<PAGE>   1



                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-QSB

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934
                                        
For Period Ended                    March 31, 1999     
                 -----------------------------------------------------

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

For the transition period from                   to
                               -----------------    ------------------

Commission File Number                        00-23527
                       -----------------------------------------------


                                  eSoft, Inc.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

        DELAWARE                                                84-0938960
------------------------                                ------------------------
(State of Incorporation)                                (IRS Employer ID Number)

295 Interlocken Blvd, #500                      Broomfield,  CO         80021
----------------------------------------        --------------------------------
(Address of principle executive offices)        (city)     (state)    (zip code)

                                 (303) 444-1600
               -------------------------------------------------
               Registrant's telephone number including area code


                    (5335 Sterling Drive, Boulder, CO 80301)

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

                               YES  X  NO
                                   ---    ---

Transitional Small Business Disclosure format (check one):

                               YES     NO  X
                                   ---    ---

The number of shares outstanding of the Registrant's $0.01 par value common
stock on April 27, 1999 was 7,345,518.



<PAGE>   2


                                  ESOFT, INC.

                               TABLE OF CONTENTS



<TABLE>
<CAPTION>
PART I   FINANCIAL INFORMATION                                                               Page
                                                                                             ----

<S>                                                                                         <C>
                  Item 1.  Financial Statements                                              3 - 10

                  Item 2.  Management's Discussion and Analysis of Financial Condition      11 - 17
                           and Results of Operations


PART II  OTHER INFORMATION                                                                  18 - 19
</TABLE>

                                       2

<PAGE>   3


PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

                                  ESOFT, INC.

                                 BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                         DECEMBER 31,         MARCH 31,
                                                                             1998               1999
                                                                         -----------         -----------
                                                                                             (UNAUDITED)
<S>                                                                      <C>                 <C>        
  ASSETS

 CURRENT ASSETS
      Cash and cash equivalents                                          $   655,650         $   763,485
      Investment securities                                                1,991,541                  --
      Accounts receivable, net of allowance for doubtful accounts          1,965,085           1,983,128
      Note receivable                                                        300,000             500,000
      Inventories                                                          1,254,696           1,013,060
      Prepaid expenses and other                                             177,416             224,204
                                                                         -----------         -----------
         Total current assets                                              6,344,388           4,483,877
                                                                         -----------         -----------
 PROPERTY AND EQUIPMENT
      Computer equipment                                                     217,176             225,754
      Furniture and equipment                                                187,464             217,864
                                                                         -----------         -----------
                                                                             404,640             443,618
      Accumulated depreciation                                              (205,688)           (222,970)
                                                                         -----------         -----------
         Net property and equipment                                          198,952             220,648
                                                                         -----------         -----------
 OTHER ASSETS
      Capitalized software costs, net of accumulated amortization            867,072             827,895
      Other                                                                    7,039              22,039
                                                                         -----------         -----------
         Total other assets                                                  874,111             849,934
                                                                         -----------         -----------
 TOTAL ASSETS                                                            $ 7,417,451         $ 5,554,459
                                                                         ===========         ===========
 </TABLE>

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

                                       3

<PAGE>   4


                                  ESOFT, INC.

                                 BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                     DECEMBER 31,         MARCH 31,
                                                                        1998                1999
                                                                        ----                ----
                                                                                         (UNAUDITED)
<S>                                                                 <C>                 <C>        
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
     Accounts payable                                               $   968,533         $ 1,420,391
     Deferred revenue                                                    23,910              26,994
     Customer deposits                                                  248,287                  --
     Accrued expenses:
          Payroll and payroll taxes                                     256,033             280,533
          Other                                                         140,184             364,941
                                                                    -----------         -----------
          Total current liabilities                                   1,636,947           2,092,859
                                                                    -----------         -----------

STOCKHOLDERS' EQUITY

     Common stock, par value $.01 per share;
        authorized 50,000,000 shares; 6,863,502 and
         7,345,518 issued and outstanding December 31,
         1998 and March 31, 1999, respectively                           68,635              73,455
     Additional paid-in capital                                       9,032,480           9,569,977
     Accumulated deficit                                             (3,320,611)         (6,049,934)
     Notes receivable                                                        --            (131,898)
                                                                    -----------         -----------
          Total stockholders' equity                                  5,780,504           3,461,600
                                                                    -----------         -----------

TOTAL LIABILITIES AND
    STOCKHOLDERS' EQUITY                                            $ 7,417,451         $ 5,554,459
                                                                    ===========         ===========
</TABLE>






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

                                       4

<PAGE>   5



                                  ESOFT, INC.

                            STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE>
<CAPTION>

                                                         FOR THE THREE MONTHS ENDED
                                                                  MARCH 31,

                                                          1998               1999
                                                          ----               ----

<S>                                                  <C>                 <C>        
REVENUES                                             $   733,932         $   553,067

COST OF GOODS SOLD                                       273,744             359,215
                                                     -----------         -----------

GROSS PROFIT                                             460,188             193,852

EXPENSES
   Sales and marketing expense                           317,126           1,679,608
   General & administrative expense                      306,727           1,111,899
   Engineering expense                                    68,623             122,562
   Software amortization costs                            48,872              41,826
   Research and development                               13,372                  -- 
                                                     -----------         -----------
                                                         754,720           2,955,895
                                                     -----------         -----------
Loss from operations                                    (294,532)         (2,762,043)
                                                     -----------         -----------

OTHER INCOME (EXPENSE):
   Interest income                                             4              32,761
   Interest expense                                         (712)                (41)
                                                     -----------         -----------
                                                            (708)             32,720
                                                     -----------         -----------

NET LOSS                                             $  (295,240)        $(2,729,323)
                                                     ===========         ===========

BASIC AND DILUTED LOSS PER COMMON SHARE              $      (.09)        $     (0.39)
                                                     ===========         ===========

WEIGHTED AVERAGE SHARES
   OUTSTANDING                                         3,108,234           7,006,044
                                                     ===========         ===========
</TABLE>








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


                                       5

<PAGE>   6



                                  ESOFT, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                                  (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                                      
                                                                      ADDITIONAL                                          TOTAL
                                                 COMMON STOCK           PAID-IN         NOTES        ACCUMULATED      STOCKHOLDERS'
                                            SHARES        AMOUNT        CAPITAL       RECEIVABLE       DEFICIT           EQUITY
                                        ------------------------------------------------------------------------------------------

<S>                                       <C>          <C>            <C>             <C>           <C>             <C>        
BALANCE, January, 1999                    6,863,502    $    68,635    $ 9,032,480             --     ($3,320,611)    $ 5,780,504
Issuance of compensatory options                 --             --          8,911             --              --           8,911
Exercise of warrants and options            482,016          4,820        528,586             --              --         533,406
Issuance of notes receivable for
   exercise of warrants                          --             --             --       (131,898)             --        (131,898)

Net loss for the three months ended
   March 31, 1999                                --             --             --             --      (2,729,323)     (2,729,323)
                                        -----------    -----------    -----------    -----------     -----------     -----------

BALANCE, March 31, 1999                   7,345,518    $    73,455    $ 9,569,977       (131,898)    ($6,049,934)    $ 3,461,600
                                        ===========    ===========    ===========    ===========     ===========     ===========

</TABLE>






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


                                       6

<PAGE>   7



                                  ESOFT, INC.

                            STATEMENTS OF CASH FLOWS
                                 (UNAUDITED)

<TABLE>
<CAPTION>

                                                                               FOR THE THREE MONTHS ENDED
                                                                                        MARCH 31,
                                                                               1998              1999
                                                                               ----              ----
<S>                                                                      <C>                 <C>         
OPERATING ACTIVITIES
Net Loss from operations                                                 $  (295,240)        $(2,729,323)
Adjustments to reconcile net loss to net cash used in operating
 activities:
    Depreciation & software amortization                                      58,473              59,109
    Provision for losses on accounts receivable                               14,070                  --
    Amortization of discount on investments                                       --              (8,459)
    Amortization of warrants                                                      --              52,469
    Issuance of compensatory options                                              --               8,911
    Changes in operating assets and liabilities:
        Accounts receivable - trade                                         (439,706)            (18,043)
        Inventories                                                          (69,142)            241,636
        Other assets                                                           9,850             (15,000)
        Prepaid expenses                                                     (91,192)            (37,209)
        Accounts payable                                                     210,046             451,858
        Accrued expenses                                                      26,434                 971
        Deferred revenue                                                      (3,129)              3,083
                                                                         -----------         -----------
Net cash used in operating activities                                       (579,536)         (1,989,997)
                                                                         -----------         -----------

INVESTING ACTIVITIES
    Proceeds from investments                                                     --           2,000,000
    Purchase of property and equipment                                       (58,955)            (38,977)
    Additions to capitalized software                                        (60,000)             (2,650)
    Notes receivable - related parties                                       (44,400)                 --
    Advances on non-operating notes receivable                                    --            (200,000)
                                                                         -----------         -----------
Net cash (used in) provided by investing activities                         (163,355)          1,758,373
                                                                         -----------         -----------

FINANCING ACTIVITIES
    Principal (payments) on borrowings                                        (7,586)                 --
    Proceeds from stock subscription                                         150,000                  --
    Deferred offering costs                                                  253,408                  --
    Conversion of promissory notes                                          (355,903)                 --
    Proceeds from sale of stock and conversion of note                     1,787,432                  --
    Proceeds from exercise of warrants and options                                --             339,459
                                                                         -----------         -----------
Net cash provided by financing activities                                  1,827,351             339,459
                                                                         -----------         -----------

INCREASE IN CASH AND CASH EQUIVALENTS                                      1,084,460             107,835

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                               102,837             655,650
                                                                         -----------         -----------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                 $ 1,187,297         $   763,485
                                                                         ===========         ===========

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
    Common Stock issued for subscriptions receivable                              --         $   193,947
</TABLE>



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


                                       7

<PAGE>   8

                                  ESOFT, INC.

                         NOTES TO FINANCIAL STATEMENTS


     1.  INTERIM FINANCIAL INFORMATION

         The accompanying financial statements should be read in conjunction
         with the Company's audited financial statements for the year ended
         December 31, 1998. In the opinion of management, the accompanying
         unaudited financial statements contain all adjustments necessary to
         present fairly the financial position as of March 31, 1999 and the
         results of operations and statement of cash flows for the periods
         presented. Management believes all such adjustments are of a normal
         and recurring nature. The results of operations for the three month
         periods ending March 31, 1999 and 1998 are not necessarily indicative
         of results to be expected for the full year.


     2.  ACCOUNTS RECEIVABLE

         The following information summarizes accounts receivable:

<TABLE>
<CAPTION>

                                                                              DECEMBER 31,        MARCH 31,
                                                                                 1998               1999
                                                                                 ----               ----
                                                                                                 (UNAUDITED)

<S>                                                                            <C>               <C>       
         Accounts Receivable                                                   $2,215,085        $2,233,128
         Less allowance for doubtful accounts                                     250,000           250,000
                                                                               ----------        ----------
                                                                               $1,965,085        $1,983,128
                                                                               ==========        ==========

</TABLE>

         The Company had two customers which each accounted for 10% or more of
         the sales through the three months ending March 31, 1999. These two
         customers represented 31% and 11% of the Company's revenue for the
         three months ended March 31, 1999. Additionally, these two customers
         represented 81% of total accounts receivable at March 31, 1999. The
         customer representing 11% of the revenue was a foreign customer with
         an accounts receivable balance of $60,496 at March 31, 1999. The
         Company has sixteen distributors which accounted for 27% of the
         Company's sales through the three months ending March 31, 1999.

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


     3.  SUBSCRIPTION RECEIVABLE

         The Company issued two promissory notes receivable in the amounts of
         $56,487 and $75,411 on March 10, 1999 and March 24, 1999 resulting
         from the exercise of 49,550 and 66,150 warrants with an exercise price
         of $1.15, by Transition Partners Limited and Copeland Consulting
         Group, Inc., respectively. At the time of exercise, $1,157 was paid in
         cash. The notes are due in March 2000 without interest until due and
         at 12% thereafter and are secured by the shares of common stock being
         issued. The Company also has a note receivable in the amount of
         $62,049 relating to a stock




                                       8

<PAGE>   9



                                  ESOFT, INC.

                         NOTES TO FINANCIAL STATEMENTS


         issuance, which was collected April 1, 1999 and therefore classified
         as a current asset at March 31, 1999.


     4.  NET LOSS PER SHARE

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

<TABLE>
<CAPTION>

                                                                  FOR THE THREE MONTHS ENDED MARCH 31,
                                                                      1998                  1999
                                                                      ----                  ----
<S>                                                                <C>                  <C>
         Basic weighted average common shares
               outstanding                                          3,108,234            7,006,044
         Diluted weighted average common
               shares outstanding                                   3,108,234            7,006,044

</TABLE>

         Options and warrants to purchase 1,708,100 and 1,464,595 shares of
         common stock were not included in the computation of diluted earnings
         per share because their effect was anti-dilutive for the periods
         ending March 31, 1998 and March 31, 1999, respectively.


     5.  REVENUE RECOGNITION

         The Company recognizes certain revenue at the time products are
         shipped to its customers. Provision is made currently for estimated
         product returns which may occur. A portion of sales is made to
         distributors under terms allowing certain rights of return and price
         protection on unsold product held by the distributors. Revenue from
         support and update service agreements is deferred at the time the
         agreement is executed and recognized ratably over the contractual
         period. The Company recognizes revenues from customer training and
         consulting services when such services are provided. All costs
         associated with licensing of software products, support and update
         services, and training and consulting services are expensed as
         incurred.


     6.  PLANNED PRIVATE PLACEMENT

         The Company has retained A.G. Edwards & Sons, Inc. to assist it in
         raising up to $5,000,000 through the sale of convertible preferred
         stock. Net proceeds will be approximately $4,600,000, after estimated
         offering expenses. Under the terms of the private placement, the
         Company has agreed to pay the agent a placement fee of 6% of the gross
         proceeds. The terms of the convertibility feature of the preferred
         stock have not yet been determined, however, any conversion feature
         with a discount to fair market value may result in a deemed dividend
         that must be recognized by the Company at the date of issuance of the
         preferred stock. The Company intends to use the proceeds of the
         offering to fund the expanded sales and marketing program and for
         working capital.


                                       9

<PAGE>   10


                                  ESOFT, INC.

                         NOTES TO FINANCIAL STATEMENTS


     7.  PLAN OF MERGER

         In January 1999, the Company signed a Plan of Merger and Agreement
         with Apexx Technology, Inc. ("Apexx"). The proposed merger requires
         the vote of the shareholders of both companies to approve the merger,
         which will take place in May 1999. The transaction proposes the
         Company issue 2,947,368 shares of its common stock for all of the
         issued and outstanding shares and options of Apexx. The Company also
         extended a line of credit to Apexx in the amount of $500,000, of which
         $500,000 was outstanding at March 31, 1999.



                                      10


<PAGE>   11



                           FORWARD-LOOKING STATEMENTS

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

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

              Some combined marketing of the Company's and Apexx's products
         has begun in the first quarter using the Apexx product identifying
         trademark "TEAM Internet" and, therefore, the Company's IPAD products
         are referred to using the product name TEAM Internet(TM). TEAM
         Internet is a registered trademark of Apexx Technology, Inc.

              The primary market being pursued by the Company consists of
         small-to-medium sized businesses ("SMB") that wish to initiate, or
         expand, their connection and presence on the Internet. The Company
         believes that the SMB market is not only expanding exponentially into
         the Internet arena, but also requires a solution that is more cost
         effective and easier to install and maintain than systems typically
         available for the Fortune 1000 companies. The SMB segment comprises
         the largest portion of the installed local area networks and
         increasingly recognizes the importance of the Internet to grow their
         business and improve productivity. Internet penetration has been
         estimated to increase from 54.9% of small business PC owners in 1998
         to 68.5% in 2002. The number of small businesses online is expected to
         increase from 3.2 million in 1998 to 4.6 million in 2002. Most
         importantly for the SMB market, the Company's TEAM Internet system is
         a complete, plug-and-play solution that can be installed and
         maintained by non-technical personnel and at a fraction of the cost of
         the typical large system solution. The TEAM Internet 100 is a system
         that can connect a business Local Area Network (LAN) up to 50 users to
         the Internet using a single Internet address. It provides all of the
         components an organization needs to develop, manage, and monitor its
         Intranet or external web presence. The TEAM Internet 2500 can connect
         up to 500 users on a LAN to the Internet. The Company has focused its
         distribution strategy on Value Added Resellers (VARs) who offer Local
         Area Network solutions to the SMB. In order to serve these VARs, the
         Company enters into agreements with leading distributors.



                                       11

<PAGE>   12


              During the first quarter the Company signed distribution
         agreements with NTT Electronics Corp. ("NEL"), ASI Corp. and
         Alternative Technology, Inc. The agreement with NEL provides exclusive
         distribution rights in Japan and non-exclusive distribution rights in
         other Asia-Pacific countries. The distribution agreement with ASI
         Corp. will provide eSoft's products with access to integrators and
         VARs throughout North America. Alternative Technology, Inc., located
         in Denver, Colorado with sales revenues of $60 million, distributes
         high-end, leading-edge, computer connectivity products in North
         America. In conjunction with the proposed merger with Apexx
         Technology, Inc. ("Apexx"), the Company extended like terms and
         conditions as agreed to between Apexx and two distributors, EMJ Data
         Systems and Nor-Tech, Inc. The Company anticipates the announcement of
         other U.S. distributors of the product during the year.

              While the Company is encouraged by initial product evaluations by
         European companies, management was disappointed in its overall efforts
         to expand its European sales through its original distributor,
         Telindus SA. As a result the Company is exploring other avenues for
         distribution and refocusing its efforts on telecommunication and
         distribution companies in the European market.

              The Company continues to add Channel Development Representatives
         (CDRs) in key cities in the United States. The purpose of the CDRs is
         to assist VARs with lead generation and market pull-through of
         products to end-users. In the first quarter, the Company added nine
         CDRs. The Company continues to make a concerted and aggressive effort
         to market eSoft and educate the market as to the all-in-one appliance
         alternatives for the SMB.

              The Company has proposed a merger with Apexx of Boise, Idaho, and
         signed a Definitive Merger Agreement, dated January 25, 1999. The
         proposed merger requires the vote of the shareholders of both
         companies to approve the merger. The transaction proposes the Company
         issue 2,947,368 shares of the Company's common stock for all of the
         issued and outstanding shares and options of Apexx. Additionally, the
         Company extended Apexx a working capital line of credit of $500,000
         with up to an additional $500,000 operating line of credit provided
         both boards of the companies approve such increases. The transaction
         required the Company to complete an S-4 registration statement, which
         became effective April 20, 1999. In conjunction with the signing of
         the Definitive Merger Agreement, the Company executed an agreement to
         purchase products from Apexx to sell through its distribution
         channels. The Company elected to utilize the Apexx TEAM Internet brand
         name across the product lines of both companies. In the first quarter,
         the Company has de-emphasized the sales of the IPAD 1200 and replaced
         it with Apexx's TEAM Internet 100. The TEAM Internet 100 is a system
         that can connect a business LAN of up to 50 users to the Internet
         using a single Internet address. It provides all of the components an
         organization needs to develop, manage, and monitor its Intranet or
         external web presence. In the first quarter, the Company has
         integrated the Apexx sales and marketing departments. The Company
         intends to distribute the TEAM Internet products through direct sales,
         VARs, network integrators, distributors, and overseas sales agents.

              Management expects the new company to have greater opportunities
         to expand market share for Internet access products, to have increased
         research and product development ability, to have more leverage to
         compete in its industry, to expand and diversify its distribution
         channels, and to further its ability to raise capital in order to
         finance the anticipated growth.


                                      12


<PAGE>   13



              As part of the Definitive Merger Agreement, eSoft and Apexx are
         conducting a joint marketing program for the benefit of both
         companies. Under this combined marketing program, the products known
         by the Company as IPAD are being re-branded utilizing the Apexx
         product name of TEAM Internet. Under the marketing program the Company
         has incurred $933,000 of marketing costs in the first quarter. Should
         the proposed merger not occur, the Company under this combined
         marketing program will have expended significant resources to promote
         the TEAM Internet brand name rather than the "IPAD" brand. Under this
         marketing plan the company will focus on selling the TEAM Internet 100
         and TEAM Internet 2500 (formerly known as the IPAD 2500) products. The
         proposed combined marketing program inaugurated a direct mail campaign
         during February through May 1999 to focus on potential users and VARS
         of the all-in-one appliance Internet connection. If the merger does
         not occur, the several month lapses in marketing eSoft products under
         the IPAD brand will make it somewhat difficult for eSoft to reenter
         the market using the IPAD brand name. This marketing program comprised
         a direct mail program of 710,000 pieces to potential end users of the
         Company's and Apexx products. The Company, under the plan, also
         targeted 238,000 free standing inserts in business journals focusing
         on potential end users. Additionally, a 55,000 piece direct mail
         campaign targeted at Value Added Resellers (VARS) and directed at
         educating these entities to the all-in-one appliance was formulated
         around this program. The Company and Apexx have generated 3,000 leads
         from this program and anticipate generating 6,000 leads.

              The Company has recently announced a new business strategy with
         three primary areas of focus: Internet Access Products, Internet
         Services, and Software Engineering Services. The Internet Access
         Products effort will build on the Company's core business of
         developing, marketing and selling the Company's market-leading TEAM
         Internet product line of Internet access products. Internet Services
         will focus on creating value by aggregating resellers and customers
         into a virtual community for the delivery of products and services by
         e-commerce and other Internet-based offerings. The Software
         Engineering Services activities will concentrate on the growing
         domestic and international demand for Linux-based software, leveraging
         the professional Linux engineering and development competencies and
         skills the Company is acquiring through Apexx. This plan leverages the
         existing Internet and Linux software strengths of eSoft and Apexx,
         while addressing the demands and requirements of the marketplace.

              Management believes its aggressive pursuit of this strategy will
         have both short-term and long-term effects on its operations. Outside
         financing will be utilized for the continued expansion of its sales
         and marketing efforts, as well as support of its extended receivable
         terms to its new distributors. Some personnel additions are also
         anticipated in the technical support and engineering departments. The
         Company also expects to expand its customer support organization. With
         the increase in headquarters staff, the Company relocated to a larger
         facility in early 1999. In addition to these near-term effects, the
         Company expects that the use of e-commerce and the online community to
         complement eSoft's traditional reseller and distribution channels will
         enable the Company to develop a larger marketplace more rapidly and
         efficiently. However, with the aggressive market expansion, the
         Company anticipates consuming working capital to meet this continued
         growth curve for the near term. As a result of expenses incurred in
         support of the expansion, the Company anticipates future losses. The
         Company expects to turn profitable in 2000.

              The Company hopes to establish one or more strategic alliance
         relationships with synergistic companies such as computer or network
         product manufacturers, large system integration companies or
         telecommunications companies which will permit the TEAM Internet
         products to be sold in conjunction with other products and
         telecommunications services. No such relationships have been
        



                                      13

<PAGE>   14



         established to date and there is no assurance that the negotiations of
         such a relationship will be successfully completed. If the Company
         establishes such relationships it may become heavily dependent upon
         such strategic alliance partners to maintain and expand its presence
         in the marketplace and the greater economic resources of the other
         parties to such relationships may force significant reductions in
         prices at which the Company can sell its products and thus adversely
         affect its margins and potential for profits.

      LIQUIDITY AND CAPITAL RESOURCES

              The Company's cash position on March 31, 1999 was $763,000, an
         increase of $107,800 from year end due to the maturing of investments.
         The Company's working capital at March 31, 1999 was $2,391,000 a
         decrease of $2,316,000. Investments of $1,992,000 matured during the
         first quarter, from which the proceeds were utilized to support
         operations. Management anticipates continuing losses in support of the
         growth curve, and thus its cash position will continue to decrease.
         Additionally, in the near term, with new distributors being added to
         continue market development, the Company anticipates its accounts
         receivable to increase. The Company is increasing efforts to reduce
         the present accounts receivable balance through more stringent
         collection efforts of the current customer base in an attempt to
         reduce days outstanding. The decrease in inventories from year end
         resulted from improved inventory management with respect to sales
         volume. TEAM Internet 2500 accounted for $513,000 or 51% of the total
         inventory at March 31, 1999. The Company has expended $39,000 in the
         first quarter in capital expenditures, of which $30,000 was related to
         furniture for the new headquarters. Management believes that its
         current cash position, the anticipated cash receipts from receivables,
         and the anticipated private placement funding will be sufficient to
         meet its working capital needs for the foreseeable future.

              The Company has retained A.G. Edwards & Sons, Inc. to assist it
         in raising up to $5,000,000 through the sale of convertible preferred
         stock. Net proceeds will be approximately $4,600,000, after estimated
         offering expenses and are anticipated to be received during the second
         quarter. Under the terms of the private placement agreement, the
         Company has agreed to pay the agent a placement fee of 6% of the gross
         proceeds. The Company intends to use the proceeds of the offering to
         fund the expanded sales and marketing program and for working capital.

         Cash Flow

              During the three months ended March 31, 1999, cash increased by
         $107,800. Adjustments to reconcile net loss ($2,729,000) resulted in
         adjustments of the use of funds of $112,000 from depreciation,
         amortization of software costs, amortization of discount on
         investments, amortization of warrants, and issuance of compensatory
         options and warrants. Funds used in operating activities were
         ($1,990,000). Funds of $697,000 were provided from operating
         activities from an increase of $242,000 in inventories, $452,000 from
         an increase in accounts payable, $1,000 from an increase in accrued
         expenses, and an increase in deferred revenue of $3,000. Operating
         funds of ($70,000) were used to finance the ($18,000) increase in
         accounts receivable, ($15,000) increase in other assets, and the
         ($37,000) increase in prepaid expenses. Investment activities came
         from a decrease in investments of $2,000,000, investments in capital
         equipment of ($39,000), capitalized software development costs
         ($3,000) and an increase in notes receivable of ($200,000) for total
         funds provided by investment activities of $1,758,000. Financing
         activities provided a net $339,000 of cash proceeds from option and
         warrant conversion of 482,000 shares of the Company's common stock.
         Funds have 



                                      14

<PAGE>   15



         been used in the first quarter of 1999 primarily for the
         expansion of market share and the joint marketing program with Apexx.
         Funds used in connection with the Apexx merger were $193,000.

              The Company anticipates expending an additional $200,000 for
         capital expenditures this fiscal year. eSoft will continue to
         capitalize software development costs consistent with its strategy of
         the development of TEAM Internet software for the marketplace.

          RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MARCH 31, 1999
               COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1998

              Quarterly revenues totaled $553,000 versus revenue of $734,000
         for the comparable quarter in 1998. This represents a decrease of
         $181,000 or 25% over the comparable quarter in 1998. The decrease is
         partly associated with a price decrease of the TEAM Internet 2500,
         which was necessary in order to remain competitive in the market
         place. In addition, most of the distributors in place during the first
         quarter 1998 signed agreements in mid to late 1998 containing
         termination clauses, which preclude the Company from recognizing
         revenue until the product has been sold through to resellers. During
         the first quarter, in connection with the proposed Apexx merger the
         Company de-emphasized the sales of the IPAD 1200 and replaced it with
         Apexx's TEAM Internet 100. Four distributors have been added in the
         first quarter, two of which were in conjunction with the proposed
         Apexx merger. For the quarter ending March 31, 1999, the Company
         experienced sales growth of $21,000 or 4% revenue growth over the 1998
         fourth quarter results.

              Gross profit margin in the current quarter was 35% of revenue
         ($194,000) compared to 63% ($460,000) for the three months ended March
         31, 1998. The decrease is associated with the price decrease of the
         TEAM Internet 2500 with no corresponding decrease in the Company's
         cost. In addition, the replacement of the IPAD 1200 with Apexx's TEAM
         Internet 100 caused margins to decrease. Once the merger with Apexx
         has been consummated and as the TEAM Internet 100 inventory is
         replenished, margins are expected to increase. Furthermore,
         approximately 36% of the first quarter sales of 1999 were comprised of
         network interface cards sold to eNetCo, in which the gross profit
         margin was 36%. The sales of these cards in 1999 were made in relation
         to sales of TEAM Internet products to eNetco at the end of 1998.

              Selling, General and Administrative, Engineering and R&D Expenses
         increased $2,201,000 or 292% from $755,000 for the quarter ending
         March 31, 1998 to $2,956,000 for the quarter ending March 31, 1999.
         Sales and marketing expenses increased $1,363,000 from $317,000 in
         1998 to $1,680,000 in 1999. The significant increases in expenditures
         are attributed to the addition of the marketing department late in
         December 1998 and the marketing campaign regarding the re-branding of
         the Company's IPAD products to Apexx's product name of TEAM Internet.
         During the quarter the Company added six employees in the Marketing
         Department, and nine CDRs and a Vice President of Sales in the Sales
         Department. The hiring of new CDRs is anticipated to continue through
         the end of the fiscal year end. General and administrative expense
         increased $805,000 from $307,000 in 1998 compared to $1,112,000 for
         the current quarter. The majority of the increase can be attributed to
         merger costs, salaries, and consultants. Engineering and tech support
         expenses increased $54,000 from $69,000 in 1998 compared to $123,000
         in 1999. The SG&A will continue to grow with the anticipated addition
         of new hires to augment the Company in all departments as growth in
         revenues dictates. Amortized software development costs total $42,000
         for the quarter.



                                      15


<PAGE>   16



              Interest expense decreased $671 in the three months ended March
         31, 1999 from $712 in 1998 to $41 in 1999. Interest income increased
         $33,000 in the quarter. This increase is associated with funds
         received from the completion of the private placement at the end of
         the second quarter in 1998.

              Net loss from operations was ($2,729,000) for the three months
         ended March 31, 1999, compared to ($295,000) for the same period in
         1998, an increase in the loss of ($2,434,000) over the same period.
         The net losses are associated with the increased SG&A necessary to
         maintain a continued quarterly sales growth rate in expanding into
         this market. Losses are anticipated to continue through the current
         fiscal year due to expenditures in support of continued growth and
         additions of new hires.

     INCOME TAXES

              At March 31, 1999, a valuation allowance of approximately
         $2,046,000 has been recorded, as Management of the Company is not able
         to determine that it is more likely than not that its deferred tax
         assets will be realized. The Company has recorded a valuation
         allowance primarily related to the uncertainty of realizing operating
         loss carryforwards subject to limitations under Section 382 of the
         Internal Revenue Code.

     YEAR 2000 EFFECT

              The TEAM Internet and IPAD product lines have no known
         susceptibility to the year 2000 issues. The testing completed on the
         product lines to date has lead the Company to believe that the
         products will not be affected by a connection to a non-compliant Y2K
         system. However the Company's testing does not cover every possible
         computing environment. Accordingly, some customers may have Y2K
         problems with products that the Company believes are Y2K compliant.
         All new products and upgrades introduced by the Company will be Y2K
         compliant. The Company has reviewed its internal systems, including
         its accounting system, and has found them to be Y2K compliant. The
         Company's internal operations and business are also dependent upon the
         computer-controlled systems of third parties such as suppliers,
         customers and service providers. Management believes that absent a
         systematic failure outside the control of the Company, such as a
         prolonged loss of electrical or telephone service, Y2K problems at
         such third parties will not have a material impact on the Company. The
         Company has no contingency plan for systemic failures such as loss of
         electrical or telephone service. The Company's contingency plan in the
         event of a non-systemic failure is to establish relationships with
         alternative suppliers or vendors to replace failed suppliers or
         vendors. Spending by the Company on compliance to date has not been
         material. Other year 2000 items are not anticipated to be material.

     IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

              None.



                                      16


<PAGE>   17




     PART II - OTHER INFORMATION

         Item 1.  Legal Proceedings

                  Not applicable

         Item 2.  Changes in Securities

                  (c) During the quarter ended March 31, 1999, the Company
         issued shares of Common Stock on the exercise of warrants by four
         consultants of the Company, as follows:

<TABLE>
<CAPTION>

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

         Date                  Title of Securities                No. of Shares          Purchase Price Per Share
         ----                  -------------------                -------------          ------------------------
         --------------------- ---------------------------- --------------------------- ----------------------------
<S>                            <C>                           <C>                        <C>
         January 14, 1999      Pantheon Capital, Inc.                 27,000                       $1.00

         --------------------- ---------------------------- --------------------------- ----------------------------
         January 15, 1999      John P. McMillan                       20,000                       $1.00

         --------------------- ---------------------------- --------------------------- ----------------------------
         February 19, 1999     Pantheon Capital, Inc.                 35,000                       $1.15

         --------------------- ---------------------------- --------------------------- ----------------------------
         March 1, 1999         Pantheon Capital, Inc.                100,300                       $1.15

         --------------------- ---------------------------- --------------------------- ----------------------------
         March 4, 1999         Transition Partners, Ltd.              66,150                       $1.15

         --------------------- ---------------------------- --------------------------- ----------------------------
         March 18, 1999        Transition Partners, Ltd.              37,500                       $1.15

         --------------------- ---------------------------- --------------------------- ----------------------------
                               Copeland Consulting Group,
         March 24, 1999                 Inc.                         103,650                       $1.15
         -----------------------------------------------------------------------------------------------------------

</TABLE>

         The warrants were issued to the consultants in connection with their
         consulting agreements entered into prior to the initial public
         offering of the Company's stock. All of the shares were issued
         pursuant to an exemption from registration under Section 4(2) of the
         Securities Act of 1933. All of the shares had been registered under a
         registration statement on Form SB-2 for sale by the shareholders who
         acquired the shares in private transactions. No underwriter was
         involved in the transaction and no fees or commissions were paid in
         connection with the purchases.

         Item 3.  Defaults Upon Senior Securities

                  Not applicable

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

                  Not applicable

         Item 5.  Other Information

                  Not applicable


                                      17


<PAGE>   18




         Item 6.  Exhibits and Reports on Form 8-K

                  a)       Exhibits

                           27       Financial Data Schedule.

                  b)       Reports on Form 8-K.

                           none



                                      18

<PAGE>   19



                                   SIGNATURES

         Pursuant to the requirements 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.

                                        eSoft, Inc.
                                        (Registrant)



     Date: May 14, 1999                 /s/ Jeffrey Finn
           ------------                 -----------------
                                        Jeffrey Finn
                                        President, Chief Operating Officer


     Date: May 14, 1999                 /s/ Amy Beth Hansman
           ------------                 ---------------------
                                        Amy Beth Hansman
                                        Chief Accounting Officer




<PAGE>   20

<TABLE>
<CAPTION>

                                 EXHIBIT INDEX


EXHIBIT NO.                DESCRIPTION
----------                 -----------
<S>                 <C>
   27               Financial Data Schedule


</TABLE>