<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                              FORM 10-QSB / A No. 1

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

For Period Ended                     June 30, 1998
                ----------------------------------------------------------------

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

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

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


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


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

     5335 Sterling Dr., Suite C                  Boulder,  CO           80301
----------------------------------------         -------------------------------
(Address of principle executive offices)         (city)  (state)      (zip code)

                                 (303) 444-1600
                -------------------------------------------------
                Registrant'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            NO    X
                           ------        ------

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 July 20, 1998 was 6,658,002.



<PAGE>   2




PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

                                   ESOFT, INC.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                            DECEMBER 31,          JUNE 30,
                                                                                1997                1998
                                                                          -------------         ------------
                                                                                                 (Unaudited)
<S>                                                                       <C>                  <C> 
                                                   ASSETS

CURRENT ASSETS
     Cash                                                                  $    102,837         $  5,946,399
     Receivables:
        Trade, net of allowance for doubtful accounts                           199,832            1,398,108
        Subscription Receivable                                                 200,000                    -
     Inventories                                                                 94,607              214,401
     Prepaid expense and other                                                   24,799              135,526
     Note Receivables                                                            20,000               21,377
     Deferred income taxes                                                       18,000               18,000
                                                                          -------------         ------------
                           Total current assets                                 660,075            7,733,811

PROPERTY AND EQUIPMENT, AT COST:
     Computer equipment                                                         119,544              173,110
     Furniture and equipment                                                    143,157              207,327
                                                                          -------------         ------------
                                                                                262,701              380,437
     Less accumulated depreciation                                             (147,881)            (175,861)
                                                                          -------------         ------------
         Net property and equipment                                             114,820              204,576

CAPITALIZED SOFTWARE COSTS, NET OF AMORTIZATION                                 651,470              609,378

OTHER ASSETS
     Deferred offering costs                                                    280,896                    -
     Other assets                                                                17,539                7,689
                                                                          -------------         ------------

TOTAL ASSETS                                                              $   1,724,800         $  8,555,454
                                                                          =============         ============
</TABLE>

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


                                       2


<PAGE>   3

                                   ESOFT, INC.

                                 BALANCE SHEETS


<TABLE>
<CAPTION>

                                                                           DECEMBER 31,            JUNE 30,
                                                                              1997                   1998
                                                                          -------------         ------------
                                                                                                (UNAUDITED)
<S>                                                                       <C>                     <C>
                                    LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
     Note Payable - bank                                               $        75,757        $       57,423
     Accounts payable                                                          174,754               508,954
     Deferred revenue                                                           46,622                90,194
     Accrued expenses and other                                                 91,949               183,773
     Due to related party                                                            -               100,000
     Note Payable - related party - current                                     20,000                     -
                                                                       ---------------        --------------
         Total current liabilities                                             409,082               940,344

     Deferred tax liability - net                                              180,000               180,000
     Convertible notes payable - related parties                               355,903                     -
                                                                       ---------------        --------------
         Total liabilities                                                     944,985             1,120,344

STOCKHOLDERS' EQUITY
     Common stock, par value $.01 per share;
       authorized 50,000,000 shares; 2,433,158 and
       6,658,002 issued and outstanding December 31,
       1997 and June 30, 1998, respectively                                     24,332                66,581
       Additional paid-in capital                                            1,135,432             8,576,399
       Accumulated deficit                                                    (379,949)           (1,207,870)
                                                                       ---------------        --------------
         Total stockholders' equity                                            779,815             7,435,110

TOTAL LIABILITIES AND
    STOCKHOLDERS' EQUITY                                               $     1,724,800        $    8,555,454
                                                                       ===============        ==============
</TABLE>





-------------------------------                  ------------------------------
PHILIP BECKER                                    REGIS A. FRANK


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


                                       3

<PAGE>   4

                                   ESOFT, INC.

                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                       FOR THE THREE MONTHS ENDED                FOR THE SIX MONTHS ENDED
                                                              JUNE 30,                                 JUNE 30,
                                                        1997               1998                 1997               1998
                                                    ------------       ------------        -------------       ------------
<S>                                                 <C>                <C>                 <C>                 <C>         
REVENUES:                                           $    272,981       $  1,121,008        $     482,263       $  1,854,940

COST OF GOODS SOLD:                                      117,513            424,796              180,890            698,540
                                                    ------------       ------------        -------------       ------------

GROSS PROFIT                                             155,468            696,212              301,373          1,156,400

EXPENSES
  Sales and marketing expense                             43,203            560,144               67,117            877,270
  General & administrative expense                        48,936            492,480              178,814            799,207
  Engineering expense                                     17,614            136,102               17,614            204,725
  Software amortization costs                             32,151             53,220               61,381            102,093
  Research and development                                     -              2,286                    -             15,658
                                                    ------------       ------------        -------------       ------------
                                                         141,904          1,244,232              324,926          1,998,953

OTHER INCOME (EXPENSE):
  Interest income                                             24             19,892                  668             19,896
  Interest expense                                       (10,413)            (4,551)             (16,718)            (5,263)
                                                    ------------       ------------        -------------       ------------
                                                         (10,389)            15,341              (16,050)            14,633

NET INCOME (LOSS)                                   $      3,175       $   (532,679)       $     (39,603)      $   (827,920)
                                                    ============       ============        =============       ============

BASIC AND DILUTED INCOME (LOSS)
      PER COMMON SHARE:                             $      (0.00)      $      (0.10)       $       (0.03)      $      (0.19)
                                                    ============       ============        =============       ============

BASIC AND DILUTED WEIGHTED
AVERAGE SHARES
OUTSTANDING                                            1,263,158          5,374,930            1,263,158          4,249,592
                                                    ============       ============        =============       ============
</TABLE>


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


                                       4

<PAGE>   5

                                   ESOFT, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (UNAUDITED)

<TABLE>
<CAPTION>


                                                       COMMON STOCK              ADDITIONAL                           TOTAL
                                                                                   PAID-IN       ACCUMULATED      STOCKHOLDERS'
                                                 SHARES          AMOUNT           CAPITAL          DEFICIT           EQUITY
                                               -----------     ----------     ---------------   ---------------  ---------------
<S>               <C> <C>                        <C>             <C>             <C>              <C>                <C>       
BALANCE, December 31, 1997                       2,433,158       $24,332         $1,135,432       $  (379,949)       $  779,815

Issuance of warrants pursuant to
  private placement, January 1998                        -             -                438                 -               438
Issuance of stock pursuant to
  private placement net, of offering costs,
  February 1998                                    290,000         2,900            184,082                 -           186,982
Issuance of stock pursuant to option
  conversion                                        60,000           600             29,400                 -            30,000
Issuance of stock pursuant to stock
  grant                                             90,000           900               (900)                -                 -
Issuance of stock pursuant to IPO
  net of offering costs, March 1998              1,550,000        15,500            993,650                 -         1,009,150
Issuance of stock for IPO fee shares,
  March 1998                                       110,000         1,100             (1,100)                -                 -
Issuance of stock for note conversion,
  March 1998                                       355,903         3,560            352,343                 -           355,903
Issuance of stock pursuant to private
  placement, March 1998                             50,000           500             49,500                 -            50,000
Issuance of stock pursuant to exercise
  of agents' warrants, April 1998                  250,000         2,500            247,500                 -           250,000
Issuance of compensatory warrants,
  April 1998                                             -             -             69,600                 -            69,600
Issuance of stock pursuant to private
  placement, net of offering costs, June
  1998                                           1,468,941        14,689          5,516,454                 -         5,531,143
Net loss for the six months ended June
  30, 1998                                               -             -                  -          (827,921)         (827,921)
                                               -----------     ----------     -------------     -------------    --------------
BALANCE, June 30, 1998                           6,658,002        $66,581        $8,576,399       $(1,207,870)       $7,435,110
                                               ===========     ==========     =============     =============    ==============
</TABLE>

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


                                       5



<PAGE>   6

                                   ESOFT, INC.

                            STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                                                            FOR THE SIX MONTHS ENDED
                                                                                                     JUNE 30,
                                                                                             1997                 1998
                                                                                          ---------           -----------
<S>                                                                                       <C>                 <C>
CASH FLOW FROM OPERATING ACTIVITIES:
  Net loss from operations                                                                $ (39,603)          $  (827,920)
  Adjustments to reconcile net cash provided by (used in) operating
  activities
      Depreciation & software amortization                                                   79,830               129,966
      Provision for losses on accounts receivables                                                -                27,930
      Issuance of compensatory options                                                            -                23,200

  Changes in operating assets and liabilities: (increase) decrease in:
      Accounts receivable - trade                                                           (13,429)           (1,225,276)
      Inventories                                                                            11,346              (119,794)
      Other assets                                                                                -                 9,850
      Prepaid expenses                                                                            -              (110,728)

  Increase (decrease) in:
      Accounts payable                                                                       20,695               334,200
      Accrued expenses                                                                        1,078                91,824
      Deferred revenue                                                                      (28,042)               43,572
                                                                                          ---------           -----------
Net cash provided by (used in) operating activities                                          31,875            (1,623,176)

CASH FLOW FROM INVESTING ACTIVITIES:
      Purchase of equipment                                                                    (440)             (117,736)
      Capitalized software costs                                                           (131,196)              (60,000)
      Notes receivable - related parties                                                          -                (2,200)
                                                                                          ---------           -----------
Net cash used in investing activities                                                      (131,636)             (179,936)

CASH FLOW FROM FINANCING ACTIVITIES
      Principal (payments) on borrowings                                                    (11,845)              (18,334)
      Proceeds from subscription receivable                                                       -               200,000
      Due to related party                                                                        -               100,000
      Proceeds (payment) from related party borrowings                                       20,000               (20,000)
      Proceeds (payment) from issuance of promissory notes                                  100,000                     -
      Net proceeds sale of stock, conversion of note and warrants                                 -             7,385,008
                                                                                          ---------           -----------
  Net cash provided by financing activities                                                 108,155             7,646,674

INCREASE (DECREASE) IN CASH                                                                   8,394             5,843,562

CASH: BEGINNING OF PERIOD                                                                    20,750               102,837
                                                                                          ---------           -----------

CASH: END OF PERIOD                                                                       $  29,144           $ 5,946,399
                                                                                          =========           ===========
</TABLE>

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


                                       6
<PAGE>   7




                                   ESOFT, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.   INTERIM FINANCIAL INFORMATION

     In the opinion of management, the accompanying unaudited financial
     statements contain all adjustments necessary to present fairly the
     financial position as of June 30, 1998 and the results of operations and
     statement of cash flows for the periods presented. The results of
     operations for the six month periods ending June 30, 1998 and 1997 are not
     necessarily indicative of results to be expected for the full year.

2.   TRADE RECEIVABLES

     The following information summarizes trade receivables:


<TABLE>
<CAPTION>
                                                                DECEMBER 31,           JUNE 30,
                                                                    1997                 1998
                                                                ------------          ----------
<S>                                                                 <C>               <C>      
Accounts Receivable                                                 247,832            1,473,108
     Less allowance for doubtful accounts                           (48,000)             (75,000)
                                                                -----------           ----------
                                                                  $ 199,832           $1,398,108
                                                                ===========           ==========
</TABLE>


     The Company has six distributors which accounted for 61% of the Company's
     sales through the six months ending June 30, 1998 and 72% of the second
     quarter sales. Sales for the second quarter were composed of 58% for
     international destinations and 42% for the domestic market. Sales
     composition through June 1998 include 41% for international destinations
     and 59% for the domestic market. The six distributors that make up the
     majority of the Company's six months sales represent 73% of the total
     accounts receivable, with one customer representing 19% of our total
     accounts receivable on June 30, 1998.

     The Company has three distributors which each comprise 10% or more of the
     sales through the six months ending June 30, 1998. The three distributors
     represent 15%, 14% and 11% of the sales revenue.

     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.


                                       7
<PAGE>   8




                                   ESOFT, INC.

                          NOTES TO FINANCIAL STATEMENTS

3.   NOTES PAYABLES:

<TABLE>
<CAPTION>
                                                                          DECEMBER 31,          JUNE 30,
                                                                              1997                1998
                                                                          ------------         ---------- 
<S>                                                                        <C>                 <C>
Notes Payables:
On January 3, 1997, the Company borrowed $100,000
from a bank, bearing interest at 12% per annum and 
was payable with monthly installments of $3,325 with 
the balance due on April 3, 1998. On April 5, 1998, 
the loan was extended to October 5, 1998 with 
monthly installment payments of $3,325 and a final 
payment of $51,924 due October 5, 1998. The loan is 
collateralized by all assets of the Company.                                $  75,757          $   57,423
                                                                            =========          ==========
Related Party:
Two notes payable on demand to an officer, director 
and stockholder of the Company, interest payable 
monthly at 7% per annum, the note was paid in full in
May 1998.                                                                   $  20,000          $        -
                                                                            =========          ==========
</TABLE>


4.   NET INCOME (LOSS) PER SHARE

     Basic earnings (loss) per share is calculated by dividing the net
     income(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.

     Options and warrants to purchase 1,557,418 shares of common stock were not
     included in the computation of diluted earnings per share because their
     effect was anti-dilutive for the period ending June 30, 1998.

5.   DUE TO - RELATED PARTY

     The Company accepted subscription agreements for the private placement of
     150,000 shares of the Company's common stock at $1.00 per share in March
     1998. From the total private placement Philip Becker, the CEO & CTO of the
     Company, subscribed to purchase 100,000 shares of the Company's common
     stock. The private placement required the Company to seek the approval of
     the Vancouver Stock Exchange for the transaction. Due to the ownership
     level of the shareholder increasing to 20% of the outstanding shares in
     March 1998 the issuance of the common stock was subsequently restricted by
     the Vancouver Stock Exchange in May 1998. The Vancouver Stock Exchange
     authorized the Company to issue the shares, subject to shareholder approval
     of the private placement to Philip Becker. If shareholder approval is not
     received, the funds will be required to be remitted to the subscriber
     immediately. The Company has not yet scheduled a shareholders' meeting to
     seek approval for the above referenced transaction.


                                       8
<PAGE>   9





                                   ESOFT, INC.

                          NOTES TO FINANCIAL STATEMENTS

6.   PRIVATE PLACEMENT

     On June 15, 1998, eSoft completed the private placement of 1,468,941 shares
     of its common stock at a price of $4.25 per share for a total offering of
     $6,243,000. The offering was placed through C.M. Oliver & Company Ltd. of
     Vancouver, B.C. (the "Agent"), which acted as agent in the offering, with
     the participation of other sub-agents and finders. The net cash proceeds to
     the Company from the private placement were approximately $5,531,000 after
     payment of expenses of the offering, estimated at $204,175, and payment of
     $507,825 (8.13% of the offering price) commissions to the Agent,
     sub-agents, and finders who will also be issued warrants to purchase
     159,318 (10.85% of the offered shares) of eSoft's common stock at a price
     of US $4.25 in the first year and US $4.90 in the second year. Shares were
     sold in the offering to investors in Canada and Europe in reliance upon the
     exemption from registration of the shares under Regulation S under the
     Securities Act of 1933 (the "Act") (see Part II item 2, below), and to
     accredited investors in the United States in reliance upon Regulation D
     (Rule 505) under the Act. The shares issued in the private placement are
     eligible for the shortened hold period of four months in British Columbia
     pursuant to the requirements of BOR #97112 of the B.C. Securities
     Commission. eSoft has agreed to register the shares as soon as practicable
     under the U.S. Securities Act of 1933 for public sale in the United States.

7.   IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     See Item 2 - Management's Discussion and Analysis of Financial Condition
     and Results of Operations page 15 for recently issued accounting standards.


                                       9
<PAGE>   10




                           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 statement 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 IPAD business and prospects
     include the possibility that a competitor will develop a more comprehensive
     or less expensive IPAD 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

          The primary market being pursued by the Company consists of
     small-to-medium size 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 Company further believes that, for reasons of internal
     control and additional cost reduction, the SMB segment finds it beneficial
     to host their own hardware and software systems rather than rely upon a
     remote Internet service provider. For the higher end IPAD model 5000, a
     secondary target market includes Internet service providers, enterprise
     level operations and special applications. The Company believes that a
     significant portion of the expansion in Internet usage--now doubling every
     100 days with an estimated 62,000,000 U.S. Internet users at the end of
     1997--is from the SMB segment that 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. Up until
     the introduction of the Company's IPAD products, the only alternatives for
     Internet connection and presence were either complete reliance on a remote
     Internet service provider, or the installation and support of a complex,
     expensive in-house system configuration. With the IPAD, system and
     advancements in the telecommunications and Internet technologies,
     businesses can now assume most of the responsibilities and functions which
     heretofore have been provided on their behalf by Internet service
     providers. Most importantly for the SMB market, the IPAD 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 IPAD functionality includes an integrated router,
     firewall, domain name server, worldwide web server, remote access server
     and e-mail server for both Intranet and Internet.

          The Company's primary distribution strategy is the classical two-tier
     distribution channel, but with a concentration on those distributors, VARs
     and resellers that focus on the network and telecommunications


                                       10
<PAGE>   11




     segments. During the second quarter the Company added four more
     distributors, two in the international market and two domestically. The
     Company added a regional distributor located in Texas, with a network of
     over 750 resellers that primarily sell to telecommunications companies.
     Most noteworthy however, is the agreement with COMSTOR Corporation, a major
     distributor that is part of the General Electric family of companies, and
     is one of the nation's fastest growing microcomputer distributors. COMSTOR
     has three large sales and distribution offices in the U.S. and a network of
     7,000 resellers who are focused in the computer and network arenas. COMSTOR
     offers customer service, technical support and training to its resellers.

          Lead generation and pull-through support for the distribution channel
     is provided through a combination of classical marketing programs, such as
     seminars and public relations, establishing a channel development sales
     force and implementing an SMB marketing program into telecommunications
     companies. Significant additions to the eSoft sales team are planned for
     the third quarter and will include incremental sales managers and
     distribution sales reps, plus several channel development reps located in
     high-density cities throughout the U.S., Canada, Europe, South America. The
     distribution sales representatives will focus on the recruitment,
     management, support and productivity of the distributors. The channel
     development representatives will focus on assisting the VARs to develop
     market awareness in their respective geographic area. The SMB marketing
     program is now being introduced into many top telecommunications companies
     in the U.S. The expectation is to launch at least two of these programs in
     the third quarter with significant revenue contribution visible in the
     fourth quarter.

          In the second quarter the Company hired J. Rex Bell as VP of Marketing
     and James Love as VP of Sales. Rex Bell brings over eighteen years of
     direct telecommunications operations and marketing management experience.
     Jim Love has over thirteen years' involvement in building successful
     two-tier distribution businesses. In the third and fourth quarter, the
     Company plans to add two sales managers and eight to twelve channel
     distribution representatives. The success in achieving the revenue goals
     for the quarter is reliant heavily upon being able to locate and recruit
     the quantity and quality of sales talent as defined above.

          The Company completed the quarter ended June 30, 1998 with revenues of
     $1,121,000 or 311% growth over the comparable quarter in 1997. The average
     quarter-on-quarter growth rate over the last five (5) quarters has been
     42%. To continue this steep-ramped growth rate, the Company will continue
     to be focused through 1998, on expanding the distribution channels with the
     addition of other large and regional distributors. The Company will
     significantly increase its sales and marketing expenditures to support the
     channel expansion and telecommunications marketing strategies.

          The Company, in the second quarter, implemented an export credit
     insurance policy to reduce the Company's exposure to foreign credit sales.
     This policy was implemented to expedite the sales cycle and reduce the
     costs of the typical foreign sales utilizing letters of credit, sight
     drafts or cash in advance. The policy permits the Company to utilize a
     large established organization to assess credit risk and establish credit
     limits. The policy calls for a 10% co-insurance with terms of 60 days. The
     Company does not insure all of its foreign sales. Specifically, Canadian
     sales which involve risks similar to domestic credit issues and/or which
     information can be garnered from sources similar to D & B Credit reporting
     agency, are not insured.

          Management believes its aggressive pursuit of its distribution
     channels will have both short-term and long-term effects on its operations.
     Cash flow from operations is anticipated to 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. In addition to these
     near-term effects, the Company expects that these efforts will


                                       11

<PAGE>   12

     expand its installed base of IPADs and continue its growth path. However,
     with the aggressive market expansion, the Company anticipates consuming
     working capital to meet this continued growth curve for the near term.
     Additionally, the Company anticipates future losses as a result of expenses
     incurred in support of the overt expansion of the sales force to accomplish
     the proposed growth curve. The Company anticipates turning profitable in
     the fourth quarter 1998.

          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 IPAD products to be sold
     in conjunction with other products and telecommunications services. No such
     relationships have been 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.

          The Company, in the quarter, received through its contract
     manufacturer in Holland, "CE" approval for its IPAD product. The "CE"
     product approval is required for products to be marketed in the European
     Union.

LIQUIDITY AND CAPITAL RESOURCES

          During the first quarter the Company completed a $340,000 private
     placement in February and March 1998 of 340,000 shares of the Company's
     common stock, all at a price of $1.00 per share to officers, directors, key
     employees and consultants of the Company. The Company accepted
     subscriptions for an additional 50,000 shares, included in above, at a
     price of $1.00 which was collected in April 1998.

          In the first quarter the Company converted the non-interest bearing
     Note payable to related parties in the amount of $355,903 into 355,903
     shares of the Company's common stock at a price of $1.00 per share.

          In March 1998, the Company completed its initial public offering of
     1,550,000 shares of the Company's common stock at an offering price of
     $1.00 per share. Additionally, the Agent was issued 110,000 shares of the
     Company's common stock in the Canadian Offering along with warrants to
     purchase 250,000 shares of the Company's common stock at a price of $1.00
     for the first 12 months and at a price of $1.15 for the next 12 months. The
     agent, subsequent to March 31, 1998, exercised its right to purchase
     250,000 shares of common stock.

          On June 15, 1998, eSoft completed the private placement of 1,468,941
     shares of its common stock at a price of $4.25 per share for a total
     offering of $6,243,000. The net cash proceeds to the Company from the
     private placement were approximately $5,531,000 after payment of expenses
     of the offering, estimated at $204,175, and payment of $507,825 (8.13% of
     the offering price) commissions to the Agent, sub-agents, and finders who
     will also be issued warrants to purchase 159,318 (10.85% of the offered
     shares) shares of the Company's common stock at a price of US $4.25 in the
     first year and US $4.90 in the second year.

          In April 1998, eSoft issued 250,000 shares of its common stock at a
     price of $1.00 per share for a total of $250,000, upon the exercise of
     agent warrants issued in conjunction with the Company's March 1998 Initial
     Public Offering to its Canadian agents.


                                       12
<PAGE>   13




          As a result of this transaction, the February and March private
     placement, and the Company's IPO in March 1998, the Company's cash position
     increased by $5,844,000 since December 31, 1997 and its working capital
     increased from $251,000 at December 31, 1997 to $6,794,000 at June 30,
     1998. Management expects the Company to continue to incur losses and to
     increase its accounts receivable as the current steep growth of sales is
     expected to continue to accelerate. Management believes that its current
     cash position and the anticipated receipts will be sufficient to meet its
     working capital needs for the current fiscal year.

Cash Flow

          During the six months ended June 30, 1998, cash increased by
     $5,844,000. Adjustments to reconcile net loss resulted in an adjustment of
     the use of funds by $181,000 from depreciation, amortization of software
     costs, provision for loss on accounts receivables and issuance of
     compensatory options. Funds used in operating activities were ($1,623,000).
     Funds of $479,000 were provided from operating activities from an increase
     of $334,000 in accounts payable, $92,000 from an increase in accrued
     expenses, an increase in deferred revenue of $44,000 and a decrease of
     other assets of $10,000. Operating funds of $1,456,000 were used to finance
     the $1,225,000 increase in accounts receivable, $120,000 increases in
     inventories and $111,000 increase in prepaids. Investments were made in
     capital equipment of ($118,000), capitalized software development costs
     ($60,000), an increase in notes receivable of ($2,200) for a total use of
     funds for investment activities of ($180,000). Financing activities
     provided $7,647,000 of cash proceeds and conversion of debt. Net cash in
     the amount of $1,527,000 was received during the period from the Company's
     IPO, warrant and option conversions, and private placements of 2,310,000
     shares of the Company's common stock and $5,531,000 from the June private
     placement. $200,000 from the collection of subscription receivable and
     $100,000 from a stock subscription agreement accepted but restricted as
     explained in related party transaction Note 5. Principal payments and debt
     repayments of ($38,000) and debt conversion of ($356,000) on the Company's
     indebtedness reduced debt obligations by ($394,000). Deferred offering
     costs from the completion of the Company's fund raising from financing
     activities and compensatory warrant compensation totaling $327,000 in non
     cash items.

          The Company anticipates expending $350,000 for external capital
     expenditures. eSoft will continue to capitalize software development costs
     consistent with its strategy of the development of IPAD software for the
     marketplace.

           RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 1998
                COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1997

          Quarterly revenues totaled $1,121,000 versus revenue of $273,000 for
     the comparable quarter in 1997. This represents an increase of $848,000 or
     311% over the comparable quarter in 1997. The increase is associated with
     the continued expansion of the Company's sales effort of IPAD products both
     domestically and in the international market. The Company completed the
     rollout in the first quarter of 1997 of the IPAD 2500 and in the fourth
     quarter of 1997 the IPAD 1200. Contribution to the increase in sales
     include the addition of one large distributor and a regional distributor in
     the second quarter. This broadened product line, along with the expanded
     sales and marketing efforts both domestically and abroad, resulted in the
     Company posting significant sales growth. The Company experienced a growth
     rate of 42% per quarter since the release of the IPAD 1200 and 2500. For
     the quarter ending June 1998 the Company experienced sales growth of
     $387,000 or 53% revenue growth over the first quarter results.

          Gross profit margin in the current quarter was 62% of revenue
     ($696,000) compared to 57% ($156,000) for the three months ended June 30,
     1997. It is anticipated that the margins will be maintained at this level
     through the remainder of the fiscal year with the present distribution
     strategy.


                                       13
<PAGE>   14

          Selling, General and Administrative, Engineering and R & D Expenses
     (SG&A) increased $1,102,000 or 777% from $142,000 in 1997 to $1,244,000 for
     the quarter ending June 1998. Sales and marketing expenses increased
     $517,000 from $43,000 in 1997 to $560,000 in 1998. The significant
     increases in expenditures are attributed to the addition of sales and
     marketing personnel, consultants and outside services, travel expenses,
     commission and marketing programs required to accomplish the ramp of the
     Company's anticipated sales growth rates. These expenditures represent 56%
     of the total quarterly sales and marketing expenditures. General and
     administrative expense increased $444,000 or 906%, from $49,000 in the 1997
     period compared to $493,000 for the current quarter. The increase in SG&A
     is attributed to the Company's overt plan to add sales, management and
     administrative personnel to support the anticipated rapid expansion of the
     Company's sales volume. The Company was reliant on only IPAD sales for the
     first time in 1997 with extensive expansion of its operations to capitalize
     on small-to-medium size business participation in the Internet growth.
     Engineering expenses increased to $118,000 for the three months ending June
     1998 with the majority of work being performed on system sales support
     training and engineering upgrades and updates to the system. The Company
     sales growth rate was 53% over the first quarter while expenditures in the
     SG & A areas increased 65% over the previous quarter.

          Amortized software development costs total $53,000 for the period.

          Interest expense decreased $5,900 in the three months ended June 30,
     1998 from $10,400 in 1997 to $4,600 in 1998. This decrease in interest
     expense is attributed to the conversion of a significant portion of debt to
     equity in the first quarter of 1998.

          Net Losses from operations was ($533,000) for the three months ended
     June 30, 1998, compared to $3,000 profit for the same period in 1997, an
     increase in the loss of ($536,000) over the same period. The net losses are
     associated with the increased SG&A necessary to maintain a continued
     quarterly sales growth rate. Losses are anticipated to continue through the
     current fiscal year due to expenditures leading sales growth rates.

            RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 1998
                 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997

          Revenues for six months of operations totaled $1,855,000 compared to
     revenues of $482,000 for the same period in 1997. This represents an
     increase of $1,373,000 or 285% over the comparable six month period in
     1997. The increase is associated with the continued expansion of the
     Company's sales effort of IPAD product both domestically and in the
     international marketplace. The Company added three large domestic
     distributors and/or VARs and four international distributors and/or VAR's
     in the first six months of the year contributing 65% of the total sales for
     the year.

          Gross profit margin was 62% of revenue ($1,156,000) compared to 63%
     ($301,000) for the six months ended June 30, 1997. It is anticipated that
     the margins will be maintained at this level through the remainder of the
     fiscal year with the current two-tier distribution approach.

          Selling, General and Administrative, Engineering and R & D Expenses
     (SG&A) increased $1,674,000 or 515% from $325,000 for the first six months
     in 1997 to $1,999,000 for the same six months in the 1998 period. Sales and
     marketing expenses increased $810,000 from $67,000 in 1997 to $877,000 in
     1998. The increases in expenditures are attributed to the addition of sales
     and marketing personnel, consultants and outside services, travel expenses,
     commission and marketing programs required to meet the ramp of the
     Company's anticipated sales growth rates. The afore mentioned expenditures
     represented 60% of the total year to date expenditures for sales and
     marketing. General and administrative expense increased $620,000


                                       14
<PAGE>   15


     from $179,000 in the 1997 period compared to total expenses of $799,000
     year to date. The increase in SG&A is attributed to the Company's
     intentional plan to expand the sales volume of the Company requiring the
     addition of personnel in all departments. Engineering expenses increased to
     $205,000 for the six months ending June 1998 with the majority of work
     being performed on system sales support training and engineering upgrades
     and updates to the system. The Company has maintained an average of 42%
     quarter-on-quarter sales growth rate over the last five quarters. To
     accomplish this sales ramp, the Company's SG & A increased an average of
     70% quarter-on-quarter over the last five quarters.

          Amortized software development costs total $102,000 for the period.

          Interest expense decreased $11,500 in the six months ended June 30,
     1998 from $16,700 in 1997 to $5,300 in 1998. This decrease in interest
     expense is attributed to the conversion of a significant portion of debt to
     equity in the first quarter of 1998. The Company additionally continues to
     pay down its term loan with the bank reducing interest expense.

          Net losses from operations totaled ($828,000) for the three months
     ended June 30, 1998, compared to ($40,000) loss for the same period in
     1997, an increase in the loss of ($788,000) loss over the same period. The
     net loss is associated with the increased SG&A necessary to ramp quarterly
     sales growth rates. Losses are anticipated to continue through the current
     fiscal year due to expenditures leading sales growth rates.

YEAR 2000 EFFECT

          The Company's TBBS product line has one deficiency associated with
     year 2000 for which a correction is scheduled for a revision release in
     October 1998. The IPAD product line has no known susceptibility to year
     2000 issues. The cost of the revision to the TBBS product is not expected
     to be material. Other year 2000 items are not anticipated to be material.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

          The Financial Accounting Standards Board has recently issued
     Statements of Financial Accounting Standards that may affect the Company's
     financial statements as follows:

          In June 1997, the Financial Accounting Standards Board issued
     Statement of Financial Accounting Standards No.130, Reporting Comprehensive
     Income (SFAS 130), which establishes standards for reporting and display of
     comprehensive income, its components and accumulated balances.
     Comprehensive income is defined to include all changes in equity except
     those resulting from investments by owners and distributions to owners.
     Among other disclosures, SFAS 130 requires that all items that are required
     to be recognized under current accounting standards as components of
     comprehensive income be reported in a financial statement that is displayed
     with the same prominence as other financial statements. SFAS 130 has been
     adopted and there was no affect on the financial statements.

          Also, in June 1997, FASB issued SFAS No. 131, "Disclosures about
     Segments of an Enterprise and Related Information" which supersedes SFAS
     No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS
     No. 131 establishes standards for the way that public companies report
     information about operating segments in annual financial statements and
     requires reporting of selected information about operating segments in
     interim financial statements issued to the public. It also establishes
     standards for disclosures regarding products and services, geographic areas
     and major customers. SFAS No. 131 defines operating segments as components
     of a company about which separate financial information is available that
     is evaluated regularly by the chief operating decision maker in deciding
     how to allocate resources and in assessing performance. SFAS 131 is
     effective for financial statements for periods beginning after December 15,
     1997 and requires comparative information for earlier years to be restated.
     Because of the recent issuance of the standard, management has been unable
     to fully evaluate the impact, if any, the standards may have on future
     financial statement disclosures. Results of operations and financial
     position, however, will be unaffected by implementation of this standard.


                                       15

<PAGE>   16

          In October 1997, Statement of Position 97-2, Software Revenue
     Recognition (SOP 97-2) was issued. The SOP provides guidance on when
     revenue should be recognized and in what amounts licensing, selling,
     leasing, or otherwise marketing computer software. SOP 97-2 is effective
     for transactions entered into in fiscal years after December 15, 1997. In
     March 1998, SOP 98-4 was issued to defer for one year the application of
     certain provisions of SOP 97-2. Because of the recent issuance of these
     SOP's, management has been unable to fully evaluate the impact, if any,
     these SOP's may have on future financial statement disclosure.

          In February 1998, the FASB issued SFAS No. 132, "Employer's
     Disclosures about Pensions and Other Postretirement Benefits" which
     standardizes the disclosure requirements for pensions and other
     postretirement benefits and requires additional information on changes in
     the benefit obligations and fair values of plan assets that will facilitate
     financial analysis. SFAS No. 132 is effective for years beginning after
     December 15, 1997 and requires comparative information for earlier years to
     be restated, unless such information is not readily available. Management
     believes the adoption of this statement will have no material impact on the
     Company's financial statements.


                                       16

<PAGE>   17
PART II - OTHER INFORMATION

     Item 1.  Legal Proceedings

              Not applicable

     Item 2.  Changes in Securities

              SALES OF EQUITY SECURITIES PURSUANT TO REGULATION S.
                  On June 15, 1998, eSoft completed a private placement of
              Common Stock (as more fully described in Note 6 of the
              financials). A portion of the shares sold in the private placement
              were not registered under the Act in reliance upon Regulation S
              under the Securities Act of 1933, as follows:

                  On June 15, 1998, 692,000 shares (the "Reg S Shares") of
              Common Stock were sold for $2,941,000 to investors in Canada and
              Europe who were not U.S. Persons in reliance upon Regulation S.
              The total offering price of the Reg S Shares was $2,941,000.
              Commissions totaling $260,175 were paid to the Agent and a finder
              who assisted the Agent, and they will also be issued warrants to
              purchase 81,624 shares of eSoft Common Stock at a price of U.S.
              $4.25 in the first year and U.S. $4.90 in the second year.

              ISSUANCE OF EQUITY SECURITIES PURSUANT TO REGULATION S.
                  In April 1998, eSoft issued Common Stock for $250,000 pursuant
              to the exercise of agent warrants issued in the March 1998 Initial
              Public Offering. These shares were issued in reliance upon
              Regulation S under the Securities Act of 1933, as follows:

                  In April 1998, 250,000 shares of Common Stock were issued upon
              the exercise of agent warrants to two investors in Canada who were
              not U.S. Persons in reliance upon Regulation S.

     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 Schedule. (Previously filed)

              b)  Reports on Form 8-K.

                  During the quarter covered by this report, the Company filed 
                  the following reports on Form 8-K.

                  Form 8-K dated June 19, 1998 reporting the completion of the
                  Private Placement of 1,468,941 common shares of the Company's
                  common stock. No financial statements were required.


                                       17

<PAGE>   18


                                   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: September 3, 1998          /s/ Regis Frank
      -----------------          --------------------------------------
                                 Regis A. Frank
                                 President, Chief Operating Officer


Date: September 3  1998          /s/ Thomas Tennessen
      -----------------          --------------------------------------
                                 Thomas Tennessen
                                 Chief Financial Officer and Principal Financial
                                 and Accounting Officer


                                       18