<PAGE>

                       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 September 30, 2000

[ ]  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 small business issuer as specified in its charter)


                DELAWARE                                  84-0938960
                --------                                  ----------
       (State or other jurisdiction                 (IRS Employer ID Number)
     of incorporation or organization)


                         295 Interlocken Boulevard, #500
                              Broomfield, CO 80021
                    (Address of Principal Executive Offices)


                                 (303) 444-1600
                (Issuer's Telephone Number, Including Area Code)



        ----------------------------------------------------------------
              (Former name, former address and former fiscal year,
                          if changed since last report)


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 November 6, 2000 was 15,458,407.

<PAGE>

                          eSOFT, INC. AND SUBSIDIARIES

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I   FINANCIAL INFORMATION                                                   Page
                                                                                 ----
<S>                                                                             <C>
         Item 1.  Consolidated Financial Statements                              3 - 11

         Item 2.  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations                                     12 - 18

PART II  OTHER INFORMATION                                                      19 - 22

</TABLE>


                                       2
<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

                          eSOFT, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,          SEPTEMBER 30,
                                                                             1999                  2000
                                                                         ------------          ------------
<S>                                                                      <C>                   <C>
                                     ASSETS
CURRENT ASSETS
     Cash and cash equivalents                                           $  8,576,055          $ 22,054,963
     Available-for-sale securities                                               --               1,402,500
     Accounts receivable:
          Trade, less allowances for doubtful accounts
             of $310,453 and $585,062, respectively                         1,454,471             1,182,701
          Other                                                               912,500             1,559,910
     Inventories                                                              672,691               413,513
     Prepaid expenses and other                                               158,261               311,358
                                                                         ------------          ------------
                Total current assets                                       11,773,978            26,924,945
                                                                         ------------          ------------
PROPERTY AND EQUIPMENT
     Computer equipment                                                       718,122             1,549,469
     Furniture and equipment                                                  326,092               512,837
     Automobile                                                                  --                  70,185
     Leasehold improvements                                                   176,314               211,023
     Accumulated depreciation                                                (660,904)           (1,013,320)
                                                                         ------------          ------------
         Net property and equipment                                           559,624             1,330,194
                                                                         ------------          ------------
OTHER ASSETS
     Capitalized software costs, net of accumulated amortization
         of $481,758 and $954,978, respectively                               702,417               229,197
     Deferred financing costs                                                 283,215               195,992
     Other assets                                                              39,557                78,912
                                                                         ------------          ------------
           Total other assets                                               1,025,189               504,101
                                                                         ------------          ------------
TOTAL ASSETS                                                             $ 13,358,791          $ 28,759,240
                                                                         ============          ============

</TABLE>

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


                                       3
<PAGE>

                          eSOFT, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                               DECEMBER 31,          SEPTEMBER 30,
                                                                   1999                   2000
                                                               ------------          ------------
<S>                                                            <C>                   <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
     Accounts payable                                          $    831,496          $    759,980
     Deferred revenue                                               289,590               796,008
     Accrued expenses:
          Payroll and payroll taxes                                 185,983               420,747
          Marketing                                                    --                 250,530
          Facility closure cost                                        --                 400,000
          Other                                                     454,815               612,470
                                                               ------------          ------------
          Total current liabilities                               1,761,884             3,239,735

LONG TERM LIABILITIES
     Convertible debentures                                       1,198,254            12,736,220
                                                               ------------          ------------
          Total liabilities                                       2,960,138            15,975,955
                                                               ------------          ------------
STOCKHOLDERS' EQUITY
     Common stock, par value $.01 per share;
       Authorized 100,000,000 shares; 14,289,075 and
       15,456,008 issued and outstanding, respectively              142,890               154,560
     Additional paid-in capital                                  24,999,820            38,234,152
     Subscriptions receivable                                       (39,704)                 (373)
     Accumulated other comprehensive income                            --                (378,000)
     Accumulated deficit                                        (14,704,353)          (25,227,054)
                                                               ------------          ------------
          Total stockholders' equity                             10,398,653            12,783,285
                                                               ------------          ------------
TOTAL LIABILITIES AND
    STOCKHOLDERS' EQUITY                                       $ 13,358,791          $ 28,759,240
                                                               ============          ============
</TABLE>

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

                                       4
<PAGE>

                          eSOFT, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                      FOR THE NINE MONTHS ENDED                   FOR THE THREE MONTHS ENDED
                                                             SEPTEMBER 30,                               SEPTEMBER 30,
                                                      1999                  2000                  1999                  2000
                                                  ------------          ------------          ------------          ------------
<S>                                               <C>                   <C>                   <C>                   <C>
REVENUES:
  Product                                         $  5,504,423          $  5,602,180          $  1,927,872          $  1,107,277
  Services                                             536,287             1,363,545               306,000               127,545
                                                  ------------          ------------          ------------          ------------
    Total revenues                                   6,040,710             6,965,725             2,233,872             1,234,822
                                                  ------------          ------------          ------------          ------------
COST OF GOODS SOLD:
  Product                                            2,688,700             2,861,334               786,007               469,477
  Services                                              73,228               263,644                73,228                98,142
                                                  ------------          ------------          ------------          ------------
    Total cost of goods sold                         2,761,928             3,124,978               859,235               567,619

GROSS PROFIT                                         3,278,782             3,840,747             1,374,637               667,203
                                                  ------------          ------------          ------------          ------------
EXPENSES:
  Sales and marketing expense                        4,836,333             7,531,809             1,033,505             3,846,709
  General & administrative expense                   5,002,825             3,936,927             1,515,914             1,688,340
  Engineering expense                                1,047,163             1,871,323               332,074               848,306
  Software amortization costs                          125,479               473,220                41,826                41,229
  Research and development expense                     493,594               775,574               137,885               294,109
                                                  ------------          ------------          ------------          ------------
    Total Expenses                                  11,505,394            14,588,853             3,061,204             6,718,693
                                                  ------------          ------------          ------------          ------------
Loss from operations                                (8,226,612)          (10,748,106)           (1,686,567)           (6,051,490)
                                                  ------------          ------------          ------------          ------------
OTHER INCOME (EXPENSE):
  Realized gain                                        109,895                  --                    --                    --
  Interest income                                       40,648               683,310                 6,518               377,666
  Interest expense                                    (283,296)             (457,905)             (223,306)             (185,141)
  Other                                                 10,180                  --                  95,063                  --
                                                  ------------          ------------          ------------          ------------
    Total Other Income (Expense)                      (122,573)              225,405              (121,725)             192 ,525
                                                  ------------          ------------          ------------          ------------
NET LOSS                                          $ (8,349,185)         $(10,522,701)         $ (1,808,292)         $ (5,858,965)
                                                  ============          ============          ============          ============
BASIC AND DILUTED NET LOSS PER COMMON
SHARE                                             $       (.81)         $       (.70)         $       (.17)         $       (.38)
                                                  ============          ============          ============          ============
BASIC AND DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING                                         10,302,233            15,005,869            10,751,198            15,428,747
                                                  ============          ============          ============          ============

</TABLE>

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

                                       5
<PAGE>

                          eSOFT, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                        Accumulated                       Total
                                      Common Stock       Additional                        Other                       Stockholders'
                                ----------------------     Paid-in     Subscriptions   Comprehensive    Accumulated       Equity
                                  Shares      Amount       Capital       Receivable       Income          Deficit        (Deficit)
                                ----------   ---------   -----------   -------------   -------------   -------------   -------------
<S>                             <C>          <C>         <C>           <C>             <C>             <C>             <C>
BALANCE, January 1, 2000        14,289,075    $142,890   $24,999,820     $  (39,704)              --   $(14,704,353)   $ 10,398,653
  Exercise of warrants
    and options                    523,325       5,234       702,280             --               --             --         707,514
  Issuance of common
    stock for bonus                  2,812          28        38,460             --               --             --          38,488
  Collection of notes
    receivable for exercise
    of options and warrants             --          --            --         39,331               --             --          39,331
  Issuance of common
    stock pursuant to
    private placement              640,796       6,408     12,493,592            --               --             --      12,500,000
  Unrealized loss on
    available-for-sale
    securities                          --          --            --             --         (378,000)            --        (378,000)
  Net loss for the nine months
    ended September 30, 2000            --          --            --             --               --    (10,522,701)    (10,522,701)
                                ----------    --------   -----------     ----------    -------------   ------------    ------------
BALANCE, September 30, 2000     15,456,008    $154,560   $38,234,152     $     (373)   $    (378,000)  $(25,227,054)   $ 12,783,285
                                ==========    ========   ===========     ==========    =============   ============    ============

</TABLE>

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




                                       6
<PAGE>

                          eSOFT, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                            FOR THE NINE MONTHS
                                                                            ENDED SEPTEMBER 30,
                                                                          1999                2000
                                                                      ------------       ------------
<S>                                                                   <C>                <C>
CASH FLOW FROM OPERATING ACTIVITIES
  Net loss from operations                                            $ (8,349,185)      $(10,522,701)
  Adjustments to reconcile net loss to net cash
    used in operating activities
      Depreciation & software amortization                                 217,394            825,636
      Provision for losses on accounts receivable                          151,639            555,000
      Amortization of discount on investments                               (8,459)              --
      Amortization of debt discounts and financing costs                   204,150            344,690
      Amortization of warrant valuation granted for
        prepaid consulting                                                 101,767               --
      Issuance of compensatory options                                      40,420               --
      Issuance of consultant options                                        45,383               --
      Issuance of common stock to brokers                                  290,625               --
      Issuance of common stock for bonuses                                    --               38,488
      Proceeds from sale of trading securities                             292,634               --
      Gain on sale of fixed assets                                            (450)              --
      Interest income on subscription receivable                            (1,009)              --
      Realized gain from sale of trading securities                       (109,445)              --

  Changes in operating assets and liabilities:

      Accounts receivable - trade                                         (321,678)          (283,230)
      Other accounts receivable                                           (306,000)          (647,410)
      Inventories                                                          783,679            259,178
      Prepaid expenses and other                                            (2,231)          (153,096)
      Other assets                                                         (25,945)           (39,355)
      Accounts payable                                                     416,266            (71,517)
      Accrued expenses                                                      26,120          1,042,949
      Deferred revenue                                                      23,296            506,418
                                                                      ------------       ------------
Net cash used in operating activities                                   (6,531,029)        (8,144,950)
                                                                      ------------       ------------
CASH FLOW FROM INVESTING ACTIVITIES
      Proceeds from sale of investments                                  2,000,000               --
      Proceeds from sale of assets                                          37,296               --
      Purchase of available-for-sale securities                               --           (1,780,500)
      Purchase of property and equipment                                  (141,873)        (1,122,986)
      Restricted cash                                                       85,000               --

</TABLE>

                                       7
<PAGE>
<TABLE>
<S>                                                                   <C>                <C>

      Additions to capitalized software                                     (2,650)              --
                                                                      ------------       ------------
Net cash provided by (used in) investing activities                      1,977,773         (2,903,486)
                                                                      ------------       ------------
CASH FLOW FROM FINANCING ACTIVITIES
      Proceeds from exercise of options and warrants and sale of
        common stock                                                     1,363,054         13,207,513
      Proceeds from stock subscription receivable                           56,487             39,331
      Proceeds from issuance of convertible debt                         4,950,000         11,280,500
      Debt offering costs paid                                            (538,953)              --
      Proceeds from short term debt                                        114,719               --
      Payments on short term debt                                         (159,151)              --
                                                                      ------------       ------------
  Net cash provided by financing activities                              5,786,156         24,527,344

INCREASE IN CASH                                                         1,232,900         13,478,908

CASH: BEGINNING OF PERIOD                                                  732,384          8,576,055
                                                                      ------------       ------------
CASH: END OF PERIOD                                                   $  1,965,284       $ 22,054,963
                                                                      ============       ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
  Cash paid for interest                                                      --         $     75,754
  Common stock issued for subscriptions receivable                    $    209,034               --
  Warrants issued in connection with debt offering                    $  2,466,633               --

</TABLE>

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


                                       8
<PAGE>

                          eSOFT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.   Basis of Presentation

          The consolidated interim financial statements include the accounts of
     eSoft, Inc. and its two wholly-owned subsidiaries, Apexx Technology, Inc.
     ("Apexx") and Technologic, Inc. ("Technologic"), (collectively "eSoft" or
     the "Company") and have been prepared by the Company, without audit,
     pursuant to the rules and regulations of the Securities and Exchange
     Commission. Certain information and footnote disclosures normally included
     in financial statements prepared in accordance with generally accepted
     accounting principles have been condensed or omitted pursuant to such rules
     and regulations, although the Company believes that the disclosures are
     adequate to make the information presented not misleading.

          These statements reflect all adjustments, consisting of normal
     recurring adjustments, which in the opinion of management, are necessary
     for fair presentation of the information contained therein. It is suggested
     that these consolidated financial statements be read in conjunction with
     the audited financial statements and notes thereto included in the
     Company's Annual Report on Form 10-KSB for the year ended December 31,
     1999. The Company follows the same accounting policies in preparation of
     interim reports.

          Results of operations for the interim periods are not necessarily
     indicative of annual results.

2.   Account Receivable - Trade

     The following information summarizes accounts receivable:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,      SEPTEMBER 30,
                                                                    1999               2000
                                                                 -----------       ------------
<S>                                                              <C>               <C>
     Accounts Receivable                                         $ 1,764,924         1,767,763
     Allowance for doubtful accounts                                (310,453)         (585,062)
                                                                 -----------       -----------
                                                                 $ 1,454,471       $ 1,182,701
                                                                 ===========       ===========
</TABLE>

          The Company did not have any customers which accounted for 10% or more
     of the sales through the nine months ending September 30, 2000, or which
     individually had outstanding balances which accounted for more than 10% of
     the total outstanding accounts receivable balance as of September 30, 2000.
     International sales represented approximately 25% of revenue for the nine
     months ending September 30, 2000, and approximately 42% of outstanding
     accounts receivable at September 30, 2000.

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

                                       9
<PAGE>

                          eSOFT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

3.   Accounts Receivable - Other

          During 1999, the Company entered into an agreement with Intel
     Corporation, a stockholder of the Company, to jointly architect and design
     certain software applications. The agreement grants the stockholder of the
     Company the right to use or sell the stockholder's products, which include
     the Company's software, as well as the right to modify the software and
     related products. The Company has recognized revenue of $2,500,000 to date
     in accordance with the percentage of completion method of which $1,132,500
     is due the Company at September 30, 2000. The Company has also entered into
     other various licensing and engineering development agreements during the
     year, of which the receivable balance at September 30, 2000 is $427,410.

4.   Convertible debentures

          In September 1999, the Company issued $2,000,000 of unsecured 5%
     Convertible Debentures at a 2.5% discount, due June 10, 2002,
     ("Debentures"), along with stock purchase warrants ("Warrants") with a
     right to purchase an aggregate of 511,182 shares of common stock at an
     exercise price of $4.4994 per share. The principal amount of the Debenture
     is convertible at any time at the investor's option into a fixed number of
     shares of eSoft common stock at $3.9125 per share, subject to certain
     anti-dilution provisions and adjustments. The Company has the ability,
     under certain circumstances, to obligate the investor to convert the
     Debentures into common stock and to exercise the Warrants. The investor has
     the option to purchase an additional $3 million of debentures, together
     with warrants to purchase shares of common stock of the Company equal to
     the quotient obtained by dividing $3 million by the conversion price for
     the debentures with an exercise price of 115% of the debenture conversion
     price. The additional $3 million of debentures would be convertible at the
     lower of (i) the Company's then current market price or (ii) $5.50, but in
     no event less than $3.9125 per share. The Debentures are manditorily
     convertible if the average per share market value over thirty consecutive
     trading days exceed 200% of the exercise price of the Warrants. The Black
     Scholes value of the Warrants issued of $846,607 plus an initial discount
     of $50,000 related to the aforementioned 2.5% discount, for a total of
     $896,607, was recorded as an original issue discount and is being amortized
     over the term of the Debentures and recorded as non-cash interest expense.
     At September 30, 2000, the balance of the unamortized original issue
     discount was $556,983. The balance of the Debentures at September 30, 2000,
     of $1,443,017 represents the original face value of the remaining
     outstanding Debentures of $2,000,000 less the balance of the unamortized
     discount of $556,983.

          In September 2000, the Company entered into an Amendment of the Stock
     and Warrant Purchase and Investor Rights Agreement dated April 26, 2000
     whereby the Company issued $12,500,000 of unsecured 7% Convertible
     Debentures due September 15, 2004 ("September 2000 Debentures") and stock
     purchase warrants ("September 2000 Warrants") with a right to purchase an
     aggregate of 600,000 shares of common stock, par value $.01 per share, at
     an exercise price of $11.00. The principal amount of the September 2000
     Debentures is convertible at any time at the investor's

                                       10
<PAGE>

                          eSOFT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

     option into a fixed number of shares of eSoft common stock at fair market
     value, but not less than $11.00 or more than $19.507 per share. The
     September 2000 Warrants shall vest and become exercisable based upon
     certain performance milestones as indicated in the agreement. At this time,
     management has estimated the fair value of the September 2000 Warrants to
     be nominal. However, the Company will be required to remeasure the
     September 2000 Warrants at each reporting date. The fair value of the
     September 2000 Warrants will be reflected in stockholders' equity, and
     changes in the fair value of these warrants will be reflected in the
     current period as a charge to earnings. In addition, the Company agreed
     to purchase 30,000 shares of Gateway common stock for $3,000,000, a
     $1,219,500 premium over the fair market value of the securities on the date
     of purchase. The premium paid is recorded as a reduction to the balance of
     the September 2000 Debentures and is being amortized over the term of the
     debentures and recorded as non-cash interest expense. At September 30,
     2000, the balance of the premium was $1,206,797. The balance of the
     September 2000 Debentures at September 30, 2000 of $11,293,203 represents
     the original face value of the outstanding September 2000 Debentures, of
     $12,500,000 less the balance of the unamortized premium of $1,206,797. The
     investment in the Gateway common stock is being accounted for as
     available-for-sale securities, whereby unrealized gains and losses are
     recognized as Other Comprehensive Income, a component of Stockholders'
     Equity.

5.   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 anti-dilutive.

          Options and warrants to purchase 4,933,140 and 3,789,296 shares of
     common stock and notes convertible into zero shares and 511,182 shares were
     not included in the computation of diluted earnings per share because their
     effect was anti-dilutive for the period ending September 30, 1999, and
     2000.

                                       11
<PAGE>

                           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, as amended and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
These statements often can be identified by the use of terms such as "may,"
"will," "expect," "believes," "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. Additional risks and uncertainties are
described in the Company's most recently filed Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1999. 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

     Through the end of the quarter, the company's primary legacy products were
targeted at providing all of the components an organization needs to develop,
manage, and monitor its Intranet, external web presence and Internet-based
applications. These legacy products included the TEAM Internet all-in-one
Internet server, the Interceptor firewall and the InstaGate Internet server. In
October of 2000, we introduced the InstaGate EX, which has been under
development for several quarters. InstaGate EX combines the best of breed
features from the legacy offerings as well as new, market-driven features and
functions. The InstaGate EX is a firewall with full virtual private network or
VPN features.

     The new product is a highly modular, flexible and scalable Linux-based
architecture specifically designed to address the evolving requirements of
small-to-medium enterprises who establish a broadband connection to the
Internet. New applications and upgrades, called SoftPaks-TM-, are available
through software downloads as businesses grow and new applications are
developed. SoftPaks include remote access service, anti-virus, Web site
filtering and reporting with new SoftPaks being added continually. SoftPaks are
applications that have been developed by eSoft or in combination with third
parties. SoftPaks are licensed to the end user on a monthly or annual
subscription basis and form a recurring revenue stream for eSoft and our channel
partners. The

                                       12
<PAGE>

SoftPaks, as well as software updates, firewall enhancements and more are
distributed via a unique process called the SoftPak Director. SoftPak Director
allows an end user to utilize a browser-based interface to evaluate and select
SoftPaks. The value to channel partners is the elimination of truck rolls to
implement new features and functions. Additionally, SoftPaks can be added
without requiring new boxes, thereby eliminating the need for hardware swaps and
downtime typically associated with new applications and services.

     In addition, the InstaGate EX creates an incremental, recurring revenue
stream for eSoft and its partners. We will continue to sell this product through
the reseller and ISP channels, with the ability to bill the end users directly
upon the downloading of the SoftPaks-TM-. Research from Frost & Sullivan shows
the firewall market growing at a compound annual rate of 38.7 percent in number
of units and 25.7 percent in revenue between 1999 and 2006, reaching a total
market size of $2.7 billion by 2006. The research attributes this steady growth
to the convergence of VPN and firewall technologies, the growing number of
companies linking their networks to the Internet, remote access connectivity for
branch offices and mobile users, and growing concern over network hacking.

     Our products target small-to-medium sized businesses that typically have
between ten and two hundred and fifty desktop computers connected to a local
area network, or LAN. The availability of low cost, high speed bandwidth,
through technologies such as cable modems and digital subscriber line or DSL is
driving small-to-medium sized business demand for full time Internet access
across their LANs, which in turn creates the need to effectively protect the
corporate assets and data through the implementation of a firewall. 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.

     During 1999, we launched our redphish-TM- program, which is targeting the
licensing of our InstaGate EX technology, both hardware and software, along with
certain customization or modifications from our professional engineering
services, in order to create highly specialized or customized offerings for
hardware manufacturers, networking companies and broadband service providers to
integrate into their own offerings. This program allows us to leverage our
research, development and product offerings, along with our partners' expertise
in hardware design, manufacturing and distribution. We believe that the redphish
program greatly improves our distribution capabilities and helps to drive
product requirements, and that it enables us to gain time to market advantages
in developing new software features, as well as building out our distribution
network.

     Our redphish program provides a vehicle through which major hardware
manufacturers can deliver customized Internet security appliance and
connectivity solutions to their small and medium-sized customers. Delivered
initially as an Internet security appliance, this platform can later serve as a
foundation for additional products and services, such as enhanced e-mail,
virtual private networking, and business-to-business applications, as well as
any SoftPaks provided by eSoft. Our program is based on revenue sharing, which
provides incentive at every point of the distribution chain. Currently, Gateway
Companies, Inc., 3Com Corporation and Hewlett Packard are actively involved in
pursuing marketing efforts that utilize or bundle eSoft's software or appliance.
Our strategy is to continue to aggressively develop additional redphish
partnerships with key hardware and service providers.

                                       13
<PAGE>

     In the second quarter of 2000, we launched our Smart DSL program in three
cities, which targets small to medium sized businesses. This program focuses on
a subscription-based model that minimizes the cash outlay requirements for our
customers and generates a more predictable recurring revenue stream associated
with each sale. Previously, most of our product revenue was generated from
one-time product sales. This approach maximized short-term revenue, but made
ongoing revenue predictions difficult. eSoft believes that a subscription-based
pricing model will result in better predictability of future revenue, and will
also better suit the cash flow requirements of our small and medium size
business customers.

     Smart DSL bundles broadband local access with the InstaGate EX and
installation, providing a one-stop shopping experience for end user customers
seeking to gain a secure, dedicated connection to the Internet. This eliminates
the historical complications small businesses faced when trying to integrate
many different features, numerous pieces of hardware, several versions of
software and more than one access provider into a DSL solution. It is our
intention to continue bringing to market new product offerings and services that
can contribute to a recurring revenue stream. We will continuously evaluate the
return on investment for SmartDSL and other offerings to determine the optimal
deployment of our resources.

     The Company expects to use outside financing for its continued company wide
expansion. We will continue to pursue recurring revenue opportunities, grow our
revenue and customer base and closely manage the operating expenses in order to
extend the availability of our working capital. The Company is targeting
break-even operations in late 2001 through the increase in sales and related
margins, while keeping general and administrative expenses fairly constant.


                         LIQUIDITY AND CAPITAL RESOURCES

     The Company's cash position on September 30, 2000 was $22,055,000, an
increase of $13,479,000 from year end primarily due to the equity and debt
investments by Gateway. The Company's working capital at September 30, 2000 was
$23,685,000, an increase of $13,673,000 from December 31, 1999. Management
anticipates continuing losses in support of its growth initiatives and, thus
expects continued negative cash flow. The Company is increasing efforts to
reduce its accounts receivable balance through more stringent collection efforts
of the current customer base in an attempt to reduce the days sales outstanding.
The Company has analyzed its accounts receivable and adjusted its allowance for
doubtful accounts to $585,000 at September 30, 2000. Other accounts receivable
relate to software development fees and licensing fees from long-term
development contracts, which are due upon completion of certain performance
criteria. The Company has expended $1,123,000 in capital expenditures in 2000,
mainly attributable to additional computers purchased for new employees, a
customer relations management, and leasehold improvements related to additional
space leased. Management believes that its current cash position, the
anticipated cash receipts from receivables, and available sources of additional
capital will be sufficient to meet its working capital needs for the foreseeable
future.

                                       14
<PAGE>

CASH FLOW

     Net cash used in operating activities for the nine months ended
September 30, 2000 was $8,145,000 compared with $6,531,000 for the nine
months ended September 30, 1999, an increase of $1,614,000 for the 2000
period compared to the 1999 period. The Company's net loss at September 30,
2000 was $10,523,000, an increase of $2,174,000 from September 30, 1999. This
increase in net loss was primarily the result of the intensive Smart DSL
business launch during the third quarter of 2000. Other significant expenses
were incurred in relation to the closing of the Atlanta facility in order to
maximize efficiencies. Adding to these increases were the increase in
accounts receivable of $930,000 related to software development and
licensing. Other items impacting the cash used in operating activities during
the nine months ended September 30, 2000 were adjustments of $826,000 for
depreciation and amortization, $555,000 for the provision for losses on
accounts receivable, and $345,000 for amortization of debt discounts and
financing costs. In addition, prepaid expenses increased $153,000,
inventories decreased $259,000, accrued expenses increased $1,043,000 and
deferred revenue increased $506,000.

     Net cash used in investing activities for the nine months ended September
30, 2000 was $2,903,000 compared with $1,978,000 provided by investing
activities for the nine months ended September 30, 1999. The decrease in cash of
$4,881,000 for the 2000 period compared to the 1999 period was primarily due to
$1,780,000 invested in Gateway common stock during the third quarter of 2000 and
about $2,000,000 of investments maturing in 1999. In addition, purchases of
property and equipment amounted to about $1,123,000 during 2000.

     Net cash provided by financing activities for the nine months ended
September 30, 2000 was $24,527,000 compared with $5,786,000 for the nine months
ended September 30, 1999. The increase of $18,741,000 for the 2000 period
compared to the 1999 period was primarily due to $12,500,000 for the proceeds
from the equity investment by Gateway and $11,281,000 for the net proceeds from
the issuance of convertible debentures to Gateway. In 1999, proceeds of
$4,950,000 were received as a result of the issuance of convertible subordinated
debentures.

         RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2000
              COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1999

     Quarterly revenues totaled $1,235,000, of which $1,107,000 was related
to product and $128,000 was related to services, versus revenue of $2,234,000
for the comparable quarter in 1999, of which $1,928,000 was related to
product and $306,000 was related to services. In total, revenue decreased
$999,000 or 45% over the comparable quarter in 1999. Product sales decreased
43% for the three months ending September 30, 2000 compared to the three
months ending September 30, 1999. The decrease is due to the transitioning of
sales to a subscription model where revenue is recognized over the life of a
contract as opposed to recognizing all of the revenue up front upon shipment.
International sales accounted for 25% of product revenue in 2000. The
services revenue was generated mainly from engineering fees for development
of software and related licensing fees mainly in connection to agreements
with Gateway Companies, Inc. and 3Com Corporation.

                                       15
<PAGE>

     Gross profit margin in the current quarter was $667,000, which is 54% of
revenues compared to $1,375,000, which is 62% of revenues for the three
months ended September 30, 1999. Gross margin on product was 58% and 59% for
the three months ending September 30, 2000 and 1999, respectively. During the
current quarter, there was a higher concentration of sales of the Instagate
and Interceptor products, which have more favorable margins. Offsetting these
better margins, certain items were sold on auction sites at little above cost
and certain unusable items were sold as scrap. Gross profit margin on product
and services relating to redphish sales has decreased from 76% for the three
months ending September 30, 1999 to 55% for the three months ending September
30, 2000. The decrease is due to the revenue in 1999 being made up of non
recurring engineering fees and licensing fees, which had little costs
associated with them. In 2000, the majority of the redphish revenue is made
up of non recurring engineering fees and product sales.

     Operating expenses increased $3,658,000 or 119% from $3,061,000 for the
quarter ending September 30, 1999 to $6,719,000 for the quarter ending
September 30, 2000. Sales and marketing expenses increased $2,813,000 from
$1,034,000 in 1999 to $3,847,000 in 2000. The increase is associated with
lead generation expenses, more intense product marketing efforts, and
marketing efforts and additional salespeople hired in connection with the
start up of Smart DSL. General and administrative expenses increased $172,000
from $1,516,000 in 1999 compared to $1,688,000 for the current quarter. This
increase can be attributed to the third quarter 2000 nonrecurring charge for
the closing of the Atlanta facility. Engineering expenses increased $516,000
from $332,000 in 1999 to $848,000 in 2000. This can be attributed to
additional people hired for domestic technical support and technical support
services being contracted out for our European operations. Furthermore,
services were outsourced for translation of the product into German, Spanish,
French, Chinese, Korean, and Japanese, and there were additional employees
eligible for bonuses. Amortized software development costs total $42,000 for
the third quarter in 1999 and 2000.

     Interest expense decreased $38,000 in the three months ended September
30, 2000 from $223,000 in 1999 to $185,000 in 2000. The interest is due to
the interest and discount amortization on the convertible debentures and
amortization of deferred offering costs. Interest income increased $371,000
in the quarter as a result of additional cash on hand related to convertible
debentures issued by Gateway in the beginning of the quarter and an equity
investment by Gateway earlier in the year.

     Net loss from operations was $5,859,000 for the three months ended
September 30, 2000, compared to $1,808,000 for the same period in 1999, an
increase in the loss of $4,051,000 over the same period. The net losses are
associated with the increased selling, general and administrative expense
necessary to support its current business strategy. Losses are anticipated to
continue through the current fiscal year due to expenditures in support of
continued growth and market penetration.

         RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2000
              COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1999

     Revenues for nine months of operations totaled $6,966,000 of which
$5,602,000 was related to product and $1,364,000 was related to services,
compared to revenues of $6,041,000 for the same period in 1999 of which
$5,504,000 was related to product and $536,000 was related to services. This
represents an increase of $925,000 or 15% over the comparable nine month period
in 1999. Product

                                       16
<PAGE>

sales remained relatively flat for the nine months ending September 30, 2000
compared to the nine months ending September 30, 1999. The lack of revenue
growth is mainly due to the transitioning of sales to a subscription model where
revenue is recognized over the life of a contract as opposed to recognizing all
of the revenue up front upon shipment. In 2000, international sales accounted
for 25% of product revenue. Services revenue increased $828,000 or 154% for the
nine months ending September 30, 2000 compared to the nine months ending
September 30, 1999. During 2000, the services revenue was mainly generated from
engineering fees for development of software, and the related licensing fees in
connection with agreements with Intel, Inc., Gateway Companies, Inc., 3Com
Corporation, and Compaq.

     Gross profit margin for the nine months ending September 30, 2000 was
$3,841,000, which is 55% of revenues for the nine months ended September 30,
2000 compared to $3,279,000, which is 54% of revenues for the nine months ended
September 30, 1999. The increase is partially due to a higher concentration of
services revenue in 2000, which had margins of about 81%.

     Operating expenses increased $3,084,000 or 27% from $11,505,000 for the
first nine months in 1999 to $14,589,000 for the same nine months in the 2000
period. Sales and marketing expenses increased $2,696,000 from $4,836,000 in
1999 to $7,532,000 in 2000. In 2000, there was an extensive marketing
campaign in relation to the launch of Smart DSL. In addition, sales people
were hired in connection with the Smart DSL launch, and in relation to the
expansion of product sales efforts domestically and internationally. General
and administrative expense decreased $1,065,000 from $5,002,000 in the 1999
period compared to total expenses of $3,937,000 in 2000. This decrease can be
attributed to the costs relating to the Apexx and Technologic mergers in
1999, which include filing fees, audit fees, legal fees, banking fees,
consulting fees, and printing fees that did not recur in 2000. Engineering
expenses increased $824,000 from $1,047,000 for the nine months ending
September 1999 to $1,871,000 for the same period in 2000. This increase was
related to additional engineers hired in response to the demand for software
development under the redphish program and increased travel in relation to
these projects. Engineering expenses also increased due to additional people
hired for domestic technical support and technical support services being
contracted out for our European operations. Furthermore, services were
outsourced for translation of the product into German, Spanish, French,
Chinese, Korean, and Japanese, and there were additional employees eligible
for bonuses. Amortized software development costs total $473,000 for the
current year, compared to $125,000 in the 1999 period. This increase is
associated with the life of the software being reevaluated and amortization
being accelerated through June 2000 for certain older versions of software.

     Interest expense increased $175,000 for the nine months ended September 30,
2000 from $283,000 in 1999 to $458,000 in 2000. The additional interest is due
to the interest and discount amortization on the convertible subordinated
debentures and amortization of deferred offering costs. Interest income
increased $643,000 for the nine month period due to additional cash on hand
related to convertible debentures issued by Gateway, the equity investment by
Gateway, and the exercise of warrants and options in the fourth quarter of 1999.

     Net losses from operations totaled $10,523,000 for the nine months ended
September 30, 2000, compared to a $8,349,000 loss for the same period in 1999,
an increase of $2,174,000 over the same period. The net losses are associated
with the selling, general and administrative expenses necessary

                                       17
<PAGE>

to support its current business strategy. Losses are anticipated to continue
into 2001 due to expenditures in support of continued growth and market
penetration.

Income Taxes

     At September 30, 2000, a valuation allowance of 100% of the deferred tax
asset 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's operating loss carryforwards may be limited under Section 382 of
the Internal Revenue Code.

Other Matters

     The Company has reviewed all other recently issued, but not yet adopted,
accounting standards in order to determine their effects, if any, on the results
of operations or financial position of the Company. Based on that review, the
Company believes that none of these pronouncements will have a significant
effect on current or future earnings or operations.



                                       18
<PAGE>

PART II - OTHER INFORMATION

     Item 1. LEGAL PROCEEDINGS

          The Company is not currently involved in any litigation other than
          routine litigation arising in the ordinary course of business that, if
          determined adversely, is not reasonably likely to have a material
          adverse effect on the Company.

     Item 2. CHANGES IN SECURITIES

          Not applicable

     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

     Item 6. EXHIBITS AND REPORTS ON FORM 8-K

          a)   Exhibits

               27   Financial Data Schedules.

          b)   Reports on Form 8-K.

          On July 19, 2000, the Company filed a Current Report on Form 8-K that
          reported a change in independent accountants.

          On August 2, 2000, the Company filed a Current Report on Form 8-K that
          reported information regarding certain negotiations between the
          Company and Gateway Companies, Inc. related to an investment made by
          Gateway Companies, Inc. in the Company.

          On September 5, 2000, the Company filed a Current Report on Form 8-K
          that reported a resolution between the Company and Gateway Companies,
          Inc. related to an investment made by Gateway Companies, Inc. in the
          Company.

                                       19
<PAGE>

          On September 25, 2000, the Company filed a Current Report on Form 8-K
          that reported the completion of the investment of Gateway Companies,
          Inc. in the Company and an investment by the Company in Gateway
          Companies, Inc.

                                       20
<PAGE>

                                   SIGNATURES


In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


Date:  November 14, 2000               eSoft, Inc.



                                       /s/ Jeffrey Finn
                                       Jeffrey Finn
                                       President, Chief Executive Officer


Date:  November 14, 2000               /s/ Amy Beth Hansman
                                       Amy Beth Hansman
                                       Chief Accounting Officer



                                       21
<PAGE>

                                  Exhibit Index


<TABLE>
<CAPTION>
Exhibit No.          Description
-----------          -----------
<S>            <C>

   27.1        Financial Data Schedule

</TABLE>


                                       22