<PAGE>   1
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                 FORM 10-KSB/A

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                    FOR THE FISCAL YEAR ENDED MARCH 31, 1998

                         COMMISSION FILE NUMBER 0-8164

             MSI HOLDINGS, INC. F/K/A/ MICRO-MEDIA SOLUTIONS, INC.
           (HEREIN REFERRED TO AS "REGISTRANT", "COMPANY", OR "MSHI")
               (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

                                UTAH               87-0280886
           STATE OR OTHER JURISDICTION OF   (I.R.S. EMPLOYER I.D. NO.)
                         INCORPORATION OR ORGANIZATION

           ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 501 WALLER STREET,
                              AUSTIN, TEXAS 78702

         ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE (512) 476-6925

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

         TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
                            NONE             N/A

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

         TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
                       COMMON STOCK,         NONE
                                 PAR VALUE $.10

Check whether the Issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has
been subject to such filing requirements for the past 90 days. (1) Yes (X) No
( ) (2) Yes (X) No ( )

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.( )

State issuer's revenues for its most recent fiscal year: $2,740,821

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.

Based on the closing price for the Company's Common Stock at June 17, 1998 of
$6.25 per share, the market value of shares held by non-affiliates would be
approximately $11,414,000.

As of March 31, 1998 the Registrant had 11,506,846 shares of common stock
issued and outstanding.

<PAGE>   2

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the
part of the form 10-KSB (e.g., part I, part II, etc.) into which the document
is incorporated: (1) Any annual report to security holders; (2) Any proxy or
other information statement; and (3) Any prospectus filed pursuant to rule 424
(b) or (c) under the Securities Act of 1933:

None.

PART I

BUSINESS

Background

MSI Holdings, Inc., a Utah corporation ("MSHI" or the "Company"), headquartered
in Austin, Texas, is a communications services company specializing in turnkey
solutions for high-speed Internet connectivity, communication infrastructure
design and installation, and network system integration for customers in both
the private and public sectors. MSHI was formerly known as Micro-Media
Solutions, Inc.,(a Utah corporation). MSHI has two wholly-owned subsidiaries,
Micro-Media Solutions, Inc., a Texas corporation ("MSI") and TeleVista, Inc., a
Texas corporation, doing business as High Power.Net, ("TVI"). TVI was
incorporated in August, 1998 and has not yet commenced operations. The Company
is publicly traded on the NASD OTC Bulletin Board under the symbol "MSIA".

MSI was formed in 1993 to provide computer hardware, software programming,
system installation and support, maintenance, and media duplication to the
public and private sectors. MSI maintains certification as a
minority-controlled business enterprise and status as a Historically
Underutilized Business ("HUB"). On June 23, 1997, the then shareholders of MSI
entered into an agreement and plan of reorganization (the "Combination
Agreement") with Mountain States Resources Corporation (now known as MSI
Holdings, Inc.), whereby the Company acquired all of the issued and outstanding
stock of MSI in exchange for 9,310,000 shares of the Common Stock of the
Company (the "Combination"). The Combination was accounted for as a
recapitalization.

MSHI's facilities in east Austin, Texas are designed for final assembly-type
production, system integration services, depot repair (pick-up, repair and
return service), warehousing of computer equipment and collocation (remote site
Internet access by companies). Currently, the Company is not providing
collocation services, but is expected to be able to provide this service in
early 1999. These facilities are located in an economically challenged area of
Austin to introduce a non-traditional business into the area, to provide
high-tech employment skills to the typically underprivileged area residents,
and to access a loyal, under-utilized and readily available workforce. In the
years since its inception, the Company has grown from a 2 person operation to
over 70 employees.

The Company has focused on systems design and system implementation services
and is a certified installer of copper and fiber optic cabling for use in local
area and wide area networks supporting data, voice, and video applications.
MSHI's computer networking services include system integration and design
installation as well as maintenance of local and wide area networks
("LAN/WAN"). In this context the Company also provides hardware and software
sales related to its systems designs and implementation services.

Industry Overview

The Company, through its collocation services, intends to enter the Internet
access market in early 1999. According to Hoover's Online industry review of
the Internet/Online industry, the Internet access market is currently a $3
billion industry and online services are predicted to generate revenues of $15
billion per year by the year 2003. The significant growth in the
telecommunications industry is driven by increasing demand for data services
and Internet connectivity. Provider and consumer hardware and software
technologies have been rapidly advancing. In this evolving climate, global
access to information has become increasingly important. The Internet has
evolved as the preferred medium to handle the demand for increased data
transmissions speeds. The Company believes companies in the forefront of
developing bandwidth capacity, transmission and processing speeds, and Internet
access are best positioned to capitalize on the growth potential in this area
of the telecommunications industry. Modem manufacturers are developing faster
modems, phone companies are seeking to transmit more data bits through their
lines and even direct-broadcast satellite companies, like DIRECT TV, are
entering the industry, including Microsoft's recent $1 billion investment in
Comcast.

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One of the main impediments to Internet growth is data transmission speed. The
Company believes that, absent increased bandwidth to handle the increasing
traffic on the Internet, delays during downloads will continue to be costly and
turn away users. By offering bundled services, the Company will provide the
market with turn-key solutions to bridge the technology gap. The Company's
ability to provide comprehensive information technology solutions, including
wider bandwidths, will enhance, in the opinion of management, its ability to
provide competitive customer service and generate increasing revenues.

Services and Products

MSHI is a communications services company specializing in turnkey solutions for
high-speed Internet connectivity, communication infrastructure design and
installation, and network system integration in the private and public sectors.
The company has plans to implement collocation services in early 1999.

Until the end of 1996, the Company emphasized the sale of electronics equipment
with a concentration in contracts that relied on MSI's HUB status. However, in
1997, the Company decided to change its direction to concentrate on
communications technology services. The Company intends to invest in the
development of core infrastructure to support collocation and Internet
connectivity services. By being able to provide high-speed bandwidth, coupled
with its current ability to provide wide-area fiber optic network
installations, MSHI should be in a position to satisfy a broad range of current
market demands.

MSHI offers web design, development, hosting, and high speed Internet
connectivity services, and will provide turn-key collocation services
(including on-site services and support). Its system integration services
include the certified design and installation of advanced copper and fiber
optic lines for both intra- and inter-plant cabling projects in the private and
public sectors. The Company also evaluates, installs, maintains, and
administers advanced LAN/WAN systems. Its full service system integration
services include the procurement, installation, configuration, and testing of
key components. Further, the Company's service and support team currently
provides service and repair for wireless, data, and voice technology networks
throughout the State of Texas.

MSI's principle product is its technical expertise. The Company has taken a
proactive approach to developing a skilled labor force while decreasing its
requirements for carrying inventories of computer hardware. In addition, the
Company's facilities are located in Austin, Texas which has been attracting
technology driven industries. The inventory necessary to carry its technical
services is readily available within the region or, alternatively, from
domestic suppliers.

Strategic Opportunity

In July 1998, MSI entered into a renewable 10 year sublease with GTE
Intelligent Network Services, Inc. ("GTE") under which MSI agreed to lease a
portion of its east Austin facilities to GTE for installation of GTE's Point of
Presence ("POP") equipment (the "Sublease"). On May 29, 1998, MSI entered into
a three year subscription to GTE's Internet Advantage version 5.1 Connection
Service granting MSI access to GTE's POP (the "Connection Service"). MSI has
also subscribed to GTE's Dialinx Service for 36 consecutive months, allowing
for the resale of internet access to end-users (the "Dialinx Service
Service),(the Sublease, Connection Service and Dialinx Service are collectively
referred to as the "GTE Agreement"). GTE's establishment, management and
monitoring of multiple domains on behalf of MSI is included in the Connection
Service. The Connection Service was upgraded to GTE's Internet Advantage
version 6.0 on September 29, 1998. MSI will lease connections to the POP for
access to the GTE Internet network to other businesses. MSI will target
companies that need direct, high-speed access to the Internet through
collocation services for high volume (known as bandwidth) Internet web
applications. Collocation is a service that provides a high speed, high
bandwidth connection to the Internet backbone using various backup systems to
increase the connection's fault tolerance. By connecting directly to Internet
via the POP, MSI is able to eliminate the local link, the weakest component in
an Internet connection. MSI will have the capacity to support over five
thousand collocation rack spaces. These rack spaces will be used to host the
net servers for MSI clients and provide those clients with direct access to the
Internet. When fully implemented, these collocation services are expected to
significantly increase MSHI's revenues over the term of the Connection Service.
The GTE Agreements provide the potential for MSHI to increase revenue by
selling Internet access to various high Internet demand entities for such
activities as commerce and academics. It is anticipated that the requisite
hardware will be operational in January 1999.

MSHI intends to develop critical business services, including high-speed,
high-bandwidth Internet connectivity, and network design and installations,
allowing MSHI to address a broad-range of the dynamic demands in the
marketplace. Currently MSHI's operations have been limited to within Texas.
However, MSHI plans to continue developing its marketing efforts to expand the
Company's licenses beyond its home state. The Company's strategic alliances are
also being utilized to promote this objective. The GTE Agreements allow MSHI to
satisfy the market's current dynamic demands and have the potential of quickly
moving the Company into other geographic markets.

<PAGE>   4

MSHI's depot service operations and state-wide service networks allow MSHI to
provide inside /outside plant cable installations, development of data
processing and network technology and provide MSHI the opportunity to add
additional bundled-services to its product mix. MSHI is expanding its current
lines of depot services to include on-site service and depot operations for
maintaining computer equipment related to the Texas State Lottery. MSHI's
current depot services clients also include: GTECH Corporation, Transactive
Corporation, the State of Texas, CompUSA, Southwestern Bell Corporation and
various Texas school districts and University systems.

The Company's Internet expertise also affords it the opportunity to provide
certain, non-traditional information technology services, such as maintaining
"virtual" retail distribution centers. MSHI currently maintains the exclusive
Hewlett Packard online storefront, which provides web site access to Fortune
100 companies, federal, state and local governmental agencies. Hoover's Online
industry review estimates this market sector, with participants like
Amazon.com, as a $5 million annual business.

Competition

The telecommunications industry is highly competitive and the capital
requirements for entry are relatively low. The computer and information access
markets are characterized by rapidly changing technology and evolving industry
standards. Competition exists in both the processing and retail levels and is
based primarily on price, product features, reputation for service and quality,
sales promotions, merchandising terms, and availability of processing capacity.
The Company experiences significant competition from other network computer
manufacturers, suppliers of personal computers and workstations, and software
developers. Major competitors of the Company include Original Equipment
Manufacturers ("OEMs") and distributors, smaller niche-market installers, and
information technology providers including system consultants. The size and
capitalization of the Company's competitors range from small local companies to
multi-national providers such as IBM, DELL and America Online. However, due in
part to the Company's change in direction to concentrate on communication
technology services, the Company will be seeking a significant capital
infusion. Without this capital infusion it is likely that the Company will be
unable to compete with those entities that have greater capital. See
Management's Discussion and Analysis of Financial Condition and Results of
Operation & Going Concern Issues.

Government Regulations

The Company has been dependant on its status as a HUB to develop is reputation
and business. It is currently well within the revenue and employee limits for
its SIC Code classification to maintain its HUB status. However, as the Company
continues to grow and develop, its revenue and employee characteristics and SIC
Code designation may change. In addition, for reasons beyond the Company's
control, the state and federal HUB programs may cease to exist. Though no such
event is anticipated, the potential loss of HUB status may have a material
adverse effect on the Company's revenue generating abilities. See Management's
Discussion and Analysis of Financial Condition and Results of Operation and
Potential Loss of HUB Status.

Employees

At March 31, 1998, MSI had a total of 60 employees, of which 53 are full-time
employees. None of MSI's employees are subject to a collective bargaining
agreement, and the Company believes its relations with its employees are good.

Legal Proceedings

The Company is currently involved in two material lawsuits, both of which
relate to the Company's relationship with a former consultant, Kenneth O'Neal
("O'Neal") and a firm which he controls, Argus Management, Inc. ("Argus"). On
December 18, 1997 Argus filed a lawsuit in Kerr County, Texas, 216th Judicial
District, to collect on two promissory notes in the aggregate principal amount
of $200,000. The Company is vigorously defending this lawsuit and it filed a
related suit against O'Neal and Argus in Travis County, Texas on February 6,
1998, alleging fraud, usury in connection with the promissory notes, and
seeking an order from the Court demanding that Argus transfer 293,185 shares of
Common Stock of MSI, held by Argus, to various shareholders who have previously
purchased such shares (the "Argus Related Shares").

Item 2. Properties

General

MSI's principal administrative, marketing, manufacturing and research and
development operations are located at 501 Waller Street in Austin, Texas. MSI's
two facilities in east Austin consist of approximately 39,500 square feet and
20,000 square feet,

<PAGE>   5

respectively, of leased office and warehouse space with the leases expiring in
July 31, 2008 and August 31, 2005, respectively. The facilities are designed
for collocation, production, system integration services, depot repair, and
warehousing. If it were to require additional space, MSI believes that
convenient office or warehouse space is readily available for lease. The annual
gross rent for these facilities for the year ended March 31, 1998 was $109,980.
The Company believes its existing facilities to be adequate for its present
requirements.

Capital Expenditures

We believe that investment in the Company's core telecommunications, services
and hardware business will: Facilitate the introduction of new products and
services; Enhance our responsiveness to ever increasing competitive challenges;
and increase the operating efficiency and productivity of our service group.

Growth in capital expenditures was driven by demands in our core business
coupled with internal expansions to prepare for the attraction of larger
contracts. Capital expenditures were $195,685, and $632,900 in 1998 and 1997,
respectfully. Our capital spending is based on customer needs and our business
plans. Investments in technologies that will enable us to provide customers
with new products and services represent a high priority.

Item 3. Legal Proceedings

For a discussion of legal proceedings, refer to Note 13, Contingency, in the
consolidated financial statements as of June 30, 1998.

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

No matters were submitted to a vote of security holders of MSI during the
quarter ending March 31, 1998. Annual meetings of the shareholders of MSI are
held in accordance with Utah law. The next annual shareholders meeting will be
set for September, 1998.

PART II
Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

The Company's Common Stock is traded over-the-counter and is quoted on the OTC
Electronic Bulletin Board under the symbol "MSIA". The table below sets forth
the high and low closing sale price of the Common Stock for the periods
indicated, as reported by the OTC Electronic Bulletin Board.

<TABLE>
<S>                          <C>                 <C>
Quarter Ended                   Low                High
June 30,1996                     N/A                N/A
September 30, 1996               N/A                N/A
December 31, 1996             0.0625               2.00
March 31,1997                   0.25               2.00
June 30,1997                   0.125               2.00
September 30, 1997              0.50               2.25
December 31, 1997               0.50               3.50
March 31, 1998                 0.625             2.6875
</TABLE>

On March 31, 1998 there were approximately 5,390 registered holders of the
Registrant's common stock, including those persons having beneficial positions
in street name holdings.

Holders of common stock are entitled to receive such dividends as may be
declared by the Registrant's Board of Directors. Since its inception, the
Company has not paid any dividends and does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. The Company plans to
retain its future earnings, if any, to finance the growth and development of
its operations. With respect to the Common Stock, the declaration and payment
of dividends in the future, of which there can be no assurance, will be
determined by the Board of Directors in light of conditions then existing,
including the Registrant's earnings, financial condition, capital requirements
and other factors.

See Note 10 in the consolidated financial statements for March 31, 1998, for a
discussion of preferred stock.

<PAGE>   6
Item 6:

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SECTION AND OTHER PARTS OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED BELOW.

Overview

Micro-Media Solutions, Inc. ("MSI"), the operating subsidiary of MSHI was
created in 1993 in Austin, Texas, to provide computer hardware, software
programming, system installation and support, maintenance, and media
duplication to the public and private sectors. MSI maintains certification as a
minority-owned business enterprise and status as a Historically Underutilized
Business ("HUB"). On June 23, 1997, the then shareholders of MSI entered into
an agreement and plan of reorganization (the "Combination Agreement") with
Mountain States Resources Corporation (now known as MSI Holdings, Inc.),
whereby the Company acquired all of the issued and outstanding stock of MSI in
exchange for 9,310,000 shares of the Common Stock of the Company (the
"Combination"). The Combination was accounted for as a recapitalization.

Among the principal costs to market and sell the Company's products are
advertising and promotion costs, salaries and commissions, and general and
administrative expenses. MSHI's operating results may be subject to
fluctuations on a quarterly and an annual basis as a result of various factors,
including, but not limited to, fluctuating market pricing for computer and
semiconductor memory products, industry competition, seasonal government
purchasing cycles, and working capital restrictions on manufacturing and
production. Therefore, the operating results for any particular period are not
necessarily indicative of the results that may occur in any future period.

The Company's revenues consist of hardware sales, software sales and the
delivery of technical services, including installing and maintaining networks
system. The technical service sales of the Company typically yield a higher
gross margin than the hardware and software sales of the Company. This is due,
in part, to the intense competition in the hardware and software sales sector
from Original Equipment Manufactures ("OEM's") and distributors. As a result,
the Company, is attempting to strategically reposition itself from emphasizing
hardware sales to intensifying sales of technical services.

Recent Developments

In July 1998, MSI entered into a renewable 10 year sublease with GTE
Intelligent Network Services, Inc. ("GTE") under which MSI agreed to lease a
portion of their east Austin facilities to GTE for installation of GTE's Point
of Presence ("POP") equipment (the "Sublease"). In May 1998, MSI entered into a
three year subscription to GTE's Internet Advantage version 5.1 Connection
Service granting MSI access to GTE's POP (the "Connection Service"). MSI has
also subscribed to GTE's Dialinx Service for 36 consecutive months, allowing
for the resale of internet access to end-users (the "Dialinx Service
Service),(the Sublease, Connection Service and Dialinx Service are collectively
referred to as the "GTE Agreement"). GTE's establishment, management and
monitoring of multiple domains on behalf of MSI is included in the Connection
Service. The Connection Service was upgraded to GTE's Internet Advantage
version 6.0 on September 29, 1998. MSI will lease connections to the POP for
access to the GTE Internet network to other businesses. MSI will target
companies that need direct, high-speed access to the Internet through turn-key
collocation services for high volume (known as bandwidth) Internet web
applications. Collocation is a service that provides a high speed, high
bandwidth connection to the Internet backbone using various backup systems to
increase the connection's fault tolerance. By connecting directly to the
Internet via the POP, MSI is able to eliminate the local loop, the weakest
component in localized Internet connections. MSI will have the capacity to
support over four thousand collocation rack spaces. These rack spaces will be
used to host the net servers for MSI clients and provide those clients with
direct access to the Internet. When fully implemented, these collocation
services are expected to significantly increase MSHI's revenues over the term
of the Connection Service. The GTE Agreements provide the potential for MSHI to
increase revenue by selling Internet access to various high Internet demand
entities for such activities as commerce and academics. It is anticipated that
the requisite hardware will be operational in January 1999.

<PAGE>   7

In July 1998, MSI began providing systems integration, warehousing, systems
configuration and other fulfillment services for Siemens-Nixdorf Information
Systems, Inc. ("Siemens-Nixdorf") for Point of Sale ("POS") systems and
Automated Teller Machines for Siemens-Nixdorf's customers such as Sears-Roebuck
and Bealls department stores (the "Siemens-Nixdorf Agreement"). This agreement
provides that Siemens-Nixdorf will store its inventory at MSI, and MSI will
charge Siemens-Nixdorf for various systems integration services. This
arrangement provides MSHI with a revenue stream without a significant working
capital commitment.

MSHI formed TeleVista, Inc., a wholly owned subsidiary ("TVI") in September of
1998 to run the electronic commerce business for the on-line sale of hardware
and software over the Internet through the use of a secure server. Secure
servers allow for the accelerated receipt of funds through credit card payments
for hardware and software purchases made through their web sites operated by
it.

Results of Operations

Year Ended March 31, 1998 Compared with the Year Ended March 31, 1997

Revenues for 1998 were $2,740,821 as compared to revenues for 1997 of
$4,665,749. Revenues for 1998 decreased $1,924,928 or (41.3%) from 1997. This
reduction in revenues in 1998 occurred primarily as a result of the completion
of a large network installation project without any new projects queued to
follow coupled with a leveling off of hardware sales.

Cost of goods sold for 1998 increased $621,566 or 20.7% from 1997. This increase
in cost of goods sold was primarily the result of increased costs of hardware
and services, partially offset by decreases in the costs associated with the
Company's network services. Costs of goods sold for 1998 as a percentage of
revenue was 132.1%. This percentage is extraordinarily high and resulted in a
negative gross margin of ($878,980) or (32.1%) of revenues for the year as
compared to a gross margin of $1,667,514 for 1997. The gross margin as a
percentage of revenues for 1997 was 35.7%. The gross margin percentage
experienced in 1997 more closely represents the gross margins Management is
working to attain. Extraordinary items experienced in cost of goods sold for
1998 include a cost overrun of approximately $500,000 on a large cabling project
for a Texas school district. The project was a lump sum contract and the overrun
was absorbed by the Company. Problems experienced with the substantial cost
overrun situation have been addressed with better controls, new middle
management and improved accounting. Management does not anticipate significant
cost overruns in the future.

Selling, general and administrative expenses in 1998 of $3,404,590 represent
124.2% of revenues. The 1998 selling, general and administrative expenses
represent an increase over 1997 of $1,254,691 or 58.4%. Approximately 50% of
the expense increase, or approximately $623,000, represents the expenses
associated with the hiring of increased marketing and technical staff to enable
the Company to work on larger service contracts. Other increases include
professional fees, which increased approximately $314,923 due to additional
legal, accounting and other consultants associated with the Combination and the
reporting requirements attendant to being a publicly traded company. Interest
expense also increased $194,000 due to increased line of credit usage and late
fees on overdue accounts and $371,000 in discount related to the Senior
Convertible debt issue.

Going Concern Issues

The Company's significant historical losses raise a doubt as to the Company's
ability to continue as a going concern. The Company plans to address the going
concern issues described elsewhere in this filing through an additional private
placement and a possible $20 million debt issue. However, there can be no
assurance that the Company will be able to secure such additional capital.
Subsequent to March 31, 1998, the Company received $2 million dollars in
proceeds from Private Placement Phase III (as defined) that have been used to
retire debt, decrease past due accounts payable and for operating expenses. As
a result, the Company's current ratio has improved and its cash position has
increased. The Company is in the process of consummating a private placement of
a newly created Series E Preferred with net proceeds to the Company of
approximately $2.6 million (the "Proposed Private Placement").

Management believes that its contracts with GTE and Siemens-Nixdorf have the
possibility of producing revenues of approximately $3 million in 1999. The
Company's ability to fulfill its obligations under the GTE Agreement is
contingent upon the successful consummation of the Proposed Private Placement
and obtaining the working capital contemplated by the debt issue described in
the preceding paragraph.

Potential Loss of Hub Status

<PAGE>   8

MSI is currently qualified in Texas as a "Historically Underutilized Business"
("HUB"). As long as MSI maintains its status as a HUB, it will continue to
receive favorable treatment by certain governmental entities in their granting
of contracts. The Company generated revenues of approximately $414,000 and
$919,000 during 1998 and 1997, respectively, from HUB related contracts, or 15%
and 20% of its gross revenues, respectively. MSI will graduate from its HUB
status upon the happening of any of the following events: (i) less than 51% of
the Company's voting stock is owned by minorities; (ii) such minority owners
are not active participants in the day-to-day operations and management of the
business; (iii) the four year average of gross revenues of MSI exceeds certain
levels based on the MSI's Standard Industrial Classification Code ("SIC Code");
or (iv) the four year average of total employment levels of MSI exceeds the
Small Business Administration established levels for businesses with a similar
four-digit SIC Code. Under the current SIC Code applicable to MSI, MSI must not
exceed 500 employees, it currently has 79 employees. The current SIC Code
classification does not impose a revenue ceiling, however, some SIC Code
classifications under which MSI operated placed a three year or a four year
average of gross revenue limitation. The potential loss of HUB status may also
be contingent upon the SIC Code under which MSI operates in the future. Future
changes in operations may require the MSI to change its SIC Code, which could
alter the employee ceiling and impose revenue restrictions as low as $5 million
per year, averaged over periods as short as three years. There can be no
assurance that MSI will continue to qualify for HUB status. Further, there is
no assurance that HUB-type programs will not be eliminated by the state or
federal governments. If MSI's HUB status is lost, the Company anticipates a
significant loss of revenues.

Liquidity and Capital Resources

On November 18, 1997, the Company received $2,120,000 upon completion of a
private placement whereby 400,000 shares of Series B Preferred were sold to
Entrepreneurial Investors, Ltd. ("EIL") for $5.30 per share ("Private Placement
Phase I"). The Company also issued 20,000 shares of Series B Preferred to
Equity Services, Ltd. ("ESL") as a placement agent fee for the completion of
Private Placement Phase I. The Company received $371,000 in October 1997 from
two individuals pursuant to two senior convertible notes (the "Notes"), which
are secured by an aggregate of 1,050,000 shares of Common Stock of the Company.
The Notes were subsequently converted into an aggregate of 70,000 shares of
Series B Preferred. On February 4, 1998, the Company received $1,000,000
completing a second private placement whereby 94,340 shares of Series C
Preferred were sold to EIL for a purchase price of $10.60 per share ("Private
Placement Phase II"). As placement agent fee for the completion of Private
Placement Phase II, the Company issued 4,717 shares of Series C Preferred to
ESL. By July, 1998, the Company received $2,964,364 completing a third private
placement, whereby 279,657 shares of Series D Preferred were sold to fourteen
investors for a purchase price of $10.60 per share ("Private Placement Phase
III"). The expenses for Private Placement Phase I, Private Placement Phase II,
and Private Placement Phase III, including broker fees, placement agent fee and
legal and accounting expenses totaled $634,800, $206,747, and $1,022,821,
respectively.

For the years ended March 31, 1998 and 1997, the Company's total assets were
$2,699,452 and $2,514,308, respectively, with liabilities of $2,753,403 and
$2,617,892, respectively. Current assets of $1,898,621 and $1,310,495 represent
90.8% and 67.9% of current liabilities of $2,090,701 and $1,929,042.
Improvements in the Company's cash position are a result of the collection of
accounts receivable and funds from increases in shareholders equity resulting
from the previously consummated private placements more particularly described
above. Reductions in accounts receivable between 1998 and 1997 are a direct
reflection of the reduced level of sales experienced in 1998. Accounts
receivable balances at March 31, 1998 and 1997 reflect the charge off of
$73,252 and $4,249, respectively, of uncollectable accounts receivable. The
Company's liabilities of $2,753,403 at March 31,1998 consist of $1,228,966 of a
fully secured credit line, $861,734 of current liabilities, $145,620 in
deferred rent and $517,082 of long-term liabilities.

The Company, subsequent to March 31, 1998, paid its Bank One Texas, NA loans in
full and substantially reduced the borrowings under its fully secured line of
credit (see Notes 4, 5 and 13 to the consolidated financial statements for the
year ended March 31, 1998). Net shareholders equity (deficit) as of March 31,
1998 and 1997 was ($53,951) and ($103,584), respectively. During the year ended
March 31, 1998, the Company completed Private Placement Phase I and Private
Placement Phase II (See Note 10 to the financial statements for the year ended
March 31, 1998). Subsequent to June 30, 1998, the Company finalized funding of
Private Placement Phase III with proceeds totaling $857,010. Receipt of these
funds enabled the Company to reduce its outstanding debt and pay off the past
due accounts payable.

During the year ended March 31, 1998, working capital increased $280,847 from
the prior year and the balances of its bank lines of credit were reduced as a
result of the application of the proceeds from the completion of Private
Placement Phase I and Private Placement Phase II. At March 31, 1998, the
Company had a working capital deficit of ($192,080) compared to a working
capital deficit of ($618,547) at March 31, 1997. At March 31, 1998 the
Company's accounts payable decreased by $575,699 or 65.7% a compared to March
31, 1997. As of March 31, 1998, MSI was more than 30 days past due on $170,000
or 57% of its accounts payable. Subsequent to March 31, 1998, all of the
accounts payable over thirty days past due were paid.

<PAGE>   9

The Company has a critical need for additional working capital to meet
contractual obligations under the GTE Agreements. Management believes that the
GTE Agreements with the Siemens Nixdorf Agreements have the potential to
increase revenue levels, provided that sufficient working capital is obtained.

Year 2000 Issues.

As with other companies, the Company has initiated a program to study the
impact on its computer system in order to be Year 2000 compliant. This study
involved identifying any modifications or replacements of certain hardware and
software maintained by the Company. The study has been completed. The company
has identified the computer systems that will require either modification,
upgrade or replacement. Implementation of the Company's Year 2000 plan should
be completed by March 31, 1999. The Company anticipates that in-house personnel
will be primarily responsible for completing these tasks and that the costs
will be insignificant. As such, the Company believes that the planned
modifications, upgrades and replacements of existing systems will be completed
in a timely fashion to assure Year 2000 compliance, and any related cost will
not have a material impact on the Company's results of operations, cash flows,
or financial conditions in future periods. The Company has budgeted for $25,000
to address these expenses. In addition, the Company is also taking actions to
assure that its customers and vendors are taking steps to remedy their Year
2000 issues.

The Company is not incurring any unique risks in connection with Year 2000
issues. It is however subject to the risk that information and financial
resources may be temporarily unavailable. This societal risk may temporarily
disrupt cash flows worldwide. The Company believes that by becoming, and
assisting its clients and vendors to become Year 2000 compliant, it is likely
to circumvent that threat. The Company expects to be Year 2000 compliant March
31, 1999. If compliance is not achieved by that date, the Company will
reallocate resources, as necessary, to ensure compliance within six months,
thereafter.

Inflation.

Management does not believe that inflation will have a material impact on the
Company's pricing of goods or services since the Company, generally, has the
ability to adjust prices to meet the current market conditions.

<PAGE>   10
Item 7.  Financial Statements and Supplementary Data

INDEX:

Independent Auditor's Report - Brown, Graham & Company, PC

Independent Auditor's Report - Salazar & Associates, CPAs

Consolidated Balance Sheet

Consolidated Statements of Operations

Consolidated Statements of Stockholders' Equity

Consolidated Statements of Cash Flow

Notes to Consolidated Financial Statements

<PAGE>   11


                           BROWN, GRAHAM & CO., P.C.
                          CERTIFIED PUBLIC ACCOUNTANTS
                               GEORGETOWN, TEXAS


To the Board of Directors of Micro-Media Solutions, Inc.,

                          INDEPENDENT AUDITOR'S REPORT

We have audited the accompanying consolidated balance sheet of Micro-Media
Solutions, Inc. and Subsidiary (the "Company") as of March 31, 1998 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

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

In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Micro-Media
Solutions, Inc. and Subsidiary as of March 31, 1998, and the results of their
operations and cash flows for the year then ended in conformity with generally
accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, and the Company has suffered losses from
operations for the years ended March 31, 1998 and 1997, and current liabilities
exceed current assets by $192,080 at March 31, 1998, which raise substantial
doubt about its ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue in
existence.

As more fully described in Note 14, subsequent to the issuance of the Company's
March 31, 1998, financial statements and our report thereon dated June 9, 1998,
we became aware that those financial statements did not reflect certain
adjustments as described in Note 14. In our original report we expressed an
unqualified opinion on the March 31, 1998, financial statements as described in
paragraph three above, and our opinion on the revised statements, as expressed
herein, remains unqualified.


/s/ Brown, Graham & Company, P.C.

Georgetown, Texas
June 9, 1998, except as the fifth paragraph above and Note 14, which are as of
September 24, 1999

<PAGE>   12

                              SALAZAR & ASSOCIATES
                          CERTIFIED PUBLIC ACCOUNTANTS

JOSE SALAZAR, CPA                                     FRANCES ORTIZ-SALAZAR, CPA


                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors of Mountain States Resources Corporation

We have audited the accompanying consolidated statements of operations,
stockholders equity and cash flows of Mountain States Resources Corporation and
subsidiary (the "Company") for the year ended March 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audit.

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

In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of their operations
and cash flows for the year ended March 31, 1997, in conformity with generally
accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 10 to
the consolidated financial statements, the Company has suffered losses from
operations and has a working capital deficiency, which raises substantial doubt
about its ability to continue as a going concern. Management's plans regarding
these matters is presented in Note 10 of these financial statements.

As more fully described in Note 11 and 12, subsequent to the issuance of the
Company's March 31, 1997 financial statements and our report thereon dated June
22, 1997, we became aware that those financial statements did not reflect
certain adjustments as described in Notes 11 and 12. In our original report we
expressed an unqualified opinion on the March 31, 1997, financial statements as
described in paragraph three above, and our opinion on the revised statements,
as expressed herein, remains unqualified.

/s/ Salazar and Associates

Salazar and Associates,
Austin, Texas
June 22, 1997, except as to the fifth paragraph above and Notes 11 and 12,
which are as of June 10, 1998

<PAGE>   13


                   MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
                     CONSOLIDATED BALANCE SHEET (RESTATED)
                                 MARCH 31, 1998

                                     ASSETS

<TABLE>
<S>                                                                    <C>
Current assets:
    Cash and cash equivalents                                           $    25,786
    Accounts receivable - Trade                                             150,851
    Inventory                                                               285,023
    Short-term Investment, restricted (Note 4)                            1,350,000
    Other receivables - Advances (Note 2)                                    86,961
                                                                        -----------
        Total current assets                                              1,898,621

Property, plant and equipment, net (Note 3)                                 800,831
                                                                        ----------
        Total assets                                                    $ 2,699,452
                                                                        ===========
                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable - trade                                            $   300,035
    Other accrued expenses                                                  169,336
    Bank line of credit (Note 4)                                          1,228,966
    Current maturities of long-term debt (Note 5)                           151,267
    Current portion of obligations under capital leases (Note 6)             41,097
    Other notes payable (Note 13)                                           200,000
                                                                        -----------
        Total current liabilities                                         2,090,701
                                                                        -----------
Long-term liabilities:
    Notes payable (Note 5)                                                  367,522
    Obligations under capital leases (Note 6)                               149,560
    Deferred Rent                                                           145,620
                                                                        -----------

        Total long-term Notes                                               662,702
                                                                        -----------
Commitments and contingencies (Notes 9 & 13)                                   --
                                                                        -----------
        Total liabilities                                                 2,753,403
                                                                        -----------
Stockholders' equity (Note 10)
    Preferred stock Series B; $5.30 stated value;
        490,000 shares authorized, issued & outstanding                   2,597,000
    Preferred stock Series C; $10.60 stated value;
        99,057 shares authorized, issued & outstanding                    1,050,004
    Common stock at $.10 par value; 50,000,000
        authorized, 11,506,846 shares issued & outstanding                1,150,685
    Additional paid-in capital                                              698,057
    Accumulated deficit                                                  (5,549,697)
                                                                        -----------
        Total stockholders' equity                                       (   53,951)
                                                                        -----------
        Total liabilities and stockholders' equity                      $ 2,699,452
                                                                        ===========
</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>   14

                   MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF OPERATIONS (RESTATED)
                  FOR THE YEARS ENDED MARCH 31, 1998 AND 1997


<TABLE>
<CAPTION>
                                                               1998              1997
                                                           ------------      ------------
<S>                                                        <C>               <C>
Revenues:
    Hardware, software and peripherals                     $  1,350,869      $  1,440,725
    Service, support and integration                            704,241           457,572
    Networks, LAN/WAN                                           685,711         2,767,452
                                                           ------------      ------------

    Total revenues                                            2,740,821         4,665,749
                                                           ------------      ------------

Cost of goods sold:
    Hardware, software and peripherals                        1,406,612         1,109,354
    Service, support and integration                          1,027,617           283,724
    Networks, LAN/WAN                                         1,185,572         1,605,157
                                                           ------------      ------------

    Total cost of goods sold                                  3,619,801         2,998,235
                                                           ------------      ------------

Gross margin (deficit)                                         (878,980)        1,667,514
                                                           ------------      ------------
Selling, general and administrative expenses:
    Salaries and benefits                                     1,299,003         1,202,791
    Professional fees and consultants                           361,075            42,251
    Advertising and marketing                                    55,561
    Occupancy                                                   392,500           185,516
    Depreciation                                                178,892           139,443
    Vehicle expense                                             106,131           158,765
    Other expense                                               272,978           316,820
    Interest expense                                            294,198           100,064
    Provision for uncollectible accounts                         73,252             4,249
                                                           ------------      ------------

    Total selling, general and administrative expenses        3,033,590         2,149,899
                                                           ------------      ------------

Net loss                                                     (3,912,570)         (482,385)

Plus: Preferred stock dividends                              (1,503,128)             --
                                                           ------------      ------------

Net loss available to common stockholders                  $ (5,415,698)     $   (482,385)
                                                           ============      ============

Basic and diluted net loss per share                       $       (.49)     $       (.05)
                                                           ============      ============

Basic and diluted weighted average shares outstanding        10,998,874        10,026,400
                                                           ============      ============
</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>   15
                   MICRO-MEDIA SOLUTIONS, INC, AND SUBSIDIARY
           CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (RESTATED)
                  FOR THE YEARS ENDED MARCH 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                        Series B                  Series C                Common Stock
                                 -----------------------   ----------------------    -----------------------
                                   Shares       Amount       Shares       Amount       Shares       Amount
                                 ---------     ---------   ---------     --------    ----------   ----------
<S>                             <C>           <C>         <C>           <C>         <C>         <C>
Balance March 31, 1996                    0   $        0            0   $        0    9,784,733   $  978,473
Common stock
 issued for services                      0            0            0            0      480,000       48,000
Common stock options
 exercised                                0            0            0            0      500,000       50,000
Net loss                                  0            0            0            0            0            0
                                 ----------   ----------   ----------   ----------   ----------   ----------
Balance March 31, 1997                    0            0            0            0   10,764,733    1,076,473
Common stock issued:
  Interest                                0            0            0            0       10,286        1,029
  Compensation                            0            0            0            0      414,900       41,490
  Preferred stock dividend                0            0            0            0       23,742        2,374
Preferred stock issued:
  Private Placement                 420,000    2,226,000       99,057    1,050,004            0            0
  Senior Debt                        70,000      371,000            0            0            0            0
Preferred stock dividend
  discount                                0            0            0            0            0            0
Stock option for:
  Compensation                            0            0            0            0            0            0
  Placement agents                        0            0            0            0            0            0
Cash received for
  uncertificated stock                    0            0            0            0      293,185       29,319
Common stock-uncertificated
  issued for note receivable              0            0            0            0            0            0
Note receivable offset against
 common stock subscribed                  0            0            0            0            0            0
Net loss                                  0            0            0            0            0            0
                                 ----------   ----------   ----------   ----------   ----------   ----------
Balance March 31, 1998              490,000   $2,597,000       99,057   $1,050,004   11,506,846   $1,150,685
                                 ==========   ==========   ==========   ==========   ==========   ==========
</TABLE>

<TABLE>
<CAPTION>
                                            Common Stock
                                      -------------------------      Additional
                                             Subscribed             (Discount on)       Accum-
                                      -------------------------       Paid - In         ulated
                                       Shares          Amount          Capital          Deficit           Total
                                      --------      -----------     -------------     -----------      -----------
<S>                                   <C>          <C>              <C>               <C>             <C>
Balance March 31, 1996                       0      $         0      $(1,046,058)         348,386      $   280,801
Common stock
 issued for services                         0                0                0                0           48,000
Common stock options
 exercised                                   0                0                0                0           50,000
Net loss                                     0                0                0         (482,385)        (482,385)
                                      --------      -----------      -----------      -----------      -----------
Balance March 31, 1997                       0                0       (1,046,058)        (133,999)        (103,584)
Common stock issued:
  Interest                                   0                0            4,114                0            5,143
  Compensation                               0                0          250,367                0          291,857
  Preferred stock dividend                   0                0           56,294          (58,668)               0
Preferred stock issued:
  Private Placement                          0                0                0         (975,641)       2,300,363
  Senior Debt                                0                0                0                0          371,000
Preferred stock and Senior Debt
 dividend discount                           0                0          856,460       (  856,460)               0
Stock option for:
  Compensation                               0                0           93,750                0           93,750
  Placement agents                           0                0                0          387,641          387,641
Cash received for
  uncertificated stock                       0                0          483,130                0          512,449
Common stock-uncertificated
  issued for note receivable           543,000          407,250                0                0          407,250
Note receivable offset against
 common stock subscribed              (543,000)        (407,250)               0                0         (407,250)
Net loss                                     0                0                0       (3,912,570)      (3,912,570)
                                      --------      -----------      -----------      -----------      -----------
Balance March 31, 1998                       0      $         0      $   698,057      $(5,549,697)     $  ( 53,951)
                                      ========      ===========      ===========      ===========      ===========
</TABLE>

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

<PAGE>   16

                   MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)
                  FOR THE YEARS ENDED MARCH 31, 1998 AND 1997


<TABLE>
<CAPTION>
                                                                           1998             1997
                                                                       -----------      -----------
<S>                                                                    <C>             <C>
Cash flows from operating activities:
    Net loss                                                           $(3,912,570)     $  (482,385)
    Adjustments to reconcile net income to net cash provided
        by operating activities:
           Depreciation expense                                            178,892          139,443
           Stock issued for compensation and placement agent fees          291,857           48,000
           Stock options issued for compensation                            93,750             --
           Stock issued for interest                                         5,143             --
           Change in trade receivables                                     832,062         (166,383)
           Change in inventory                                             (19,569)         189,040
           Change in accounts payable                                     (577,325)         307,855
           Change in Deferred rent                                         145,620              --
           Change in accrued expenses                                       57,775           60,875
                                                                       -----------      -----------

               Net cash provided by (used by) operating activities      (2,904,365)          96,445
                                                                       -----------      -----------
Cash flows from investment activities:
    Purchase of property & equipment                                      (195,685)        (655,714)
    Purchase of short term investment                                   (1,350,000)            --
    Additional notes receivables                                          (142,265)            --
    Proceeds from notes receivables                                        477,645             --
    Proceeds from other receivables                                        162,793             --
    Additional other receivables                                          (121,341)        (389,963)
                                                                       -----------      -----------

               Net cash used by investing activities                    (1,168,853)      (1,045,677)
                                                                       -----------      -----------

Cash flows from financing activities:
    Proceeds from line of credit (net)                                     504,076          275,000
    Proceeds from other notes payable                                      200,000             --
    Payments on long-term debt                                            (162,153)         467,654
    Payments on capital lease obligations                                  (32,485)         223,141
    Proceeds from private placement of preferred stock                   2,688,004             --
    Proceeds from issuance of common stock                                 512,450             --
    Proceeds from senior convertible debt                                  371,000             --
                                                                       -----------      -----------

               Net cash provided by financing activities                 4,080,892          965,795
                                                                       -----------      -----------

               Net increase in cash                                          7,674           16,563

Cash as beginning of period                                                 18,112            1,549
                                                                       -----------      -----------

Cash at end of period                                                  $    25,786      $    18,112
                                                                       ===========      ===========
</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>   17
                   MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
          CONSOLIDATED STATEMENTS OF CASH FLOW (RESTATED) - CONTINUED
                  FOR THE YEARS ENDED MARCH 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                             1998           1997
                                                                          ----------     ----------
<S>                                                                       <C>            <C>
Supplemental disclosure:
    Cash paid during the year for:
        Interest                                                          $  232,578     $   97,143
                                                                          ==========     ==========

Supplemental schedule of non-cash investing and financing activities:
        Preferred stock issued for placement agent fees                   $  156,000     $     --
        Stock options:
           Compensation                                                       93,750
           Placement agent fees                                              387,641           --
        Common stock issued for:
           Compensation                                                      291,857         48,000
           Interest on debt                                                    5,143           --
           Preferred stock dividends                                          58,668           --
        Common stock subscribed for note receivable                          407,250           --
        Debt converted to preferred stock                                    371,000           --
        Inventory received for other notes receivable                         84,394           --
        Discount on preferred stock issued for dividend                      856,460           --
                                                                          ==========     ==========
</TABLE>

  THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>   18

                   MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
                  FOR THE YEARS ENDED MARCH 31, 1998 AND 1997

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS AND ORGANIZATION:

Micro-Media Solutions, Inc. (formerly Mountain States Resources Corporation,
("MSRC")), was organized under the laws of the State of Utah on April 15, 1969.
MSRC began operations in April 15, 1969, as a mining, mineral extraction and
oil and gas exploration company. MSRC discontinued its operations in 1993 and
became a development stage company as described in the Statement of Financial
Accounting Standards No.7, "Accounting and Reporting by Development Stage
Enterprises". On June 23, 1997, MSRC entered into an agreement and plan of
reorganization with the shareholders of Micro-Media Solutions, Inc. (a Texas
Corporation), ("MSI-Texas"), in which MSRC acquired 100% of the common stock of
MSI-Texas. As part of the reorganization, MSRC changed its name to Micro-Media
Solutions, Inc., (a Utah Corporation), ("MSI") (the "Company"). The transaction
was accounted for as a recapitalization.

MSI-Texas is an Austin, Texas, based technology corporation formed to provide
computer hardware, software programming, system support, maintenance, media
duplication, and kitting to the public and private sectors. In addition,
MSI-Texas is certified by the State of Texas as a Historically Underutilized
Business (HUB).

MSI-Texas is a business solutions technology integrator with infrastructure
design and implementation services. In addition, MSI-Texas' computer networking
services includes system integration and local and wide-area networks.

GOING CONCERN:

As shown in the accompanying consolidated financial statements, the Company has
incurred a net loss in the current year of $3,912,570. As of March 31, 1998,
the Company's current liabilities exceeded its current assets by $192,080 and
owes accounts payable with dates due in excess of thirty (30) days in the
approximate amount of $170,000. These factors create a substantial doubt about
the Company's ability to continue as a going concern. The ability of the
Company to continue as a going concern is dependent on the Company's obtaining
additional financing to fund the expenses related to operations and capital
improvements.

Subsequent to March 31, 1998, the Company received $2 million in phase III of a
private placement agreement, (see Note 10), which have been used to retire
debt, decrease past due accounts payable and for operating expenses. In
addition, the Company is continuing discussions with private investment groups
for a private placement of a newly created series of preferred stock with net
proceeds to the Company of approximately $2.6 million, and plans a public
offering in the year ending March 31, 1999. Management has identified and
closed substantial contracts during the year ended March 31, 1999, and believes
it can produce the level of revenue necessary to return the Company to a
positive earnings trend. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.

PRINCIPLES OF CONSOLIDATION:

The consolidated financial statements for the years ended March 31, 1998 and
1997, include the accounts and transactions of MSI and MSI-Texas. All
significant inter-company accounts and transactions have been eliminated in the
accompanying consolidated financial statements. MSI, however, did not have any
material asset or liability accounts or account balances. With the exception of
MSI's equity accounts and a deficit retained earnings of $5.7 million, the
significant account balances belong to MSI-Texas.

CASH AND CASH EQUIVALENTS:

Cash equivalents consist primarily of funds invested in short-term
interest-bearing accounts. The Company considers all highly liquid investments
purchased with initial maturities of three months or less to be cash
equivalents.

<PAGE>   19

                   MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
                  FOR THE YEARS ENDED MARCH 31, 1998 AND 1997

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

ACCOUNTS RECEIVABLE:

The Company follows the allowance method of expensing accounts receivable when
considered uncollectible. As of March 31, 1998, management believes all
accounts are collectible; and therefore, no allowance has been recorded.

INVENTORY:

Inventory is valued at lower of cost, using the FIFO method
(first-in/first-out), or market. Inventory consists principally of hardware and
software needed for maintaining and building network technology for customers.

PROPERTY, PLANT, AND EQUIPMENT:

Property and equipment are stated at cost. For financial statement purposes,
depreciation is computed using the straight-line method over the estimated
useful lives of the related assets. Amortization of leasehold improvements is
computed using the straight-line method over the shorter of the term of the
related lease or the useful life of the leasehold improvements. Accelerated
depreciation methods are used for tax purposes. Depreciation and amortization
are calculated over the following useful lives stated in years:

<TABLE>
<CAPTION>
                                                          Useful
                                                          Lives
                                                         -------
               <S>                                     <C>
                Vehicles                                     5
                Furniture and fixtures                       5
                Equipment                                    5
                Leasehold improvements                      20
</TABLE>

REVENUE AND COST RECOGNITION:

Revenue from sales of hardware, software and peripherals is recognized upon
shipment to the customer. Most hardware, software and peripherals sales are
made without the right of return. Product returns which are minimal are
recorded as a reduction of sales upon receipt of the product. Service, support
and integration sales are recognized upon completion of the service and is not
subject to warranty.

Revenue from fixed priced contracts is recognized on the
percentage-of-completion method of accounting, measured by the cost-to-cost
method. This method is used because management considers total costs incurred
to be the best available measure of progress on contracts.

Contract costs include all direct costs and those indirect costs related to
contract performance. Changes in job performance, job conditions, and estimated
profitability and final contract settlements may result in revisions to costs
and revenue and are recognized in the period in which the revisions are
determined.

The asset, "Costs and Estimated Earnings in Excess of Billings on Uncompleted
Contracts", represents revenue earned in excess of amounts billed. The
liability "Billings in Excess of Costs and Estimated Earnings on Uncompleted
Contracts" represents billings in excess of amounts earned.

Revenue and contract costs from fixed priced contracts are included in the
various categories of revenue and cost of goods sold. As of March 31, 1998,
there were no contracts in progress.

FEDERAL INCOME TAX:

The Company uses the liability method of accounting for income taxes as
prescribed by the Financial Accounting Standard Board Statement No. 109.
Deferred tax liabilities and assets are determined based on differences between
the financial statement and tax basis of assets and liabilities using enacted
tax rates expected to be in effect for the year in which the differences are
expected to reverse. The net change in deferred tax assets and liabilities is
reflected in the statement of operations.

<PAGE>   20

                   MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
                  FOR THE YEARS ENDED MARCH 31, 1998 AND 1997

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

NEW ACCOUNTING PRONOUNCEMENTS:

The Company accounts for stock options and warrants issued to employees in
accordance with APB 25, "Accounting for Stock Issued to Employees". The Company
follows FASB Statement 123, "Accounting for Stock- Based Compensation" ("SFAS
No. 123") for financial statement disclosure purposes and issuance of options
and warrants to non-employees for services rendered.

In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", management reviews
long-lived assets and intangible assets for impairment whenever events or
changes in circumstances indicate the carrying amount of an asset may not be
fully recoverable. As part of this assessment, management prepares an analysis
of the undiscounted cash flows for each product that has significant long-lived
or intangible asset values associated with it. This analysis for the asset
values as of March 31, 1998, indicated there was no impairment to the carrying
value of these assets.

SFAS No. 130, "Reporting Comprehensive Income", effective for fiscal years
beginning after December 15, 1997, establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. This statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. The Company has
addressed the requirements of SFAS No. 130 and no material impact on the
financial statements is expected.

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", effective for fiscal years beginning after December 15, 1997,
establishes standards for reporting information about operating segments in
annual financial statements and interim financial reports issued to
shareholders. Generally, certain financial information is required to be
reported on the basis that is used internally for evaluating performance or an
allocation of resources to operating segments. The Company has not yet
determined to what extent the standard will impact its financial statements.

USE OF ESTIMATES AND CERTAIN CONCENTRATIONS:

Management of the Company has made a number of estimates and assumptions
relating to the valuation and reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Although actual results could differ from those estimates,
management believes its estimates are reasonable. Certain components,
subassemblies and software included in the Company's computer systems are
obtained from sole suppliers or a limited number of suppliers. The Company
relies, to a certain extent, upon the ability of its suppliers' to enhance
existing products in a timely and cost-effective manner, to develop new
products to meet changing customer needs and to respond to emerging standards
and other technological developments in the computer industry. The Company's
reliance on a limited number of suppliers involves several risks, including the
possibility of shortages and/or increases in costs of components and
subassemblies, and the risk of reduced control over delivery schedules.

FINANCIAL INSTRUMENTS:

Cash equivalents include highly liquid short-term investments with original
maturities of three months or less, readily convertible to known amounts of
cash. The amounts reported as cash equivalents, receivables, other assets,
accounts payable and accrued expenses and debt are considered by the Company to
be reasonable approximations of their fair values, based on market information
available to management as of March 31, 1998. The use of different market
assumptions and estimation methodologies could have a material effect on the
estimated fair value amounts. The reported fair values do not take into
consideration potential taxes or other expenses that would be incurred in an
actual settlement.

<PAGE>   21

                   MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
                  FOR THE YEARS ENDED MARCH 31, 1998 AND 1997

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of cash and cash equivalents and trade accounts
receivable. A concentration of credit risk may exist with respect to trade
receivables, as many of the Company's customers are in the computer and
telecommunications industries. The Company has a large number of customers on
which it performs ongoing credit evaluations and generally does not require
collateral from its customers. Historically, the Company has not experienced
significant losses related to receivables from individual customers or groups
of customers in any particular industry or geographic area.

NOTE 2 - OTHER RECEIVABLES

Other receivables include employee advances for travel and lodging for out of
town projects in the amount of $21,961. Also included in other receivables is
$65,000 of cost paid by the Company to the third parties in satisfaction of
obligations of Argus Management, Inc., (see Note 13).

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT

A summary of the Company's investment in property, plant and equipment at
March 31, 1998, is as follows (see Note 5 and 6):

<TABLE>
       <S>                                                      <C>
       Equipment, Furniture and Fixtures                        $    613,184
       Transportation Equipment                                      253,204
       Leasehold Improvements                                        307,790
                                                                ------------
                                                                   1,174,178
       Less Accumulated Depreciation                                 373,347
                                                                ------------
            Net Property, Plant and Equipment                   $    800,831
                                                                ============
</TABLE>

Depreciation charged against income for the years ended March 31, 1998 and
1997, was $178,892 and $139,443, respectively.

NOTE 4 - BANK LINE OF CREDIT

The Company was in default on a secured line of credit agreement with Bank One
Texas, N.A. providing for borrowings of up to $725,000 based on the amount of
the Company's eligible receivables. As of March 31, 1998, the Company owed
$208,966 plus accrued interest at 18% in the amount of $19,219 secured by
accounts receivable. This amount was paid in full in April 1998 and was not
renewed. Under the agreement, the Company was subject to covenants including
certain financial ratios.

The Company has a secured line of credit agreement with Compass Bank for
$1,350,000 secured by two certificates of deposit aggregating $1,350,000 held
in the Company's name by Compass Bank and payable in monthly installments of
interest only. The balance as of March 31, 1998, was $1,020,000 plus accrued
interest at 8% per annum in the amount of $4,893. Subsequent to March 31, 1998,
the outstanding balance of the line of credit was reduced to $750,000 using
subsequent funding (see note 10) and matures February 5, 1999. The subsequent
reduction in the loans did not release the restriction on the certificates of
deposit. There are no additional loan covenants associated with this line of
credit.

<PAGE>   22
                   MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
                  FOR THE YEARS ENDED MARCH 31, 1998 AND 1997

NOTE 5 - NOTES PAYABLE

Long-term notes payable consist of the following amounts at March 31, 1998:

<TABLE>
<S>                                                                                                     <C>
Austin Community Development Corporation, $100,000 equipment loan dated May 29,
1996, secured by equipment and accounts receivable. Loan requires interest
payments at 9% for the first six months, principal and interest payments
thereafter of $2,224 beginning in February 1997. Loan will mature
over a 60 month period ending January 2002.                                                              $   81,327

Austin Community Development Corporation, $100,000 working capital loan dated
June 14, 1995, secured by equipment and accounts receivable. Loan is due in 48
monthly principal installments of $2,083 along with interest of 9%
beginning in July 1996. Loan will mature in June 2000.                                                       56,497

Neighborhood Commercial Management Program, $75,000 loan from City of Austin
dated June 8, 1995, secured by second lien on equipment and accounts
receivable. Loan is due in 60 monthly installments of principal and interest of
$1,347 beginning January 1996. Interest rate of 0% until December 1995,
thereafter 3% rate to maturity. Loan will mature over a 60 month period
ending December 2000.                                                                                        43,104

Neighborhood Commercial Management Program, $250,000 loan from City of Austin
dated August 12, 1996, secured by second lien on equipment and accounts
receivable. Loan is due in 60 monthly installments of principal and interest of
$4,492 beginning January 1997. Interest rate of 0% until December 1996,
thereafter 3% rate to maturity. Loan will mature over a 60 month period
ending December 2001.                                                                                       191,194

Bank One Texas, N.A., $200,000 loan dated June 26, 1996, secured by a first
lien on equipment and leasehold improvements. Loan is due in 60 monthly
principal installments of $3,333 along with interest equal to the Bank One
Texas, N.A. base rate plus 2%. Subsequent to March 31, 1998, loan was paid in
full.                                                                                                       146,667
                                                                                                         ----------
                                                                                                            518,789
Less current portion                                                                                       (151,267)
                                                                                                         ----------
                                                                                                         $  367,522
                                                                                                         ==========
</TABLE>

Following are maturities of long-term debt for each of the next five years:

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
<S>                                                                                                     <C>
        1999                                                                                             $  151,267
        2000                                                                                                153,067
        2001                                                                                                134,348
        2002                                                                                                 80,107
                                                                                                         ----------
                                                                                                         $  518,789
                                                                                                         ==========
</TABLE>

The officers of the Company have personally guaranteed all notes.


<PAGE>   23

                   MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
                  FOR THE YEARS ENDED MARCH 31, 1998 AND 1997

NOTE 6 - OBLIGATIONS UNDER CAPITAL LEASES

The Company is lessee of transportation and telephone equipment under capital
leases expiring in various years through September 2001. The asset and
liabilities under capital leases are recorded at the lower of the present value
of the minimum lease payments or the fair value of the assets. The assets are
depreciated over the lower of their related lease terms or their estimated
productive lives. Depreciation of assets under capital leases is included in
depreciation expense (see Note 3).

Following is a summary of property held under capital leases:

<TABLE>
<S>                                                                <C>
                Transportation Equipment                             $ 218,055
                Communication Equipment                                 56,014
</TABLE>

Minimum future lease payments under capital leases as of March 31, 1998, for
each of the next five years and in the aggregate are:

<TABLE>
<CAPTION>
       YEAR ENDED MARCH 31,
       <S>                                                          <C>
                1999                                                $   68,077
                2000                                                    60,343
                2001                                                    74,985
                                                                    ----------
                Total minimum lease payments                           203,405
                Less: Amount representing interest                     (12,748)
                                                                    ----------
                                                                       190,657
                Less current portion                                   (41,097)
                                                                    ----------
                                                                    $  149,560
                                                                    ==========
</TABLE>

NOTE 7 - FEDERAL INCOME TAXES

A reconciliation of income tax at the statutory rate to the Company's effective
rate is as follows:

<TABLE>
      <S>                                                           <C>
       Computed at the expected statutory rate                      $ (1,330,000)
       Non-deductible items                                               40,000
       Valuation allowance                                             1,290,000
                                                                    ------------
       Income tax                                                   $      --
                                                                    ============

Deferred tax assets are as follows:
       Deferred tax asset                                           $  1,334,000
       Valuation allowance                                            (1,334,000)
                                                                    ------------
                                                                    $      --
                                                                    ============
</TABLE>

The Company has available at March 31, 1998, $3,924,000 of unused operating
loss carryforwards that may be applied against future taxable income and that
expire in various years through 2013.

NOTE 8 - RELATED PARTY TRANSACTIONS

The Company had notes receivable from certain related parties at March 31,
1997, in the amount of $419,774. These related parties are owned and controlled
by majority stockholders of the Company. During the year ended March 31, 1998,
the Company loaned an additional $142,265 to these related entities and
received payments in the amount of $562,039. At March 31, 1998, the Company did
not have any notes receivables or payables to related parties. The Company did
not have sales or purchases with the related parties for the years ended
March 31, 1998 or 1997.

<PAGE>   24
                   MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
                  FOR THE YEARS ENDED MARCH 31, 1998 AND 1997

NOTE 9 - COMMITMENTS

The Company leases its principal general offices and warehouse facilities. The
leases expire at August 31, 2005 and July 31, 2008, each with a 10 year
renewable option. Future minimum lease payments (excluding property taxes) are
as follows:

<TABLE>
<CAPTION>
                     Year ended March 31,
                     ---------------------
                     <S>                                <C>
                     1999                               $          186,107
                     2000                                          231,248
                     2001                                          242,563
                     2002                                          266,365
                     2003                                          281,789
                     2004                                          297,458
                     Thereafter                                  1,065,249
                                                        -------------------
                                                        $        2,570,779
                                                        ===================
</TABLE>

The total rental obligation under the above contract for the year ended March
31, 1998, was $109,980.

NOTE 10 - STOCKHOLDERS' EQUITY

In October 1997, the Company completed a Private Placement Agreement, (the
"Agreement") with a group of accredited investors. The Agreement provides for
three "Phases" of financing.

Phase I of the Agreement was funded in November 1997. The Company received
$2,120,000 in exchange for 400,000 shares of series B preferred stock (5%
cumulative, convertible, non-voting, stated value $5.30) ,(the "Series B
Stock"). Each share of preferred stock is initially convertible into 10 shares
of the Company's common stock subject to adjustment and six warrants, (the
"Warrants") for the purchase of six shares of common stock at $1.50 per share.
The Company paid $302,000 and issued 20,000 shares of series B preferred stock
for placement agent fees in Phase I. Also options to purchase 400,000 shares of
common stock at $1.50 per share were issued as a part of the Agreement. The
common stock had a fair value of $0.92 per share at the grant date resulting in
$367,350 in placement agent fees.

At the time of issuance the Series B Stock was convertible to common stock at
an amount that was "in-the-money". This beneficial conversion feature was
limited to net proceeds of $1,818,000. Due to the limitation on the number of
shares of stock that can be issued to retain the HUB status, $856,460 has been
recorded as dividends and as an increase in additional paid-in capital in the
accompanying financial statements. The unrecognized portion of the discount in
the amount of $961,540 will be recorded if and when the preferred stock is
converted or the HUB status changes.

Phase II of the Agreement was funded in February 1998. The Company received
$1,000,004 in exchange for 94,340 shares of series C preferred stock (6%
cumulative, convertible, non-voting, stated value, $10.60), (the "Series C
Stock). Each share of preferred stock is initially convertible into 10 shares
of the Company's common stock, subject to adjustment. The Company paid $130,000
and issued 4,717 shares of series C preferred stock for placement agent fees.
Also options to purchase 47,170 shares of common stock at $4.00 per share were
issued as a part of the Agreement. The common stock had a fair value of $0.43
per share at the grant date resulting in $20,291 in placement agent fees.

<PAGE>   25

                   MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
                  FOR THE YEARS ENDED MARCH 31, 1998 AND 1997

NOTE 10 - STOCKHOLDERS' EQUITY - CONTINUED

At the time of issuance the Series C Stock was convertible to common stock at
an amount that was "in-the-money". This beneficial conversion feature was
limited to net proceeds of $870,000. Due to the limitation on the number of
shares of stock that can be issued to retain the HUB status, the unrecognized
discount in the amount of $870,000 will be recorded if and when the preferred
stock is converted or the HUB status changes.

Phase III of the Agreement was partially funded in April and May 1998 with the
completion of the funding planned in July 1998. The Company has received
$2,000,000 in the partial funding of Phase III.

Senior convertible debt in the amount of $371,000 was issued for cash in
November 1997. This debt was converted to 70,000 shares of series B preferred
stock (5% cumulative, convertible, non-voting, stated value, $5.30), in
February 1998. Accrued interest in the amount of $5,143 was paid with the
issuance of 10,286 shares of common stock.

At the time of issuance the Senior convertible debt was convertible to common
stock at an amount that was "in-the-money". This beneficial conversion feature
was limited to net proceeds of $371,000. Due to the limitation on the number of
shares of stock that can be issued to retain the HUB status, interest expense
in the amount of $371,000 will be recorded if and when the preferred stock is
converted or the HUB status changes.

Preferred stock dividends were accrued and paid through March 31, 1998, in the
amount of $58,668 by the issuance of 23,742 shares of common stock.

NOTE 11 - STOCK OPTIONS AND WARRANTS

A summary of the status of the Company's stock options as of March 31, 1998, is
presented below:

<TABLE>
<S>                                                                 <C>
Options outstanding at March 31, 1997                                    --
Options granted                                                       622,710
Options exercised                                                        --
Options canceled                                                         --
Less: options not exercisable at year end                             222,710
                                                                      -------
        Options outstanding and
         exercisable at March 31                                      400,000
                                                                      =======

Weighted Average Exercise Price per Share                             $  1.50
                                                                      =======
</TABLE>

The following table summarizes the information about the stock options as of
March 31, 1998:

<TABLE>
<CAPTION>
                 Weighted                   Weighted                                 Weighted
                  Number                     Average              Average             Number                Average
Range of         Outstand-                  Remaining             Exercise           Exercisable            Exercise
Exercise          ing at                   Contractual              Price               At                    Price
 Price           March 31                     Life              (Total Shares)        March 31           (Exer. Shares)
---------       -----------                ------------         --------------       -----------          -------------
<S>              <C>                       <C>                   <C>                 <C>                <C>
 $ 1.50            50,000 (1)               5 years                 $ 1.50                  --                 $1.50
   2.25            25,000 (1)               2 years                   2.25                  --                  2.25
   1.50           100,000 (1)               5 years                   1.50                  --                  1.50
   1.50           400,000 (2)               5 years                   1.50             400,000                  1.50
   4.50            47,170 (2)               6 years                   4.00                  --                  4.00
   1.50
 ------           -------                   -------                 ------             -------                ------
 $ 4.00           622,170                   5 years                 $ 1.72             400,000                 $1.50
 ======           =======                   =======                 ======             =======                ======
</TABLE>

(1) Options issued to employees for past services.
(2) Options granted for placement agent fees (Note 10)

<PAGE>   26

                   MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
                  FOR THE YEARS ENDED MARCH 31, 1998 AND 1997

NOTE 11 - STOCK OPTIONS & WARRANTS - CONTINUED

Stock options to employees have been recorded as compensation as applied under
APB No. 25 in the amount of $93,750.

SFAS No. 123 requires the Company to provide pro forma information regarding
net income (loss) applicable to common stockholders and income (loss) per share
as if compensation cost for the Company's stock options granted to employees
had been determined in accordance with the fair value based method prescribed
in that Statement.

The Company estimated the fair value of each stock option at the grant date by
using the Black-Scholes option- pricing model with the following weighted
average assumptions used for grants as follows:

<TABLE>
                  <S>                                             <C>
                  Dividend yield                                        0%
                  Expected volatility                               16.46%
                  Risk-free interest rate                            8.54%
                  Expected lives                                  5 Years
</TABLE>

The weighted fair value of options granted for compensation during the year
ended March 31, 1998, was $1.08.

Under the accounting provisions of SFAS No 123, the Company's net loss
applicable to common stockholders and loss pro forma amounts are indicated as
follows:

<TABLE>
<S>                                                               <C>
Net (loss) applicable to common stockholders:
                  As reported                                     $(5,803,339)
                  Pro forma                                       $(5,898,589)

Net (loss) per share:
                  As reported                                     $      (.53)
                  Pro forma                                       $      (.54)
</TABLE>

At March 31, 1998, the Company had warrants outstanding to acquire 2,940,000
shares of common stock. All of the warrants were eligible to be exercised at
year end. The following table summarizes the information about the warrants as
of March 31, 1998:

<TABLE>
<CAPTION>
                       Number
 Exercise           Outstanding          Expiration
   Price              March 31              Date
 --------           -----------          ----------
<S>                    <C>               <C>
 $ 1.50                120,000           1/31/2000
 $ 1.50              2,400,000           1/31/2000
 $0.795                300,000           1/31/2000
 $0.795                120,000           1/31/2000
                    ----------
                     2,940,000
                    ==========
</TABLE>

In addition, all of the warrant contracts prohibit exercise of the warrants if
the HUB status of the Company is compromised upon such exercise.

<PAGE>   27

                   MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
                  FOR THE YEARS ENDED MARCH 31, 1998 AND 1997

NOTE 12 - EARNINGS PER SHARE

The following data details the amounts used in computing earnings per share
(EPS) and the effect on income and the weighted average number of shares of
dilutive potential common stock.

<TABLE>
<CAPTION>
                                                 1998              1997
                                             ------------      ------------
<S>                                          <C>               <C>
Loss from continuing operations              $ (3,912,570)     $   (482,385)
Less: Preferred dividends                      (1,890,769)
                                             ------------      ------------
Loss available to common shareholders
   used in basic EPS                         $ (5,803,339)     $   (482,385)
                                             ============      ============
Weighted average number of common shares
   used in basic EPS                           10,998,874        10,026,400
Effect of dilutive securities:
   Stock options                                     --                --
   Warrants                                          --                --
                                             ------------      ------------
Weighted number of common shares and
   dilutive potential common stock used
   in diluted EPS                              10,998,874        10,026,400
                                             ============      ============
</TABLE>

Options on 622,170 shares of common stock and warrants on 2,940,000 shares of
common stock were not included in computing diluted EPS for the year ended
March 31, 1998, because their effects were antidilutive.

NOTE 13 - CONTINGENCY

On December 18, 1997, Argus Management, Inc. filed Plaintiff's Original
Petition in the 216th District Court of Kerr County, Texas. Argus claims the
Company and Mr. Jose G. Chavez, as joint obligors, defaulted on their
obligation to Argus pursuant to two promissory notes for $100,000 each, both
dated June 2, 1997. Argus is seeking a judgment for $200,000, together with
interest on the notes at the rate of 20% per annum from June 2, 1997, through
the date the notes are satisfied. As of March 31, 1998, $65,000 had been
disbursed to third parties in satisfaction of obligations of Argus Management,
Inc. The $65,000 has been recorded in other receivables in the accompanying
financial statements.

On February 6, 1998, the Company filed Plaintiff's Original Petition in the
above-referenced case. The Company asserts breach of contract, fraud,
defamation, usury, and civil conspiracy claims against Argus Management, Inc.
The Company strongly disagrees with Argus' contentions and denies liability to
Argus under the notes and plans to oppose vigorously Argus' claims and recover
the amounts disbursed to third parties.

A lawsuit was filed by Manpower, Inc. to preserve its claims for certain
delinquent obligations that were reduced to approximately $38,000 which is
included in accounts payable at March 31, 1998. The full amount of the
principal and interest was paid on April 29, 1998, and a Notice of Dismissal
was filed on May 8, 1998.

On January 22, 1998, the Company filed a lawsuit against Bits Technical
Corporation for damages attributable to a breach of commitment. This matter is
still pending. On August 17, 1998, Bits Technical Corporation ("BTC") filed a
counterclaim against the Company in connection with the above case. In the
counterclaim, BTC asserts the Company fraudulently induced BTC to promise to
loan money to the company. In particular, BTC claims the Company promised
certain contracts and business opportunities to BTC that the Company was
unwilling or unable to deliver.

Bank One, Texas, NA filed a lawsuit against the Company for the collection of
approximately $355,633 of principal plus interest of $29,289 as well as
attorney fees and court costs of $10,000. The bank was paid in full in April
1998. The bank then executed a Notice of Nonsuit to dismiss with prejudice the
lawsuit on April 29, 1998.

<PAGE>   28

                   MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
                  FOR THE YEARS ENDED MARCH 31, 1998 AND 1997

NOTE 13 - CONTINGENCY - CONTINUED

On November 20, 1996, MCA Communications, Inc. ("MCA") filed a lawsuit against
the Company in County Court at Law No. 2 in Harris County, Texas. MCA claims
the Company owes $12,485.40 for certain goods and services that MCA claims to
have provided to MSI in connection with various projects for the Texas
Department of Health. MCA also seeks interest, costs, and attorneys' fees. On
January 6, 1997, the Company filed its answer and denied the above-referenced
claim in its entirety.

NOTE 14 - SUBSEQUENT CHANGE

         Subsequent to issuing the March 31, 1998, audited financial statements
and accompanying auditor's report dated June 9, 1998, additional adjustments to
the financial statements were recorded for undocumented obligations of the
Company's common stock. An adjustment has been made to record the Company's
obligation to issue 362,400 shares of common stock for compensation in the
amount of $256,295, to the Company's employees, consultants and stockholder's
prior to March 31, 1998. Also an adjustment was made to record 543,000 shares
of common stock subscribed in the amount of $407,250 for a note receivable. The
note receivable has been offset against the common stock subscribed in the
accompanying financial statements.

         Additionally, 293,185 shares of uncertificated common stock has been
reported for the cash recorded and reported as of March 31, 1998, in the amount
of $512,450. An adjustment has been made to increase common stock and decrease
additional paid in capital in the amount of $29,319.

         Also, an adjustment has been made to correct stock options issued for
placement agent fees recorded under SFAS No. 123. A decrease of $153,547 to
additional paid-in capital as an offset against preferred stock proceeds with a
corresponding increase in additional paid-in capital of $153,545 has been
recorded for the year ended March 31, 1998.

         The following adjustments have been included in the restated financial
statements and accompanying audit report dated October 9, 1998:

<TABLE>
<CAPTION>
                                                                     Balance as                                    Balance
                                                                     Previously                                     after
       CONSOLIDATED BALANCE SHEET ADJUSTMENTS:                        Reported             Adjustments            Adjustments
       ----------------------------------------------------     ---------------------    ------------------     ----------------
       <S>                                                      <C>                      <C>                   <C>
       Other accrued expenses                                                153,240                16,096              169,336
       Common stock                                                        1,085,126                65,559            1,150,685
       Additional paid-in capita                                           2,491,459               174,640            2,666,099
       Accumulated deficit                                               (7,115,822)              (256,297)          (7,372,119)

       CONSOLIDATED STATEMENT OF OPERATION ADJUSTMENT:
       ----------------------------------------------------
       Selling, General and Administrative expenses                        3,190,842               256,295            3,447,137
       Net loss                                                           (3,510,653)             (256,295)          (3,766,950)
       Preferred stock dividend                                            3,471,170                    --            3,471,170
       Net loss available to common stockholders                          (6,981,823)             (256,297)          (7,238,120)
       Basic and diluted loss per share                                        (0.65)                (0.01)               (0.66)
                                                                  ==================      ================       ==============
       Basic and diluted shares outstanding                               10,785,717               213,157           10,998,874
                                                                  ==================      ================       ==============
</TABLE>

<PAGE>   29

                   MICRO-MEDIA SOLUTIONS, INC. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
                  FOR THE YEARS ENDED MARCH 31, 1998 AND 1997

         NOTE 14 - SUBSEQUENT CHANGE - CONTINUED

         Subsequent to issuing the March 31, 1998, audited financial statements
and accompanying auditor's report dated June 9, 1998 as restated on October 9,
1998, additional adjustments to the financial statements have been recorded. An
adjustment has been made to record deferred rent in accordance with SFAS No.
23. An increase in current liabilities with a corresponding increase in rent
expense in the amount of $145,620 has been recorded for the year ended March
31, 1998. Also, subsequent to issuing the restated financial statements, EITF
98-5 was issued limiting the beneficial conversion feature for instruments
issued after May 20, 1999 to the net proceeds. A decrease in discount
recognized in the amount of $1,112,139 has been recorded. The financial
statements are being restated as recommended by the SEC staff as discussed in
Note 10. Other amounts have been reclassified to agree to the current year
presentation.

         The following adjustments have been included in the restated financial
statements:

<TABLE>
<CAPTION>
                                                                Balance as                                    Balance
                                                                Previously                                     after
       CONSOLIDATED BALANCE SHEET ADJUSTMENTS:                   Reported             Adjustments            Adjustments
       --------------------------------------------------  ---------------------    ------------------     ----------------
       <S>                                                 <C>                      <C>                   <C>
       Deferred rent                                                         --               145,620               145,620
       Additional paid-in capital                                     2,666,099            (1,580,401)            1,085,698
       Accumulated deficit                                           (7,372,119)            1,434,781            (5,937,338)

       CONSOLIDATED STATEMENT OF OPERATION ADJUSTMENT:
       ---------------------------------------------------
       Cost of goods sold                                             3,060,634               559,167             3,619,801
       Selling, General and Administrative expenses                   3,447,137              (413,547)            3,033,590
       Net loss                                                      (3,766,950)             (145,620)           (3,912,570)
       Preferred stock dividend                                       3,471,170            (1,580,401)            1,890,769
       Net loss available to common stockholders                    (7,238,120)             1,434,781            (5,803,339)
       Basic and diluted loss per share                                  (0.66)                    --                 (0.66)
                                                             ==================      ================        ==============
       Basic and diluted shares outstanding                          10,998,874                    --            10,998,874
                                                             ==================      ================        ==============
</TABLE>


On October 14, 1998, the Company changed its name to MSI Holdings, Inc.

<PAGE>   30

Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure

Changes have been previously reported on Forms 8-K and 8-K/A.

PART III

Item 9. Directors and Executive Officers of the Registrant The executive
officers, key employees and directors of the Registrant and their ages and
positions with the Registrant or its subsidiaries are as follows:

As of October 26, 1998, MSHI's current executive officers and directors, their
titles, ages and tenure are as follows:

<TABLE>
<CAPTION>
                                                        Period from
Name                  Age        Position               which served
<S>                   <C>        <C>                    <C>
Jose G. Chavez        46    Chairman of the
                            Board Of Directors,
                            President and
                            Chief Executive Officer    June 23, 1997

David W. Hill         32    Chief Financial Officer    August 10, 1998

Mitchell C. Kettrick  32    Vice-President,
                            Secretary and Director     June 23, 1997

Tom M. Upton          41    Vice-President Sales
                            and Marketing              September 9, 1998

Jaime Munoz           37    Vice-President
                            of Operations              November 15, 1997


Ernesto M. Chavarria  43    Director                   February 16, 1998

Blandida Cardenas     43    Director                   February 16, 1998

Daniel Dornier        36    Director                   July 21, 1998
</TABLE>

The Company has no knowledge of any arrangement or understanding in existence
between any executive officer named above and any other person pursuant to
which any such executive officer was or is to be elected to such office or
offices. All officers of the Company serve at the pleasure of the Board of
Directors. All Officers of the Company will hold office until the next annual
meeting of the Company.

<PAGE>   31
Biographical Information

Jose Chavez, the President and Chief Executive Officer of the Company, has over
25 years experience in manufacturing, engineering, system design and
development, energy engineering, and computer technology management. As
co-founder of MSI in 1993, Mr. Chavez has led the development of MSI from a
two-person start-up in 1993 to a multi-million dollar business enterprise. Mr.
Chavez was Plant Manager for HDS, a division of Hart Graphics, Inc., a computer
disk manufacturer for 1991 to 1993, and Manufacturing Manager for CompuAdd
Corporation, a personal computer manufacturer from 1989 to 1991. Prior to
working at CompuAdd, Mr. Chavez was a section head at Hughes Aircraft for nine
years. Mr. Chavez obtained a Master of Administrative Management from the
University of Redlands Business School in 1981 and a Bachelor of Science in
Electrical Engineering from the University of Texas at El Paso in 1975. Mr.
Chavez has been a director of the Company since June, 1997.

David W. Hill, Chief Financial Officer, brings over 10 years of experience in
executive financial management, mergers & acquisitions, investment development,
and strategic planning. Mr. Hill served as a Finance Manager for Dell Computers
Home and Small Business Group from 1997 to 1998. Mr. Hill served with Applied
Materials, Inc. in 1997. Additionally, Mr. Hill was President and Chief
Financial Officer of Discovery Technologies, Inc. from 1993 to 1997. Mr. Hill
filed for protection from creditors under Chapter VII of the Bankruptcy Code in
1998. He received his Master of Business Administration from Baylor University
in 1989 and a Bachelor of Science in International Trade from Texas Tech
University in 1987.

Mitchell Kettrick, Vice-President of Technical Operations, has over 12 years of
experience in manufacturing, test diagnostis and networking. As MSI's
co-founder and Chief Technology Officer, he oversees technical services,
systems design, and information services. Mr. Kettrick was the Quality
Assurance Manager for Hart Distribution Service, a computer disk manufacturer,
in 1992 and the Manufacturing Systems Test Manager for CompuAdd Corporation, a
personal computer manufacturer, from 1987 to 1991. Mr. Kettrick received an
Associate Degree in Computer Maintenance Technology from Texas State Technical
College in 1987. Mr. Kettrick has been a director of the Company since June,
1997.

Thomas M. Upton, Vice-President of Sales and Marketing, has 17 years high-tech
sales experience. From 1996 to 1998, Mr. Upton worked for Boundless
Technologies, Inc., as their Vice President of the Global Distribution Division,
Senior Director of Worldwide Sales, and Director of North American Sales. Mr.
Upton was previously a Regional Manager of Major Accounts and served as National
Support Manager responsible for worldwide system support with Applied Digital
Data Systems, a subsidiary of AT&T, from 1981 to 1994. Mr. Upton has a Bachelor
of Science in Electrical Engineering degree from New York Institute of
Technology.

Jaime Munoz, Vice President of Operations, has over 10 years of direct
experience in project management implementation. Mr. Munoz manages MSI's
purchasing, warehouse operations, facilities, on-site production, security, and
human resources. His background includes extensive experience with strategic
planning, market assessment, new business development and operations
management. Prior to joining MSI, Mr. Munoz worked as a consultant for the
American Residential Services from 1997 to 1998, and served as Vice
President/Chief Marketing Officer for Infrastructure Services, Inc., in
Houston, Texas from 1987 to 1997. Mr. Munoz obtained a Bachelor of Science in
Mechanical Engineering from The University of Texas at El Paso.

Ernesto M. Chavarria, Director, has over 25 years experience providing
consulting services in the area of international business development and
public affairs to Fortune 500 Companies. Mr. Chavarria has been the President
of ITBR, Inc., an international overseas consulting company since 1990. Mr.
Chavarria has been a Director of the Company since November 1997.

Blandida Cardenas, Director, has been a Professor at the LBJ Institute for
Teaching and Learning since 1993 and has served as a Director of the Office of
Minorities in Higher Education. She has also served as the Commissioner of
Presidential Appointments to the U.S. Commission of Civil Rights. Ms. Cardenas
has also been an Associate Professor at the University of Texas at San Antonio
for over 14 years. Ms. Cardenas has been a Director of the Company since
November 1997.

Daniel Dornier, Director, brings over a decade's worth of investment banking
experience to the Company. Since 1995, Mr. Dornier has been the President of
Dornier Capital Advisers, where he manages investment portfolios for high net
worth in the U.S. and Europe. Between 1993 and 1995, Mr. Dornier was a private
investment manager for various companies owned by the Dornier family. He was
previously an investment banker at SBC Warburg, Dillon, Reed from 1991 to 1993.
In 1989, he obtained his Master of Business Administration from the City
University of Bellevue, Washington, the Zurich, Switzerland campus, and in 1984
he received a Bachelor of Business Administration from the University of
Nuertingen, Germany.

<PAGE>   32

Board Committees

Pursuant to Private Placement Phase I and Private Placement Phase II, the
Company is required to establish (i) a Compensation Committee, consisting of
three Board Members, one of which to be designated by the holders of the Series
B Preferred and (ii) an Audit Committee consisting of three Board Members, one
of which to be designated by the holders of the Series C Preferred.

Compensation of Directors

Each director who is not an employee of the Company (the "Outside Directors")
will be paid the sum of $1,000 for each meeting of the Board of Directors
attended by them. Additionally, they will be reimbursed for expenses incurred
in attending meetings of the Board of Directors and related committees. MSHI
has the following three Outside Directors: Ernesto M. Chavarria, Blandida
Cardenas and Daniel Dornier.

Indemnification of Officers and Directors.

As permitted by the Utah Business Corporation Act, as amended, the Company has
included in its Revised Articles of Incorporation a provision that the Company
may indemnify its officers, directors, employees and agents under certain
circumstances, including those circumstances in which indemnification would
otherwise be discretionary, and the Company is required to advance expenses to
its officers and directors as incurred in connection with proceeding against
them for which they may be indemnified.

Summary Compensation Table.

The following table sets forth compensation for the Chief Executive Officer
("CEO"), and the four most highly compensated other executive officers whose
salary and bonus for 1998 and was $100,000 or greater (collectively, the "Named
Executives"). Only the CEO and one other executive officer of MSI received
salaries and bonuses in excess of $100,000 in fiscal 1998. Consequently, only
the CEO and one other executive officer appear in this table.

Executive Compensation
Summary Compensation Table

Long Term Compensation

Item 10.  Executive Compensation

                           Summary Compensation Table
                                 (part 1 of 2)

<TABLE>
<CAPTION>
               Annual Compensation
--------------------------------------------------------
<S>     <C>    <C>         <C>        <C>        <C>
Awards  Payouts
  (a)             (b)        (c)         (d)        (e)
Name and
Principal       Fiscal
Position         Year      Salary      Bonus      Other
Jose G.
Chavez, CEO &
President        1998       105,000
                 1997        50,500    34,000
                 1996        87,000    13,000

Mitchell.
Kettrick,
Vice President
and Secretary
                 1998        75,000
                 1997        52,000
                 1996        45,000
</TABLE>

<PAGE>   33

                           Summary Compensation Table
                                 (part 1 of 2)


<TABLE>
<CAPTION>
          Long Term Compensation
------------------------------------------------------
                                 Awards                   Payouts
                            -----------------          ------------
<S>            <C>       <C>            <C>           <C>        <C>
(a)             (b)         (f)           (g)         (h)        (i)
Name and                 Restricted
Principal      Fiscal      Stock        Options  LTIP     All other
Position        Year       Awards        SAR's   Payouts  Compensation
Jose G.
Chavez, CEO &
President       1998      $62,500
                1997
                1996

Mitchell.
Kettrick,
Vice President
and Secretary   1998      $31,250
                1997
                1996
</TABLE>

Employment Contracts

On June 15, 1997, the Company entered into employment agreements with Jose
Chavez, President and CEO (the "Chavez Agreement"), and Mitchell Kettrick, Vice
President (the "Kettrick Agreement"). Both of these agreements terminate on
March 31, 2001, subject to two one-year extensions.

        The Chavez Agreement provides for an annual salary of $100,000 and
reimbursement of all reasonable out-of-pocket expenses. The Chavez Agreement
also provides for a grant dated March 31, 1998, of an option to purchase up to
100,000 shares of Common Stock at a price of $1.50 per share exercisable for a
period of five (5) years commencing on March 31, 1998. In addition, during the
term of the Chavez Agreement, Chavez is entitled to a bonus, at the discretion
of the Board of Directors, consisting of cash and common stock, calculated as
follows: (1) for each ten percent (10%) increase in revenues, from year to
year, above the base of $10,000,000 in fiscal 1998, Chavez shall be issued
100,000 shares of Common Stock at fifty percent (50%) of the then current
market value, not to exceed $1.70 per share; and (2) for each $1.00 increase in
the Common Stock value above the base value of $3.00 per share in fiscal 1998,
calculated on the last ninety (90) day average, the Company shall pay Chavez a
cash bonus of $100,000 due no later than June 30 of each fiscal year. Chavez
also is entitled to an automobile allowance of up to $650.00 per month. Mr.
Chavez did not receive a bonus for fiscal year ended March 31, 1998. Mr. Chavez
has agreed to renegotiate the Chavez Agreement's option terms, which
negotiations are expected to be concluded in November 1998.

        The Kettrick Agreement provides for an annual salary of $75,000 per
year and reimbursement of all reasonable out-of-pocket expenses. Moreover, the
Kettrick Agreement provides for a grant, dated March 31, 1998, of a five-year
option to purchase up to 50,000 shares of Common Stock at a price of $1.50 per
share exercisable beginning July 1, 1998. Kettrick also has a second option,
dated March 31, 1998, for 25,000 shares at $2.25 per share exercisable for a
period of two (2) years. The Kettrick Agreement also provides for a bonus, at
the discretion of the Board of Directors, consisting of cash and Common Stock,
calculated as follows: (1) for each ten percent (10%) increase in revenues
above the base of $10,000,000 in fiscal 1998, Kettrick shall be issued 50,000
shares of Common Stock at fifty percent (50%) of the then current market value,
not to exceed $1.70 per share; and (2) for each $1.00 increase in the Common
Stock value above the base value of $3.00 per share in fiscal 1998, calculated
on the last ninety (90) day average, the Company shall pay Kettrick a cash
bonus of $50,000 due no later than June 30 of each fiscal year. Kettrick is
also entitled to an automobile allowance of up to $500.00 per month. Mr.
Kettrick did not receive a bonus for fiscal year ended March 31, 1998. Mr.
Kettrick has agreed to renegotiate the Kettrick Agreement's option terms, which
negotiations are expected to be concluded in November 1998.

        David W. Hill, Chief Financial Officer, and the Company are negotiating
certain terms of an employment agreement.

<PAGE>   34

Item 11.  Security Ownership of Certain Beneficial Owners and Management

As of March 31, 1998, there were 11,506,846 shares of common stock issued and
outstanding.

The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1998, by (i) each
person who is known by the Company to own beneficially more than five percent
(5%) of the Company's Common Stock, (ii) each director of the Company, (iii)
each Named Executive, and (iv) all directors and officers of the Company as a
group. Except as otherwise indicated, the Company believes that the beneficial
owners of the Common Stock listed below, based on information furnished by such
owners, have investment and voting power with respect to such shares, subject
to community property laws where applicable.

<TABLE>
<CAPTION>
Name and Address of Beneficial
<S>                 <C>                  <C>
Owner               Common Stock (1)      Percent of
Class (1)

Jose G. Chavez        7,225,000            62.79%
501 Waller
Austin, Texas

Mitchell C. Kettrick
501 Waller
Austin, Texas         1,500,000            13.04%

George Villalva
501 Waller
Austin, Texas           475,000             4.13%

All Directors and
Officers as a Group   9,200,000            79.96%
</TABLE>

Calculations are based on 11,506,846 outstanding shares of Common Stock as of
March 31, 1998 and the assumed conversion of all options and warrants held by
the above named group. All common shares held by the Officers and Directors
listed above are "restricted securities" and as such are subject to limitations
on resale. The shares held by the officers and directors may be sold pursuant
to Rule 144 under certain circumstances, subject to certain Lock-Up Agreements.
See "Shares Eligible for Future Sale-Lock-Up Agreements."

Rule 13d-3 under the Securities Exchange Act of 1934, involving the
determination of beneficial owners of securities, includes as beneficial owners
of securities, among others, any person who directly or indirectly, through any
contract, arrangement, understanding, relationship or otherwise has, or shares,
voting power and/or investment power with respect to such securities; and, any
person who has the right to acquire beneficial ownership of such security
within sixty days through means, including, but notice of any option, warrant
or conversion of a security. Any securities not outstanding which are subject
to such options, warrants or conversion privileges shall be deemed to be
outstanding securities of the class owned by such person, but shall not be
deemed to be outstanding for the purpose of computing the percentage of the
class by any other person.

There are no contractual arrangements or pledges of the Registrant's
securities, known to the Registrant, which may at a subsequent date result in a
change of control of the Registrant.

<PAGE>   35

Item 12.  Certain Relationships and Related Transactions

Certain officers, directors, stockholders and employees of the Company have
ownership interests in entities to which the Company has advanced monies for
working capital and expenses. The advances have been converted to notes and are
personally guaranteed by the shareholders of the related entities. The schedule
below lists the name of the stockholder and their percentage of ownership.

<TABLE>
<CAPTION>
                        Prima                     Quality
                      Development &         Communications, Inc.        Salas
Name of Stockholder  Construction, Inc.  (Percentage of Ownership) Concessions, Inc.
-------------------------------------------------------------------------------------
<S>                  <C>                 <C>                       <C>
Jose G. Chavez (1)         26                      28                    33
Frank Rodriguez (1)        15                       5                    --
Andrew Ramirez (1)         26                      27                    35
George Villalva (1)        15                       5                     4
Mitchell C. Kettrick (1)   18                      10                    13
Bruce Funderburk           --                      20                    --
Laurel Funderburk          --                       5                    --
Tammie Delaney             --                      --                    15
                          ---                     ---                   ---
TOTALS                    100                     100                   100
</TABLE>

(1)     Officers of MSI.

Certain officers and directors of the Company serve as officers directors and
advisors to these related companies on an as needed basis and their involvement
is minimal.

As of March 31, 1998 and 1997, the Company had amounts due from the following
related entities:


<TABLE>
<S>                                           <C>            <C>
10% Note Receivable from Related Parties        1998            1997
  Prima Development & Construction, Inc.       $ -0-         $251,983
  Quality Communications, Inc.                   -0-           84,394
  Salas Concessions, Inc.                        -0-           83,397
                                               -----         --------
                                TOTAL          $ -0-         $476,425
                                               =====         ========
</TABLE>

The shareholders of MSI set forth above signed personal guarantees for all the
notes and leases. Prima Development & Construction, Inc. ("Prima"), a
construction and fiber optics cabling firm, executed the original loan
agreement during the year ended March 31, 1997, with the principal amount of
the loan of $185,000. Interest is due and payable monthly as it accrues,
commencing on April 10, 1997 and continuing on the same day of each month
thereafter during the term of the note. Principal and interest are payable in
monthly installments of $2,444.79. The annual interest rate on the note is 10%.
An amendment to the loan agreement with Prima was executed to incorporate funds
advanced from MSI. The principal amount of the amendment is $66,983. Interest
is due and payable monthly as it accrues, commencing on January 2, 1998 and
continuing on the same day of each month thereafter during the term of the
note. Principal and interest are payable in monthly installments of $885. The
annual interest rate on the note is 10%. The loan, as amended, was repaid
during the year ended March 31, 1998. The ownership of Prima include owners of
MSI and other outside investors. Prima sub-contracts, on a project to project
basis, fiber optic cabling and related construction to MSI.

Quality Communications, Inc. ("QCI"), a telecommunications corporation,
executed a loan agreement during the year ended March 31, 1997, in the
principal amount of $84,394. Interest is due and payable monthly as it accrues,
commencing on April 10, 1997 and continuing on the same day of each month
thereafter during the term of the note. Principal and interest are payable in
monthly installments of $1,025. The annual interest rate on the note is 10%.
The loan was repaid during the year ended March 31, 1998. The shareholders of
QCI include officers, directors and shareholders of MSI and other outside
investors. MSI sub-contracts cabling projects with QCI on a project to project
basis.

<PAGE>   36
Salas Concessions, Inc. ("Salas"), a food service corporation, executed a loan
agreement during the year ended March 31, 1997, in the principal amount of
$83,397. Interest is due and payable monthly as it accrues, commencing on April
10, 1997 and continuing on the same day of each month thereafter during the
term of the note. Principal and interest are payable in monthly installments of
$1,767. The annual interest rate on the note is 10%. The loan was repaid during
the year ended March 31, 1998.

During the years ended March 31, 1997 and 1998, the above listed entities did
not pay interest to the Company. During the same periods, no other income or
expense was received from or paid to the above listed entities.

As of March 31, 1998, no amounts were owed to the Company by any of the
entities listed above. In addition, the Company does not intend to loan any
additional funds to the above named entities in the future.

Item 13.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

<PAGE>   37
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                                   MSI HOLDINGS, INC.

                           Date: October 4,1999 By: /s/ Robert Gibbs
                                                    ---------------------------
                                                    Robert Gibbs, President and
                                                    Chief Executive Officer


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of this
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
         Signature                                  Title                    Date
         ---------                                  -----                    ----
<S>                                               <C>                       <C>
/s/ Steve Metzger                                  Director                  October 4, 1999
    -----------------------------------
    Steve Metzger

/s/ Davinder Sethi                                 Director                  October 4, 1999
    -----------------------------------
    Davinder Sethi

/s/ Ernesto Chavarria                              Director                  October 4, 1999
    -----------------------------------
    Ernesto Chavarria

/s/ Blandida Cardenas                              Director                  October 4, 1999
    -----------------------------------
    Blandida Cardenas

/s/ Daniel Dornier                                 Director                  October 4, 1999
    -----------------------------------
    Daniel Dornier

/s/ Humbert Powell                                 Director                  October 4, 1999
    -----------------------------------
    Humbert Powell

/s/ Robert Gibbs                                   President and
    -----------------------------------            Chief Executive Officer   October 4, 1999
    Robert Gibbs


/s/ Doug Banister                                  Chief Financial Officer   October 4, 1999
    -----------------------------------
    Doug Banister

/s/ Stephen Hoelscher                              Secretary, Controller
    -----------------------------------            Chief Accounting Officer  October 4, 1999
    Stephen Hoelscher
</TABLE>


<PAGE>   38

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER              DESCRIPTION
-------             -----------
<S>            <C>
 27                 Financial Data Schedule
</TABLE>