limited to, the risk new
products (internally developed or acquired) and product upgrades may not be
effected on a timely basis; the risk such products may not achieve market
acceptance within the Windows or Macintosh markets; the risk the prevalence and
functionality of available free e-mail software will increase and further erode

                                       7

<PAGE>

revenues; the risk of the growth potential of QuicKeys for Windows; the risk
that QuicKeys for Macintosh may not be fully adaptable to Mac OS X; the risk the
Company would not be able to fund its working capital needs from cash flows; and
the risk associated with domestic and international general economic conditions.
The Company's products are sold in markets that change rapidly and the Company
must continually anticipate and adapt its products to emerging computer
technologies and capabilities. The Company may not be able to successfully adapt
to these changing markets.

Risk factors may affect future results
The Company may experience material fluctuations in future revenues and
operating results on a quarterly or annual basis resulting from a number of
factors, including but not limited to the risks discussed in the paragraph
above.

Item 2: Properties

The Company's principal facility is a 21,000-square-foot office building that
the Company built in 1990 in West Des Moines, Iowa. On January 31, 2002, the
Company refinanced the mortgage on the building by signing a Fixed Rate
Revolving or Draw Note with a bank in the maximum amount of $645,000. On January
31, 2002, the Company received $500,000 under this arrangement. At September 30,
2002, the Company has a balance of $474,649.

The Company has rented a small amount of office space in its principal facility
from time to time. At December 1, 2002, two tenants are renting about 765 square
feet.

Item 3: Legal Proceedings

None.

Item 4: Submission of Matters to a Vote of Security Holders

No matters were submitted to the stockholders in the fourth quarter of fiscal
2002.

                                       8

<PAGE>

                                     PART II

Item 5: Market for Registrant's Common Equity and Related Stockholder Matters

As of November 30, 2002, there were approximately 220 stockholders of record.
The Company believes that it has approximately 1,000 beneficial stockholders
(including the stockholders of record). The Company has never paid cash
dividends on its stock and anticipates it will continue to retain earnings for
use in the growth and operation of its business and does not anticipate paying
any cash dividends on its Common Stock in the foreseeable future. Under the
Company's loan agreement, the bank requires prior approval before any dividends
can be paid.

The Company's common stock trades on the Over the Counter Bulletin Board tier of
The Nasdaq Stock Market under the symbol: CESW. The following table sets forth
the range of high and low sales prices per share of common stock for each
quarter as provided by Nasdaq since the stock first started trading on July 28,
2000.

Quarter ended:              Common stock
-------------------------------------------------
                            Low          High
-------------------------------------------------

December 31, 2000           $0.313       $0.687
March 31, 2001              $0.200       $0.375
June 30, 2001               $0.160       $0.240
September 30, 2001          $0.130       $0.230
December 31, 2001           $0.125       $0.170
March 31, 2002              $0.100       $0.180
June 30, 2002               $0.100       $0.550
September 30, 2002          $0.260       $0.510

Item 6: Management's Discussion and Analysis of Financial Condition and Results
of Operations

RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes included elsewhere herein. Historical results and
percentage relationships are not necessarily indicative of the operating results
for any future period. Within this discussion and analysis, all dollar amounts
(except for per share amounts) have been rounded to the nearest thousand.

The following table sets forth certain data derived from the statements of
operations, expressed as a percentage of net revenues for each of the years in
the two-year period ended September 30, 2002.

                                           Years ended September 30,
---------------------------------------------------------------------
                                              2002         2001
---------------------------------------------------------------------
Percentage of net revenues:
Net revenues                                  100%         100%
Cost of revenues                               13           19
---------------------------------------------------------------------
Gross profit                                   87           81
---------------------------------------------------------------------

                                       9

<PAGE>

Sales and marketing                       24         51
General and administrative                38         58
Research and development                  36         49
--------------------------------------------------------------
Total operating expenses                  99        158
--------------------------------------------------------------
Operating loss                           (12)       (77)
Other expense                             (1)        (1)
--------------------------------------------------------------
Loss before income taxes                 (13)       (78)
Income tax benefit                        (0)        (0)
--------------------------------------------------------------
Net Loss                                 (13)%      (78)%
==============================================================

NET REVENUES
Revenues increased 7% from fiscal 2001 to fiscal 2002. Approximately 52% of the
Company's fiscal 2002 revenues were from Personal Productivity products. These
revenues are primarily from sales of QuicKeys, the Company's productivity
enhancing utility program, which is available for the Windows and Apple
Macintosh markets. Revenues from the QuicKeys product group increased by 11%
compared to the prior year. The increase in fiscal 2002 compared to the prior
year was primarily due to customers purchasing QuicKeys X for the new version of
Apple's Mac OS X.

Revenues from the Company's Messaging products grew 3%, and accounted for
approximately 48% of the total net revenues. Presently, the majority of
messaging revenues is generated from the Company's QuickMail Pro and QuickMail
Office products. These products are cross-platform, open standards messaging
products available for both Microsoft Windows and Mac OS environments. In
management's opinion, this revenue growth was the result of releasing an upgrade
of the Company's product during fiscal 2002 and has been negatively impacted due
to the development of strong competition within the e-mail market and the
decline in economic conditions. This competition includes the prevalence of
inexpensive and, in some cases, free e-mail software. In management's opinion,
such competition is expected to continue and may hinder substantial, long-term
growth of this product group.

COST OF REVENUES
The Company's cost of revenues is composed primarily of: 1) the costs of product
materials such as manuals, diskettes, CD-ROMS, and packaging; 2) amortization of
capitalized purchased software; 3) royalties paid to outside developers for the
use of certain software included with some of the Company's products; 4)
translation cost; and 5) amortization of capitalized manufacturing expenses.
Amortization of capitalized purchased software includes both purchased product
rights and technology rights.

Cost of revenues, as a percentage of net revenues, decreased from 19% to 13% in
fiscal 2002, compared to fiscal 2001. The change, on a percentage basis, was due
to lower royalties associated with the QuickMail product line reduced by higher
amortization expense associated with capitalized purchased software.

SALES AND MARKETING
Sales and marketing expenses decreased to $404,000 during fiscal year 2002 from
$783,000 during fiscal year 2001. The significant decreases included salaries
and benefits, $162,000 or 42% from prior year; contract labor and temporary
help, $24,000 or 98%; marketing/advertising expenses, $163,000 or 61%; allocated
facility overhead expenses,

                                       10

<PAGE>

$17,000 or 19%; travel, food and entertainment, $12,000 or 84% and
miscellaneous, $1,000 or 63%. The decreases are a result of a smaller sales and
marketing workforce, a more focused marketing/advertising program and the
decrease in overhead is from a reallocation from general and administrative
because of the workforce reduction and restructuring and reduced expenses.

GENERAL AND ADMINISTRATIVE
General and administrative expenses are composed principally of salaries of
administrative and technical support personnel, fees for professional services,
and facilities expenses. These expenses decreased $263,000 or 29% during fiscal
2002 compared to fiscal 2001. The significant decreases included salaries and
benefits, $137,000 or 26%; bad debts, $76,000 or 99%; depreciation, $47,000 or
48%; professional services, $26,000 or 29% and maintenance, repairs and
equipment rental, $15,000, or 25% offset by increases in telephone, $9,000, or
13% and allocated facility overhead expenses, $29,000 or 13%. The decrease in
salaries and benefits is the result of a smaller administrative workforce in
fiscal 2002. The decrease in depreciation was the result of a portion of the
fixed assets becoming fully depreciated.

RESEARCH AND DEVELOPMENT
Research and development expenses were $602,000 and $766,000 in fiscal 2002 and
2001, respectively. Salaries and benefits, overhead allocation and miscellaneous
decreased by $146,000, $12,000 and $6,000, respectively, in fiscal 2002 compared
to fiscal 2001 due to the decreased number of employees in research and
development while the decrease in overhead was due to the reallocation and
reduction of overhead expenses as discussed previously.

LOSS ON SALES OF INVESTMENTS / CHANGE IN MARKET VALUE OF SECURITIES
During fiscal 2002, the Company disposed of the remaining shares of
Elder-Beeman. The disposal resulted in a reversal of unrealized depreciation
recorded in accumulated other comprehensive loss in fiscal 2001.

During fiscal 2001, the Company disposed of the remaining shares of Lightning
Rod Software, Inc. The disposal resulted in a reversal of unrealized
depreciation recorded in accumulated other comprehensive loss in fiscal 2000.

INTEREST INCOME
Interest income was $224 and $28,000 in fiscal 2002 and 2001, respectively. The
major reasons for the decrease is the reduction of interest rates and
availability of investable funds.

INTEREST EXPENSE
Interest expense increased to 34,000 in fiscal 2002 from $15,000 in fiscal 2001
as a result of the refinancing during fiscal 2002.

INCOME TAXES
The Company recorded no income tax benefit in either fiscal 2002 or 2001 as it
is in a net operating loss carry forward position. The Company has recorded a
valuation allowance for its net deferred tax assets.

                                       11

<PAGE>

CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those accounting policies that management
believes are important to the portrayal of the Company's financial condition and
results of operations and require management's most difficult, subjective
judgements, often because of the need to estimate the effects of inherently
uncertain factors.

Revenue Recognition
Revenue from software licenses is recognized upon shipment of the product, net
of an allowance for estimated product returns. The Company provides an allowance
for product returns based upon historical experience and anticipated returns
from its major distributors.

Revenues associated with obligations to provide customers with future product
enhancements are deferred and recognized either pro rata over the term of the
respective agreements or, in the case of revenues associated with specific
upgrades, upon shipment of the upgraded products.

Post-contract customer support (PCS) is provided with other software licenses,
and is also available on a per call basis separate from the license fee. Revenue
equal to the estimated costs of providing the PCS is deferred and recognized
over the estimated performance period.

LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $118,000 to $181,000 as of the end of
fiscal 2002 compared to $63,000 for the prior year. Operating losses of $221,000
along with increases in trade receivable of $48,000, other assets of $34,000 and
decreases in accounts payable of $54,000, accrued expenses of $55,000 were
offset by other sources, which include the decreases in inventories of $29,000
and non-cash depreciation and amortization expenses of $160,000 resulting in a
use of cash in operations of $221,000. Proceeds from a mortgage of $500,000 less
payments on the outstanding principal of the long-term debt of $158,000
contributed to the increase in cash and cash equivalents.

Cash and cash equivalents decreased to $63,000 at the end of fiscal 2001, from
$735,000 at the end of fiscal 2000. Operating losses of $1,213,000 were
partially offset by other sources, which include the decrease in trade accounts
receivable of 236,000, the decrease in recoverable income tax of $154,000, the
decrease in other assets of $75,000 and the decrease in inventories of $59,000
resulting in a use of cash in operations of $450,000. Payments on the
outstanding principal of the long-term debt of $109,000 and payments for
acquired software of $98,000 also reduced cash and cash equivalents.

On January 31, 2002, the Company signed a Fixed Rate Revolving or Draw Note with
a bank in the maximum amount of $645,000. Funds advanced are subject to an
interest rate of 9% with a maturity date of December 31, 2006. Payments are
based on a 15-year term. The Company's President has provided a personal
guarantee to the bank in the amount of $250,000. Any advance in excess of
$500,000 must be approved by the guarantor. On January 31, 2002, the Company
received $500,000 under this arrangement. At September 30, 2002 the Company has
a balance of $474,649.

Company management has reduced expenses significantly in fiscal 2002 and
anticipates the release of upgrades of existing products and the introduction of
new products in fiscal 2003. Company management believes that funds from
operations and the availability under its note

                                       12

<PAGE>

with a bank will enable the Company to meet its obligations during the year
ending September 30, 2003.

RISK AND UNCERTAINTY
The preceding statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which are not historical facts
are forward-looking statements. These forward-looking statements involve risks
and uncertainties that could render them materially different, including, but
not limited to, the risk that new products and product upgrades may not be
effected on a timely basis, the risk that such products and upgrades may not
achieve market acceptance, the risk that competitors will develop similar
products and reach the market first, the risk that competing products
distributed at no cost will materially decrease the Company's opportunity to
market its products, and the risk that the Company would not be able to fund its
working capital needs from cash flow.

RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 142
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(SFAS No. 121) and subsequently SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS No. 144).
In August 2001, the FASB issued SFAS No. 144. SFAS No. 144 retains the
fundamental provisions in SFAS No. 121 for recognizing and measuring impairment
losses on long-lived assets held for use.

Also, in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires a company to
record the fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the retirement of
tangible long-lived assets that result from the acquisition, construction,
development and/or normal use of the assets. A corresponding asset is also
recorded, which is depreciated over the life of the asset. Subsequent to the
initial measurement of the asset retirement obligation, the obligation is
adjusted at the end of each period to reflect the passage of time and changes in
the estimated future cash flows underlying the obligation.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
(SFAS No. 145). SFAS No. 145 rescinds FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Find
Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for
intangible Assets of Motor Carriers. This Statement amends FASB Statement No.
13, Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meaning, or describe their applicability under changed conditions.

                                       13

<PAGE>

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit and Activity (including Certain Costs Incurred in a Restructuring)."

Both SFAS No. 142 and SFAS No. 144 are effective for fiscal years beginning
after December 15, 2001. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. SFAS No. 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. These will be implemented during the
Company's year ending September 30, 2003. Management does not expect these
statements to have a material effect on the Company's financial statements. SFAS
No. 145 is generally effective for financial Statements issued after May 15,
2002. This statement did not have an effect on the Company's financial
statements.

Item 7: Financial Statements

Index to Item 7: Financial Statements

Independent Auditors' Report                                         15
Balance Sheets, as of September 30, 2002 and 2001                    16
Statements of Operations, for the years
  ended September 30, 2002 and 2001                                  17
Statements of Stockholders' Equity and Comprehensive Loss,
  for the years ended September 30, 2002 and 2001                    18
Statements of Cash Flows, for the years
  ended September 30, 2002 and 2001                                  19
Notes to Financial Statements                                        20

                                       14

<PAGE>

INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS AND STOCKHOLDERS
CE SOFTWARE, INC.:

We have audited the accompanying balance sheets of CE Software, Inc., as of
September 30, 2002 and 2001, and the related statements of operations,
stockholders' equity and comprehensive loss, and cash flows for the years 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 audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CE Software, Inc., as of
September 30, 2002 and 2001, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.

                                                                        KPMG LLP


Des Moines, Iowa
November 27, 2002

                                       15

<PAGE>

BALANCE SHEETS
CE Software, Inc.
September 30, 2002 and 2001

<TABLE>
<CAPTION>
Assets (note 3)                                                          2002         2001
------                                                                   ----         ----
<S>                                                                  <C>           <C>
Current assets:
  Cash and cash equivalents                                          $  180,899       62,687
  Investments                                                                 -          131
  Trade accounts receivable, less allowance for doubtful
    accounts of $22,000 in 2002 and $16,000 in 2001 (note 7)            172,482      124,225
  Inventories                                                            79,454      108,213
  Other current assets                                                   72,976       62,760
                                                                     ----------    ---------
    Total current assets                                                505,811      358,016
                                                                     ----------    ---------

Property, fixtures, and equipment:
  Land                                                                   82,877       82,877
  Building                                                            1,312,016    1,312,016
  Fixtures and equipment                                              2,449,671    2,753,626
                                                                     ----------    ---------
    Total property, fixtures, and equipment                           3,844,564    4,148,519
  Less accumulated depreciation                                       2,874,481    3,089,791
                                                                     ----------    ---------
    Net property, fixtures, and equipment                               970,083    1,058,728
                                                                     ----------    ---------

Intangible assets, net of amortization                                   80,118      148,807
Other assets                                                             24,551        1,081
                                                                     ----------    ---------
    Total assets                                                     $1,580,563    1,566,632
                                                                     ==========    =========

<CAPTION>
Liabilities and Stockholders' Equity                                     2002         2001
------------------------------------                                     ----         ----
<S>                                                                  <C>           <C>
Current liabilities:
  Current portion of long-term debt (note 3)                         $   40,536      117,545
  Trade accounts payable                                                 67,103      121,301
  Accrued payroll and benefits                                           87,938      110,948
  Other accrued payables                                                 62,782       95,040
  Deferred revenue                                                        3,341        1,265
                                                                     ----------    ---------
    Total current liabilities                                           261,700      446,099

Long-term debt, net of current portion (note 3)                         434,113       14,733
                                                                     ----------    ---------
    Total liabilities                                                   695,813      460,832
                                                                     ----------    ---------

Stockholders' equity (note 4):
  Common stock, $.10 par value.  Authorized
    10,000,000 shares; issued and outstanding
     1,454,984 in 2002 and 1,455,124 in 2001                            145,498      145,512
  Additional paid-in capital                                          1,557,903    1,557,903
  Accumulated other comprehensive loss                                        -          (34)
  Accumulated deficit                                                  (818,651)    (597,581)
                                                                     ----------    ---------
    Total stockholders' equity                                          884,750    1,105,800
                                                                     ----------    ---------
    Total liabilities and stockholders' equity                       $1,580,563    1,566,632
                                                                     ==========    =========
</TABLE>

See accompanying notes to financial statements.

                                       16

<PAGE>

STATEMENTS OF OPERATIONS
CE Software, Inc.
Years ended September 30, 2002 and 2001

<TABLE>
<CAPTION>
                                                                     2002           2001
                                                                     ----           ----
<S>                                                               <C>            <C>
Net revenues (note 7)                                             $1,653,620      1,547,643
Cost of revenues                                                     220,183        293,338
                                                                  ----------     ----------
  Gross profit                                                     1,433,437      1,254,305
                                                                  ----------     ----------

Sales and marketing                                                  404,094        783,087
General and administrative                                           629,768        893,116
Research and development                                             602,474        765,724
                                                                  ----------     ----------
  Operating expenses                                               1,636,336      2,441,927
                                                                  ----------     ----------
  Operating loss                                                    (202,899)    (1,187,622)
Other income (expense):
  Gain (loss) on sale of investments and equipment (note 2)               13        (61,996)
  Interest income                                                        224         28,349
  Interest expense                                                   (34,283)       (14,811)
  Miscellaneous                                                       15,909         22,786
                                                                  ----------     ----------

    Loss before income taxes                                        (221,036)    (1,213,294)
Income taxes (note 5)                                                      -              -
                                                                  ----------     ----------
    Net loss                                                      $ (221,036)    (1,213,294)
                                                                  ==========     ==========

Basic loss per share (note 1)                                     $    (0.15)         (0.93)
                                                                  ==========     ==========

Shares used in per share calculation - basic                       1,455,092      1,310,466
                                                                  ==========     ==========

Diluted loss per share (note 1)                                   $    (0.15)         (0.93)
                                                                  ==========     ==========

Shares used in per share calculation - diluted                     1,455,092      1,310,466
                                                                  ==========     ==========
</TABLE>

See accompanying notes to financial statements.

                                       17

<PAGE>

STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
CE Software, Inc.
Years ended September 30, 2002 and 2001

<TABLE>
<CAPTION>
                                                                        Accumulated   (Accumulated
                                                           Additional    Other Com-     Deficit)/
                                      # of      Common       Paid-in     prehensive     Retained
                                     Shares      Stock       Capital        Loss        Earnings        Total
---------------------------------------------------------------------------------------------------------------
<S>                                 <C>         <C>        <C>          <C>           <C>            <C>
Balances at September 30, 2000      1,155,124   $115,512    1,504,713     (23,433)        615,713     2,212,505
Comprehensive loss:
  Net loss                                             -            -           -      (1,213,294)   (1,213,294)
  Other comprehensive income                           -            -      23,399               -        23,399
---------------------------------------------------------------------------------------------------------------
Total comprehensive loss                               -            -      23,399      (1,213,294)   (1,189,895)
Common stock issued                   300,000     30,000       53,190           -               -        83,190
---------------------------------------------------------------------------------------------------------------
Balances at September 30, 2001      1,455,124    145,512    1,557,903         (34)       (597,581)    1,105,800
Comprehensive loss:
  Net loss                                             -            -           -        (221,036)     (221,036)
  Other comprehensive income                           -            -          34               -            34
---------------------------------------------------------------------------------------------------------------
Total comprehensive loss                               -                       34        (221,036)     (221,002)
Common stock redeemed                    (140)       (14)           -           -             (34)          (48)
----------------------------------------------------------------------------------------------------------------
Balances at September 30, 2002      1,454,984   $145,498    1,557,903           -        (818,651)      884,750
===============================================================================================================
</TABLE>

See accompanying notes to financial statements.

                                       18

<PAGE>

STATEMENTS OF CASH FLOWS
CE Software Inc.
Years ended September 30, 2002 and 2001

<TABLE>
<CAPTION>
                                                                              2002          2001
                                                                              ----          ----
<S>                                                                       <C>           <C>
Cash flows from operating activities:
  Net loss                                                                $ (221,036)   (1,213,294)
  Adjustments to reconcile net loss to net
    cash used in operating activities:
      Depreciation and amortization:
        Property, fixtures, and equipment                                     91,685       138,366
        Purchased software                                                    68,689        42,228
      Gain on sale of equipment                                                  (80)         (200)
      Loss on sale of investments                                                 67        62,196
      (Increase) decrease in trade accounts receivable                       (48,257)      236,430
      Decrease in recoverable income taxes                                         -       153,766
      Decrease in inventories                                                 28,759        58,958
      (Increase) decrease in other assets                                    (33,686)       74,900
      (Decrease) increase in trade accounts payable                          (54,198)       24,102
      Decrease in accrued expenses                                           (55,268)      (26,425)
      Increase (decrease) in deferred revenue                                  2,076          (768)
                                                                          ------------------------
        Net cash used in operating activities                               (221,249)     (449,741)
                                                                          ------------------------
Cash flows from investing activities:
  Purchase of fixtures and equipment                                          (3,040)      (29,394)
  Proceeds from sales of equipment                                                80           200
  Proceeds from sale of investments                                               98        12,801
  Redemption of common stock                                                     (48)            -
  Payment for acquired software                                                    -       (97,878)
                                                                          ------------------------
        Net cash used in investing activities                                 (2,910)     (114,271)
                                                                          ------------------------
Cash flows from financing activities:
  Proceeds from issuance of long-term debt                                   500,000             -
  Payments on long-term debt                                                (157,629)     (108,581)
                                                                          ------------------------
        Net cash provided by (used in)
        financing activities                                                 342,371      (108,581)
                                                                          ------------------------
        Net increase (decrease) in cash
        and cash equivalents                                                 118,212      (672,593)
Cash and cash equivalents at beginning of year                                62,687       735,280
                                                                          ------------------------
Cash and cash equivalents at end of year                                  $  180,899        62,687
                                                                          ========================

Supplemental disclosures of cash flow information:
  Cash paid during the year for interest                                  $   35,148        15,521
                                                                          ========================

Supplemental schedule of non-cash investing and financing activities:
During March 2001 the Company acquired software from
      PrairieSoft, Inc. in exchange for cash and 300,000
      shares of common stock.
      The consideration paid and allocation is as follows:
        Consideration paid:
          Cash                                                            $        -        47,878
          Common stock issued                                                      -        83,190
                                                                          ----------     ---------
                                                                          $        -       131,068
                                                                          ==========     =========
        Allocated to:
          Other assets                                                    $        -       131,068
                                                                          ==========     =========
</TABLE>

See accompanying notes to financial statements.

                                       19

<PAGE>

NOTES TO FINANCIAL STATEMENTS
CE Software, Inc.
September 30, 2002 and 2001

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS
The Company manufactures and sells computer system enhancing and network
productivity software for Apple Macintosh and IBM PC and compatible personal
computers.

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

LIQUIDITY
The Company has had losses of $1,434,330 over the last two years but cash and
cash equivalents increased $118,212 during fiscal 2002.

On January 31, 2002, the Company signed a Fixed Rate Revolving or Draw Note with
a bank in the maximum amount of $645,000. Funds advanced are subject to an
interest rate of 9% with a maturity date of December 31, 2006. Payments are
based on a 15-year term. The Company's President has provided a personal
guarantee to the bank in the amount of $250,000. Any advance in excess of
$500,000 must be approved by the guarantor. On January 31, 2002, the Company
received $500,000 under this arrangement. At September 30, 2002, the Company has
a balance of $474,649.

Company management has reduced expenses significantly in fiscal 2002 and
anticipates the release of upgrades of existing products and the introduction of
new products in fiscal 2003. Company management believes that funds from
operations and the availability under its note with a bank will enable the
Company to meet its obligations during the year ending September 30, 2003.

CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers money market
funds and overnight repurchase agreements to be the equivalent of cash. At
September 30, 2002 and 2001, cash equivalents totaled approximately $1,000 and
$56,000, respectively.

INVESTMENTS
There were no available-for-sale securities held by the company at September 30,
2002 and they consisted of stock of Elder-Beeman at September 30, 2001. The
investments were recorded at market value, with the unrealized loss recorded as
a component of accumulated other comprehensive loss at September 30, 2001.

                                       20

<PAGE>

INVENTORIES
Inventories are composed primarily of product materials, and capitalized
production costs. Product materials, such as instruction manuals, CD-ROMS,
diskettes, and packaging boxes, are stated at the lower of cost or market with
cost determined using the first-in, first-out method.

PROPERTY, FIXTURES, AND EQUIPMENT
Property, fixtures, and equipment are stated at cost. Depreciation is calculated
on the straight-line method over the estimated useful lives of the assets as
follows: 31 1/2 years for building and five to seven years for fixtures and
equipment.

INTANGIBLE ASSETS
Amortization expense was $68,689, and $42,228, for the years ended September 30,
2002 and 2001, respectively. Accumulated amortization at September 30, 2002 and
2001 was $184,673 and $115,984, respectively. The Company assesses the
recoverability of intangible assets through analysis of undiscounted cash flows.
These assets are amortized over three-year and two-year lives for the
PrairieSoft and Object Zone purchases, respectively.

On March 23, 2001, the Company received shareholder approval to purchase certain
software products from PrairieSoft, Inc. for a purchase price consisting of cash
in the amount of $47,878 and 300,000 newly issued shares of the Company's
unregistered Common Stock. On May 7, 2001, the Company purchased software code
from Object Zone A. B. for $50,000 in cash.

STOCK OPTION PLAN
The Company has adopted Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-based Compensation," as required for
disclosure purposes only. The Company applies the provisions of Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees." In accordance with APB 25, compensation expense is recorded only on
the date of grant if the current market price of the underlying stock exceeded
the exercise price. Pro forma disclosures required by SFAS 123 have been
provided (see note 4).

CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those accounting policies that management
believes are important to the portrayal of the Company's financial condition and
results of operations and require management's most difficult, subjective
judgements, often because of the need to estimate the effects of inherently
uncertain factors.

Revenue Recognition
Revenue from software licenses is recognized upon shipment of the product, net
of an allowance for estimated product returns. The Company provides an allowance
for product returns based upon historical experience and anticipated returns
from its major distributors. The allowance for estimated product returns at
September 30, 2002 and 2001, was $19,300 and $16,500, respectively, and is
netted against trade accounts receivable in the consolidated balance sheets.

Revenues associated with obligations to provide customers with future product
enhancements are deferred and recognized either pro rata over the term of the
respective agreements or, in

                                       21

<PAGE>

the case of revenues associated with specific upgrades, upon shipment of the
upgraded products.

Post-contract customer support (PCS) is provided with other software licenses,
and is also available on a per call basis separate from the license fee. Revenue
equal to the estimated costs of providing the PCS is deferred and recognized
over the estimated performance period. Other accrued payables at September 30,
2002 and 2001 include $43,761 and $34,598, respectively, of such deferrals.

ADVERTISING
Advertising costs are expensed in the period the advertising takes place. For
the years ended September 30, 2002 and 2001, advertising costs were $126,427 and
$287,047, respectively.

INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosure About
Fair Value of Financial Instruments" requires the Company to disclose the
estimated fair values for it financial instruments. Fair value estimates,
methods, and assumptions are set forth below:

Cash and cash equivalents, trade accounts receivable, trade accounts payable,
and accrued expenses - The carrying amount approximates the estimated fair value
due to the short-term nature of those instruments.

Investments - Available-for-sale securities were recorded at market value using
published stock prices.

Long-term debt - The carrying value approximates fair value, as the Company's
borrowing rate has not changed significantly, since the debt was issued during
the year ended September 30, 2002. At September 30, 2001, the carrying amount
approximated the fair value since the debt bore interest at a variable interest
rate.

Limitations - Fair value estimates are made as of a specific point in time,
based upon the relevant market information about the financial instruments.
Because no market exists for a majority of the Company's financial instruments,
fair value estimates are based on judgments regarding current economic
conditions and other factors. These estimates are subjective in nature and
involve uncertainties and matters of judgments and, therefore, cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.

EARNINGS (LOSS) PER COMMON SHARE
SFAS No. 128, "Earnings Per Share," requires the presentation of basic and
diluted earnings (loss) per share. Basic earnings (loss) per common share is
computed by dividing net

                                       22

<PAGE>

earnings (loss) by the weighted average number of common shares outstanding
during the year. Diluted earnings (loss) per common share reflect the potential
dilution that would occur from the exercise of common stock options outstanding.
Antidilutive options excluded from the diluted per share calculation totaled
82,200 at September 30, 2002 and 89,080 at September 30, 2001.

OTHER
Other comprehensive loss consisted of unrealized gains and losses on equity
securities.

RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 142
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(SFAS No. 121) and subsequently SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS No. 144).
In August, 2001, the FASB issued SFAS No. 144. SFAS No. 144 retains the
fundamental provisions in SFAS No. 121 for recognizing and measuring impairment
losses on long-lived assets held for use.

Also, in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires a company to
record the fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the retirement of
tangible long-lived assets that result from the acquisition, construction,
development and/or normal use of the assets. A corresponding asset is also
recorded, which is depreciated over the life of the asset. Subsequent to the
initial measurement of the asset retirement obligation, the obligation is
adjusted at the end of each period to reflect the passage of time and changes in
the estimated future cash flows underlying the obligation.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
(SFAS No. 145). SFAS No. 145 rescinds FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Find
Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for
intangible Assets of Motor Carriers. This Statement amends FASB Statement No.
13, Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meaning, or describe their applicability under changed conditions.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination

                                       23

<PAGE>

Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred
in a Restructuring)."

Both SFAS No. 142 and SFAS No. 144 are effective for fiscal years beginning
after December 15, 2001. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. SFAS No. 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. These will be implemented during the
Company's year ending September 30, 2003. Management does not expect these
statements to have a material effect on the Company's financial statements. SFAS
No. 145 is generally effective for financial Statements issued after May 15,
2002. This statement did not have an effect on the Company's financial
statements.

(2) SALE OF STOCK HELD AS AN INVESTMENT
In fiscal 2002, 37 shares of Elder-Beeman available-for-sale securities were
sold, resulting in a realized loss on the sale of $67.

In fiscal 2001, 15,000 shares of Lightning Rod available-for-sale securities
were sold, resulting in a realized loss on the sale of $62,196.

(3) LONG-TERM DEBT
On January 31, 2002, the Company signed a Fixed Rate Revolving or Draw Note with
a bank in the maximum amount of $645,000. All assets are pledged as collateral.
Funds advanced are subject to an interest rate of 9 % with a maturity date of
December 31, 2006. Payments are based on a 15-year term. The Company's President
has provided a personal guarantee to the bank in the amount of $250,000. Any
advance in excess of $500,000 must be approved by the guarantor. On January 31,
2002, the Company received $500,000 under this arrangement. The maturity of
long-term debt for the five years ending September 30 are as follows: 2003,
$40,536; 2004, $44,329; 2005, $48,487; 2006, $53,036 and 2007, $288,261.

(4) COMMON STOCK
STOCK OPTION PLAN
The Company adopted the 2000 stock option plan on April 27, 2000. The Plan is
available to all employees, non-employee Directors and consultants and options
are generally granted at the discretion of the stock option committee of the
board of directors. Total shares of common stock that may be subject to options
under the Plan are 300,000 shares. Under the plan, the purchase price per share
under options granted is generally the market value at the date of the grant.
Options granted under the plan shall expire 10 years from the date such option
is granted. One-third of the options are exercisable one year after the grant
date with the remaining two-thirds exercisable pro rata during the succeeding 24
months, unless other vesting provisions are provided for in the grant.

The Company applies APB 25 in accounting for its stock option plans and
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS 123, the
Company's net loss and net loss per share would have been indicated as follows:

                                       24

<PAGE>

-------------------------------------------------------------------------------
                                               2002                 2001
-------------------------------------------------------------------------------
Net loss - as reported                      $(221,036)          $(1,213,294)
Net loss - pro forma                        $(224,429)          $(1,214,045)

Basic loss per share - as reported          $   (0.15)          $     (0.93)
Basic loss per share - pro forma            $   (0.15)          $     (0.93)
Diluted loss per share - as reported        $   (0.15)          $     (0.93)
Diluted loss per share - pro forma          $   (0.15)          $     (0.93)

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option valuation model with the following weighted average
assumptions used for grants during fiscal 2002: risk-free interest rate of 1.5%;
dividend yield of 0.0%; expected volatility of 31%, and expected lives of five
years and during fiscal 2001: risk-free interest rate of 6.0%; dividend yield of
0.0%; expected volatility of 82%, and expected lives of five years. The fair
values of the option grants in 2002 and 2001 were $0.185 per share and .220 per
share, respectively. The effects of applying SFAS 123 may not be representative
of the effects on reported net earnings (loss) for future years.

The number of options and the weighted-average exercise price of options
outstanding, granted, exercised, and cancelled during the year ended September
30, 2002, are as follows:

-------------------------------------------------------------------------
                                                   Number        Weighted
                                                   of             Average
Number of options:                                 Shares         Prices
-------------------------------------------------------------------------

Outstanding at beginning of year                    88,900         $0.194
Granted                                              8,000          0.185
-------------------------------------------------------------------------
                                                    96,900          0.193

Exercised                                                -              -
Cancelled                                           14,700          0.203
-------------------------------------------------------------------------
Outstanding at end of year                          82,200          0.192
=========================================================================

The options outstanding as of September 30, 2002 have the following attributes:

-----------------------------------------------------------------------------
Option statistics
by price ranges:              $0.110   $ 0.187   $ 0.220    $0.260   $0.312
-----------------------------------------------------------------------------
Options outstanding            4,000    62,639    11,000     4,000      561
Weighted-average
remaining life (in years)       9.50      7.92      8.75      9.42     8.00

(5) INCOME TAXES
The income tax benefit for 2002 and 2001, differs from the "expected" tax
benefit computed by applying the United States federal income tax rate of 34% to
the loss before income taxes, as follows:

----------------------------------------------------------------------
                                                 2002           2001
----------------------------------------------------------------------
Computed "expected" tax benefit              $(75,152)      (412,520)

                                       25

<PAGE>

Increase in "expected" tax expense resulting from:
    Change in valuation allowance                       75,000        402,000
    Other, net                                             152         10,520
-----------------------------------------------------------------------------
       Income tax (benefit) expense                   $      -              -
=============================================================================

The tax effects of temporary differences that give rise to significant portions
of the deferred income tax assets and liabilities at September 30, 2002 and 2001
are as follows:

-------------------------------------------------------------------------------
                                                           2002          2001
-------------------------------------------------------------------------------
Deferred tax assets:
    Allowance for product returns                     $     6,600       5,600
    Allowance for doubtful accounts                         7,500       5,400
    Accrued expenses                                       36,900      29,600
    Intangible assets                                     108,600     101,600
    Net operating loss carryforward                       695,700     641,600
    Alternative minimum tax credit                         85,000      85,000
-----------------------------------------------------------------------------
    Gross deferred tax assets                             940,300     868,800
    Valuation allowance                                   933,000     858,000
-----------------------------------------------------------------------------
       Net deferred tax assets                              7,300      10,800

Deferred tax liabilities:
    Accelerated depreciation for tax purposes              (7,300)    (10,800)
------------------------------------------------------------------------------
        Net deferred tax assets (liabilities)         $         -           -
==============================================================================

The change in the total valuation allowance for the years ended September 30,
2002 and 2001 was an increase of $75,000 and $402,000, respectively. The Company
has federal net operating loss carry forwards of $85,000 expiring in 2019,
$260,000 expiring in 2020, $191,000 expiring in 2021, $1,291,000 expiring in
2022 and $159,000 expiring in 2023.

(6) 401(k) PROFIT-SHARING PLAN
The Company has a 401(k) profit-sharing plan covering substantially all of its
employees. The profit-sharing component of the plan is funded by employer
contributions at the discretion of the board of directors. There was no
profit-sharing contribution for the years ended September 30, 2002 or 2001.

The plan includes a 401(k) component that allows qualified employees to
contribute between 1% and 12% of their compensation. The Company, at the
discretion of the board of directors, can make matching contributions to the
accounts of qualified employees who have met the one year of service
requirement. Net employer contributions for the years ended September 30, 2002
and 2001, were $16,595 and $24,941, respectively.

(7) MAJOR CUSTOMERS AND EXPORT SALES
The Company's major customers are distributors. Of its domestic revenues, sales
to the top two distributor customers in 2002 and 2001 were approximately
$439,000 and $402,000, respectively. Accounts receivable from these two
distributor customers at September 30, 2002 and 2001 were approximately $61,000
and $88,000, respectively.

                                       26

<PAGE>

The majority of export sales are to distributors. Export sales were
approximately $398,000 and $428,000, for the years ended September 30, 2002 and
2001, respectively. Sales to the Company's top three export distributor
customers represented approximately $135,000, $34,000, and $31,000, or 8%, 2%,
and 2%, of net revenues in fiscal 2002. Sales to the top three export
distributors customers represented approximately $158,000, $64,000, and $62,000,
or 10%, 4%, and 4%, of net revenues in fiscal 2001. Percentage components of
export sales by geographic area for 2002 and 2001, respectively, were Europe (88
and 96 percent); Japan (6 and 0 percent) and Australia (6 and 4 percent).

Item 8:  Changes in and Disagreements with Accountants on Accounting
         and Financial Disclosure

Not applicable.

                                       27

<PAGE>

                                    PART III

Item 9:  Directors and Executive Officers of the Registrant

Information with respect to this Item may be found in the section captioned
"Nominees for Election as Directors" appearing in the Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held February 28, 2003. Such information is incorporated herein by
reference.

Information with respect to delinquent Form 4 filings may be found in the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" appearing in the Proxy Statement to be delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held February 28, 2003.
Such information is incorporated herein by reference.

Item 10:  Executive Compensation

Information with respect to this Item may be found in the section captioned
"Executive Compensation" appearing in the Proxy Statement to be delivered to
stockholders in connection with the Annual Meeting of Stockholders to be held
February 28, 2003. Such information is incorporated herein by reference.

Item 11:  Security Ownership of Certain Beneficial Owners and
          Management

Information with respect to this Item may be found in the section captioned
"Security Ownership of Certain Beneficial Owners and Management" appearing in
the Proxy Statement to be delivered to stockholders in connection with the
Annual Meeting of Stockholders to be held February 28, 2003. Such information is
incorporated herein by reference.

Item 12:  Certain Relationships and Related Transactions

Information with respect to this Item may be found in the section captioned
"Executive Compensation" appearing in the Proxy Statement to be delivered to
stockholders in connection with the Annual Meeting of Stockholders to be held
February 28, 2003. Such information is incorporated herein by reference.

Item 13:  Exhibits, Financial Statements, and Reports on Form 8-K

(a)    The following documents are filed as a part of this Report:

       1.  Financial Statements

The following financial statements of CE Software, Inc., and the Independent
Auditors' Report issued thereon, are incorporated by reference in Part II, Item
7:

                                       28

<PAGE>

Independent Auditors' Report.
Balance Sheets, as of September 30, 2002 and 2001.
Statements of Operations, for the years
    ended September 30, 2002 and 2001.
Statements of Stockholders' Equity and Comprehensive Loss,
    for the years ended September 30, 2002 and 2001.
Statements of Cash Flows, for the years
    ended September 30, 2002 and 2001.
Notes to Financial Statements.

     2. Exhibits                                            Page 32

The following exhibits are filed as part of, or incorporated by reference into,
this Report:

3.1       Amended and Restated Articles of Incorporation of the Company as
          corrected by Articles of Correction filed with the Iowa Secretary of
          State on April 27, 2000.
3.2       Bylaws
4.1       Form of Certificate for Common Stock
10.1      CE Software, Inc., 2000 Stock Option Plan
10.2      CE Software, Inc. 401(k) Profit Sharing Plan
10.3      Business Loan Agreement
10.4      Purchase Agreement with PrairieSoft, Inc.
10.5      Bank Commitment Letter
10.6      Bank Fixed Rate Revolving or Draw Note

Item 14: Controls and Procedures

With the participation of management, CE Software, Inc.'s chief executive
officer and chief financial officer evaluated its disclosure controls and
procedures on September 30, 2002. Based on this evaluation, the chief executive
officer and chief financial officer concluded that the disclosure controls and
procedures are effective in connection with CE Software, Inc.'s filing of its
annual report on Form 10-KSB for the year ended September 30, 2002.

Subsequent to September 30, 2002, through the date of this filing of Form 10-KSB
for the year ended September 30, 2002, there have been no significant changes in
CE Software, Inc.'s internal controls or in other factors that could
significantly affect these controls, including any significant deficiencies or
material weaknesses of internal controls that would require corrective action.

                                       29

<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.

                                    CE SOFTWARE, INC.
                                    (Registrant)

                                            /s/ John S. Kirk
                                    By-------------------------------------
                                    (John S. Kirk, President, and Director)

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 below.

       Signature                             Title                      Date
       ---------                             -----                      ----

       /s/ John S. Kirk                                                12/30/02
--------------------------           President, Secretary,             --------
       (John S. Kirk)                Treasurer and Director

                   CERTIFICATION OF PERIODIC FINANCIAL REPORT
                       PURSUANT TO 18 U.S.C. SECTION 1350

This certification is made solely for purpose of 18 U.S.C. Section 1350, subject
to the knowledge standard contained therein, and not for any other purpose.

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, I, the undersigned, certify that, to the best of my
knowledge, this periodic report of CE SOFTWARE, INC., filed on Form 10-KSB for
the annual period ended September 30, 2002, and containing the financial
statements, fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that the information contained in the
periodic report fairly presents, in all material respects, the financial
condition and results of operations of the issuer.

                      CE SOFTWARE, INC.
                      (Issuer)

                      by: /s/ John S. Kirk
                      -----------------------------------
                      John S. Kirk
                      President, Chief Executive Officer
                      and Chief Financial Officer

                                       30

<PAGE>

                      CERTIFICATION PURSUANT TO SECTION 302
                        OF THE SARBANES-OXLEY ACT OF 2002

I, John S. Kirk, certify that:
1. I have reviewed this annual report on Form 10-KSB of CE Software, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
         a) designed such disclosure controls and procedures to ensure that
         material information relating to the registrant, including its
         consolidated subsidiaries, is made known to us by others within those
         entities, particularly during the period in which this annual report is
         being prepared;
         b) evaluated the effectiveness of the registrant's disclosure controls
         and procedures as of a date within 90 days prior to the filing date of
         this annual report (the "Evaluation Date"); and
         c) presented in this annual report our conclusions about the
         effectiveness of the disclosure controls and procedures based on our
         evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
         a) all significant deficiencies in the design or operation of internal
         controls which could adversely affect the registrant's ability to
         record, process, summarize and report financial data and have
         identified for the registrant's auditors any material weaknesses in
         internal controls; and
         b) any fraud, whether or not material, that involves management or
         other employees who have a significant role in the registrant's
         internal controls; and
6. I have indicated in this annual report whether there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.

Date: 12/30/02
     ---------

                      by: /s/ John S. Kirk
                 ----------------------------------
                 John S. Kirk
                 President, Chief Executive Officer
                 and Chief Financial Officer

                                       31

<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit                                                                                    Reference (*)
Number                                                                                     or  Page #
<S>                                                                                        <C>
3.1        Amended and Restated Articles of Incorporation of the Company as
           corrected by Articles of Correction filed with the Iowa Secretary of
           State on April 27, 2000 is incorporated by reference to Exhibit 3.1
           to Form 10KSB filed with the Commission on January 16, 2001                             *
3.2        Bylaws, incorporated by reference to Exhibit 2.1 to Form 10-SB
           filed with the Commission on March 10, 2000                                             *
4.1        Form of Certificate for Common Stock is incorporated by reference to
           Exhibit 4.1 to Form 10KSB filed with the Commission on January 16,
           2001                                                                                    *
10.1       CE Software, Inc., 2000 Stock Option Plan is incorporated by reference
           to Exhibit 10.1 to Form 10KSB filed with the Commission on January
           16, 2001                                                                                *
10.2       CE Software, Inc. 401(k) Profit Sharing Plan is incorporated by reference
           to Exhibit 10.2 to Form 10KSB filed with the Commission on January 16,
           2001                                                                                    *
10.3       Business Loan Agreement is incorporated by reference to Exhibit 10.3 to
           Form 10KSB filed with the Commission on January 16, 2001                                *
10.4       Purchase Agreement with PrairieSoft, Inc. is incorporated by reference
           to Appendix A of the Proxy to Form 14A filed with the Commission on
           January 24, 2001                                                                        *
10.5       Bank Commitment Letter is incorporated by reference to Exhibit 10.6 to
           Form 10KSB filed with the Commission on January 16, 2001                                *
10.6       Bank Fixed Rate Revolving or Draw Note is incorporated by reference
           to Exhibit 10.1 to Form 10QSB filed with the Commission on February 14,
           2002                                                                                    *
</TABLE>

                                       32